Paradoxes, Environmental Regulation, and America's Golden Age

Bruce Yandle

Alumni Professor of Economics & Legal Studies

Clemson University

Clemson, SC 29632

The Philadelphia Society

Oak Brook, Illinois

April 25, 1998

A Time of Paradoxes

What a wonderful world! In vital ways, we seem to be living in a Garden of Eden. In spite of horrible ongoing civil wars and terrorism that plague large numbers of people on the planet, we know that more people are experiencing freedom than ever before. Just a short time ago, Eastern Europe was a walled community; ordinary people were unable to move their families from one county to another, let alone to cross country lines or venture forth to the land of the free.

I shall never forget seeing Czech families making their way on the autostrade in Italy in 1991, proudly displaying cardboard signs telling the world that they were free. The story has been repeated for millions. Free markets are burgeoning where command-and-control once dictated the who, what, and when of production and consumption. The power of contracts, property rights, and gains from trade are lifting and spreading incomes and wealth.

Consider our routine activities. We have almost unlimited access to information, goods, and travel. There are spot and futures markets for things as diverse as natural gas, electricity, stock market averages, and even permits to emit sulfur dioxide. We go "on line" to buy automobiles, airplane tickets, financial derivatives. We can swap email messages in the dead of the night, laying plans for meetings like this one. Scientists and engineers in Europe collaborate in real time with manufacturing operators in the U.S. Component parts for new BMWs are in the air traveling to their home plant in S.C. Ten hours later, they happily power shining Z3 convertibles.

In split seconds, contracts are negotiated, deals are made, and the rights of contracting parties are respected in the rough and tumble of the market place. Goods, capital, and people move to the Four Corners of the globe, with less government interference and friction than ever before. Incomes are rising rapidly; wealth is being created. Life expectancies are rising, and the world is getting cleaner.

With expanded knowledge and information, liberty has expanded and markets are flourishing in one part of our world. This is the case on one side of the ledger. But alas, there is another side.

While we can design, build, and sell new BMWs with relative ease, we must think more than twice before cutting down a juniper tree that may be listed as potential habitat for an endangered species. The wiser course of action says we should first get permission from a federal agent. Unloading a truck of builders' sand on a new home construction site can land us in the federal penitentiary, unless we first have federal permits. Building duck ponds without permission can yield penalties more severe than manslaughter. Sending a small amount of chemical waste to a local recycler can generate liability for cleaning up an entire landfill.

Taking steps to build a home on land initially zoned residential but later rezoned can lead to an uncompensated loss of the entire investment. Making an effort to plow and plant a dry field that was temporarily covered by a flooding river can lead to lessons learned about wetlands violations. Setting aside land for a retirement home can be frustrated, if there is a possibility that a golden-cheeked warbler just may decide to locate there. And one must exercise restraint before pointing a rifle and pulling the trigger when a menacing grizzly bear turns to attack. Taking such common sense action may put one in the position of calling on the Mountain States Legal Foundation for assistance when charged with killing an endangered species. With the Foundation's help, you may ultimately win after enduring a costly court battle, but the record says it will take nine years.

While we live in a veritable Garden of Eden on the one hand, we live as peasants on a feudalistic manor on the other. And the baneful lord of the manor is not bashful when it comes to command and control.

Superfund, wetlands, endangered species. How did the lord of the manor become so powerful? What has happened to property rights? What happened to liberty?

Property Rights and the Constitutional Order

Precious time and my hope of keeping your goodwill prevent a complete rendering of the story. Doing so requires us to reconsider the important and precious foundation stones of this wonderful republic, to remember the vital constitutional constraints that set in motion the most powerful story of human action the world has ever witnessed.

Our Founders knew much that is now seemingly forgotten. They knew from bitter experience that for human beings to be free, for the free spirit of man to soar, there must be basic protections that limit the powers of the government Leviathan. They understood the difference between rules of law based on just conduct and wisdom of the ages and rules of politics that were based on expediency, concentrated power, and special interest struggles.

They knew that for markets to flourish, for wealth to be created, preserved, and accumulated, property rights had to be protected. More than words on parchment, the Constitution they penned formed moral and legal constraints believed necessary to limit the heavy hand of government. They wrote in the Constitution: "Nor shall private property be taken for public use without just compensation."

Property rights. Why are they so important? Deep in the genetic material that forms human life, instincts lie buried calling for survival, reproduction, and conservation of energy and resources. Over the millennia, human beings that survived and prospered devised rules, customs, and traditions that protected the stuff of life. The rules were simple: You do not reap where you have not sown. You do not eat unless you have contributed. You do not impose unwanted costs on your neighbor or he on you. Property rights formed the foundation for moral behavior and markets. And government was invented for the purpose of protecting those rights, knowing full well that its naturally destructive tendencies were to be tolerated so long as property rights were made secure.

