EPA and Lehman Brothers

EPA seal


I certainly hope that Congress fails to cut the budget of EPA to the point where the Agency's capability to pass and enforce environmental regulation evaporates. I know that is the intent of the current mischief. Memories are very short in DC. Some of the newbies haven't a clue about the need for regulation. I am not a regulatory freak; I am just as opposed to "unnecessary" regulations as these folks. Regulations are essential to maintain the efficient operation of the market. Just about every free market economist, with the exception of the early Milton Friedman, accepts the need to move toward efficient, perfect markets. I have tried to outline a non-ideological argument that this intention is folly, and dangerous folly to boot.

  1. Markets fail to produce the Panglossian optimum outcome ("all is for the best in the best of all possible worlds") for many reasons. The desideratum is technically a Pareto efficient outcome (not a Panglossian world) that even the most conservative economists seek as their Grail. The irony of Pangloss's cheeriness is overlooked by most economists.

  2. Regulation is a standard economic instrument to restore Pareto efficiency to the market. Regulation is not only an instrument to obtain an efficient outcome. It can mitigate distortions that allow some to prosper unfairly at the expense of others. The EPA came into being because producers of goods were dumping their wastes into the environment for free. But it wasn't free. Those wastes harmed humans and the living and inanimate parts of the environment. Banks were regulated to stop unfair and inefficient practices. Insider trading gives a few access to information that others in the market lack, giving them an obvious and unfair advantage.

  3. Without regulation, small market failures can grow into big and ornery ones. The recent market collapse (failure) can be traced to many causes, but the weakening of regulations is accepted as one of the more important factors. The demise of Lehman Bros. is often used as a metaphor for the whole mess.

  4. Environmental regulations have a similar role. The environment, like the financial system, is a technically complex system. We can't understand it the same way we know how an automobile works. But we do know a lot about it, especially because, since the 1970's, we have gained more and more understanding of how much our well-being depends on having a healthy world. Regulations help keep the environment (a meager name for the web of life of which we are but a small part) from losing the capability to support us and to maintain its inherent wholeness. Arguments about the details of any regulation hinge on the cost of implementing the new rule and the benefits gained thereby. That's not the point of where I am going.

  5. When we let a market run completely free, we run the risk of collapse. We are facing, with the antics of the Congress, the possibility that the environment is to be freed from the regulatory restraints that have worked against much opposition and efforts to throw them away.

  6. In a sense the environment is a kind of market. I don't really think this of it way, but for the sake of my argument I'll let this image stand. We "buy" services from the market. We get the air we breathe; the water we drink, the fish we eat, and just about everything we use to live by. Nature donates most of this to us. We pay her back by restorative projects, but these are infinitesimal. Governments, who generally claim that they own the natural resources inside their boundaries, give or sell the right to get these goods from nature to extractors, fishermen, farmers and others. They in turn use them to produce all the goods and services we consume.

  7. Early on in the "environment era, the natural system was being stressed, but generally without showing systemic deterioration. A fishery lost here or these; a few lakes dying; oil spills here and there. But now the situation has changed. The impacts of our human economy on the natural world have begun to equal or outweigh historical change mechanisms. Some argue that we have moved into an entirely new geologic epoch, the Anthropocene, named to indicate that human activities are significantly affecting the Earth's ecosystems. The Earth's climate, like the financial system, is complex. We know that there have been historical changes of geologic regimes. There is little argument over the existence of the Ice Ages. On the other hand, there is much argument over the current possibility of a major change in climatic behavior due to the emission of greenhouse gases. (Disclosure: I am a believer in the distinct possibility of such a regime change.)

  8. The parallels between the arguments used to justify the loosening of financial regulations and that being used to gut the EPA are striking. The environmental market can stand no more distortions and stresses than the financial world can. Both are complex and can collapse in an instant in spite of our beliefs that we are in control. There is one critically important difference. We think we can restore the health of the financial world by playing around with all sorts of economic tools. It is pure hubris of the most dangerous kind to assume we will be able to restore the Earth's health by playing around with analogous tools. The consequences of possible changes are huge in terms of life and livelihood. Once Lehman Brothers closed its doors, it was gone from the scene along with trillions in wealth. We simply cannot afford to take a similar chance with the world. The Earth won't go away, but it may close the market I spoke about above to many of its inhabitants. The environmental market needs regulation like all others. It is the most important market we have. Should it collapse, the loss of wealth would be immeasurable.