Throughout history, governments have regulated food and drug products. In general, the focus of this regulation has been on ensuring the quality and safety of food and drugs. Food and drug regulation as we know it today in the United States had its roots in the late nineteenth century when state and local governments began to enact food and drug regulations in earnest. Federal regulation of the industry began on a large scale in the early twentieth century when Congress enacted the Pure Food and Drugs Act of 1906. The regulatory agency spawned by this law – the U.S. Food and Drug Administration (FDA) – now directly regulates between one-fifth and one-quarter of U.S. gross domestic product (GDP) and possesses significant power over product entry, the ways in which food and drugs are marketed to consumers, and the manufacturing practices of food and drug firms. This article will focus on the evolution of food and drug regulation in the United States from the middle of the nineteenth century until the present day .
General Issues in Food and Drug Regulation
Perhaps the most enduring problem in the food and drug industry has been the issue of “adulteration” – the cheapening of products through the addition of impure or inferior ingredients. Since ancient times, producers of food and drug products have attempted to alter their wares in an effort to obtain dear prices for cheaper goods. For instance, water has often been added to wine, the cream skimmed from milk, and chalk added to bread. Hence, regulations governing what could or could not be added to food and drug products have been very common, as have regulations that require the use of official weights and measures. Because the adulteration of food and drugs may pose both economic and health risks to consumers, the stated public interest motivation for food and drug regulation has generally been to protect consumers from fraudulent and/or unsafe food and drug products.
From an economic perspective, regulations like these may be justified in markets where producers know more about product quality than consumers. As Akerlof demonstrates, when consumers have less information about product quality than producers, lower quality products (which are generally cheaper to produce) may drive out higher quality products. Asymmetric information about product quality may thus result in lower quality products – the so-called “lemons” – dominating the market. To the extent that regulators are better informed about quality than consumers, regulation that punishes firms that cheat on quality or that requires firms to disclose information about product quality can improve efficiency. Thus, regulations governing what can or cannot be added to products, how products are labeled, and whether certain products can be safely sold to consumers, can be justified in the public interest if consumers do not possess the information to accurately discern these aspects of product quality on their own. Regulations that solve the asymmetric information problem benefit consumers who desire better information about product quality, as well as producers of higher quality products, who desire to segment the market for their wares.
For certain products, it may be relatively easy for consumers to know whether or not they have been deceived into purchasing a low quality product after consuming it. For such goods, sometimes called “experience goods,” market mechanisms like branding or repeat purchase may be adequate to solve the asymmetric information problem. Consumers can “punish” firms that cheat on quality by taking their business elsewhere. Hence, as long as consumers are able to identify whether or not they have been cheated, regulation may not be needed to solve the asymmetric information problem. However, for those products where quality is not easily ascertained by consumers even after consuming the product, market mechanisms are unlikely to be adequate since it is impossible for consumers to punish cheaters if they cannot determine whether or not they have in fact been cheated. For such “credence goods,” market mechanisms may therefore be insufficient to ensure that the right level of quality is delivered. Like all goods, food and drugs are multidimensional in terms of product quality. Some dimensions of quality (for instance, flavor or texture) are experience goods because they can be easily determined upon consumption. Other dimensions (for instance, the ingredients contained in certain foods, the caloric content of foods, whether or not an item is “organic,” or the therapeutic merits of medicines) are better characterized as credence goods since it may not be obvious to even a sophisticated consumer whether or not he has been cheated. Hence, there are a priori reasons to believe that market forces will not be adequate to solve the asymmetric information problem that plagues many dimensions of food and drug quality.
