Pollution – Going Once, Going Twice…

By George P. Brockway, originally published October 30, 1989

1989-10-30 Polution - Going Once, Going Twice.... Title

WE ARE SUPPOSED to cheer the Bush Administration’s clean air bill, which is intended to cut sulfur dioxide emissions  in half by the year 2000 and to do various other things. Well, I do cheer. Anything at all is better than what we’ve had for the past decade.

But there is a catch here-as there seems to be to every kinder, gentler proposal. Pollution control is going to be turned over to the economists, led by Michael J. Boskin, chairman of the Council of Economic Advisors; and the economists are going to push for as silly an idea as any the profession has spawned in this century. Unfortunately, this idea of theirs is not simply silly; it is, in a word, uncivilized. They should be ashamed.

The scheme is to establish a market for licenses to pollute-or, as I have sometimes heard it delicately put, for effluent rights.

This scam has been around for several years (you might even have read about it in this space as early as December 28, 1981). The major premise is that enforcing antipollution laws is expensive. The minor premise is that the free market can do everything. The conclusion is that rights to pollute should be auctioned off to the highest bidder (an auction being erroneously viewed as the ideal market), then the government could use the money to clean up the messes the polluters bought the rights to make. Not  only that, but the rights could be transferable- sort of like taxi medallions and the hope is that they would be traded on one of the exchanges, even that a futures market could be developed. And not only that, but environmental groups could bid for the rights and thus render them more expensive for polluters. If it weren’t a restraint on trade, environmental groups might go ahead and buy some of the rights and keep them off the market, thereby actually stopping the corresponding pollution. The mind boggles.

Anyone who has had the slightest connection with government can foresee dozens of practical difficulties with the scheme, especially if local governments are involved. I’ll take up a couple of them later. For the moment, let’s look warily at the theory.

The first thing about the free market is not just that it can’t do everything; it can’t, by itself, do anything. It can’t even set itself up and maintain itself. As Leon Walras, patron saint of General Equilibrium Analysis (a.k.a. the theory that The Market Knows) wrote when his followers weren’t looking, “[Production in free competition, after being engaged in a great number of small enterprises, tends to distribute itself among a number less great of medium enterprises, then among a small number of great enterprises, to end finally, first in a monopoly at cost price, then in a monopoly at the price of maximum gain.(Walras’ emphases.)

Yet antitrust laws are so difficult to write and so expensive to enforce that Milton Friedman, our contemporary conservative guru, throws the whole thing over. We act as if we had perfect competition, he says; therefore we do. On the same reasoning, we act as if pollution weren’t worth taking much trouble about; therefore it isn’t.

Once you start thinking this way, there is not much left for government to do; and if the voters get excited about pollution or whatever, you can pacify them by holding an auction. It would seem, for example, that the current fuss over the best way to approach the drug crisis is misdirected. It would be more economical to auction off the right to sell crack on the streets, possibly restricting the bidding for certain prestigious posts (like Official Lafayette Park Purveyor of Props for Presidential TV Shows) to pushers who promise to shave and wear a jacket and tie, even in summer.

Closer to pollution rights would be adulteration rights. The Pure Food and Drug Laws are expensive and difficult to enforce, too, and require lots of enterprise- stultifying paperwork. Why not auction off adulteration rights? We might have separate auctions for the right to mix sawdust with flour, for the right to let a processing plant get a teeny bit filthy, and for the right to use handy carcinogens without telling anybody, and without being sued if found out. This last auction would have to be carefully handled to avoid adverse publicity for the winners, which might have a depressing effect on their sales, and hence on the GNP.

To be sure, carcinogens are life-threatening. But so are air and water pollution. And so, for a different sort of example, is jogging in New York’s Central Park at night. As I suggested here eight years ago, why not admit that taxes would have to go up if Central Park were made safe? The economical solution would be to auction off mugging rights. Wilding rights might go for a little less per participant because of economies of scale. Also, we’ll be better able to compete internationally if we teach these youngsters how the free-market system works-or anyway how economists think it works.

