Sunday, October 23, 2005

The Ideal Political Platform Part #2

Last week I introduced the basic tenets of an ideal political platform in America, which largely parallels the major tenets of classic liberalism/conservatism as espoused in the 1970s by many prominent economists, notably Milton Friedman. Classic liberalism posits that government should be limited to what government does best, that social welfare should be provided in ways that are minimally distorting to the economy (e.g. lump-sum payments), that the tax system should be simple and transparent, and that individuals should be allowed to do pretty much whatever they want to as long as their actions do not directly harm others (e.g. gays should have full rights and most personal drug use should be decriminalized).

But classic liberalism as espoused decades ago is not entirely up to the task of defining the key components of a political philosophy for America in the 21st century, mainly because it under-estimated the environmental problems that would confront us and the need for government intervention in these matters. Below I highlight how the essential tenets of classic liberalism need to be augmented given the environmental realities of the 21st century:

1. Classic liberalism assumed that as information improved, private markets would lead to the increased preservation of environmental resources and that externalities (e.g. pollution) would be internalized (e.g. taken into account by private actors) given a system of strong property rights. While much improvement in the environmental arena has occurred, and much of this is due to property rights and better scientific knowledge, most economists vastly under-estimated the level of coordination that is required to tackle some of the world’s most serious environmental problems. Issues such as global warming and the loss of biodiversity require much more government intervention then had previously been assumed. This is not to say that this government intervention won’t rely heavily on the workings of the market system, but only that top-down regulation is absolutely necessary. There is simply no way to adequately address these issues without a strong commitment from the federal government, which will eventually include a high level of international cooperation. Policies such as absolute limits on CO2, government funding of alternative energy systems, and coordinated efforts to purchase and protect biodiversity hotspots around the world will need to be a major component of future government policy.

2. Coupled with a stronger role in protecting the environment, the government should move us towards a more rational method of risk management in areas that are prone to natural disasters. It is highly inefficient, as well as an abrogation of government responsibility, to create incentives for people to live in areas that are both dangerous and prone to catastrophe by providing them with reconstruction aid every time disaster strikes. The government has two options; either require that all people living in hurricane zones, flood plains, or near fault lines purchase private insurance, or make it absolutely clear that people will not be compensated for their loss of property by the government if disaster strikes. Such a policy would no doubt lead to dramatic shifts in the population densities in many disaster-prone areas of the country, and perhaps some one-time assistance for relocation would be required. The net effect would be to dramatically reduce future losses of life and property and save the government hundreds of billions in future costs. It would also force private actors (notably insurance companies) to take into account the effects of environmental externalities that until now have largely been ignored.

3. Regarding personal health and risk, the government also must play a much more active role than advocated by proponents of classic liberal economics. Milton Friedman famously noted that there is no use for the Food and Drug Administration since companies whose products lead to illness will be forced out of the market (i.e. products that make people sick will not be bought). What he failed to realize is that if someone gets sick it is extremely difficult to trace the source of the illness, and without government regulation many companies that poison consumers could in fact operate profitably for long periods of time. But Friedman did have a point in that as people look more and more towards government to regulate the economy, they sometimes do decrease the effort that they invest in making wise choices for themselves (e.g. does anyone really need the government to tell them that “fast food” is bad for you?). This being said, it is clear that in this highly complex and inter-connected system, where we all are exposed to thousands of chemicals a year, many of which interact in ways that aren’t yet fully understood, where it is hard to trace the origin of products, and where the effects of these products often don’t manifest for years, the government must play an active role in regulation. The Food and Drug Administration, the Environmental Protection Agency, and the U.S. Department of Agriculture should all be well-funded, be decoupled from conflicts of interest with industry, and their mandate to protect the public welfare through rational risk assessment should be strengthened.

Next week I turn to foreign policy.



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