Texas Energy Policy and the Incoherence of the Efficiency Concept

by Neil H. Buchanan

At this point, it appears that most homes and businesses in Texas have at long last had their electric power restored.  If any are still without service, they are in the second week of living in 18th Century conditions, which millions upon millions of Texans experienced for many days last week.  And even now, houses with electric power restored do not have running water, with plumbers working day and night to work through waiting lists that run into the thousands (per plumber).

In a column last week, I noted how quickly life becomes truly elemental when the foundations of modern living disappear.  Being thrust into a feral life is jarring, and humans understandably have psychological safety mechanisms that allow us to forget very quickly how awful things felt while we were waiting for normal life to return.  And as I pointed out, even when a power outage is relatively short, the temptation to say that it was "only 10 hours" or "only two days" misses the fact that we cannot know during the events themselves when they will end.  It is similar to a job search that stretches on for months, and after a job offer comes in, downplaying the crippling uncertainty and depression that the person suffered.

We should, therefore, fight the temptation to minimize a crisis that lasted "only" a week or so (but which, again, is still not actually over for the people without running water).  The people in Texas's government who are to blame will do everything possible to say that the problem is solved and that we should all move on -- just as they have been saying that Trump's "only four hours and a couple of hundred people" insurrection is nothing to dwell on.

As a policy matter, however, the Texas disaster is a perfect moment to reflect on the concepts of regulation, deregulation, the so-called free market, and that ever-elusive concept called Economic Efficiency (cue the triumphant music).  I have argued for years that efficiency is a meaningless concept (see, for example, the article that Professor Dorf and I co-authored that will be published soon in Cornell Law Review), and last week's collapse in the Lone Star State is a perfect illustration of the emptiness of free-market bromides.

What are safety measures, from the standpoint of a company?  They are expenses, and just like wages and health care benefits for workers, for-profit companies want to minimize expenses.  But the idea is applicable beyond the world of business.  People on tight budgets who defer maintenance on their cars are crossing their fingers and hoping that driving on bald tires and with bad brakes will not end in tragedy.

If it does end in tragedy, 20-20 hindsight allows us to say that we pushed our luck just a bit too far.  But does that actually mean that we made the wrong decision, even from a purely cost-benefit standpoint?  Not necessarily.  After all, even if we end up paying money at the back end, maybe that will end up being a smaller number than the amount that it would have taken to keep up a prudent maintenance schedule.  If we are injured, each person has her own internal calculus regarding how much money she would have paid to avoid the pain and healing process.  If we injure someone else, we either pay for their injuries directly or through our insurance -- or not at all, if we can avoid being legally liable.  Guilt over having caused someone else's death or maiming is a subjective experience.

Former Texas Governor Rick Perry has said that Texans are glad to subject themselves to the horrors of last week, because that is the price for keeping the federal government out of their business.  Really, he said that ("partly rhetorically," whatever that means), and he even claimed that Texans would have put up with deprivation for even longer to maintain the fiction that they are not truly part of the United States.  This, of course, is merely a specific example of the common claim by comfortable people that other people should be made uncomfortable in the service of some larger goal.  "It's a recession, but the government should tighten its belt and ignore the people who need help, because 'we' understand that the government can't do everything for everyone."

One does not need to suffer from Perry's award-winning level of arrogance and cluelessness, however, to wave this all away.  Texas ignored a decade of warnings that it should require power companies to prepare for extreme weather, because "the free market approach" means that governments should not tell private businesses what to do.  Never mind that electricity generation and distribution is as far from the textbook version of competition as one could imagine (well, health care is probably even further away), meaning that even within the confines of orthodox economic theory we should not expect this hands-off policy to go well.  What matters to Texas's Republican politicians, however, is that no business owner be forced to do anything.

Is it not true, however, that last week's epic collapse shows that businesses can make terrible, regrettable, and even inefficient decisions?  Surely, the billions of dollars of damage that Texans will pay in multiple ways, now and over the coming years, tell us that the costs of Texas's version of free-market electricity exceed the benefits.  Right?

In a strong critique of Texas's approach, Paul Krugman has pointed out that there actually is a self-contained logic that one could trot out to justify Texas-style survival of the fittest.  Krugman clearly does not endorse the explanation, but he points out that Texas's failure to mandate up-front mitigation costs is paired with Texas's failure to put a cap on price spikes.  This is why we are seeing stories about the people who thought they were lucky even to have power last week now being shocked to receive bills of thousands of dollars for one week's worth of electricity.

How could that be "efficient"?  The idea is that the possibility of being the one power company that is able to continue to deliver power to customers -- at a huge premium -- during a disaster will encourage well-run companies to be prepared, even as other companies skimp on preventive planning.  Aesop's ants will always get the last laugh on the grasshoppers, right?  But the theory gets even better, because every company has the same ability to see the incentives, so they will all prepare for the worst, and then the worst never comes.

Krugman points out that the ever-deplorable Ted Cruz, furiously backpedaling and in full pander mode, has decried the sudden price spikes, which means that Cruz (surprise!) is an opportunist and not even a real conservative on economic issues.  It also means, however, that the key element in the incentive structure of Texas's free-market dystopia is inoperative.  If companies know that they will not be permitted to gouge their customers when possible, why put in the money now to be able to stay in operation during the next storm?

The problem, however, goes even deeper than that.  This is yet another example of the anti-regulatory logic that says that businesses will act in their enlightened self-interest in order to avoid losing customers.  Ultra-orthodox libertarians argue that all regulatory agencies are not only wasteful but unnecessary.  Why have a Health Department with restaurant inspectors, after all, when we "know" that eatery owners will have every incentive not to sicken their patrons?  Why have the FDA when every pharmaceutical company fears losing customers after selling tainted drugs?  Businesses regulate themselves!

In the real world, businesses cut corners all the time, in exactly the way that cash-poor homeowners might decide not to replace their roofs or to ignore that strange smell coming from the pipes.  And as to consequences, tracing something like food poisoning to a particular restaurant is hardly an exact science, allowing restaurateurs to gamble on not being caught.

But of course, one can always simply put a high value on "not government" -- a la Rick Perry -- and say that even those real-world consequences are absolutely worth it.  And since economic efficiency is all about the maximization of net social utility, one can then say that even any Hobbesian outcome that befalls us is efficient per se.  The efficiency concept is so malleable that anything can be called efficient.

On the other hand, as Professor Dorf and I emphasize, the opposite of what Texas is doing can also be called efficient.  Texas has set up a regulatory structure that includes enforcing property rights, contract laws (forcing people to pay those $16,000 electric bills), and so on, and The Invisible Hand then tells us what is efficient.  A different set of laws would lead people to make different choices, and The Invisible Hand would then tell us that something else is efficient.  From the perspective of one set of laws, the outcome under the other set of laws is inefficient.

In the end, we should not fool ourselves into thinking that Texas's politicians did any of this because they were following their libertarian economic model to its inexorable conclusion.  They did the bidding of a powerful industry that has corrupted the state's political system for decades, and "being free from government interference" is nothing more than a cover story.

All of which means that Texas could change its electricity-related laws in ways that would better protect Texans from human misery such as they experienced last week, AND they could do so without violating the logic of the free market.  All markets exist and function because of the rules that governments put in place, so changing the current set of rules is not a violation of the laws handed down by Mother Nature herself.  Texas can and should finally learn that it has been worshiping false idols of market orthodoxy.  Other states' experiences under different rules are not perfect, but they are certainly better than Texas's.