Friday, May 07, 2010

The Expensive American

-- Posted by Neil H. Buchanan

In my FindLaw column this week (here), I use the Gulf oil disaster as a jumping-off point to discuss the ways in which the very high costs of the American lifestyle have been hidden from the public. So long as we get relatively cheap gasoline and 99-cent hamburgers, it is all too easy to ignore the costs that we cannot see. Ultimately, those costs come back to haunt us, as the unfolding environmental disaster off the coast of Louisiana makes all too clear. In addition to that epic tragedy, I also use as examples last month's West Virginia mining disaster and the environmental havoc caused by the production of meat and dairy products. Here, I will describe the conceptual problem that underlies all of these problems, and I will offer a few more examples of how the phenomenon of hidden costs pervades the U.S. policy landscape.

The oil gushing from the floor of the Gulf seems almost certain to wreak destruction on a scale never before seen. That destruction also seems certain to be essentially irreversible, with oil seeping into the soil, killing plants and wildlife, and changing the nature of the ecosystem forever. Normally, the costs of extracting and using oil -- even the costs that do not show up in gasoline prices -- are seen more immediately, in the form of air and water pollution. The difference, therefore, lies only in the probabilistic nature of the harm of oil spills and other such events. We know that they will happen, but we can predict their frequency and severity only imperfectly.

Whether discussing harms that happen on a continuous basis or the probabilistic ones, however, the standard analytical approach in economics is very familiar: identifying "externalities," and then imposing Pigovian taxes to internalize those costs. The added analytical step necessary when dealing with probabilistic harms is to assign a probability to an event, and then to multiply that probability by the costs that such an event would impose. (A 1% chance of a $1000 harm has an expected cost of $10.) The more unusual and unlikely the event, however, the more difficult it is to put a cost on the event. It is not easy to determine all of the harms caused by the exhaust from cars, but that is nothing compared to putting a price on all of the possible disaster scenarios that might follow from deep-sea oil drilling.

Even if we believe that there are reliable ways to measure costs, however, the problem is that there are far too many ways in which Americans fail to include those costs in the prices of the things they buy. Meat is not just murder, it is very expensive murder, in the grotesque environmental damage that industrial meat and dairy activities cause. (Interesting irony: One "cost" of the Gulf oil disaster that has been discussed in the media is the loss of income from the seafood industry. The problem is that those industries themselves generate a great deal of pollution, and they also destroy habitats.)

The phenomenon of ignoring hidden costs, however, goes well beyond the environmental harms that have now become so obvious in the Gulf. One way to have low taxes, after all, is to refuse to maintain public infrastructure. Basic accounting, of course, would tell us that the depreciation of these assets is as much a cost as anything else; so ignoring them merely puts off the day when the costs become impossible to ignore. Sometimes, this comes in the form of a dramatic event, such as the bridge collapse in Minneapolis in 2007 that killed 13 people -- or the previous crisis in the Gulf, when we learned that years of ignoring the levees in New Orleans was anything but consequence-free.

Often, however, the costs simply come in the form of a continuing decline in the quality of an important economic asset, such as the decline in the quality of U.S. schools, or the decline in Americans' health due to a health care system that drives people to ignore their illnesses until it is too late. Or, for that matter, in the decline in Americans' health from the introduction of things like high fructose corn syrup that lead to obesity, diabetes, etc.

The U.S. political system is notorious for its inability to take into account long-term costs, of course. One important lesson from the Gulf disaster is that ignoring those costs must not continue. The other lesson is that the politics of the moment are about little more than denying and ignoring hidden costs.

For the last generation or more, politicians (led by Republicans, but joined by a very large number of Democrats) have gleefully changed laws and neutered regulators to make it ever less likely that even the most basic Pigovian corrections will be enforced. Regulations and taxes are exactly what make our real cost of living obvious. When we allow politicians to attack the most effective methods we have to promote responsible behavior -- when we allow them to perpetuate the belief that our activities are consequence-free -- then we will surely experience a continuing parade of unsurprising surprises.


michael a. livingston said...

OMG, this is two or three consecutive Neil B. columns that I have found creative, intelligent, and thought-provoking despite our political differences. Has he changed, or have I? Perhaps I should consult a physician.

Charles said...

"The more unusual and unlikely the event, however, the more difficult it is to put a cost on [it]."

And, of course, the less meaningful is "probability of the event" when the "trials" are inevitably few in number and unrepeatable. Consequently, so is "expected cost".

That BP (along with many others with vested interests, apparently including the Obama admin) failed to recognize - or ignored - those basics is not so surprising. That entities like LTCM also may have ignored them (they certainly recognized them) is rather surprising. Or at least seemed so at the time - perhaps they were prescient early adopters of the new "privatize reward, socialize risk" strategy.

To the main point of the essay, I try to keep in mind that we evolved to be on the lookout for near-term dangers like predators in the bushes and falling rocks, not long-term hazards like environmental disasters and financial meltdowns. Professional training in which careful cost-benefit trades are standard may help in making the transition from the former to the latter, but relatively few experience such training, and many who do are incentivized to ignore it.

CJ said...

Another hidden cost is all the post-retirement benefits for public employees that are not being funded or properly recognized on state balance sheets.

Will it be possible to restructure these? The question of whether states can go bankrupt seems a grey area.

The article below breaks the ice on the topic but seems only a start:

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