Defining Ideas

Setting Krugman Straight

Tuesday, August 19, 2014

The recent story in the New York Magazine, “Has the ‘Libertarian Moment’ Arrived?” by Robert Draper, has given rise to a great deal of speculation about whether we are poised for another great political transformation. Needless to say, the prospect of this “moment” fills the New York Times set with dread. The Times’ all-purpose scold Paul Krugman followed up Draper’s tell-all story with his own harsh critique of “libertarian economics” in his column “Phosphorus and Freedom.” He concludes that it is “foolish” for defenders of free market economics to believe that “we have a vastly bigger and more intrusive government than we need.” Unfortunately, Krugman knows nothing about the libertarian principles that he blithely dismisses.

Krugman points to three places where he thinks that libertarian enthusiasts have gone sadly astray: pollution, the Food and Drug Administration, and the Department of Motor Vehicles.

In order to set the stage for this critique, it is necessary to first establish how libertarians understand free markets. Most emphatically, these markets do not operate in a vacuum. They require that we have clear assignments of rights to both human labor and external objects. The standard position here is that all individuals own their own labor and the various resources, both physical and intangible, that they acquire either by initial capture or by transfer from a prior owner. Its basic system of exchange must be protected by vigorous rules that prevent all self-interested individuals from disrupting voluntary transactions. There must be formalities with certain classes of contracts to increase security of exchange. And there must be strong rules to prevent bad actors from bypassing the market by seizing things that do not belong to them. That prohibition against theft in turn requires the state to provide remedies against other actions that destroy the property of other persons, not only by direct blows but also by pollution. Far from rejecting these government limitations on individual activities, a responsible system of laissez-faire capitalism necessarily embraces them. A sensible libertarian is a classical liberal in the tradition of Adam Smith and David Hume. On economic issues he is no anarchist, but a believer in limited government.

Libertarians and Pollution

Krugman sums up his criticism of libertarianism in one word: phosphorus. Evidently, Erick Erickson, a prominent blogger at Red State, frothed at the mouth when a local city council banned phosphorus in dishwasher detergents. Erickson’s categorical denunciation was ignorant and ill-informed, but so too was Krugman’s purported refutation of that overheated position.

There is little doubt that phosphorus is a pollutant that can kill aquatic life. One possible remedy against parties whose discharges poison the land and waters of others is a tort suit brought to stop its use or collect damages for harms caused. But a moment’s reflection shows that this solution is creaky. First, there are too many users to sue, and second, it is not clear which people should bring suits for the assorted harms. For hundreds of years it has been widely understood that direct regulation is often an efficient substitute for an inferior tort system, which achieves a legitimate government goal at low costs. Krugman is right that the system cannot work if farmers can evade controls, and the sensible libertarian recognizes that as well by expanding the scope of enforcement.

Indeed, the key challenge for regulatory design is what form of regulation works best. Perhaps a total ban of phosphorus in detergents or farming is too costly to productive activities. It is therefore always a fair question to ask whether small amounts might be used, and if so by whom, and further whether to tax those users to give them private incentives to avoid the additional harms.

So stated, the libertarian critique against government regulation no longer operates as a blunderbuss. Instead it asks whether the regulation comes too soon and is too severe. Thus it is commonplace today to require individuals who wish to build homes at a distance from the water to go through extensive government approvals, often administered by an overzealous Army Corps of Engineers, before getting a building permit. The paperwork is expensive and never ending; the delays inordinate, and the required precautions a waste of time and money. For example, the record in the 2006 case Rapanos v. United States, revealed that “The average applicant for an individual permit spends 788 days and $271,596 in completing the process, and the average applicant for a nationwide permit spends 313 days and $28,915—not counting costs of mitigation or design changes.”

Rather than engage in this unending charade, just let the construction start, and then impose a prompt cease-and-desist order, clean-up obligations, fines, and damages—but only for builders whose activities pose an imminent threat of pollution, which, given everyone’s knowledge of the looming sanctions, will typically be a tiny fraction of the cases. In the face of this sensible alternative, and in light of similar difficulties in getting building permits in urban settings, Krugman is a pure ideologue in denying that government is “vastly bigger and more intrusive” than it ought to be.

