Posted by: bmeverett | August 28, 2012

Regulation versus Central Planning


The role of regulation in the US economy has attained a well-deserved place in our national election debate. The republicans argue that our current excessive regulations are impeding economic growth, while the democrats reply that regulations are necessary to counter corporate greed and the excesses of the marketplace. Every once in a while, the discussion is sharpened by a particular case, such as the 2-1 recent decision by the Federal Appeals Court for the District of Columbia regarding the EPA’s Cross State Air Pollution Rule (CSAPR).

The CSAPR is pretty simple in concept. States have a great deal of discretion in meeting federal environmental rules within their boundaries, but the Clean Air Act gives the EPA enhanced authority under certain circumstances. For example, when a state can demonstrate that its air quality is affected by the emission of pollutants generated in other states upwind of the complainant, the EPA can and does step in. The issue, however, is the precise nature of the relief. The EPA’s CSAPR was sweeping in its scope, earning the cheers of environmental groups (and the downwind states) and the opposition of conservatives (and the upwind states). The federal courts found the EPA’s approach objectionable, and here’s why.

First, the Clean Air Act allows the EPA to order an upwind state to reduce emissions by the amount by which its contribution affects the ability of states downwind to meet EPA attainment rules for criteria pollutants such as sulfur oxides, nitrogen oxides and particulates. Instead of applying the rule narrowly, however, the EPA decided to combine the impact of all 28 upwind states and allocate the required reductions based on the EPA’s assessment of costs. In other words, State A could end up having to reduce its SO2 emissions by 100 tons per day even if its contribution to the downwind states’ problem was only 50 tons per day. The Court found this approach inconsistent with the Clean Air Act.

Second, once the required emissions reduction has been established, the upwind state is supposed to have the right to determine how best to achieve that reduction. Instead, the EPA mandated the specific steps to be taken, such as the reduction in output of specified coal-fired power plants, thus replacing state federal authority with federal mandates.

The Court’s decision was pretty straightforward: the EPA do only what is authorized by law. What’s really interesting about this case is the often hysterical objections from environmentalists and their colleagues on the political left. An August 23 editorial in the Los Angeles Times, for example, called the Court’s decision “costly, ideological and wrongheaded”. Why? Because the EPA believed that their way was better, supposedly saving an additional $280 billion a year and improving air quality. Anyone with experience in EPA cost evaluation methodology knows to be very skeptical of these claims, but even so, the Times seems to be arguing that federal regulators should be allowed to do whatever they want, regardless of the law, if they think their actions will produce a good result. Limitations on the EPA’s power are thus “ideological.”

Give the Times credit at least for getting to the heart of the problem. The classical economic view of regulation is to correct market distortions. Pollution is what’s known as an “externality” – a cost not reflected in the market price. If I buy electricity from a coal-fired power plant, and you, who are not a party to that transaction, suffer adverse health effects, then the social cost of the transaction exceeds the price. The society will therefore tend to overproduce coal-fired electricity. There is therefore a reasonable theoretical basis for government intervention – but on a limited basis. If, for example, the government imposes a tax on coal-fired power plants equal to the external costs, then the price of coal-fired electricity equals its social cost. The market can do the rest. That is the conservative argument.

The argument from the left is that pollution is immoral and should not be tolerated. It’s wrong for people to have the right to buy their way out of damaging their neighbors’ health. The government should therefore prohibit coal-fired power plants or at least require them by law to install sufficient pollution control equipment to substantially mitigate the health effects associated with burning coal.

We’ve been having this argument – and it’s a reasonable one – for several decades now, and the quality of our air and water has improved as we have constantly sought a balance between the desire for an improved environment with the need for economic growth.

The LA Times’ argument is much more extreme: the government should be given the authority to make the society better – in this case by reducing pollution – and that authority should supersede the text of the law, which is just an annoying detail. This view flies way past the classical economic theory of correcting externalities and lands squarely in the land of central planning. If given its way, the EPA would not correct distortions in the electric power generation industry, but would simply decide which electric generating plants are to be built, where they are to be built and what fuel they are to use. They would use their own cost estimating procedure, which conforms to no known accounting system, and they would answer to nobody. It’s even remotely possible that the politically appointed head of the EPA could perhaps, just conceivably, be slightly influenced by the political needs of the Administration when making its decisions.

The economic irrationality of this approach is striking. There is, after all, a reason the Soviet Union lost the Cold War. Even more startling, however, is the utter lawlessness of this view. Advocates of central planning, particularly in the environmental arena, see pollution as caused by criminals who should be stopped in their tracks and punished severely for dirtying up our air. They tend not to see that we are all the polluters – through our consumption, our mobility and our lifestyle. Giving the government unfettered power to “clean up the air” is to give government control of our lives. According to the LA Times’ view, Congress should not write specific laws, and we should not have recourse to the courts for grievances regarding environmental regulations. Let the EPA run the show, and all will be well.

We are suffering from this problem across-the-board. Obamacare and the Dodd-Frank financial reform law are both examples of this frightening overreach. Congress proposes to give unelected bureaucrats the power not to implement the law, but to do pretty much whatever they want to make society better. Congress has made no real effort to diagnose the problems that actually need to be fixed nor to specify any particular approach to their solution. Obamacare, for example, establishes the Independent Payment Advisory Board to determine which health care procedures “work” and are therefore worthy of reimbursement. If you get prostate cancer, you don’t discuss the options with your doctor and then get a second opinion. Your doctor looks up the approved treatment in a book, and that’s what you get. Furthermore, the law attempts to shield the Board’s decisions from review by either the courts or Congress. Dodd-Frank carefully sited the Consumer Protection Agency inside the Federal Reserve where it can be shielded from congressional oversight.

Poorly written laws like these are a real threat to our freedom and well-being. For a more complete discussion of this problem, I highly recommend “Three Felonies a Day: How the Feds Target the Innocent” by Harvey Silverglate.

Occasionally a country, like Germany in the 1920s, in chaos with hyperinflation, 25% unemployment and daily pervasive street violence, succumbs to the temptation to allow dictators to rule by decree. The United States, despite the economic woes of the last few years, remains a stable, prosperous and secure country. We’ve reached this point through free markets, limited government and the rule of law. Environmental issues are important, and we have done quite well improving our air and water quality with the careful application of sensible laws. Let’s keep it that way.

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