Taco 'Bout a Recall

Speaker 2

And Phil Magnus, the economist.

Speaker 1

And today we have an explosive episode of Happy Our Econ. Of course, we'll be discussing the cyclosporiasis outbreak that led to a massive recall on everybody's favorite, iceberg lettuce, and it made for a really bad time for toilets around the country. ⁓ Phil, were were you one of the unlucky ones to bite into a tainted piece of iceberg lettuce?

Speaker 2

Well, ⁓ I adamantly refuse to eat lettuce and most other vegetables. So ⁓ I I guess my dietary habits have made me immune from this.

Speaker 1

What I found so funny about the iceberg lettuce in particular is that apparently iceberg lettuce has like zero nutritional value to it. Like there's nothing there.

Speaker 2

It it's just like filler material that they put in there when they're selling you food. So you ⁓ you think you're getting more, but it's just y you know, basically useless to even have in there.

Speaker 1

think now the reality of the risk of explosive diarrhea, the risk to reward, it's like, let's see, you're not getting any nutrition, and then also you could have a just a terrible, terrible experience of life. You know, you're gonna have to start weighing those options. There's ⁓ a chef ⁓ named Chef Andrew Gruhl Who I follow on social media and he recommends, just in general, a life, some life advice. He says, only eat salads from whole lettuce heads, not bagged and processed ever. And that's due to the likelihood of ⁓ contamination. And my my wife, fortunately, grows lettuce on our property in our backyard. I didn't know about this. I didn't think there were any secrets between the two of us, but apparently she's been growing her own lettuce and and that's what my ⁓ my kids have been eating.

Speaker 2

So you got a a a doomsday lettuce supply in case ⁓ cyclo whatever it hits the stores again. Yeah.

Speaker 1

And if it's ever, you know, the end of the world and you have roving bands of cannibals coming around, they're gonna be able to eat us with a side of lettuce. Good for them. So apparently the the contamination traced back to Mexico, and I can't help but think like between Mexican lettuce and Canada's wildfires, it seems like there's a coordinated attack on on the US right now. What's the yeah?

Speaker 2

It's the tariffs. They're ⁓ they're both coordinating to come after us because Trump put tariffs on both countries and ⁓ no I and and ⁓ you know, I saw the wildfires ⁓ up close and personal. I've been in Canada for the last ⁓ week or so and ⁓ you know it you there's a haze around the sun of is burning material that's coming to the from the north and it's filtered into the United States. If you've been on the East Coast, yeah, you've got wildfires. And then you have ⁓ Mexican lettuce coming from the south. One of the interesting things I saw there was a news story last week that the government of Mexico had warned people, like warned tourists from Mexico into the United States not to eat the lettuce in the United States that ⁓ they have apparently shipped us because it causes diarrhea. Wow. So there's all sorts of irony stacked in that one across the borders, back and forth. But ⁓ yeah, it's ⁓ interesting times.

Speaker 1

Before we get into y you know, sort of the economics of the ⁓ explosive diarrhea outbreak, you know, will this change diet habits in general? I mean is this a win for carnivores? Are carnivores just pointing at this and saying, You see? You see when you're not able to cook, you're not able to heat something? I yeah.

Speaker 2

You know, I've been telling those vegans for years this ⁓ this lettuce stuff that they eat. Well, you know, as we established, it has no nutritional value and then it has this substantial downside. So I do the cost benefit analysis here, no gain, high risk. That means don't eat eat lettuce.

Speaker 1

You know, what is the economic hit for a recall? Because there's been recalls in the past and what happens to the supplier? How much is this gonna cost the company?

Speaker 2

Right, right. So Taco Bell is in a really bad situation right now because of this. Now you have to remember the market incentives are not aligned for a ⁓ company, a food provider, to intentionally sicken or poison their customer base. ⁓ you know, it's a sure way to lose your customer base. If you are giving them food that ⁓ has now suddenly a reputation for ⁓ causing dietary problems. ⁓ or if you are, you know, you go back to the historical examples of snake oil salesmen ⁓ that were trying to sell medical conics that were really just like arsenic and mercury and lead and all the stuff that's horrible for you. you know, that doesn't really work when you're a n a nationwide chain and your product's reputation is tied into ⁓ the value it provides. And Taco Bell has already taken a hit. ⁓ I think I read an article just yesterday. They said that their sales were down about 30% in the last week after this outbreak. And the corporate headquarters has already pivoted and they've taken strategies to try to ⁓ recompense their customers. So not only have they pulled all the lettuce from the shelves and done the recall, ⁓ they've admitted the problem. And it's kind of weird because it wasn't technically Taco Bell that tainted the lettuce. ⁓ there are many other dietary issues you can get from eating Taco Bell, but this was not them, it was actually the supplier. ⁓ is the farm that had the tainted lettuce, but they're stuck with the burden of it. So they pulled the lettuce off the shelves and they actually launched an advertising campaign for certain like lettuce-free burritos and lettuce-free tacos. And where I guess they mixed ground beef and ⁓ more beans, more cheese and ⁓ other products in there, ⁓ but intentionally trying to sidestep the lettuce problem. So they're so they're signaling to their customers, we know about this, we know that there was a problem. We're doing something to fix it, come back to Taco Bell.

