Republicans who support subsidies should stop their mass-manipulation. Rather than hiding behind hypocritical pro-market rhetoric, it is time to admit they have embraced their very own entitlement-boom that rivals the dreams of any European welfarist. Matt Kibbe recently wailed in Forbes about a "tort litigation nightmare" because a court granted a large award to a woman paralyzed from the neck down by a company's negligence. And last week in the Wall Street Journal, Senator Ron Johnson of Wisconsin decried the EPA and the Department of Labor's increased regulation because of its "job crushing... cost" to businesses. "Cost" is a strange adjective to describe all these rules when many actually serve to stop current subsidies. Senator Johnson unsurprisingly failed to mention the excruciating economic cost-benefit scrutiny applied to regulations by the Office of Information and Regulatory Affairs (OIRA), recently famous for rejecting the EPA's smog rules.
Both point toward an ironic truth: mainstream Republicanism has rejected market economics in favor of a subsidy-loving conservative nanny-state. Subsidies, as economists tell us, insulate people from the true costs (or consequences) of their behavior. And market efficiencies and the economic growth they create get undermined when people don't pay full price.
Even more disturbing, these handout-loving Republican pundits and politicians regularly and cynically deceive rank and file believers in personal responsibility by using free-market sounding language to distract citizens from their constituents' reliance on public support. These interest group puppets start by pretending that the only subsidies come from governments. But any economist will tell you this is nonsense. Inefficient subsidies flow from more than just the national treasury. In fact, sometimes only the government can shut off this golden faucet.
Economists call these decision-distorting efficiency killers "externalities." An externality arises when part of the price of my behavior gets absorbed by someone else, forcing that person to subsidize my choice. For example, costs get externalized if a toy factory's manufacturing process puts toxic chemicals in the groundwater, and the neighbors get stuck paying for part of the toy making process -- by shouldering lowered property value, experiencing illness, or getting stuck with the bill for cleaning up the mess. This is one reason why we compensate people through lawsuits -- to make sure the toy factory, not its neighbors, pays the full price for its behavior.
But Republicans leaders seem bent on forcing their backers' costs onto others. House Majority Leader Eric Cantor (R-VA) opposes greenhouse gas taxes, arguing they would "cost our economy billions of dollars [and] destroy jobs." Certainly such taxes do encourage what economists call "creative destruction," another market miracle where inefficient providers get put out to pasture. But then better providers take their place, which is why markets are good for business. The supposedly job-killing pollution taxes would remove the ventilator from these market-insulated companies and expose them for what they are -- corporate welfare queens.
When I drive a car, or operate a coal factory, many people pay the price for my emissions. These hurt other consumers and businesses, future citizens who clean up the mess, or Bangladeshis swamped by floodwaters. Whatever one's position on climate change, we all know that pollution costs something, and when we pollute without paying the full cost -- we act like people do on someone else's dime. We overindulge. No wonder the misery of traffic.
If Matt Kibbe had his way, he would eliminate the "tort litigation nightmare." But doing so would allow a host of externalities, forcing people to subsidize others' negligence. Consider medical malpractice compensation caps. If an architect makes $200k a year with ten working years ahead of her, and a surgeon commits professional negligence that destroys the architect's ability to work, that poor architect faces a $2 million loss. But with a tort liability cap of $1 million, the surgeon will only pay for half the cost of his bad behavior. The injured architect would have to subsidize the surgeon's practice.
Systemic risk, also an externality, recently reared its ugly head. If, after Lehman collapsed, the banking sector had failed, its employees and stockholders would certainly have paid a tremendous price. But this would only amount to a fraction of the total cost paid by the rest of the world. Bailouts may have saved world markets from depression, but our citizens have paid dearly -- recession, a feeble recovery, and mounds of debt to cover tax cuts and stimulus spending. But we can't just bill the banks for this mess after the fact because the tab dwarfs bank resources. Unlike the polluting factory or the negligent doctor, a court judgment cannot make the banks face the full cleanup cost.
