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Note to William Anderson: Limited liability is a key to understanding the Great American Ponzi scheme

January 5th, 2009 No comments

William Anderson (an adjunct scholar of the Mises Institute and economics prof. at Frostburg State University) has a thoughtful New Year’s Day post, pointing out how Paul Krugman fails to understand the causes of ouir economic stagnation and financial meltdown.

I posted the following comment, in which I argue that the state grant of limited laibility (which I have discussed in several recent posts) is a key to understanding the Great American Ponzi scheme:

Bill, I agree with the thrust of your criticisms of Krugman, but have a few small quibbles.

First, while you rightly condemn “most economic regulation … of the command-and-control variety”, you blame all of this on “the whims of bureaucrats and environmentalists” and completely fail to note that state and federal environmental regulation (i) initially responded to real environmental problems and (ii) also represents the successful efforts by established firms to raise barriers to entry and to cartelize their industries.  See Roger Meiners & Bruce Yandle, Common Law and the Conceit of Modern Environmental Policy, 7 Geo. Mason L. Rev. 923, 926-46 (1999), and Walter Block, Environmentalism and Economic Freedom: the Case for Private Property Rights..

Second, while you are correct that Krugman fails to understand the role of the state in creating the distortions that underlie our current problems, it seems to me that you have neglected one of the key state interventions that has fuelled the rent-seeking and risk socialization that we see today – the grants of legal personhood (with unlimited purposes and life and Constitutional rights) to corporations and blanket limited liability to shareholders.

Limited liability has enabled corporate managers to act without close shareholder oversight and management; this I believe has played a key role in the vast misalignment of incentives that Michael Lewis and David Einhorn describe at the NYT, and in the risk mismanagement that Joe Nocera of the NYT describes at length in the NYT Magazine.  Those taking large bonuses (whether in the financial industry or large corporations) were essentially playing with OPM – Other People’s Money – and capturing the upside of short-term gains while leaving shareholders and taxpayers holding the bag for loses.

I hope that you and others here will look more deeply at the role of the state in the problem of misaligned incentives that continue to corrupt American capitalism.

Breaking the senseless impasse on ANWR and OCS exploration and development – a tax and rebate proposal

July 16th, 2008 10 comments

It’s long been obvious that:

(1) government policy concerning the use of public lands is highly bureaucratized, often inept and subject to behind the scenes sweet deals favoring insiders;

(2) discussions about how the public lands should be used often very politicized;

(3) politicization is especially prominent with respect to public lands that have potentially high commercial value but where development requires additional approvals from legislators or others outside of the Administration/regulatory bureaucracy – such as the Arctic National Wildlife Refuge (ANWR) and the native lands within it, which cannot be explored without Congressional approval, and the Outer Continental Shelf (OCS), further development of which has been blocked both by Executive Order and by annual moratoria imposed by Congress, with the strong backing of many coastal states that wish to protect their tourism industries; and

(4) supporters on both sides – whether for development of ANWR and OCS or for the continued preservation of wildlife, recreation or tourism values or protection of other objectives – have perfectly legitimate interests, and excellent arguments to make (and some not so excellent) in support of those interests.

But it has not been so obvious that the different interests are in fact irreconcilable, especially when one notes how well conservation groups that own land have been able to balance their conservation objectives with active resource extraction – which can be done carefully while providing revenues for other activities.  In fact, I suppose that if any of the major environmental groups had been given title to ANWR, development would have been well underway years ago (as I have previously suggested).  Likewise, the states that have until now blocked further OCS development have done so in good part because the federal government takes the lion’s share of the royalty revenues, while leaving the states and local communities with the short end of the stick and the risks of feared development disasters.

So – for the rather simple reason that there is no private owner of the resources at stake, but instead a politically-controlled legal owner (the U.S. citizens via their government) and an array of shadow owners (the various interest groups and bureaucrats) who have been unable either to conclude any deals or to force their preferences down the throats of those they disagree with – we have deadlock, with valuable resources sitting in the ground, and possibilities for mutually beneficial deals lost.  This is a rather basic analysis that has been recognized by libertarian thinkers and free market environmentalists like John Baden for quite some time.

Recently, in response to a proposal by Iain Murray of CEI that ANWR and the OCS be opened to development, I indicated some further thoughts on possible paths forward:

The key is to end politicized control, not to run roughshod over conservationists.  If we are serious about ANWR, we ought to simply cede it to the Sierra Club or The Nature Conservancy.  They would certainly pump from it AND protect it, and use the revenues to support more important conservation projects.   As for the OCS, exploration is limited only because states don`t want to bear the burden of pollution risks with a slim share of revenues.  With more generous revenue sharing, more OCS development will occur.

However, I’d like to change tack a little bit, as these disputes are part of the bigger problem of federalized management, and we are unlikely to see Congress act in the near future to privatize ANWR or other federal lands, or even to turn them over to environmental groups to manage.  We face a real problem with respect to most of federal lands that revenues from resource extraction go into the big black hole of general funds, with very little ability of the resource managers to capture the benefit of managing well, and very little incentive by American taxpayers to make sure that resources are well-managed, priced to receive good returns and do not leave taxpayers generally holding the bag for environmental risks.  A litany of horror stories could easily be assembled on these points. 

How can we get started on improving incentives on our government resource management projects?  Well, a small idea occurs to me:

I’ve recently reviewed a slew of recent arguments on the climate change front and noted wide-ranging support (driven by equity, efficiency and expedience) for a federal carbon pricing scheme (whether by carbon taxes or by emission rights under a cap and trade scheme), particularly if all of the funds raised by the tax or permit sale are passed through to Americans on a per capita basisWhy couldn’t we apply the same concept to ANWR and the OCS lands, with a small percentage being kept by the relevant oversight agency to fund and incentivize oversight? 

If royalty revenues are passed through to citizens, Americans will directly benefit from moving ahead (without encouraging government bloat), so that development will not be seen as simply a giveaway by politicians to evil oil and gas companies.  Further, citizens (and entrepreneurial prosecutors) will have greater incentives to monitor government performance (as in not giving away the resources too cheaply, and actually collecting revenues owed), and will able use the dividend checks to fund, to their hearts’ content, further environmental protection.  In the case of the OCS, clearly a greater cut of the royalties ought to go to citizens in the relevant coastal states to compensate them for the relatively higher environmnetal risks they bear.

To incentivize the environmental groups to support this type of approach, as well as to provide better assurance of environmental oversight, I would suggest that new leases to explore or develop in ANWR and the OCS include as a contracting party an environmental group, either as the direct lessee (subcontracting to a preferred oil and gas company) or as environmental risk manager, in either case capturing a share of the royalty.  The environmental groups will reap some benefit (that they can use for other projects) and will be subject to oversight by their members, and to competition from other environmental groups to protect wildlife and other values.

Such schemes would incentivize all stakeholders to work together in a win-win manner, while minimizing environmental risk, and directly rewarding citizens and leading to improved resource management.

Maybe the strong desire of many to see carbon pricing at the federal level can be leveraged to enhance both environmental protection AND economic growth, while streamline government and rewarding good resource management, at least in the case of ANWR and the OCS.  (Next up, federal lands – forests, hard rock mining and oil and gas – generally!)

Just a thought.