Abolish the FDA?

Krugman’s second sally ridicules Milton Friedman for suggesting that we should abolish the FDA and use tort law in its place. In this case, both economists get failing marks stemming from their inability to master the institutional details. For starters, the FDA has three distinct functions in regulating drugs: insuring purity, testing for safety, and testing for effectiveness. No serious libertarian mounts an existential attack on the FDA for discharging the first function. An action in tort law (or in contract law for a breach of the implied warranty of merchantability) presupposes that you can find the rogue supplier who puts dangerous stuff into the marketplace. As with pollution, the inadequacy of the individual lawsuit requires some concerted government action to stop these deadly incidents before they occur. Indeed, in practice, the risks of contamination and adulteration are so severe that reputable pharmaceutical manufacturers work hand-in-hand with the FDA to stop illegal imports and domestic sales of bogus drugs.

It hardly follows, however, that the FDA does as well when it oversees clinical trials of new drugs. Here its practices are rigid and obsolete; they impose unconscionable delays on letting new drugs into the market. As a consequence of its incompetence, the FDA is besieged with pleas for exceptions by people for whom all approved therapies have failed. Indeed, the extensive market for off-label uses of FDA-approved drugs shows that physicians are a lot better at making treatment prescriptions than the FDA. Moreover, its effectiveness studies almost always miss the boat. Individual healthcare programs, armed with knowledge of their customer base, can do this job better.

Nor is the tort law any panacea. The actions today are not confined to suits for drugs that are improperly formulated. Those cases are rarities. Virtually all the litigation brought today is by disgruntled patients who insist that the FDA-required warnings did not adequately inform them of the associated risks of the product. These lawsuits are almost always counterproductive given that the FDA warnings are typically far too alarmist, so that they serve no useful function at all. Private systems of warnings developed by such organizations as the National Comprehensive Cancer Network provide far more accurate and up-to-date information than the FDA, because they systematically address such key issues as dosage levels, treatment sequences, and drug interactions that the FDA overlooks. Is this intervention “bigger and more intrusive than we need”? You betcha.

The Case for the DMV

Last, Krugman fantasizes that libertarians recoil at the Department of Motor Vehicles. This is not the case. The case for that body is similar to that for collective controls over pollution, only easier. Keeping bad drivers off the road is often better than allowing them to kill innocent people. Keeping a system of fines and tort remedies in place offers a sensible three-prong program that tends to minimize the risks of keeping too many good drivers off the road and letting too many bad drivers on it. The tests can be reasonably objective and easily processed. It is government at its best. Illinois, which can hardly do anything right, runs a perfectly fine DMV for ordinary drivers.

Yet it hardly follows that all motor vehicle licensing is risk free. Former Illinois Governor George Ryan went to jail for taking bribes to issue licenses to unqualified truck drivers, with deadly results. The abuses of licensing power become greater when the licenses limit the number of trucks that ship tomatoes from Illinois to California, but not back again, or rations taxi cabs medallions that sell at artificially high prices. A sound system of regulation never lets the state use its licensing power to restrict competition on a facility over which the state has monopoly power.

The Bigger Picture

The overall pattern should now be clear. One reason why the debate between hard-line libertarians and their fevered opponents like Krugman has taken such a know-nothing turn is that neither side bothers to take seriously the nitty-gritty institutional details on the uses and limits of regulation in a variety of complex areas. Milton Friedman tended to miss these points because his main targets were minimum wage, rent control, and agricultural price supports, where the hard line libertarian solutions make a good deal of sense.

Krugman doesn’t have that excuse. He fails to understand how institutions work because it is so much easier to slam libertarians for their cultish devotion to Ayn Rand. The truth is, as I argued in an earlier critique of Rand Paul, libertarianism has a strong and useful theory of rights, but offers only loose guidance on the mix between public and private remedies for both breach of contract and harms to strangers, including pollution. All Krugman’s popular work is marred by his obsessive attention to monetary policy and the Fed. If he ever cared to study mid-level regulations on pollution, drugs, and highway usage, he would discover that not all libertarians are as clueless as his New York Times screeds have become.