Economists have long recognized that regulation is not always enacted to improve efficiency and advance the public interest. Indeed, since Stigler and Peltzman, it has often been argued that regulation is sought by specific industry groups in order to tilt the competitive playing field to their advantage. For instance, by functioning as an entry barrier, regulation may raise the profits of incumbent firms by precluding the entry of new firms and new products. In these instances of “regulatory capture,” regulation harms efficiency by limiting the extent of competition and innovation in the market. In the context of product quality regulations like those applying to food and drugs, regulation may help incumbent producers by making it more costly for newer products to enter the market. Indeed, regulations that require producers to meet certain minimum standards or that ban the use of certain additives may benefit incumbent producers at the expense of producers of cheaper substitutes. Such regulations may also harm consumers, whose needs may be better met by these new prohibited products. The observation that select producer interests are often among the most vocal proponents of regulation is consistent with this regulatory capture explanation for regulation. Indeed, as we will see, a desire to shift the competitive playing field in favor of the producers of certain products has historically been an important motivation for food and drug regulation.
The fact that producer groups are often among the most important political constituencies in favor of regulation need not, however, imply that regulation necessarily advances the interests of these producers at the expense of efficiency. As noted earlier, to the extent that regulation reduces informational asymmetries about product quality, regulation may benefit producers of higher quality items as well as the consumers of such goods. Indeed, such efficiency-enhancing regulation may be particularly desirable for those producers whose goods are least amenable to market-based solutions to the asymmetric information problem (i.e., credence goods) precisely because it helps these producers expand the market for their wares and increase their profits. Hence, because it is possible for regulation that benefits certain producers to also improve welfare, producer support for regulation should not be taken as prima facie evidence of Stiglerian regulation.
United States’ Experience with Food and Drug Regulation
From colonial times until the mid to late nineteenth century, most food and drug regulation in America was enacted at the state and local level. Additionally, these regulations were generally targeted toward specific food products. For instance, in 1641 Massachusetts introduced its first food adulteration law, which required the official inspection of beef, pork and fish; this was followed in the 1650s with legislation that regulated the quality of bread. Meanwhile, Virginia in the 1600s enacted laws to regulate weights and measures for corn and to outlaw the sale of adulterated wines.
During the latter half of the nineteenth century, the scale and scope of state level food regulation expanded considerably. Several factors contributed to this growth in legislation. For instance:
Specialization and urbanization made households more dependent on food purchased in impersonal markets. While these forces increased the variety of foods available, it also increased uncertainty about quality, since the more specialized and urbanized consumers became, the less they knew about the quality of products purchased from others.
Technological change in food manufacturing gave rise to new products and increased product complexity. The late nineteenth century witnessed the introduction of several new food products including alum-based baking powders, oleomargarine (the first viable substitute for butter), glucose, canned foods, “dressed” (i.e. refrigerated) beef, blended whiskey, chemical preservatives, and so on. Unfamiliarity with these new products generated consumer concerns about food safety and food adulteration. Moreover, because many of these new products directly challenged the dominant position enjoyed by more traditional foods, these developments also give rise to demands for regulation on the part of traditional food producers who desired regulation to disadvantage these new competitors.
Related to the previous point, the rise of analytic chemistry facilitated the “cheapening” of food in ways that were difficult for consumers to detect. For instance, the introduction of preservatives made it possible for food manufacturers to mask food deterioration. Additionally, the development of glucose as a cheap alternative to sugar facilitated deception on the part of producers of high priced products like maple syrup. Hence, concerns about adulteration were increasingly felt. Curiously, however, the rise of analytic chemistry also improved the ability of experts to detect these more subtle forms of food adulteration.
Because food adulteration became more difficult to detect, market mechanisms that relied on the ability of consumers to detect cheating ex post became less effective in solving the food adulteration problem. Hence, there was a growing perception that regulation by experts was necessary .
Given this environment, it is perhaps unsurprising that a mixture of incentives gave rise to food regulation in the late nineteenth century. General pure food and dairy laws that required producers to properly label their products to indicate whether mixtures or impurities were added were likely enacted to help reduce asymmetric information about product quality. While producers of “pure” items also played a role in demanding these regulations, consumer groups – specifically women’s groups and leaders of the fledgling home economics movement – were also an important constituency in favor of regulation because they desired better information about food ingredients. In contrast, narrow producer interest motivations seem to have been more important in generating a demand for more specific food regulations. For instance, state and federal oleomargarine restrictions were clearly enacted at the behest of dairy producing interests, who wanted to limit the availability of oleomargarine. Additionally, state and federal meat inspection laws were introduced to placate local butchers and local slaughterhouses in eastern markets who desired to reduce the competitive threat posed by the large mid-western meat packers.