Speaker 1

No, I admit that I in the past I have enjoyed a a good Taco Bell ⁓ here and there. But when I lived in Los Angeles, one of the most surprising things that I found were that there were Taco Bell restaurants in Los Angeles because we're talking about some of the best Mexican food in the world and people were still choosing to go the Taco Bell route. So they took it an initial hit, but I think that they're gonna give that old Taco Bell try and they're gonna climb right out of it.

Speaker 2

Yeah, it it's a fairly resilient company and a lot of the fast food chains are like this. And you know, there's there's an economic reason behind this. ⁓ yes, you can go to another city, another country, and it may be renowned for its Mexican food, or it may be renowned for its steak, or whatever it happens to be, but there's an information signal sent and you can go almost anywhere in the world and you see a familiar fast food chain. It's not gonna be great food, but it'll be consistent. And you don't have to do much research to know that you're getting the same Taco at Taco Bell at anywhere in the world that sells Taco Bell or the same burger at McDonald's. So if you're looking for a quick meal, yes, you go to Taco Bell, you go to McDonald's. ⁓ they also compete on some other margins. Like ⁓ a lot of these ⁓ restaurants, they stay open late. So you got the munchies at 2 a.m. You go to Taco Bell. Or ⁓ if if you're ⁓ you're you're hungry in the middle of the night, you go to McDonald's, you go to ⁓ any of these other major chains that stay open, you can't do that with a regular restaurant.

Speaker 1

Do you know how much money the the lettuce farm lost? ⁓ you know, is it a a day's profit? Is it is it a month's? I mean, is there such a thing as recall insurance? I mean,

Speaker 2

I am certain that Taco Bell probably has certain, you know, insurance properties and things that are in place for them as a company. ⁓ I'm not so sure about ⁓ the farms and where they sourced them from. I think there was one company that ⁓ they've traced some of the outbreaks to, but it's a company that also sources it from hundreds, if not thousands, of different farms. ⁓ so that's why these things start to get really complicated. ⁓ you don't really know where the blame is. And, you know, the the better ⁓ Better to be safe than sorry also means that all of the lettuce from that company now has to be recalled and destroyed, even though it might be like twenty five percent of their farms are tainted. ⁓ the other seventy five percent is just like this filler that they were putting in tacos. In the

Speaker 1

Past ⁓ there have been recalls that I guess I've been a part of, and you get that email or that letter in the mail, and you think, When did I use that product? Especially especially if you're okay, you know, and and thankfully I I was okay. In some instances, I've been compensated financially, you know, like, ⁓ here's here's 14 bucks. And it's like, ⁓ great. I guess that's one way for a company to kind of dig themselves out of a diarrhea heap.

Speaker 2

It's preemptive, just like you were saying. And, you know, part of the reason there is they don't want someone suing them because they got diarrhea from a taco. ⁓ or, you know, if it's other products that you don't want someone suing them because they got an el an electric shock from a defective cord. you see a lot of this in the automobile industry. ⁓ we've all bought a car and then, you know, five years later you get an emergency recall. on this weird little thing. Like I I got one on my truck a few months ago. And it was like, well, if you're in reverse on a hill in a snowstorm, the backup camera may fail. Therefore your truck is recalled and you need to go in and have this chip or something switched out to make it work again. And I'm like, well, I ⁓ it's not a very ⁓ frequent occurrence that I'm trying to go in reverse in a snowstorm on a on a hill or something, but they're proactively trying to do that because for the one person that is in that situation, The camera fails and then they're in a wreck or they ⁓ they have an accident. Well, then it's a liability on the company. ⁓ so actually the market incentive is there for most of these companies to try to make amends, which is quite at odds with this narrative of evil capitalism trying to extort profits from ⁓ masses of people by selling them defective products. Again, as I keep stressing, it's not in the interest of most companies to harm their customer base, because that means the customer base Finds out and leaves.

