June 10, 2010 Washington Monthly/New America Even Video:
"Can Regulators Get Their Mojo Back?"
Reputation and Power: Organizational Image and Pharmaceutical Regulation at the FDA by Daniel Carpenter Princeton University Press, 856 pp.
s this issue goes to press, congressional deliberations on the mammoth financial reform bill have entered the trench-warfare stage, over a seemingly obscure question: where to put the new Consumer Financial Protection Agency (CFPA), which will centralize the writing and (to some degree) enforcement of federal financial regulations on such things as mortgages, savings accounts, and consumer debt. Should it be an independent agency, like the Securities and Exchange Commission, or a subunit of the Treasury Department or the Federal Reserve?
Liberal Democrats, having been burned over the public option in health care, have now promised to die in the ditch to make the CFPA independent, on the theory that institutional autonomy will make the agency more powerful and thus less vulnerable to pressure from the financial sector. Republicans like Senator Bob Corker of Tennessee seem to agree with the liberals’ theory and fear that a freestanding agency would tend toward overregulation, which explains why they are so opposed to making the CFPA independent. All sides concur that while the specific powers given to the CFPA are important, in the long run the capacity of the agency to develop operational and strategic independence matters more. What is really at issue in this debate, as in so many others, is the question of bureaucratic autonomy—a principle that liberals rarely give pride of place, but probably should.
Bureaucratic agencies are often created in the wake of a scandal or crisis, to protect the interests of the public. But as Eric Patashnik argues in his recent book, Reforms at Risk, once the crisis fades from the public view special interests and their lobbies use the pressure points of the democratic process to claw back their legislative losses. Governmental agencies muscular enough to defend themselves and influence the evolution of public policy can help ensure the vindication of the general interest once the public has moved on to other things. While participatory democracy might be the ideal way to prevent reforms from being reversed, bureaucratic autonomy is a realistic, necessary, and, indeed, worthwhile second best. The success of liberal objectives in areas like financial regulation and health care reform, in short, may depend on learning how to arm agencies with the weapons of their own defense.
Thankfully, we have been graced with a genuine magnum opus to guide us through these questions: Daniel Carpenter’s remarkable, exhaustive, and frankly (at more than 850 pages) exhausting historical study, Reputation and Power: Organizational Image and Pharmaceutical Regulation at the FDA. It is, without question, the best study of a federal agency since Martha Derthick’s Policymaking for Social Security, and, like Derthick, Carpenter reminds us that bureaucrats are not mere functionaries and timeservers. They have the capacity, under certain conditions, to be powerful agents of political, economic, and social change.
The questions that Carpenter raises are of vital importance for liberals, since the question of bureaucratic power turns out to be central to the possibility of effective governance. To make sense of Carpenter’s argument, let’s take a short detour into a long-standing debate among political scientists, one with deep roots in American political culture.
mericans have traditionally shuddered at the danger that bureaucracies pose for democratic self-government, and thus for liberty. Liberals get nightmares thinking about J. Edgar Hoover’s FBI snooping on civil rights activists or the CIA torturing suspected terrorists, while conservatives fear "jackbooted thugs" from the Environmental Protection Agency or the Bureau of Alcohol, Tobacco and Firearms invading their property. We are reassured, then, when we discover that agencies are firmly under the control of the people’s representatives in Congress and the White House.
Political scientists and economists have largely sympathized with our traditional fear of out-of-control bureaucracy. As academics are wont to do, they have formalized this fear, describing the relationship between elected officials and bureaucrats as akin to that between corporate shareholders and management—between "principals" and their "agents." Principals hire agents because they lack the time or expertise to do the work themselves. In so doing, however, they take the risk that their agent will exploit their limited knowledge and oversight capacity to either "shirk" (fail to work, a la the policemen in doughnut shops) or "subvert" (use the principal’s resources for purposes that he has not approved).
Put simply, the main purpose of this school of research has been to explore how it is that the will of politicians—and, by extension, the voters who put them in office—can be faithfully translated into the actions of far-flung government agencies. Political scientists have identified numerous mechanisms by which politicians can impose their will. Congressional oversight and control over appropriations give politicians the ability to question, shame, and punish officials whose agencies get out of line. Presidents who detect bureaucratic freelancing can appoint officials sympathetic to their agenda, promote preferred bureaucrats through the permanent ranks, and, in the extreme case (as with President Harry S. Truman and General Douglas MacArthur), fire those who flout their will.