We don't begrudge banks for trying to turn a big profit, but citizens shouldn't be forced to subsidize it either. Since we cannot afford to let the financial markets fail, systemic risk must be regulated up-front, rather than paid for after the fact. Those who fight bank regulations designed to minimize systemic risk actually work to preserve mammoth bank subsidies -- because the banks can never take on the full risk-cost of their risky behavior.
The list goes on. Globalization displaces workers, which means the displaced pick up most of the tab for our economic gains. The rising tide may lift all boats, but it drowns a few people too. When we refuse to compensate them accordingly -- through retraining and other assistance -- we force them to subsidize our fortunes. Accordingly, last summer, Senate Minority Leader Mitch McConnell (R-KY) threatened to block a free trade deal with South Korea unless the White House dropped the provision for the Trade Adjustment Assistance program, which helps retrain displaced workers. Mr. McConnell apparently believes these workers should subsidize the rest of us.
The issues above are, of course, complex along many dimensions not discussed here. But the truth remains: Some kinds of taxes and regulations actually stop subsidies, and market rhetoric frequently hypocritically helps conceal colossal handouts.
These Republican leaders are right about one thing. The jobs that rely on subsidies will be killed if externality entitlements get taken away. But they will be replaced by a more efficient, prosperous economy and the jobs that come with it. Forcing companies and people to internalize the costs of their behavior is not bad for businesses in general. Just the ones with their hands in someone else's pocket.
In 'Making Globalization Work' Stiglitz explains the reason the 'Invisible Hand' often seems invisible is that it is often not there.
He also discusses externalities:
"Whenever there are "externalities"—where the actions of an individual have impacts on others for which they do not pay, or for which they are not compensated—markets will not work well. Some of the important instances have long understood environmental externalities. Markets, by themselves, produce too much pollution. Markets, by themselves, also produce too little basic research. (The government was responsible for financing most of the important scientific breakthroughs, including the internet and the first telegraph line, and many bio-tech advances.)
But recent research has shown that these externalities are pervasive, whenever there is imperfect information or imperfect risk markets—that is always.
Government plays an important role in banking & securities regulation, and a host of other areas: some regulation is required to make markets work. Government is needed, almost all would agree, at a minimum to enforce contracts and property rights.
The real debate today is about finding the right balance between the market and government (and the third "sector"—non-governmental non-profit organizations.) Both are needed. They can each complement each other. This balance differs from time to time and place to place."
Reality based problem solving & effective decision making is undermined when people insist on ideological solutions to real problems. Cui bono?
Of course, Americans would rather hurl political rhetoric than get the job done.
Of course, I'm sure you're right. Ideology always trumps what works.
Second, the author acts as if Republicans are the only ones who have pushed for these subsidies and breaks. That of course is not the case. All politicians do and that is why we need small government -- give politicians of both parties less money to play with.
Third, the author wants greenhouse gas taxes in an effort to raise the price of existing industries he accuses of externalities. People knowingly use fossil fuels and choose them consistently over the alternative. He says that better, more efficient providers will take their place. If they were better and/or more efficient, they would have already taken their place. But alas, that is only in the mind of the global warming religionists who place value in some theory that is increasingly proven false.
http://priceofoil.org/fossil-fuel-subsidies/
http://thinkbynumbers.org/blog/government-spending/corporate-welfare/corporate-welfare-statistics-vs-social-welfare-statistics/
Nanny state?
Could be, but then, consider this.
Only the wealthy can afford to have a nanny.
I've never even seen one...................have you?
Additionally, get rid of all income taxes, which beg for tax breaks over time, and move to a consumption tax. When you buy and consume, you pay. Environmentalists should love this because it will reduce the amount of stuff made. That should also make the global warming religionists happy with less "greenhouse" gases emitted because less stuff is produced.