On the other hand, the knock-down price (no pun intended, of course) for the right to commit mayhem and murder might be a bit higher. One would not want to set the price too high, because there wouldn’t be any bidders, and there would be no money to pay for the homicide squads needed to catch cheaters who didn’t pay for the rights. Some of these costs, though, could be defrayed if cops wore little logos advertising their shoes and underwear, like tennis professionals.

The economists are too convinced of their own cleverness to notice, but at this point prospective polluters would see a fault in the scheme and might hesitate before putting in their bids. One of them, a veteran of the antiwar demonstrations of the’ 60s, might persuade the others as follows: “Suppose they held an auction for pollution rights and nobody came. Then there would be no money to enforce antipollution laws or to clean up the messes. There would not even be any laws, because the Environmental Protection Agency wouldn’t have enough money to write the appropriate regulations. Without any laws or enforcement, who cares about pollution rights? They’re free. Only a sucker would pay for them.”

All kidding aside, it is clear that the economists’ scheme is self-contradictory. It promises to get rid of bureaucratic interference with the free-market system. Visions of balanced budgets dance before the professors’ eyes, and of the fantastic growth in “productivity” that would result from not wasting time and money on nonessentials (“externalities,” economists call them) like clean air or pure water. Yet these visions cannot be realized unless the Environmental Protection Agency, or some surrogate, stands ready to lower the boom on polluters who refuse to play by the new rules. No one is going to pay to avoid what does not exist.

Furthermore, without continued enforcement after the auctions you can bet that crafty polluters here or there would buy certain rights and then exceed them. The malefactors would have a leg up on their competitors and might well win awards for competing internationally. In short, the economists’ scheme would cost as much as ordinary control but would be far less effective. (I’ll admit it would give brokers another “product” or two to trade on the exchanges.)

AS I MENTIONED earlier, there are some practical difficulties, particularly if, instead of nationwide auctions, local options are recognized. (After all, who knows the environment better than those who live in it?) Suppose you have a steel mill on the shores of Lake Superior and you want to pollute the lake. Fine. We’ll have an auction. What are we offered? Since no one else needs the rights, how about a dollar?

I’m not forgetting the busybody (and probably elitist) environmental groups. They’re spread pretty thin, however (an awful lot of their budgets goes to sending me junk mail), and can’t all enter every auction. They take turns. The steel mill, meanwhile, provides most of the employment for our Lake Superior town, and the mill’s conglomerate owner threatens to shut it down. So the town enters the bidding, swamps the environmentalists, and wins, whereupon it gives the pollution rights to the steel mill for free. Everyone is happy, except for the environmentalists and the fish and the people who drink lake water instead of beer.

In most towns or regions there may be more than one polluter seeking the rights, and naturally they will compete vigorously for them. It’s the American way. Once upon a time I lived in New Jersey, where there are God knows how many separate municipalities, and almost all of them hire scavenger services. In each county there are several competing scavengers. At any rate, they all submit bids for every municipality’s business.

Much to everyone’s surprise, the same fellow is low man in the same towns year after year, while other players always win in their usual towns. (Economists think they know about this, too. The scavengers’ “experience” enables them to avoid the “Winner’s Curse,” which is the result of bidding too low.) Occasionally a feud breaks out, and a few truly surprised towns find themselves opening sealed envelopes containing very low bids. The feuds don’t last long.

It doesn’t take much imagination to visualize something similar with pollution rights, especially since the oil industry (one of the most stylish polluters) is familiar with a practice that looks to suspicious souls like collusive bidding. Offshore oil leases are expensive and risky, moreover, prompting oil companies to form syndicates to spread the risk. Syndicates would also appear to narrow the bidding.

What I’m afraid it all comes down to is that today’s economists don’t understand government. They don’t believe in government. Although they would quickly and nervously deny it, they are like Karl Marx in thinking that the state should wither away because all questions are economic questions. They get irritated when people object to cheap imports that take away their livelihood, or when unions strike to prevent wage cuts, or when attempts are made to use taxes to distribute income a little more equitably.

It further has to be said that economists do not take the general welfare seriously. They certainly don’t take the environment seriously. They don’t really believe in the greenhouse effect, or acid rain, or the consequences of PCBs in drinking water, or the possibility of another, closer Chernobyl. They can’t possibly understand these matters and make their fatuous proposals about auctioning off the right to pollute.

 The New Leader


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