Frequently, legislators also hard-wire their preferences into the structure of agencies by shaping their institutional form (as in the case of independent agencies and commissions) or by creating "fire alarms" (such as lawsuits) that organized interests can pull when they detect unauthorized bureaucratic activity. These impressive weapons, scholars insist, mean that agencies are likely to follow the intentions of their political masters, even where legislators’ fingerprints are not immediately visible.
This way of studying bureaucracy has added immensely to our understanding of one of the most fundamental questions of democratic theory, which is how it is possible for the people in an era of Big Government to actually rule. But despite the attractiveness of this approach, it has a number of serious flaws.
The first has to do with the implicit theory of democracy that undergirds it. James Madison observed in the Federalist Papers, "In framing a government which is to be administered by men over men, the great difficulty lies in this: you must first enable the government to control the governed; and in the next place oblige it to control itself." It is for the purpose of "controlling the governed" that we create government agencies in the first place. We build police forces to prevent criminals from harming our persons and possessions and environmental agencies to keep businesses from despoiling our air, rivers, and open spaces. The principal-agent theory would have us believe that these goals would actually be met if only agencies were closely monitored by Congress and the White House. But this is not, in fact, the case.
Regulation is often characterized by what James Q. Wilson called "entrepreneurial politics"—vigorous, ongoing political activism by those who have to pay the tab (such as factory owners who have to comply with environmental rules), but only sporadic interest from those who get the benefits (including citizens who will enjoy cleaner air). While consumer advocates and other public interest watchdogs (starting with Ralph Nader in the 1970s) have often sought to make agencies more responsive to the public, this approach has found only limited—and not always durable—success. That is because greater responsiveness only increases the opportunities for concentrated interests to exert influence over the agencies that are supposed to regulate them. Perhaps ironically, it may be the case that only those regulatory agencies that are able to escape domination by politicians will be able to effectively pursue the goals that those same elected officials wrote into law back when the public was paying attention. Effectiveness, in short, may demand a significant degree of bureaucratic autonomy, rather than democratic control.
The second major flaw in the principal-agent approach is that it tends to focus almost all of its attention on the levers Congress and the president use to control bureaucracies, but remarkably little on the creativity of bureaucratic leaders. Carpenter’s key insight is that bureaucrats themselves have the power not only to shirk or subvert their principals, but in some cases to guide or even dominate them. The canvas on which he explains how this is possible is the history of one of America’s most powerful agencies, the Food and Drug Administration.
he FDA is not, one might think, the most gripping of subjects. It certainly does not have the glamour of other bureaucratic agents whose power came to rival or even eclipse their principals, such as J. Edgar Hoover’s FBI, James Webb’s NASA, or Curtis LeMay’s Air Force.
But what it lacks in sex appeal, the FDA has made up for in raw governmental power. Indeed, the agency has the ultimate gatekeeping authority: it can prevent capitalist enterprises from bringing their products to market and set the terms under which those products can be sold. What’s more, despite America’s reputation as a business-dominated state-building laggard, the FDA developed this authority earlier than similar agencies in other industrialized countries—for decades, the FDA routinely rejected drugs that other nations made available for sale. For most of its history, it also managed to avoid succumbing to outside pressures and thus was able to chart its own regulatory course.
In short, the FDA in its heyday was a remarkable victory for powerful, scientific, rational governance, planted in what one might have thought was exceptionally rocky soil. How did the FDA get away with it? The answer has a great deal to teach us not only about the sources of bureaucratic authority, but also about how we have built effective governmental power in the United States in the past—and perhaps how we could do so again.
