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Wednesday, November 16, 2011

Strategic CSR - FREE 'free markets'

The editorial pages of The Wall Street Journal should be taken with a pinch (read ‘truck full’) of salt. As someone who reads newspapers for informed content, I find them even less helpful than the editorials of The New York Times. Needless to say, Rupert Murdoch’s influence at the WSJ has not improved things! Nevertheless, a recent editorial caught my eye and quickly had me nodding my head:

The Occupy Wall Street protesters aren't good at articulating what they want, but one of their demands is "end corporate welfare." Well, welcome aboard. Some of us have been fighting crony capitalism for decades, and it's good to have new allies if liberals have awakened to the dangers of the corporate welfare state.

The column continues:

Corporate welfare is the offer of special favors—cash grants, loans, guarantees, bailouts and special tax breaks—to specific industries or firms. The government doesn't track the overall cost of these programs, but in 2008 the Cato Institute made an attempt and came up with $92 billion for fiscal 2006, which is more than the U.S. government spends on homeland security. That annual cost may have doubled to $200 billion in this new era of industry bailouts and subsidies. According to the House Budget Committee, the 2009 stimulus bill alone contained more than $80 billion in "clean energy" subsidies, and tens of billions more went for the auto bailout and cash for clunkers, as well as aid for the mortgage industry through programs to refinance or buy up toxic loans.

I couldn’t agree more. People on both the left and the right tend to favor government intervention when it is in support of a cause they believe in (e.g., subsidies for solar power on the left, tax breaks for oil firms on the right), but at least the left recognizes that it favors government intervention. Right-wing ideology, in contrast, preaches the free market, but then implements heavily subsidized intervention in contravention of that ideology.

What the column does not include, therefore, is the recognition that subsidies and quotas are only one component of the inefficient corporate welfare system we have created in the West. As the article about energy policy in the second url below from the NYT correctly notes:

Economics 101 tells us that an industry imposing large costs on third parties should be required to “internalize” those costs — that is, to pay for the damage it inflicts, treating that damage as a cost of production. Fracking might still be worth doing given those costs. But no industry should be held harmless from its impacts on the environment and the nation’s infrastructure. Yet what the industry and its defenders demand is, of course, precisely that it be let off the hook for the damage it causes. Why? Because we need that energy!

It is the combination of reduced government intervention (i.e., the removal of subsidies, quotas, tax breaks, etc.) PLUS the full internalization of all externalities in product pricing that allows a truly free market to emerge. One without the other is not free; at present, we have neither:

So it’s worth pointing out that special treatment for fracking makes a mockery of free-market principles. Pro-fracking politicians claim to be against subsidies, yet letting an industry impose costs without paying compensation is in effect a huge subsidy. They say they oppose having the government “pick winners,” yet they demand special treatment for this industry precisely because they claim it will be a winner.

In this light, a government tax on carbon is simply a means of accounting for the full environmental costs of oil/gas extraction, processing, and consumption. In other words, it is a means of creating the conditions for a FREE ‘free market.’ Once the level-playing field has been created (with more accurate prices for all forms of energy—traditional and alternative), then let the market determine which energy sources should drive our future economies.