Federal regulation of the food and drug industry was mostly piecemeal until the early 1900s. In 1848, Congress enacted the Drug Importation Act to curb the import of adulterated medicines. The 1886 oleomargarine tax required margarine manufacturers to stamp their product in various ways, imposed an internal revenue tax of 2 cents per pound on all oleomargarine produced in the United States, and levied a fee of $600 per year on oleomargarine producers, $480 per year on oleomargarine wholesalers, and $48 per year on oleomargarine retailers. The 1891 Meat Inspection Act mandated the inspection of all live cattle for export as well as for all live cattle that were to be slaughtered and the meat exported. In 1897 the Tea Importation Act was passed which required Customs inspection of tea imported into the United States. Finally, in 1902 Congress enacted the Biologics Control Act to regulate the safety of vaccinations and serums used to prevent diseases in humans.
The 1906 Pure Food and Drugs Act and the 1906 Meat Inspection Act
The first general pure food and drug law at the federal level was not enacted until 1906 with the passage of the Pure Food and Drugs Act. While interest in federal regulation arose contemporaneously with interest in state regulation, conflict among competing interest groups regarding the provisions of a federal law made it difficult to build an effective political constituency in favor of federal regulation. The law that emerged from this long legislative battle was similar in character to the state pure food laws that preceded it in that its focus was on accurate product labeling: it outlawed interstate trade in “adulterated” and “misbranded” foods, and required producers to indicate the presence of mixtures and/or impurities on product labels. Unlike earlier state legislation, however, the adulteration and misbranding provisions of this law also applied to drugs. Additionally, drugs listed in the United States Pharmacopoeia (USP) and the National Formulary (NF) were required to conform to USP and NF standards.
Congress enacted the Pure Food and Drug Act along with the 1906 Meat Inspection Act, which tightened the USDA’s oversight of meat production. This new meat inspection law mandated ante and post mortem inspection of livestock, established sanitary standards for slaughterhouses and processing plants, and required continuous USDA inspection of meat processing and packaging. While the desire to create more uniform national food regulations was an important underlying motivation for regulation, it is noteworthy that both of these laws were enacted following a flurry of investigative journalism about the quality of meat and patent medicines. Specifically, the publication of Upton Sinclair’s The Jungle, with its vivid description of the conditions of the meat packing industry, as well as a series of articles by Samuel Hopkins Adams published in Collier’s Weekly about the dangers associated with patent medicine use, played a key role in provoking legislators to enact federal regulation of food and drugs .
Responsibility for enforcing the Pure Food and Drugs Act fell to the Bureau of Chemistry, a division within the USDA, which conducted some of the earliest studies of food adulteration within the United States. The Bureau of Chemistry was renamed the Food, Drug, and Insecticide Administration in 1927. In 1931 the name was shortened to the Food and Drug Administration (FDA). In 1940 the FDA was transferred from the USDA to the Federal Security Agency, which, in 1953, was renamed the Department of Health, Education and Welfare.
Whether the 1906 Pure Food and Drugs Act was enacted to advance special interests or to improve efficiency is a subject of some debate. Kolko, for instance, suggests that the law reflected regulatory capture by large, national food manufacturers, who wanted to use federal legislation to disadvantage smaller, local firms. Coppin and High argue that rent-seeking on the part of bureaucrats within the government – specifically, Dr. Harvey Wiley, chief of the Bureau of Chemistry – was a critical factor in the emergence of this law. According to Coppin and High, Wiley was a “bureaucratic entrepreneur” who sought to ensure the future of his agency. By building ties with pro-regulation interest groups and lobbying in favor of a federal food and drug law, Wiley secured a lasting policy area for his organization.