The key concept that Carpenter deploys to explain the FDA’s extraordinary accomplishments is reputation. Reputation is an alternative to the economists’ focus on the pursuit of material interest. In Carpenter’s view, bureaucrats (and others in public life) fundamentally seek the esteem of others. And their reputations improve when they work for organizations with good reputations, just as they are tarred when they work for disreputable agencies. This leads to a virtuous cycle: agencies with strong reputations attract more talented staff, which improves their actual performance. This, in turn, further bolsters their public image. Obviously, the same thing is true in reverse, which is why agencies with tarnished reputations so often have a hard time pulling themselves out of the ditch. Thus there is an incentive for bureaucrats not only to do good work, but also to build agencies with the power and autonomy to control their own agenda.
ew bureaucracies have managed to do this as successfully as the FDA, an agency that owes its reputation and clout, in part, to repeated, tragic reminders of the dangers of an unregulated marketplace. In late 1937, more than a hundred people died after ingesting a toxic potion known as "Dr. Massengill’s Elixir Sulfanilamide." The deaths were painted as a "policy tragedy" by the USDA (which technically regulated pharmaceuticals at the time but had little real authority). Arguing that such incidents were the predictable consequence of an effectively unregulated industry, agency officials also used the tragedy to call into question the ability of the private sector (in particular the American Medical Association’s voluntary "Seal of Approval" system) to protect Americans from the drug industry. Only a powerful government agency with the authority to keep drugs off the market until they were proven safe—the power of "gatekeeping"—could do the job. Congress responded by passing the Federal Food, Drug and Cosmetics Act of 1938, which created the FDA and gave it the power to regulate drugs for safety.
The Massengill tragedy, and later ones, seared into the public mind a set of lessons that would prove immensely empowering to the FDA. First and foremost, it provided vivid evidence that drug companies could not be trusted to police themselves, and that the public needed an impartial guardian to protect its health and welfare—which is exactly how the FDA came to be viewed. It was an image the agency consciously cultivated, in part by embracing both the methods and the prestige of science.
Throughout the 1950s, the FDA developed increasingly rigorous scientific standards for testing drugs, and managed to impose them on a frequently recalcitrant industry. By crafting the yardstick by which drugs were measured and by insisting on controlled trials (rather than the subjective impressions of doctors), the FDA shaped what scientists, the drug industry, and Congress took to be scientific reality. What’s more, the agency’s reputation as an impartial arbiter of drug safety allowed it to reject drug applications from the most powerful firms in the industry without fear of consequence, and each time it did so its fearsome image grew.
Eventually, drug companies became concerned about their own reputation in the eyes of the FDA, since it was becoming clear that the agency took companies’ track records into account when evaluating applications for new drugs. To garner the FDA’s favor, they hired the types of people (especially clinical pharmacologists) that the FDA preferred and worked with the academic and medical institutions that the agency thought reputable. The FDA’s power was so considerable that it was able to make these things happen even when it lacked the statutory authority to do so.
Indeed, the FDA’s original legislative mandate gave it a powerful but limited set of tools. Its power came from its gatekeeping authority—no new drug could be sold unless the FDA ruled that it was safe. Consequently, the FDA held almost all the cards when negotiating with drug companies that had applications pending before it, as the agency had the option to either reject applications outright or delay action. But the FDA’s power was also limited, since it only had the statutory authority to test drugs for safety, not for effectiveness.
During the 1950s, however, the FDA made a number of incremental decisions that subtly reshaped its scientific standards and gave it the de facto power to regulate drugs for efficacy as well. By 1959, Ralph Smith of the FDA’s Bureau of Medicine was openly asserting, "No drug is entirely safe…If it is an agent which is life-saving or if it is palliative in a serious condition for which there is no effective remedy, some degree of hazard can be tolerated." Reinterpreting safety by weighing risks against benefits stretched the FDA’s legislative mandate, to say the least. But by the time Smith enunciated the agency’s position it was almost universally acknowledged, as Carpenter puts it, that the agency’s "decisions were actively and necessarily incorporating ‘efficacy’ considerations already." The FDA’s image gave the agency the capacity to stretch its legal mandate, and to insulate its actions from reversal by Congress or the courts.
