Free Market Busts Taco Bell $1 Billion, But Times Wants More Bureaucrats

December 9th, 2006 6:43 AM

"The expanding outbreak of E. coli poisonings in New York, New Jersey and several other states underscores the need for more rigorous regulation of the whole supply chain for fresh produce . . . Surely it is time to give government regulators the power and resources they need to ensure the safety of fresh fruits and vegetables." - NY Times editorial, Sickened by Fresh Produce, 12/09/06

"[Taco Bell owner] Yum Brands is feeling the financial fallout on Wall Street, as two analysts downgraded its stock, citing the potential effects of customers' food safety concerns. Shares fell $1.36 to $59.72 on Friday. The stock has fallen 5.6% in the last three sessions." - Taco Bell feels fallout from E. coli outbreak, LA Times, 12/9/06

Two NYC streets, two reactions to the outbreak of E. coli sickenings among people who ate at Taco Bell.  On W. 43rd street, the Gray Lady of the New York Times looks at bad news as an excuse for government to expand its power.  A few miles downtown, Wall Street exacts its own revenge, busting down the stock of Taco Bell's owner, Yum Brands.

Society obviously has an interest in preventing outbreaks of food poisonings. So let's consider which solution, the big-government one proposed by the Times, or the free-market one imposed by Wall Street, is likely to be more effective.

Under the Times' plan, we' have more government regulators overseeing the fresh produce supply chain.  What happens to a bureaucrat who fails to detect a bad batch of lettuce?  Probably nothing amidst all the mutual finger-pointing. At worst maybe a small black mark on someone's record, perhaps followed by a union grievance proceeding to fight it.  And from perspective of producers or restaurant/supermarket chains? Some fines, that can always be appealed.  How much would the fines be?  Several thousand? $100,000? $1 million? $5 million?

In contrast, how has the free market punished Taco Bell and its corporate owner?  You'll note the LA Times story reports the stock has lost 5.6% of its market value in the last three sessions. I checked YUM's market cap.  It's currently $15.83 billion. That means before losing 5.6% it was $16.76 billion.  You might say the free market has imposed a "fine" of . . . $930 million - close to $1 billion.   It's also likely that from quality managers on up some YUM-Taco Bell people will wind up losing their jobs over this.

Some would point to the occurrence of the outbreak despite the predictable market reaction as proof that the free market doesn't work.  The fact is that no system is perfect. The question is, in the long run, what does a better job of focusing the mind of corporate executives - a few more government employees picking through the lettuce, or the prospect of a Wall Street execution in the morning?

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