Law and Libecap argue that a mixture of bureaucratic, producer and consumer interests were in favor of federal food and drugs regulation, but that the last-minute onset of consumer interest in regulation (provoked by muckraking journalism about food and drug quality) played a key role in influencing the timing of regulation.
Enforcement of the Pure Food and Drugs Act met with mixed success. Indeed, the evidence from the enforcement of this law suggests that neither the pure industry capture nor public interest hypotheses provide an adequate account for regulation. On the one hand, some evidence suggests that the fledgling FDA’s enforcement work helped raise standards and reduce informational asymmetries about food quality. For instance, under the Net Weight Amendment of 1919, food and drug packages shipped in interstate commerce were required to be “plainly and conspicuously marked to show the quantity of contents in terms of weight, measure, and numerical count”. Similarly, under the Seafood Amendment of 1934, Gulf coast shrimp packaged under FDA supervision was required to be stamped with a label stating “Production supervised by the U.S. Food and Drug Administration” as a mechanism for ensuring quality and freshness. Additionally, during this period, investigators from the FDA played a key role in helping manufacturers improve the quality and reliability of processed foods, poultry products, food colorings, and canned items.
On the other hand, the FDA’s efforts to regulate the patent medicine industry – specifically, to regulate the therapeutic claims that patent medicine firms made about their products – were largely unsuccessful. In U.S. vs. Johnson, the Supreme Court ruled that therapeutic claims were essentially subjective and hence beyond the reach of this law. This situation was partially alleviated by the Sherley Amendment of 1912, which made it possible for the government to prosecute patent medicine producers who intended to defraud consumers. Effective regulation of pharmaceuticals was generally not possible, however, because under this amendment the government needed to prove fraud in order to successfully prosecute a patent medicine firm for making false therapeutic claims about its products. Hence, until new legislation was enacted in 1938, the patent medicine industry continued to escape effective federal control.
The 1938 Food, Drugs and Cosmetics Act
Like the law it replaced (the 1906 Pure Food and Drugs Act), the Food, Drugs and Cosmetics Act of 1938 was enacted following a protracted legislative battle. In the early 1930s, the FDA and its Congressional supporters began to lobby in favor of replacing the Pure Food and Drugs Act with stronger legislation that would give the agency greater authority to regulate the patent medicine industry. These efforts were successfully challenged by the patent medicine industry and its Congressional allies until 1938, when the so-called “Elixir Sulfanilamide tragedy” made it impossible for Congress to continue to ignore demands for tighter regulation. The story behind the Elixir Sulfanilamide tragedy is as follows. In 1937, Massengill, a Tennessee drug company, began to market a liquid sulfa drug called Elixir Sulfanilamide. Unfortunately, the solvent in this drug was a highly toxic variant of antifreeze; as a result, over 100 people died from taking this drug. Public outcry over this tragedy was critical in breaking the Congressional deadlock over tighter regulation.
Under the 1938 law, the FDA was given considerably greater authority over the food and drug industry. The FDA was granted the power to regulate the therapeutic claims drug manufacturers printed on their product labels; authority over drug advertising, however, rested with the Federal Trade Commission (FTC) under the Wheeler-Lea Act of 1938. Additionally, the new law required that drugs be marketed with adequate directions for safe use, and FDA authority was extended to include medical devices and cosmetics. Perhaps the most striking and novel feature of the 1938 law was that it introduced mandatory pre-market approval for new drugs. Under this new law, drug manufacturers were required to demonstrate to the FDA that a new drug was safe before it could be released to the market. This feature of the legislation was clearly a reaction to the Elixir Sulfanilamide incident; food and drug bills introduced in Congress prior to 1938 did not include provisions requiring mandatory pre-market approval of new drugs.