Speaker 1

You know, I don't think it's possible to talk about this subject, especially when it comes to like foodborne illness, without bringing up the classic work of fiction, and I emphasize the word fiction. I'm talking about Upton Sinclair's The Jungle. Tell us a little bit o about it.

Speaker 2

So Upton Sinclair, you know, let's let's say he was an out and out socialist. ⁓ so very left-wing activist, and he wanted to portray capitalism basically as ⁓ you know, the culprit of all the ills in the world. This is also a guy that like praised the early Soviet Union as the new future. ⁓ but he was a ⁓ a social activist ⁓ fiction writer at the turn of the 20th century, and he wrote this horrific novel about the supposed conditions in the meatpacking plants. ⁓ and ideas will ⁓ you know, I'm gonna describe in graphic detail ⁓ these awful conditions for the workers, unsanitary treatment of the beef. ⁓ he also had some racism in there. Like one of the ⁓ the things they don't talk about in the jungle is it has certain passages about how ⁓ they don't want black people working in the meatpacking industry and stuff. So he he's very much a product of that progressive era ⁓ mentality where like capitalism is the source of all problems in the world and These evil companies are trying to ⁓ screw their consumer base into buying defective products that are going to poison them or give them ⁓ terrible nutrition, ⁓ while also exploiting the workers in in these horrific conditions, ⁓ where people are getting maimed and hurt on the meat packing lines. And you know, you look at that point in history, yes, meat packing was not a pretty industry. But you also start to see it's actually the market mechanisms that make the correction in there. This is the whole era when the Food and Drug Administration comes into existence. So the Pure Food and Drug Act is passed around the turn of the century. And most people that study this, you know, they assume it's like, well, the government is coming to protect you from the corporations. If you dig into the research behind what caused the FDA to come into existence, or you dig into Research behind Upton Sinclair's argument here, this fictional story to try to prompt the FDA's existence. ⁓ it is exactly that. It's a fictional story. The reality is behind the FDA, it was a ⁓ a a case of private companies lobbying the federal government to establish regulatory burdens from above that would squeeze the little guys and benefit the large. market controlling companies that had an end with a lobbyist, that had a friend with the congressman, or ⁓ in specifically the FDA's case, ⁓ there were a lot of people that were politically connected and financially connected to the first commissioner, Harvey Washington Wiley. ⁓ he's one of these bureaucrats. He was like the Anthony Fauci of the Food and Drug Administration in that era, this guy that had been there for decades upon decades, and he had political connections to almost everyone in Washington. And they've they found his papers and looked in it. And he's actually cutting deals to favorably regulate on behalf of his friends and penalize their competitors. So this thing that's supposed to be for the public good or for ⁓ helping and ⁓ protect society really is this corrupt agency that's working on behalf of private interests at the expense of market competition.

Speaker 1

You know w we'll often hear about the horrors of industrial farming. Could an argument be made that kind of we have industrial farming the way that it is today because of these regulations? Because

Speaker 2

Small producer cannot afford these weird regulatory compliance measures that are necessary to trade on the national or international market. And you find this a lot in food products. ⁓ so some of these barriers to trade across borders, ⁓ and this has gotten all tied up in the tariff debate and everything else. It's about food safety standards. Like Europe will have one standard that they'll impose on the US. The US will have its own standard that it imposes on Europe. And it means Even though the food is perfectly safe in both of those countries or both of those regions, except for the lettuce, ⁓ apparently, but ⁓ even though the food by and large is perfectly safe, you cannot cross the borders with it because of this arcane regulatory compliance thing that was actually put into place to benefit some company that had a friend with a politician.

Speaker 1

If the FDA didn't exist, you know, who in the market would trace the cause of these outbreaks back to the source? What what recourse would customers have without the FDA?

