Unfortunately, in their admiration of laissez-faire, many conservatives forget the crucial conditions that the market requires to work its allocative magic. As economists have shown, the free market is best if and only if it is perfectly competive and both buyers and sellers have complete information. Failing these conditions, distortions may result that make some regulation desirable.
Consider the proposed regulation on labeling of alcoholic beverages, a regulation recently rescinded by the Reagan administration. It would have required sellers to print the ingredients of their products on their labels. This would have had two salubrious effects on the market.
First, it would have provided buyers with important information about product quality, thereby facilitating consumer choice. For example, in choosing between two brands of identically priced wine, the consumer would be able to make an informed choice about a Beaujolais made only from grapes and one packed with dye, sugar, and chemicals. This would drive out dishonest producers and bring into the market buyers now wary of products of questionable quality.
Second, labeling would have enhanced competition among producers by lifting the veil of secret formulas. It would also have exposed those companies that relied on inferior ingredients to attacks in advertising wars. This would have further heightened consumer awareness and choice--and pressure on producers to come up with better products.
In addition to promoting competition and consumer choice, the labeling requirement would have had an important health benefit. Many of the ingredients in alcoholic beverages provoke allergic responses. For example,the preservative sulfur dioxide can induce asthma and respiratory problems. Similarly, dyes used in some cordials and liqueurs can cause hives, while some ingredients, e.g., red dye in some wines, are suspected carcinogens.
In rescinding the labeling requirement, the Treasury department, which has jurisdiction over alcoholic beverages, declared that the cost of labeling outweighed its benefits. Treasury came to it conclusion primarily on the basis of a consulting report prepared for the Carter administration.
According to that report, the cost to the industry ranged from roughly $12 million to $150 million, while the benefits to consumers ranged from $31 to $188 million. The remarkably different interpretation of these estimates by the Carter and Reagan administrations make it clear that cost-benefit analysis is not a strictly scientific but rather a highly discretionary decision-making tool.
The Carter administration originally adopted the labeling requirement because the low-end benefit estimates ($31 million) exceeded the low-end costs ($12 million) and the high-end benefit estimates exceeded the high-end costs. In their view, that meant benefits were likely to exceed costs. In contrast, the Reagan Treasury interpreted the possibility that the higher-end cost estimates exceeded the lower-end benefits to mean that costs would likely exceed benefits.
The most logical explanation for the administration's different view of the same information is ideological bias. With the case for labeling not overwhelming, conservatives in Treasury tilted toward the free market and away from consumer protection. If that is the case, they may legitimately be accused of overzealousness.
While the cost-benefit analysis was a close call, it was well within the power of Treasury to write the regulations so as to ensure that beverager producers bear only the lower cost estimates that were definitely less than the benefits. Indeed, the department could have merely required producers to provide an adress to which consumers could write for ingredient information; but it did not take even this small step to protect the 1/2 to 2 million allergenic Americans.
A second and more cynical possibility, advanced by some supporters of labeling, is that administration knuckled under to the liquor lobby.
But according to a Treasury official, opposition to labeling was fierce, particularly from the California congressional delegation. Wine growers in that state apparently feared disclosure of the long list of ingredients that sometimes are mingled with the simple grape --urea, ox blood, dyes, sugar, egg albumen-- would hurt sales.
Whichever reason represents truth, the administration's rhetoric about "objective" cost- benefit analysis should not be allowed to obscure an important principle: the free market's invisible hand needs competition and information to work. conservatism should not mean "caveat emptor."