Within a short period of time, the FDA began to deem some drugs to be so dangerous that no adequate directions could be written for direct use by patients. As a consequence, the FDA created a new class of drugs which would only be available with a physician’s prescription. Ambiguity over whether certain medicines – specifically, amphetamines and barbiturates – could be safely marketed directly to consumers or required a physician’s prescription led to disagreements between physicians, pharmacists, drug companies, and the FDA. The political response to these conflicts was the Humphrey-Durham Amendment in 1951, which permitted a drug to be sold directly to patients “unless, because of its toxicity or other potential for harmful effect or because the method of collateral measures necessary to its use, it may safely be sold and used only under the supervision of a practitioner.”
The most significant expansion in FDA authority over drugs in the post World War II period occurred when Congress enacted the 1962 Drug Amendments (also known as the Kefauver-Harris Amendments) to the Food, Drugs and Cosmetics Act. Like the 1938 law, the 1962 Drug Amendments were passed in response to a therapeutic crisis – in this instance, the discovery that the use of thalidomide (a sedative that was marketed to combat the symptoms associated with morning sickness) by pregnant women caused birth deformities in thousands of babies in Europe . As a result of these amendments, drug companies were required to establish that drugs were both safe and effective prior to market release (the 1938 law only required proof of safety) and the FDA was granted greater authority to oversee clinical trials for new drugs. Under the 1962 Drug Amendments, responsibility for regulating prescription drug advertising was transferred from the FTC to the FDA; furthermore, the FDA was given the authority to establish good manufacturing practices in the drug industry and the power to access company records to monitor these practices. As a result of these amendments, the United States today has among the toughest drug approval regimes in the developed world.
A large and growing body of scholarship has been devoted to analyzing the economics and politics of the drug approval process. Early work has focused on the extent to which the FDA’s pre-market approval process has affected the rate of innovation and the availability of new pharmaceuticals . Peltzman, among others, argues that 1962 Drug Amendments significantly reduced the flow of new drugs onto the market and imposed large welfare losses on society. These views have been challenged by Temin who maintains that much of the decline in new drug introductions occurred prior to the 1962 Drug Amendments. More recent work, however, suggests that the FDA’s pre-market approval process has indeed reduced the availability of new medicines. In international comparisons, scholars have also found that new medicines generally become available more quickly in Europe than in America, suggesting that tighter regulation in the U.S. has induced a drug-lag. Some critics believe that the costs of this drug lag are large relative to the benefits because delay in the introduction of new drugs prevents patients from accessing new and more effective medicines. Gieringer, for instance, estimates that the number of deaths that can be attributed to the drug lag far exceeds the number of lives saved by extra caution on the part of the FDA. Hence, according to these authors, the 1962 Drug Amendments may have had adverse consequences for overall welfare.
Other scholarship has examined the pattern of drug approval times in the post 1962 period. It is commonly observed that larger pharmaceutical firms receive faster drug approvals than smaller firms. One interpretation of this fact is that larger firms have “captured” the drug approval process and use the process to disadvantage their smaller competitors. Empirical work by Olson and Carpenter, however, casts some doubt on this Stiglerian interpretation . These authors find that while larger firms do generally receive quicker drug approvals, drug approval times are also responsive to several other factors, including the specific disease at which a drug is directed, the number of applications submitted by the drug company, and the existence of a disease-specific interest group. Indeed, in other work, Carpenter demonstrates that a regulator that seeks to maximize its reputation for protecting consumer safety may approve new drugs in ways that appear to benefit large firms . Hence, the fact that large pharmaceutical firms obtain faster drug approvals than small firms need not imply that the FDA has been “captured” by these corporations.
Food and Drug Regulation since the 1960s
Since the passage of the 1962 Drug Amendments, federal food and drug regulation in the United States has evolved along several lines. In some cases, regulation has strengthened the government’s authority over various aspects of the food and drug trade. For instance, the 1976 Medical Device Amendments required medical device manufacturers to register with the FDA and to follow quality control guideline. These amendments also established pre-market approval guidelines for medical devices. Along similar lines, the 1990 Nutrition Labeling and Education Act required all packaged foods to contain standardized nutritional information and standardized information on serving sizes .
