Government, Markets & the Environment

Markets are a little out of style these day, but my faith is intact. I don’t seek or expect to find perfection.  Imperfect as they may be, markets will be back because nothing else works better; we need them.  Over reasonable time periods, markets produce in great abundance whatever goods or services society wants. They can do this because they are based on the greatest of renewable resources – human ingenuity. The market is a mechanism that focuses the genius of the people on what they consider most important.  When the innovation of the market is focused on improving the environment, we can expect good results.

The Difference Between a Medicine & a Poison is Dosage and Usage

Let me first stipulate some government regulation is indeed required for a clean environment.  There is no such thing as a pure system and market incentives alone are insufficient to address externalities, the things that people don’t own or own collectively.  But the choices and intelligent inherent in the market mechanism is still the way to go most of the time.  We just need to employ the appropriate tools at the appropriate time and against the appropriate problems. Command and control regulation was appropriate and successful in going after large point source pollution in the 1970s. Although many of these problems have been largely eliminated, we still need regulations to prevent their recurrence. However, as the problems we face become finer and more diverse, we will need more and more to rely on incentives for innovation and market mechanisms to finish the job. Command and control is the big chain saw that creates the gross shape. We needed the chain saw, but now it is time to put it aside. We are at the fine carving stage and it is time to use different tools.

Not in Spite of Governments Best Efforts; Because of Them

We need to learn from experience. The big government chain saw is useful but also dangerous. It has solved many environmental problems but many of today’s environmental problems result from earlier government interventions. To err is human, but if you want to screw up on a really monumental scale you need to enlist the help of big government.

Private industry could never by itself have produced the resources needed to destroy the wetlands of Louisiana in order to build sometimes underwater cities, such as parts of New Orleans. Government water projects & subsidies encourage the growing of water hungry crops in the middle of our southwestern deserts. Government mandated the use of asbestos in of our buildings and local building codes often prevent sustainable buildings. Government agricultural policies and trade restrictions turn over many square miles of our land to inappropriate crops while at the same time starving farmers in developing countries by subsidizing competition against them. Government programs to protect jobs allow dirty inefficient industries to stay in business long after the market would shuttered them as unprofitable.

My personal favorite result of government master plans is kudzu. Anybody who has been around the countryside in the Southeast knows this persistent invader that shrouds everything in its way. It can grow a foot a day and choke a forest in a matter of weeks. It costs farmers and foresters a fortune every year to keep it down. In the 1930s, the Civilian Conservation Corps planted kudzu all over the south. Farmers were paid as much as eight dollars an acre (bigger money in those days)  to plant fields of the vines in the 1940s. I guess we can consider that a successful government program.  They are well established now.

Most of these things were done with good intentions & they were often based on what was considered the best the science of the time. The science was right about Kudzu. It was and remains an excellent way to prevent erosion. It just is a little too enthusiastic about covering-up everything else. We need to be very careful with any big plan. Each generation says “back then they THOUGHT, now we KNOW” but they always learn a generation too late. If you think I am wrong, consider the current ethanol subsidies and the rush to biofuels. Biofuels are a great idea, but only when appropriate feedstocks are used. The Europeans have had to rethink their biofuels programs after they learned that whole forest in Indonesia and Malaysia were being cut and burned to establish palm oil plantations. Sure enough, palm oil burns clean, but all those trees that used to be the forest don’t. In the U.S. we will come to regret replacing big oil with big corn if that becomes our main ethanol fuel stock.

A Proper Choice Architecture

A proper environmental policy involves government in the role of setting up incentives and then leaving the decision making to those who are closest to the problem and have the most to gain or lose. It does not pick winners or losers. It will by its nature be iterative, gradual and diverse. You cannot expect immediate effects, but you will get a better long term result and a sustainable solution when you bring a wider spectrum of human intelligence into the game.  The genius of a lot of people solving their own problems with their resources always outweighs that of a small group of experts trying using other people’s money to come up with a global solution that applies to others.

There is an old joke. This guy comes into the doctor’s office. “Doc,” he says raising his arm, “It hurts when I do this.” The doctor replies, “Then stop doing that.”

A good first step for a better environment is for the government to stop doing some of the things it is doing now. For example, the government should not subsidize flood insurance. If you are building your home or business in a place with a reasonable risk, you can get insurance from a private vendor. If firms whose business it is to insure you think it is too risky at an affordable price, why should the government step in and be a bigger fool? This simple move would almost immediately create de-facto conservation zones on most barrier islands and fragile estuaries and cost the taxpayers nothing. In fact we would save money by getting out of the fool support, insurance & protection business. 

Another thing the government could do is to phase itself out of the water business. Where water is scarce, it is usually governed by century old rules that were created to encourage people to farm deserts by giving them government subsidized water. Maybe it was a good idea back then, but not any more.  As a result of these antiquated practices, water today is distributed like bread in the old Soviet Union. The first guy in line gets a lot at a low price. Those with political influence do not have to stand in line at all. Other people get nothing much or nothing at all. The simple market solution is to charge a market rate for the water. People will stop wasting water when it is no longer almost free. Farmers will decide that maybe it is not worth growing that cotton in the middle of deserts and land will revert to uses more in line with its natural state. I said PHASE out. We cannot just make people quit all at once, since many people have their life savings tied up in the current system, but let’s start today.  

The most far reaching thing we can do, however, is a kind of an earth tax. This tax would largely REPLACE income taxes. We could determine the externality cost of most forms of energy and tax accordingly. That is why I favor a carbon tax. It is not only a way to raise revenue, but also a means to encourage wiser use of resources. For example, you would not have to ban SUVs if the price of gas was high enough. People would make choices rationally. A person might load seven passengers into that SUV and have a much smaller impact on the environment than those seven individual Prius drivers and each would be paying accordingly.  That is the beauty of allowing choice.

Bigger government alone is never the solution for environmental problems. The most intrusive governments (communists) were by far the biggest polluters. Their system created so much pollution that it wore down stone and still managed to produce poor economic results. It was amazing how much better it got when the communists lost power.

A smart government that creates incentives toward a goal, but does not mandate precise means will be able to use the market mechanism to produce both a cleaner environment AND a better economy.

The environment is not a left-right issue.  Some have just framed the issue in their terms. “Want a clean world,” they say, “then you must let government boss you around.”  Experience does not bear this out.  We can understand and recognize the problem w/o accepting their big government control as the solutions. Command & control was a stage we needed to pass through to get to where we are today.  It worked back then. It was fitting, proper and necessary back in 1970, but it is not 1970 anymore.  We now need to fine tune and we cannot command that.  The market mechanism is the future.   With good choice architecture, it will harness human imagination, intelligence and innovation as it always does.