02/10/2012 04:23 pm ET Updated Apr 11, 2012

The Republican Nanny State

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.