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Milton Friedman is dead, and really misunderstood

Maximilian Auffhammer, professor, international sustainable development | December 14, 2016

Many of my colleagues are trying to find a silver lining in the outcome of the election, but for those of us concerned with energy and the environment I am afraid all we’re going find is a used Kentucky Fried Chicken napkin. There are two distinctly different, yet connected, things at immediate risk: policy and scientific research. Let’s start with policy.

Maximizing welfare requires regulation, but key policies under threat

trumpkfc400The GOP has long prayed at the temple of Milton Friedman. Friedman, who was one of the most brilliant thinkers of this past century (and my neighbor in San Francisco, albeit in a much nicer apartment), was at the forefront of arguments that markets are incredibly effective at allocating scarce resources.

At the heart of (t)his argument lies the assumption that markets are “perfectly competitive”. This means that everyone has perfect information, no individual firm or person can influence price, transactions costs are low, there is no public goods or externality problem and the list goes on. If such a unicorn market is left alone, agents in it will maximize social welfare, so there is no need for government intervention.

Well, the problem is that perfectly competitive markets are about as common as Susan B. Anthony coins. Most markets are in fact not perfectly competitive, which Milton Friedman of course acknowledged. Market failures abound. The key question is whether the costs of intervening in the markets to address the failure outweigh the benefits.

The classic case of a market failure is an externality. If a power plant emits a pollutant, which causes kids in a neighboring city to fall ill, the absence of government intervention will lead to an inefficiently large amount of pollution.

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Government should intervene to maximize welfare at the output level where the marginal benefit from emitting the last unit of pollution is equal to the marginal damage it causes. That amount in most cases is not zero, which upsets many folks in the environmental community, but this is economics 101. If the government does not intervene, however, the power plant produces more than the optimal amount of pollution, thereby sort of “stealing” welfare from the kids downwind.

This point is undisputed by scientists. Yes, economics done well is science. The archbishop (=department chair) in the church of Milton Friedman is …. an environmental economist! The holder of the Milton Friedman chair in economics at the University of Chicago Economics department is … an environmental economist: Michael Greenstone. Michael was a top economic advisor to President Obama and just last week was singing the praises of environmental regulation on NPR.  To top this, last week he was also named head the University of Chicago’s Becker-Friedman Institute for Research in Economics, named for two conservative Nobel Prize winning economists who spent their careers there. See what I’m getting at here? The world’s top economists at conservative departments *do not* believe in laissez faire all the time. This, you would think, should make it more palatable for the GOP leadership to support sensible environmental regulation.

If the Trump administration is going to increase efficiency of environmental regulation by replacing costly standards with more efficient incentive based regulations, you will see me dance a Schuhplattler. I’ll post a video on this blog for you.

But no matter where you look, there is almost obsessive talk of “government overreach”. My excessive consumption of media coverage leads me to believe that the plan may more likely be a gutting of regulation instead. While killing off the Clean Power Plan will not bring coal back from the dead, it will certainly significantly hamper the necessary progress on the rollout of renewables and energy efficiency required to make progress towards the scientifically determined targets to avoid the worst consequences from climate change.

The possible abandonment of the Paris Agreement will surely result in a higher emissions path for the US and possibly the rest of the world. (China and India only signed on because the US did.) Further, we have recently learned that the Social Cost of Carbon in federal rule making is at risk. The Social Cost of Carbon is a number used in federal benefit cost analysis, to incorporate the global damages from greenhouse gas emissions. The president could, for example, instruct agencies to use a domestic cost of carbon, which is a fraction of the true damages from carbon emissions. This would further increase emissions.

Finally, agencies interpret rules and I am afraid that there will be some very lax interpretations of regulations to protect the environment. I am most worried about the National Environmental Policy Act (NEPA) and the Endangered Species Act (ESA). While president elect Trump has said he likes clean air and water, his appointments would suggest that this is just hot air. Which leads me to the second point.

Purging climate experts from the federal government would harm future generations

When there is a party switch in presidents, it is normal for political appointees to go from liberal to conservative or vice versa. I have no problem with that. One would hope that appointees would have experience relevant to their charge, but even if they do not, they are, well, political appointees. I am really worried about the appointments – economists and regular people – to EPA and DOE for reasons discussed elsewhere.

But running a federal agency is tricky business as you are charged with running an organization made up of hundreds and in many cases thousands of federal staffers. These are not political appointees but instead have multi-decade careers at these agencies, working for administrations from both political parties. The staffers provide the institutional memory and know how “things work”. Many economists and statisticians at federal agencies are fellows of my profession’s most distinguished academic societies, publish in our leading journals, push science and policy forwards and do this at a fraction of the wage they would command in the private sector or the cushy bosom of academia (hey, free coffee!). On Friday, we learned  that the incoming administration’s transition team is requesting names of staffers, who have worked on climate regulation at the department of energy. While there is no evidence that this questionnaire will result in these folks being fired or benched, this is alarming news.

The Nobel laureate economist Bob Solow has noted that one way to severely hinder economic growth is to damage capital and slow down the growth rate of its productivity. These staffers represent the productive capital of the federal government. NASA’s climate research branch, DOE and its national labs, EPA, NOAA, Interior, State all have staff conducting research on climate and the environment. These research and policy groups have produced models, tools and insight that have pushed forward our understanding of the environment and how to write policies that increase global welfare.

While we do not know how the Trump administration will use the information It requested, gutting these agencies of their climate, energy and environmental staff would represent an irreparable and irresponsible setback, robbing current and future generations of welfare that is rightfully theirs. Neither side of the aisle condones theft.

I have said this before. The GOP is the party of markets. Most environmental and energy economists love nothing better than a good market-based regulation. I hope that the GOP and Trump administration will relearn what free market economics is all about. It’s not about the absences of regulation. It’s about sensible regulation. We have no right to steal from our fellow humans alive now or in the future. That said, I’m not optimistic. I will now go back to breathing into my paper bag.

Comments to “Milton Friedman is dead, and really misunderstood

  1. Check last week’s Science for an article on Congress pushing NOAA to adopt more climate change forecasting technology to improve weather forecasting. Apparently its the climate change researchers who have the best understanding of the earth’s weather, and the more traditional weather forecasting approaches have fallen behind. Of course, there is a limit on how far ahead certain sorts will accept the validity of the models. In a way its like creationists who accept an old earth when digging for oil or minerals, but reject it otherwise.

  2. What are you yapping about? How is Friedman misunderstood? Where are these apparent, obvious acknowledgements by him that markets were imperfect? He was famous for believing the opposite.

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