Speaker 2

This is thing you have to remember: the consumer is sovereign and private companies know this. ⁓ most private companies that are selling food on the market realize that, hey, if we lose our customer base because we become ⁓ reputed and known as the Mexican restaurant that causes diarrhea, or the steak restaurant that has flies in its steak, or some other horrible thing that's coming about it, ⁓ you know, that destroys their customer base. And as we saw with Taco Bell, even if it's Taco Bell's. Source supplier that's the real culprit here, the customer base dropped off by 30% in a week. That's a pretty shocking hit. So the company has all sorts of incentives to get to the bottom of the problem and try to correct it themselves. ⁓ whether that's tracing their supplier and saying, hey, wait a minute, we're no longer going to source from this farm, ⁓ or we're doing an internal investigation, a self-recall. You see it all the time in the private sector, self-recalls. occurring without any regulatory instigator. And it's actually to try to preempt and and beat the government regulators to the game. ⁓ it's because they know they're going to lose their customer base if they don't ⁓ take these measures first. The government is almost always like the latest and last actor to enter into the fray. You know, they're they're late to the game. ⁓ something like the FDA will make a big splashy announcement. Hey, we're trying to trace the source of this problem. But it it's like, okay, well that would have been great to know three weeks ago when Taco Bell already started to take the steps necessary to correct.

Speaker 1

It's like local is better. You under you have a better understanding the closer you are to it. And ⁓ I was in ⁓ Las Vegas a couple weeks ago for for Freedom Fest and I I met a guy there who got food poisoning at one of the restaurants. And when he told me where he got the food poisoning, ⁓ I said, I'm not eating there. There there we go. Thankfully he he went before me, so I didn't have to so I didn't have to find out

Speaker 2

He was your canary in the coal mine for that restaurant.

Speaker 1

And I'll tell you what, I was more than happy for him to take the bullet on that one, ⁓ than for me to deal with it. So, you know, what happens if you know, if the FDA makes makes a bad call? You know, are they liable to the supplier?

Speaker 2

Almost never and there's a long history of this sort of thing, even to the origins of the agency. ⁓ you know, one of the ⁓ the the the stories very early on after the FDA was created is we're talking like nineteen ten, nineteen twelve or so, ⁓ they briefly went after Coca-Cola. And they claimed that ⁓ Coca-Cola was misrepresenting itself because Coca being the name has a s a common root with cocaine, and they had done tests in Coca-Cola and they found there wasn't enough cocaine in the Coca-Cola to be able to label it that And people like, what? This is a this is absolute nonsense. We like our Coca-Cola. This is our ⁓ like our our famous nationally circulating product that everyone loves and enjoys. And they kind of pushed back some of the FDA's power over that. But y you have over a hundred years of the FDA making mistakes. And you know, the i the less you a market wide edict recall this, or ⁓ you can't put this on the label because of ⁓ of some regulatory reason. And this sort of thing, it often has severe economic consequences. It means that, hey, if the FDA makes an error and you have to destroy millions of pounds of perfectly good beef because they aired and they're trying to be ⁓ like this nationwide enforcer on it, well, who bears the burden of that cost? It's not the FDA issuing a refund check to everyone's beef that they ordered destroyed.

Speaker 1

Some of the worst images that ⁓ that I've seen have been, for example, people who have been trying to feed the homeless and here come the agents and they end up dumping like bleach on the food so that they will not be served.

Speaker 2

Yeah, the local food enforcement agent for the city decides, wait a minute, you're serving the homeless, but you're not an officially certified kitchen according to our health code. Therefore, you're not allowed to do this act of charity. And and it is actually frankly kind of disgusting. Because what's the alternative here? Well, the homeless people they go completely hungry. Or ⁓ they have another food source that's not necessarily Up to the standards, even of the kitchen. And this is one of the interesting things, you know, you travel in the developing world, there are charities giving out food to the homeless, and and people are there ⁓ in line to to get this stuff. Let that be the consumer ⁓ signal there. ⁓ you know, the homeless people were not lining up. You you you'd have a question about is this ⁓ this kitchen up to stuff or something? ⁓ just the same thing as like people don't go to a restaurant. That has a reputation for causing stomach illness, that restaurant eventually goes out of business. Yes.

Speaker 1

I came across something that I found really interesting. The Democratic front runner for California governor, ⁓ Xavier ⁓ he had this to say about Mexican food in California. He said

Speaker 2

Basera, yeah. And if you're gonna buy a street taco, buy a real street taco, not a not something from one of these. I'll leave it at that. All I know is that there's real food in California and there are real street tacos and you don't get ⁓ in some establishment that's been around for a long time. You get it on the street from the guy who's been making it for a long time in his little cart.

