Our economy allows us to use many goods we do not know how to produce, and also employ the services of experts. The ability to use knowledge we do not possess drives much of our prosperity, since any person can only know a tiny fraction of total economic knowledge. We effectively trade knowledge as well as goods in markets.

Reliance on knowledge we don’t possess creates a risk of being taken advantage of by others. An auto mechanic could tell me the phalange on my car needs to be replaced, and I might well believe him. We face a trust problem: who can we trust to trade with us but not take advantage of our lack of knowledge?

Last week I discussed the Insurance Services Office’s (ISO) fire protection ratings and Underwriter’s Laboratories’ (UL) seals of approval for appliances, both of which are examples of how markets assure quality. I think that many people are predisposed to be skeptical of market quality assurance, because of the temptation to profit from uninformed customers.

Consequently we often turn to government for quality assurances. For instance, government assures the quality of goods it provides like public schools and national defense. Occupational licensing by states verifies the qualifications and good conduct of many professionals. Agencies like the Food and Drug Administration and Federal Aviation Administration regulate the quality of goods sold by businesses.

The accumulated evidence, however, demonstrates that government often poorly assures quality. The Department of Energy and Environmental Protection Agency’s Energy Star certification program provides one illustration of the problem.

Evaluating whether new energy efficient appliances deliver the promised savings is challenging. For example, we purchased a new air conditioning unit at the Sutter house two years ago. Suppose I wanted to check if our heating and cooling costs have indeed fallen. I could look at our monthly bills from before and after the purchase, but we use electricity for many things. And I should probably also control for differences in the weather.

The Energy Star program certifies appliances that exceed Federal energy efficiency standards by at least 10 to 25 percent. In principle the program should relieve us of the burden of verifying energy savings. Many Federal agencies must purchase Energy Star certified products, which also qualify for Federal tax credits and various state rebates, so millions of dollars are spent based on Energy Star ratings.

A study by the Government Accountability Office (GAO), however, documented significant holes in the Energy Star certification process. The GAO submitted twenty bogus products, complete with fake product descriptions and pictures, for approval. Several of the products were downright ridiculous, like a gasoline-powered alarm clock. Yet fifteen products received Energy Star certification, with only two rejected (three were still pending certification at the end of the GAO test). The government’s Energy Star promises apparently are not very reliable.

We might blame these mistakes on bureaucrats who didn’t bother to check the products they approved. But the problem runs deeper. The GAO noted that the Energy Star program does not require independent, third party testing of energy efficiency claims. Federal officials take manufacturers at their word, which offers customers no protection from producers’ false claims.

We might think that businesses will never resist the temptation to profit from uninformed consumers, while bureaucrats who cannot profit will be more responsible. Yet ISO and UL demonstrate that market incentives can be aligned to produce trustworthy performance for over 100 years. Bureaucrats do not earn profits, but continue to be paid even when quality promises are broken, and agencies often receive budget increases after problems arise on their watch.

The costs of unreliable government quality assurances are all around us, from the New Orleans levees which collapsed during Hurricane Katrina to the thousands of high school graduates requiring remedial college courses. We have all probably heard the phrase, “Good enough for government work.” Given this sentiment, government’s unreliable promises about quality, as illustrated by the Energy Star program, should hardly be a surprise.

 

Daniel Sutter is the Charles G. Koch Professor of Economics with the Johnson Center for Political Economy at Troy University. Respond to him at dsutter@troy.edu, and like the Johnson Center on Facebook.