The Washington Toy Story

by Timothy P. Carney
by Timothy P. Carney
Previously by Timothy P. Carney: The Forgotten Man

The following is an excerpt from Tim Carney’s new book, Obamanomics: How Barack Obama Is Bankrupting You and Enriching His Wall Street Friends, Corporate Lobbyists, and Union Bosses, published November 30 by Regnery Publishing.

A staple of Obamanomics is the regulations, pitched as consumer protection, that functions as Big Business protection. We have seen this at work in the toy industry.

 “The year of the recall,” as some people called it, saw recalls of Dora the Explorer and Barbie dolls due to excessive lead in the toys’ paint. Mattel, the largest toymaker in the world, recalled more than two million toys. All the recalled toys were made in China.

Obama, after backing away from a pledge to ban all Chinese-made toys, put his support behind a bill called the Consumer Product Safety Improvement Act (CPSIA). This bill passed Congress in July when Obama was on the campaign trail, so he missed the vote. But he issued a joint press release with another Democratic senator reading, in part, “‘Keeping America’s children safe from dangerous products must be a top priority’ said Senator Obama. . . . ‘I urge the President to sign this bill into law as quickly as possible.’” [1]

When Obama entered the White House, he made enforcing this law a priority. His nominee to head the Consumer Products Safety Commission, Inez Tenenbaum, testified during her confirmation hearings that “one of the things that is urgent is the full implementation of the Consumer Product Safety Improvement Act which you passed last year.” [2]

Although standing up for child safety is a pretty safe bet politically, this bill isn’t all puppies, rainbows, and smiling babies. Like most Washington regulation, it has a sordid backstory. And, as with most instances of Obamanomics, Big Government has been a boon for Big Business and a bane to smaller competitors.

Mattel wins the game

Pulling more than two million toys off the shelf in 2007 was a blow to Mattel’s reputation – it’s hard to generate worse PR than you get for selling over-leaded toys to kids. Mattel responded to its critics by immediately instituting a new testing regimen for its toys and by working to standardize and streamline the process. [3]

While Mattel was investing in its factories, it was also investing in Washington. The company had spent a steady $120,000 per year on lobbying from 2002 through 2006, [4] but the number ballooned to $540,000 in 2007, the year of the recall. In 2008, its lobbying expenditures hit $730,000 – more than six times what the company had spent two years before. [5]

In August 2007, during the recall scandal, Mattel retained the lobbying firm Johnson, Madigan, Peck, Boland & Stewart. [6] The company’s lobbyists included Sean Richardson and Sheila Murphy, who had recently been the chief of staff and legislative director, respectively, for Democratic senator Amy Klobuchar. A month later, Klobuchar became a co-sponsor of CPSIA.

The bill imposed new but bearable costs on Mattel. Perhaps more important, it promised to provide a government stamp of approval on Mattel’s toys which had – justly – earned the distrust of consumers. CPSIA established a principle that any children’s product was guilty until proven innocent – or in this case, unsafe until proven safe. The bill required every manufacturer of children’s products to submit its products to third-party testing for lead and other toxins before selling them. It also promised to crack down on second-hand sales of products violating the new lead standards.

The law sent shivers through the world of thrift stores. Products that were perfectly legal to make and sell in 2008 might be outlawed in 2009. “This has gotten so serious and it is so frightening because we serve consumers that sometimes have no other way to clothe their children,” said Adele Meyer, executive director of the National Association of Resale and Thrift Shops. She added, “You could wipe out a whole industry.” [7]

Thrift stores didn’t have a powerful lobby in Washington, but they had plenty of public sentiment behind them. In its final days, Bush’s CPSC tried to allay the fears:

The new safety law does not require resellers to test children’s products in inventory for compliance with the lead limit before they are sold. However, resellers cannot sell children’s products that exceed the lead limit and therefore should avoid products that are likely to have lead content, unless they have testing or other information to indicate the products being sold have less than the new limit. Those resellers that do sell products in violation of the new limits could face civil and/or criminal penalties. [8]

You got that, Salvation Army? The bill doesn’t require you to test your products for lead. But if you sell a product with 301 parts-per-million of lead – even if nobody gets sick – you could get sued or go to jail.