Speaker 1

This has garnered a a lot of fury in California. And the thing that gets me is when you talk about a nanny state, California just goes right to the top. Exactly. You could look at any product you have right now, and if there's a label about how dangerous it is, there's gonna be a little part about how in California this thing will, you know, has been known to cause, you know cause cancer. Cause cancer. It's it's in every single thing. So you have this in incredible nanny state, and now you have somebody running for governor who's saying, you know what, you should go and eat from the people that have no health qualifications whatsoever. Hilarious. I mean, beyond being real a really stupid thing to say, because you want your brick and mortar restaurants to do well because they pay taxes, ⁓ they provide, you know, so much for the community, et cetera. But telling people, no, you should go to the guy who stole the shopping cart From the from Vaughn's and is now grilling, you know, ⁓ who knows what kind of meat on top of it. It's just it's very it was very funny.

Speaker 2

Fascinating. You know, and I can attest exactly to what you're describing here. California is the nanny state. ⁓ the independent institute where it works, our our main office is is located out in Oakland, California. And you go out there, there's one of these these ⁓ proposition stickers that the state requires and everything. It's like this building, if you walk through the door, may cause cancer and all these other conditions. This ⁓ this product is known to the state of California to cause such and such ⁓ medical harm. And it's on not just like food items or medicines or things like that. It's on some of the most absurd stuff. It's like, well, this light bulb is known to cause cancer or something, things like that, because it contains an electronic part that ⁓ has a distant component that touched mercury or something. ⁓ so hyper-regulated economy. ⁓ they have these stickers on everything. And because they're a big populist state, it means that anyone that wants to do business there. In the United States, now, no matter whether you're in California or not, you also have to put this sticker on it. So you may live in Alabama or Maine or something, and you're getting a package that has the California sticker on it. We've all seen that. And yet, yeah, you have someone like Xavier Basera, he's coming out there saying, Well, yeah, go to the food stands. I think what's interesting here is even though he veers toward this hyper nanny state regulatory environment that, ⁓ He's obviously a part of in his political career. He's nonetheless intuited something that ⁓ maybe it's not even needed. If he is willing to trust even the street food from the random guy with the cart standing outside the baseball stadium, you know, that that's a an implicit admission here that maybe the rest of the state is under regulatory over.

Speaker 1

Yeah, and I think there's a there's a part of me as I've gotten older I I may have become a little bit of a nanny myself when it comes to to things like this, because ⁓ at least in in New York City, we've been seeing a lot of similar things pop up. And the funny thing is ⁓ they're fairly new to New York City. ⁓ but yet people are then defending them as if they've always been part of the city. And it's like, well, hold on a second, let's let's admit some things here. Yeah, yeah, exactly. And it's like, no, you know what? You know, like it or not, the cartel that runs the hot dog stands. They've had an iron grip on those hot dog stands. So it's been very tough to open up a stand, you know, ⁓ if you will. So th there's this thing of like the new being treated as if it's always been that way. ⁓ for me, I think the big thing is that it does present a a very unfair system where the brick and mortar shops are being just effed over in so many ways and these in independent entrepreneurs with the shopping carts are then able to go around every single regulation that that the other ones are responsible for. You know, so I wonder what is the solution, you know, for that. Yeah.

Speaker 2

Well, I think the first is to recognize, and this comes straight out of public choice economics. ⁓ this is George Stigler's great observation, is that regulatory tools of the state are not really operating in the public interest most of the time. They're actually operating in the interest of controlling entry into certain markets. And if you have a politically powerful firm or a group of firms, the the hot dog Stan Cartel you mentioned in New York City, you know, their interest in regulation. is to keep that regulation in place, not because it's helping their consumers, but because it's keeping other people out of the hot dog stand industry. It's creating a burden, an obstacle for them to enter into competition. And, you know, Stigler and some of the other public choice theorists will will take this out. You see this pattern all over the place if you start looking for it in almost every other aspect of regulation, ⁓ it comes about under the ostensible name of we're helping the public, but the reality is we're putting a license fee in place to keep hairdressers from competing against the barbershop cartel, or we're putting in food safety regulations to stop the hot dog stands from facing competition, or ⁓ restaurants, new restaurants from opening. We're creating high startup cost if you want to enter into that marketplace. And that startup cost means that I Already established in that marketplace, ⁓ who've met the regulatory obstacles, ⁓ have an automatic advantage over you because ⁓ my burdens already been met. ⁓ I'm politically connected, my firm has gone through all the obstacles that exist to keep you out of competition. And I get to say, well, I'm doing it for your own good, I'm doing it for your safety.

Speaker 1

Well, Phil, I'm hoping that both of us made it out of this episode without some kind of stomach bug. And I hope everyone listening makes it through this episode as well. Enjoy your dining and ⁓ ditch the lettuce, so maybe for another couple of weeks. We are happy hour econ. We'll see you next week.