The FDA’s already venerable reputation was further burnished in 1961, when it refused to approve the sale of the drug thalidomide in the United States, although it had been on the market in Europe for years. It soon came to light that the medication, which was used to treat morning sickness, caused gruesome birth defects—more than 10,000 children in forty-six countries were born with mangled or nonexistent limbs as a result of exposure in utero. While few nonretirees remember the thalidomide tragedy today, the pictures of children horribly deformed from exposure to the drug were burned into the psyche of an entire generation of Americans. Sylvia Plath captured the collective horror in her poem "Thalidomide," which offered a haunting description of victims with "knuckles at shoulder-blades."
Against this backdrop, Frances Kelsey, the FDA reviewer responsible for rejecting thalidomide, became an instant celebrity. In 1962 she was voted one of the ten "Most Admired Women in the World" by Gallup, along with Jackie Kennedy and Lady Bird Johnson. As the media recounted the painstakingly detailed process she went through in investigating thalidomide, the standard vices of bureaucracy were transformed into virtues. As Carpenter puts it, through Kelsey’s story the media "re-interpreted ‘bureaucratic nitpicking’ and deliberation … as modern-day, scientific virtues that upheld protection of American families and infants." Kelsey personified, and projected to a popular audience, the image that the FDA wished to have of itself.
Indeed, despite the accolades that were heaped on her, Kelsey’s critical decision was not especially heroic—as Carpenter explains, she was not "one woman against the system." What allowed her to reject thalidomide were procedures and scientific standards that were already well developed when she reached the agency in the 1950s. In fact, the decision to hire Kelsey in the first place was a part of a conscious FDA strategy to bring in clinical pharmacologists who sympathized with the agency’s scientific culture, and who were skeptical of the more impressionistic approach that was favored by doctors and drug companies at the time.
By dealing a powerful blow to the drug industry’s reputation, the scandal gave the FDA’s supporters in Congress the power to pass the Kefauver-Harris Amendment, which ratified the agency’s existing practice of evaluating efficacy as well as safety, and gave it a legal basis for extending efficacy evaluation to existing as well as new drugs. Over the next decade, scores of drugs were taken off the market, many of them without any explicit FDA action. Just knowing that the FDA had authority to crack down on ineffective products was enough to persuade some manufacturers to pull them from the shelves. During this period, the FDA also formalized the now-familiar three-stage process for testing drugs on humans, which helped prevent research subjects from being exposed to toxic compounds (the seventeen women in the United States who gave birth to deformed infants as a result of taking thalidomide had been participating in clinical trials) and tightened its oversight of drug testing, despite considerable opposition from politically connected organizations like Houston’s M. D. Anderson Cancer Center.
The expansion of the FDA’s statutory power, in combination with its growing reputation, gave it the tools to fully domesticate the once mighty drug industry. In Carpenter’s evaluation,
At the level of research and development practices, a broad ranging deference to the Administration and its pharmacological regime set in, as drug companies universally engaged in product development through sequences of randomized, blinded, and controlled clinical trials, as they adopted FDA-initiated and preferred standards and concepts in their manufacturing and marketing, and as they displayed increasingly obsequious behavior toward Administration officials.
The most powerful firms of the new era were those like Merck, which anticipated the FDA’s wishes in areas such as personnel and research design, while those who bucked the agency found it difficult to get their drugs to market. With the industry basically cowed, the FDA’s relatively small staff was able to exercise considerable power while keeping its most impressive weapons sheathed. What’s more, the industry rarely fought back through Congress or the courts when the FDA expanded its authority, even if it appeared to be stretching the formal bounds of its statutory power.
The FDA’s powerful reputation gave it a great deal of insulation when an antiregulatory chill took hold in the 1980s. But in the end, the agency proved vulnerable to attacks from libertarians and advocates of streamlining drug approvals—especially AIDS activists who argued that the agency’s painstaking approval process was keeping lifesaving drugs off the market and causing thousands of deaths. These advocates and their allies in government succeeded, at least to some degree, in chipping away at the FDA’s image, and were eventually able to establish time limits for approving new drugs, thus stripping away one of the tools (the possibility for delay) that had struck such fear in the hearts of drug companies. During the course of the 1980s and ’90s the increasingly aggressive and politically active pharmaceutical industry (in coordination with Republican elected officials and conservative think tanks) also brought pressure to bear on the agency in other ways. During the Bush administration, the FDA even found itself overseen by political appointees drawn from historical centers of opposition to the agency, the American Enterprise Institute and the M. D. Anderson Cancer Center.