And small craftsmen were threatened by the testing requirement. Every manufacturer, including grandpa in his woodshed, would need to submit its products to an accredited outside testing facility. This would be costly and burdensome. But written into the law was a provision that, while common sense, seriously favored mass-producers. Look at this guidance from the CPSIA:

If your products need to be tested, and they are materially identical and made in the same fashion with no change in assembly, equipment used, etc., then a single sample may be all that is necessary for testing purposes. A change in materials or design can be enough to alter testing results. [9]

So if you’re rolling 10,000 petroleum-based Barbies off an assembly line in Shanghai, you need test only one. If you’re making ten sets of children’s rosary beads to donate to the kids in your parish receiving their first communion, you also need to test one – unless these rosaries are unique, or if you made some at home, some at your office, and some while visiting your grandchildren. In those cases you need to get each one tested – not just each rosary, but each component: the little beads, the big beads, the crucifix, and the string.

Mattel was deploying the “Overhead Smash”: crowding out smaller competitors and potential start-ups by lobbying for stricter regulation.

Obama’s CPSC, to its credit, moved fairly quickly to exclude certain safe materials from testing requirements. [10] And come late August – six months after the law took effect – the government lifted the testing burden on Grandpa’s all-wood, unpainted chair – depending on what sort of screws, nails, or joinery he used.

But the CPSC issued another, crucial exemption: the commission voted unanimously to allow Mattel – and only Mattel – to test its own products on-site rather than submit samples to an outside tester. [11] Now, this exemption was not given out lightly. Mattel spent considerable resources developing its own testing facilities, which the company “firewalled” to protect it from corporate influence. Mattel, through extraordinary effort and expenditure, had earned the right to test its own products. The company made its case to the CPSC, and the CPSC agreed.

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There’s no evidence of cronyism or any sort of wrong-doing here, and the law explicitly provided for such exemptions. But this episode gets at the heart of the problems with Obamanomics.

First, Mattel had already begun developing its own in-house testing regimen before the CPSIA even passed. We also can tell – thanks to their lobbying filings – that Mattel had significant input into the bill’s drafting. The relationship was probably a two-way street: Mattel lobbyists guided the bill’s testing requirements to match the company’s testing plans, and lawmakers’ demands on testing helped shape Mattel’s testing process.

And after the law went into effect, the world’s largest toymaker had decent access to Obama’s CPSC. One day in late August, according to CPSC notes, Mattel executives met with CPSC Chair Inez Tenenbaum and other CPSC commissioners, at the request of Mattel executive Jim Walter. [12]

Do you think grandpa in the back shed would get meetings with three CPSC commissioners? No, Mattel was exploiting the First Law of Obamanomics: “During a legislative debate, whichever business has the best lobbyists is most likely to win the most favorable small print.” Playing the “Inside Game,” Mattel found it easier to follow all the rules because it was there as the rules were being drafted.

Also, consider that no small manufacturer could afford to build its own in-house testing facility. This was all typical of Big Government, one-size-fits-all regulation: the smaller businesses, many serving the poorer communities, don’t have their own K Street lobbyists (and certainly not a former chief of staff and a former legislative director for a U.S. Senator). And they get steamrolled.

Notes

December 12, 2009

Tim Carney [send him mail] is the author The Big Ripoff: How Big Business and Big Government Steal Your Money and Obamanomics: How Barack Obama Is Bankrupting You and Enriching His Wall Street Friends, Corporate Lobbyists, and Union Bosses. He is also the Warren T. Brookes Journalism Fellow at the Competitive Enterprise Institute.

Copyright © 2009 Tim Carney