The People’s Agents: When the Fox Guards the Hen House…and Is Paid by Perdue

The financial cataclysm gripping the country is often (and rightly) blamed on a lax system of public and private oversight of financial institutions. On the private side, investors trusted huge auditing companies like Arthur Anderson to rate multinational corporations for fiscal soundness. Meanwhile, Arthur Anderson also took handsome fees from the same corporations to conduct those audits.  Such self-dealing makes no sense to most Americans.  No one lets us administer our own driving tests, much less check our own tax returns.

On the public side of the equation, we must consider the behavior of the government’s watchdog, the Securities and Exchange Commission (SEC), which was missing in action for much of the last decade.  Investors are so furious about this turn of events that some of Bernie Madoff’s victims have even filed suit against the SEC asking for money because the government ignored warnings from a whistleblower, while Madoff made off (sorry!) with billions of their dollars.

Now we have learned that these corrupt, nonsensical, and above all-highly ineffective approaches to financial transactions also apply to our food.  Reporting by the New York Times (here and here) revealed that unqualified inspectors employed by the privately owned American Institute of Baking were deployed by such food industry giants as Kellogg to inspect facilities owned by the Peanut Corporation of America, which owns and operates the plant that shipped the chopped nuts, peanut paste, and peanut butter contaminated with salmonella, killing as many as nine people and sickening 21,000 others.  The plant in southeast Georgia had leaks in its roof, water running down the walls, rodent infestation, and dysfunctional roasters. Employees provided by temp companies were paid minimum wage and wore uniforms they took home with them, thus collecting and carrying additional contamination into the plant.  All of these problems were apparently overlooked by the inspector, a gentleman named Eugene Hatfield, who rated the food safety level at the plant “superior” in March 2008, just a few months before the salmonella outbreak hit the front pages.

Not only did Mr. Hatfield lack expertise in peanut processing, he was paid $1,000 for the all-day audit by the Peanut Corporation itself, even though Kellogg was the entity that required the safety check as a condition of doing business with the processor.  Adding insult to injury, Mr. Hatfield notified the plant in advance of his inspection, giving the company ample time to sweep obvious pollution under the rug.

In the end, peanut producers stand to lose more than $1 billion as a result of the recall and attendant publicity, and the manufacturers, wholesalers, retailers, restaurants, snack bars, and others involved in marketing the 2,100 products that contained the nuts will lose hundreds of millions, if not billions, more.  How ironic then that the Food and Drug Administration (FDA) had a total budget of $537.777 million dollars, a $32 million increase over 2008 figures, despite the fact that it is responsible for regulating 80 percent of the food supply (everything except meat and poultry, which are under the jurisdiction of the Department of Agriculture).  But, then again, the SEC budget for FY 2009 was $913 million, a $7 million increase over 2008 figures (2 meg download).   Bernie Madoff ran off with how much again? Oh, yes, an estimated $63 billion.

Of course, putting more and better government cops on the beat is not a foolproof solution.  The reasons why the economy crashed are infinitely more complex than the readily apparent shortcomings in resources and competence at the SEC, and food safety—especially when 20 percent of food is imported—is also a complex issue.  But we are not reeling from the blows of subtle scandals now. Bernie Madoff was a crook about whom prominent financial experts registered concerns for years before his Ponzi scheme fell apart, and the problems at the Georgia peanut factory were plainly apparent to anyone who wanted to see them.  We are paying a huge price here not just because greedy and immoral people covered their tracks so well, but because our understanding of the importance of government in protecting the public welfare has gone way out of focus, fragmented by years of rhetoric from American business falsely reassuring us that it could keep its own house in order, and would do so, if only we would relax all those “burdensome” regulations.

We can only hope that our elected political leaders have now learned the tough lesson that shortchanging the regulators, whether they work at the SEC or the FDA, is not just dangerous for consumers, but very, very bad for business.