Tag Archives: Richard Williams

Markets Fail and Governments Do Too

We often hear that markets fail when it comes to preserving the environment, so government regulation is needed to protect natural resources from the ravages of capitalism. But what happens when government regulations themselves get in the way of innovative ideas that move us towards a cleaner and more environmentally sustainable future?

This is exactly what happened in Logan City, Utah when the local government built a small hydropower turbine and ran into a nightmare of regulatory red tape that led to large cost overruns and far more time committed to the project than was originally anticipated. In the end, the project was delayed four years and ended up costing twice as much as planned.

This abstract from a recent working paper from the Mercatus Center describes what happened:

In 2004 Logan, Utah, saw the opportunity to place a turbine within the city’s culinary water system. The turbine would reduce excess water pressure and would generate clean, low-cost electricity for the city’s residents. Federal funding was available, and the city qualified for a grant under the American Recovery and Reinvestment Act. Unfortunately, Logan City found that a complex and costly federal nexus of regulatory requirements must be met before any hydropower project can be licensed with the Federal Energy Regulatory Commission. This regulation drove up costs in terms of time and money and, as a result, Logan City is not planning to undertake any similar projects in the future. Other cities have had similar experiences to Logan’s, and we briefly explore these as well. We find that regulation is likely deterring the development of small hydropower potential across the United States, and that reform is warranted.

This wouldn’t be the first time that regulations have led to perverse environmental outcomes. To prevent these problems in the future, agencies need to take better account of the expected costs and benefits of their rules before finalizing them. For example, recent analysis by myself and my colleague Richard Williams shows that agencies only rarely estimate dollar values for both benefits and costs of their regulations.

Another improvement would be for agencies to consider more flexible approaches when regulating. For example, the Occupational Safety and Health Administration recently proposed a rule to reduce silica exposure for workers. The rule requires businesses to consider gas masks or other personal protection equipment only as a last resort. Other methods of controlling silica dust, like enclosing work areas or using sprays and vacuums, should be considered first. These methods are likely to be more burdensome than asking workers to wear a gas mask. The agency should consider offering more flexibility to businesses and workers if it wants to relieve some unnecessary burden in its proposed rule.

Of course it’s true that markets can fail. But it’s important to remember that governments often fail too. Only an approach that considers both market failure and government failure can illuminate the best course of action when addressing a serious social problem like environmental degradation. Furthermore, until regulators start acting more like the experts we expect them to be, government is likely to fail just as much, if not more often, than markets.

Crony Capitalism and the Revolving Door

A colleague just handed me the latest issue of the Harvard Journal of Law and Public Policy (it’s hot off the presses, so an electronic link still isn’t available; here is a link to the previous issue). It features a short essay by Jonathan Macey of Yale Law School called “Crony Capitalism: Right Here, Right Now.”

The entire piece is worth reading. But this anecdote, which I hadn’t heard before, jumped out:

The Senate confirmed Jack Lew as Secretary of the Treasury in February 2013, and one of the striking things about that appointment is that his contract at Citibank, where he did administrative work with a hedge fund, stipulated that he would receive a bonus if, and only if, he were appointed to a senior position in government.

Macey cites this Bloomberg piece by Jonathan Weil.

It is tempting, of course, to blame Citibank. And part of me does. But P.J. O’Rourke has a nice line about this phenomenon which I quoted in The Pathology of Privilege. “When buy­ing and selling are controlled by legislation,” he says, “the first things to be bought and sold are legislators.”

It may seem disgusting that, as Weil put it, “Citigroup might have agreed to pay Lew some sort of a bounty to seek out, and be appointed to, such a position.” But in today’s modern crony-capitalist economy, high-ranking government officials sometimes determine whether a firm lives or dies. When that is the case, it’s only prudent to have a man on the inside. Stories like this reinforce the point that government-granted privileges to particular firms sully the reputation of both government and markets.

H/T, Richard Williams.