While the formal powers that the FDA established in its glory days still exist—in particular the ability to subject new drugs to rigorous, scientific trials—the pressure to rapidly approve drugs has taken its toll. This pressure has been compounded by increasing drug-industry exploitation of the FDA’s Achilles heel—its weak post-approval drug-monitoring system, and its lack of control (other than limits on advertising) over doctors’ off-label prescribing. These vulnerabilities were brought into sharp relief in 2004, when it came to light that the FDA knew years before it was pulled from the market that the painkiller Vioxx was potentially dangerous; more than 27,000 people are believed to have died from strokes or heart attacks as a result of taking the drug. The Vioxx scandal badly tarnished the FDA’s reputation, and observers began to question whether the agency’s approval continued to be the world’s gold standard. While the FDA’s esprit de corps and power may recover under a Democratic president more in tune with its mission, Carpenter concludes that, in the wake of the Vioxx ordeal, the FDA has irrevocably "lost some of its scientific and consumer protection luster."
he story of the FDA as presented by Carpenter holds important lessons for liberals. First and foremost, while Americans’ skepticism of government is strong, it is not insurmountable. Many Americans think of "bureaucrats" as either ineffectual or self-interested power grabbers, but few feel that way about employees of the FBI, the military, the Social Security Administration, or the National Institutes of Health. And because Americans view these agencies in a positive light, they and their representatives in Congress have been willing to grant them broad power and authority, and in some cases to allow them to exercise power that they have not been explicitly granted—proof that Americans do not oppose handing power to government when they believe it is in trustworthy hands. Just as important, as a result of their reputation these agencies have been able to attract talent that other agencies cannot.
Carpenter’s argument has some important, if highly speculative, implications for our current debate on financial regulation. As many liberals have rightly noted, and indeed Carpenter himself argued in a recent op-ed in the New York Times, it may be dangerous to put a consumer financial regulator in a larger—and perhaps more finance-friendly—organization like the Federal Reserve. Yet there are lessons from Carpenter’s own book that suggest there may be real advantages as well. The Fed is taken seriously by the financial industry itself, and because of its reputation and more attractive salary schedule it is substantially more able to attract talent than other federal regulatory agencies. If placed inside the Fed, the CFPA would be able to build a strong, clear organizational image (especially if it were given the insulation from the rest of the Fed that Senator Dodd’s bill would provide, including near-complete control over its own budget). This would help foster the political will to grant the agency the autonomy it needs to effectively regulate the financial industry. An agency of that sort could induce a significant degree of "anticipatory compliance" just as the FDA once did, or at least command the respect of financial companies.
Second, in building an agency with the kind of power that the FDA had at its height, personnel matters. An agency with the ability to control, at least to some degree, its political destiny and strike fear into the hearts of those it regulates requires not only high-quality people, but also people possessed of a particular regulatory spirit. The FDA encouraged the development of the nascent field of clinical pharmacology and then recruited adherents to the agency. This gave the FDA a built-in coherence, and thus the ability to develop a strong organizational culture. The CFPA would need to do the same thing, perhaps by hiring the best behavioral economists from academia to lead the agency, and sponsoring research by those on the outside. This, again, might be easier to do from within the Fed, with its preexisting reputation and more generous salaries, than it would be in a brand-new agency.
Finally, developing a powerful organizational image would depend in part on a leadership cadre capable of exploiting the damaged reputation of the financial industry, and taking advantage of new leverage points as they present themselves. The background of the financial crisis obviously should give the CFPA a running start on this. But, as the FDA’s more recent experience shows, the enemies of any regulatory agency with teeth will always be on the lookout for opportunities to strike at its organizational image. Even if the CFPA is able to reshape the financial industry as the FDA once did with Big Pharma, nothing lasts forever. Organizational image, Carpenter suggests, is power—but power based on something as subjective as reputation is also, perhaps inevitably, ephemeral.
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Steven Teles is associate professor of political science at Johns Hopkins University, a Bernard Schwartz Fellow at the New America Foundation, and the author of The Rise of The Conservative Legal Movement, recently released in paperback.