In other cases, regulations have been enacted to streamline the pre-market approval process for new drugs. Concerns that mandatory pre-market approval of new drugs may have reduced the rate at which new pharmaceuticals become available to consumers prompted the FDA to issue new rules in 1991 to accelerate the review of drugs for life-threatening diseases. Similar concerns also motivated Congress to enact the Prescription Drug User Fee Act of 1992 which required drug manufacturers to pay fees to the FDA to review drug approval applications and required the FDA to use these fees to pay for more reviewers to assess these new drug applications . Speedier drug approval times have not, however, come without costs. Evidence presented by Olson suggests that faster drug approval times have also contributed to a higher incidence of adverse drug reactions from new pharmaceuticals.
Finally, in a few instances, legislation has weakened government’s authority over food and drug products. For example, the 1976 Vitamins and Minerals Amendments precluded the FDA from establishing standards that limited the potency of vitamins and minerals added to foods. Similarly, the 1994 Dietary Supplements and Nutritional Labeling Act weakened the FDA’s ability to regulate dietary supplements by classifying them as foods rather than drugs. In these cases, the consumers and producers of “natural” or “herbal” remedies played a key role in pushing Congress to limit the FDA’s authority.
- ^ See Hutt and Hutt (1984) for an excellent survey of the history of food regulation in earlier times. French and Phillips (2000) discuss the development of food regulation in the United Kingdom.
- ^ This rationale for regulation was articulated by a member of the 49th Congress (1885): In ordinary cases the consumer may be left to his own intelligence to protect himself against impositions. By the exercise of a reasonable degree of caution, he can protect himself from frauds in under-weight and in under-measure. If he can not detect a paper-soled shoe on inspection he detects it in the wearing of it, and in one way or another he can impose a penalty upon the fraudulent vendor. As a general rule the doctrine of laissez faire can be applied. Not so with many of the adulterations of food. Scientific inspection is needed to detect the fraud, and scientific inspection is beyond the reach of the ordinary consumer. In such cases, the Government should intervene (Congressional Record, 49th Congress, 1st Session, pp. 5040-41).
- ^ It is noteworthy that in writing The Jungle, Sinclair’s motivation was not to obtain federal meat inspection legislation, but rather, to provoke public outrage over industrial working conditions. “I aimed at the public’s heart,” he later wrote, “and by accident I hit it in the stomach.” (Quoted in Kolko 1967, p. 103.)
- ^ Thalidomide was not approved for sale in the U.S. The fact that an FDA official – Dr. Frances Kelsey, an FDA drug examiner – played a key role in blocking its availability in the United States gave even more legitimacy to the view that the FDA’s authority over pharmaceuticals needed to be strengthened. See Temin (1980, pp. 123-24). Ironically, Dr. Kelsey’s efforts to block the introduction of thalidomide in the United States stemmed not from knowledge about the fact that thalidomide caused birth defects, but rather, from concerns that thalidomide might cause neuropathy (a disease of the nervous system) in some of its users. Indeed, the association between thalidomide and birth defects was discovered by researchers in Europe, not by drug investigators at the FDA. Hence, the FDA may not in fact have deserved the credit it was given in preventing the thalidomide tragedy from spreading to the U.S. (Harris 1992).
- ^ See Comanor (1986) for a summary of this literature.
- ^ Along these lines, Olson (1995, 1996a, 1996b) also finds that other aspects of the FDA’s enforcement work from the 1970s until the present are generally responsive to pressures from multiple interest groups including firms, consumer groups, the media, and Congress.
- ^ For a very readable discussion of this perspective see Carpenter (2004b).
- ^ See Mathios (2000) and Ippolito and Pappalardo (2002) for analyses of the effects of this law on food consumption choices.
- ^ See Olson (2000) for analysis of the effects of these user fees on approval times.
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