Don't Abandon Market Ship

The financial meltdown has led many people, especially politicians, to blame the problem on market failure and to jump on the regulatory bandwagon. Though the problems on Wall Street are much more related to regulated markets than free markets, the call is for more regulation to fix failed regulation. Couple this with the fact Presidentelect Obama and a Democratically controlled Congress are unlikely to embrace Adam Smith’s notion of the invisible hand, and we can expect the anti-regulatory sentiment born in the Reagan administration to wane quickly.

Environmental protection will not escape the anti-market, pro-regulatory mentality. Despite the growing evidence that property rights and markets help the private sector improve environmental quality, three forces are likely to work against “free market environmentalism” and in favor of “regulatory environmentalism.”

First, reduced wealth and incomes resulting from the global economic downturn will lower the demand for many goods, and the environment will be no exception. It is well established that most aspects of environmental quality are positively related to economic growth. As GDP rises, people want cleaner air and water, more open space, and endangered species preservation. Of course, the level of these demands varies depending on how certain environmental goods directly affect human health and welfare. Thus clean air and water are demanded at lower levels of income than endangered species protection. Like it or not, most environmental improvements are luxury goods for which the demand moves inversely with the economy. Therefore, as we focus more on jobs and income, we will spend less on the environment.

Second, free market environmentalism is currently facing a rough road because the mother of all environmental problems—global warming—does not have easy market solutions. Calls for carbon trading markets come as close as anything to a market response to greenhouse gas emissions, but such markets are fraught with problems. Hence, we can expect regulatory environmentalism to gain traction with rising global temperatures.

Third, the Obama administration is all about “change,” especially change from the Bush administration. Recall that President Bush sauntered into Washington professing to be a free marketeer. His appointment of Gale Norton as secretary of interior was his way of signaling that he would swing the pendulum back from extremist environmental positions. Environmentalists expected Bush to counter policies such as the ban on road building on millions of acres of federal land and the strict arsenic standards for water supplies. Never mind the fact that, under Bush, only seven miles of new Forest Service roads have been built, that fossil fuel production on federal lands grew faster under Clinton, and that air and water are cleaner today than they were eight years ago. The perception is that “Bush the deregulator” has pushed back environmental progress and that the next president must change this. As Wesley Warren, director of programs at the Natural Resources Defense Council, puts it, “The days of the sort of wild-frontier open market will be coming to a close.” Therefore we can expect Obama to regulate everything from financial markets to carbon emissions.

Though these three forces suggest rough seas for free market environmentalism, there are two good reasons not to abandon the market ship. First, government resources for regulation are going to be strapped in the current regulatory environment. The $700 billion bailout package is only the tip of the iceberg. Record deficits will force even a Democratic Congress and president to look for ways to cut back. In such a fiscal climate, subsidies for everything from alternative energy to national parks are not likely to get top billing, and environmental regulatory bureaucracies are not likely to grow.

A second reason to embrace free market environmentalism is that it has a proven track record of getting the incentives right. The adage that “no one washes a rental car” (see chapter 4 in Greener Than Thou—Are You Really an Environmentalist?) captures the reasoning behind free market environmentalism. Where resources are left in the commons, they are squandered; where they are made the property of individuals or groups, they are husbanded. As Chris Costello (PERC Lone Mountain Fellow) and his colleagues showed in Science, fish stocks for which property rights have been established are increasing rather than crashing as they are for stocks under regulatory regimes. Water markets are providing incentives for farmers to improve water-use efficiency and sell conserved water to cities and environmental interests. Between 1998 and 2007, more than a thousand water market transactions have been implemented to increase stream flows in the western United States. With fewer than 90 transactions, California and Idaho have restored more than 3.4 million acre-feet to streams and rivers (see Saving Our Streams at perc.org). Niger, an African country with an exploding population, has added 7.4 million acres of forest cover since 1980, thanks to a law that made trees private property.

Around the world, environmental entrepreneurs are finding ways to make the environment an asset to be husbanded by private owners. Now is not the time to stifle entrepreneurship by shifting back to command-and-control environmental regulations. The future of environmental improvement lies not in the heavy hand of government regulation but in the invisible hand of Adam Smith’s free markets. As always, the challenge is to keep politicians and regulators out of the way of progress.

In his “On Target” column, PERC’s executive director Tery L. Anderson confronts issues surrounding free market environmentalism. Anderson can be reached at perc@perc.org.

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Terry Anderson is president of PERC and the John and Jean De Nault Senior Fellow at the Hoover Institution, Stanford University. He believes that market approaches can be both economically sound and environmentally sensitive. His research helped launch the idea of free market environmentalism and has prompted public debate over the proper role of...
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