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Label financial products as we label food
THOSE labels that you see on packaged foods listing their ingredients and nutritional values had their beginnings in an international scandal and in the efforts by governments to deal constructively with the public outrage that followed.
The scandal erupted with the publication in 1906 of Upton Sinclair's novel "The Jungle," a bestseller that detailed the experiences of a Lithuanian immigrant family working in America's meatpacking industry.
The public response to the book's description of unsanitary conditions in the industry was so strong that the US Congress enacted the Pure Food and Drug Act - the first law to require labeling of contents on food packages - the very same year.
By 1910, according to The Manchester Guardian, "The Jungle Scare" had spread to the United Kingdom, and the eventual effect was better food labeling laws in the UK, too. Indeed, the scandal set in motion a sequence of laws in countries around the world that today require food labeling to go beyond mere lists of ingredients to include information about the vitamins, minerals, and calories that products contain.
These labels are undoubtedly useful to consumers, but it is unlikely that many manufacturers, if given the choice, would have introduced them on their own. That is how regulatory progress is often made. The history of legislative reform is substantially a punctuated equilibrium, with long periods of time during which public apathy prevents any progress, interrupted by scandals that suddenly make progress possible.
We have to hope that the same kind of outcome will emerge from the financial scandals that have produced public outrage analogous to that directed at the food industries in Upton Sinclair's day.
As was the case then, public outrage today is at a level that might well overwhelm the lobbying efforts of entrenched interests. Today we need laws that will require purveyors of financial products to provide the essential information that consumers need.
That is the argument of a new book written by the Squam Lake Group, led by Kenneth French of Dartmouth and composed of 15 finance and economics professors, including me. Among its proposals, "The Squam Lake Report: Fixing the Financial System," recommends that investment products like mutual funds should include a standardized disclosure label analogous to the nutritional labels on foods.
The structure of the label should be developed by a committee of academics, regulators, and industry executives with the objective of promoting informed comparison among consumers of investment products. Of course, existing regulations require that a significant amount of information be disclosed in prospectuses for financial products. The label would be designed for those who are less motivated and/or able to read these prospectuses.
Not all investors will be able to interpret even these simple measures of the outlook for an investment. But neither are all consumers of food able to interpret the quantities of nutrients that are shown on nutritional labels.
(The author is professor of economics at Yale University. Copyright: Project Syndicate, 2010.www.project-syndicate.org. Shanghai Daily condensed the article.)
The scandal erupted with the publication in 1906 of Upton Sinclair's novel "The Jungle," a bestseller that detailed the experiences of a Lithuanian immigrant family working in America's meatpacking industry.
The public response to the book's description of unsanitary conditions in the industry was so strong that the US Congress enacted the Pure Food and Drug Act - the first law to require labeling of contents on food packages - the very same year.
By 1910, according to The Manchester Guardian, "The Jungle Scare" had spread to the United Kingdom, and the eventual effect was better food labeling laws in the UK, too. Indeed, the scandal set in motion a sequence of laws in countries around the world that today require food labeling to go beyond mere lists of ingredients to include information about the vitamins, minerals, and calories that products contain.
These labels are undoubtedly useful to consumers, but it is unlikely that many manufacturers, if given the choice, would have introduced them on their own. That is how regulatory progress is often made. The history of legislative reform is substantially a punctuated equilibrium, with long periods of time during which public apathy prevents any progress, interrupted by scandals that suddenly make progress possible.
We have to hope that the same kind of outcome will emerge from the financial scandals that have produced public outrage analogous to that directed at the food industries in Upton Sinclair's day.
As was the case then, public outrage today is at a level that might well overwhelm the lobbying efforts of entrenched interests. Today we need laws that will require purveyors of financial products to provide the essential information that consumers need.
That is the argument of a new book written by the Squam Lake Group, led by Kenneth French of Dartmouth and composed of 15 finance and economics professors, including me. Among its proposals, "The Squam Lake Report: Fixing the Financial System," recommends that investment products like mutual funds should include a standardized disclosure label analogous to the nutritional labels on foods.
The structure of the label should be developed by a committee of academics, regulators, and industry executives with the objective of promoting informed comparison among consumers of investment products. Of course, existing regulations require that a significant amount of information be disclosed in prospectuses for financial products. The label would be designed for those who are less motivated and/or able to read these prospectuses.
Not all investors will be able to interpret even these simple measures of the outlook for an investment. But neither are all consumers of food able to interpret the quantities of nutrients that are shown on nutritional labels.
(The author is professor of economics at Yale University. Copyright: Project Syndicate, 2010.www.project-syndicate.org. Shanghai Daily condensed the article.)
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