The founders did not put a happy face on government as we do now. They knew that government was not Santa Claus. They understood that self-interest, the natural human desire to improve position and family, could be channeled beneficially by rules of law, property rights, and free market forces. They knew from experience that those same motivations are perverted by the rule of politics. Special interest groups driven by self-interest will tilt the hand of government in their direction. Instead of working the soil, factory, and field to produce new wealth, the special interest groups will work the halls of Congress and transfer wealth to themselves from the unorganized, unwitting common man.

Leviathan One and Two

The constitutional containment delivered by the founders lasted for almost 100 years. Then, at the turn of the century, roughly one hundred years ago, the rules changed. Marked by the 1887 Act to Regulate Commerce and the rise of the Interstate Commerce Commission, then by rules for regulating food and other products, the federal government took on new powers that limited competition, provided monopoly protection, and transferred wealth across special interest groups. The genie was out of the bottle. The first American Leviathan was born. But while government flexed its new regulatory muscles, the industry regulation that emerged did not systematically destroy bedrock private property rights. That was to come later, delivered by the environmental revolution in the late 1960s and early 1970s.

The environmental revolution cut through and across the property rights fabric that formed the market economy. The new social regulation that emerged regulated industries and functions within each and every plant, factory, field, and mine. Command-and-control, technology-based, regulation emerged in the fine print of the Federal Register. The rule book grew thick with regulations affecting water and air, waste disposal, reconstruction of closed mines and wells, landfills, tree cutting, waste disposal, home building, and chemicals from birth to grave. The creative energies of America's brightest and best entrepreneurs were diverted. Energy previously devoted to finding new and better products and services, exploration, making markets, and reducing costs became focused on regulators, regulation, and ways to avoid costs and gain political favors.

And who supported this massive effort? Dedicated environmentalists with true concerns about the biological envelope that supports all life. Other quasi-environmentalists who saw an opportunity to stop economic development in its tracks. Bureaucrats who found enriched careers in regulating. Politicians who found new markets for their services. And some industrialists who found it easier to compete in Washington for political favors than to slug it out in competitive markets. The famous iron triangle emerged full-blown.

And what was the glue that held it together. Bootleggers and Baptists, those who take the high ground populate the environmental revolution and appeal for rules they believe will protect the environment-the Baptists in the story. Then, the bootleggers, those who let the Baptists fight their battles for them as they obtain regulations that raise competitors costs, limit the entry of new competition, and shield them from common law suits that previously protected the property rights of ordinary people. Yes, some firms saw opportunity in the emerging rules. If government was going to regulate, then let's get the right regulation, the one that favors us.

What do we have? Rules the limit the emissions of sulfur dioxide in the name of acid rain, even though the scientists who studied the issue said there was no acid rain problem. Rules that expand the market for low sulfur coal and natural gas, but reduce the demand for petroleum and ordinary coal. We have toxic release inventory rules that give a black eye to industries that must publicize emissions of more than 600 chemical, in pounds, even though all industry taken together produces just 17 percent of the total emissions. Rules that set stricter controls on new and expanding plants while grandfathering older ones. Regulations that favor one fuel over others. Endangered species protection that limits timber cutting on government land, raising the price of timber and the profits of firms that cut on their own land.

The list could go on, and if it did, it would contain the fall out from Kyoto. The agreement itself seeks to raise competitor's cost, with Europe pushing the U.S. to cut back even more, and challenging the idea of seeking lower cost emission reductions from countries that can do it at lower cost. Following in the bootlegger lineup are two major international oil companies that announced support for Kyoto. Why? A combination of reasons to be sure. But they had made major investments in alternative energy products.

The bootlegger list includes corn farmers and producers of corn-based ethanol, assisted by none other than the U.S. Department of Agriculture. And what do they want? Continuation of the rich subsidies on ethanol blends of gasoline. All this in the name of reducing global warming.

Quite understandably, firms and industries that live in this age of regulated capitalism have invested in the rules and stand to lose when the rules of revised. They quite logically support the Leviathan, hoping always to bring down costs once the favors have been won. And just as understandable, there are the politicians who seek to harvest a political commission each time they pass favors to special interest groups

Yes, an effort to deregulate raises the wrath of the favored special interest groups. Is it any wonder that Congress is unable to take meaningful action to eliminate Superfund, the program that produces lots of litigation and hardly any cleanup. Is it any wonder that Congress is unable to pass a property rights protection bill. Should we be surprised that Congress cannot completely modify the endangered species act in ways that reverse incentives, making exploration, production, and conservation of species attractive endeavors instead of deadly activities to be avoided at all costs?

Houses Built on the Sand of Politics Will Fall

But every house built on sand will eventually fall. Societies that fail to protect fundamental property rights are destined to fail. We know that. So it is with the property rights destruction of the Environmental Revolution. But why?

Rapidly expanding global markets, advances in technology, unavoidable needs to reduce costs, outright failings of old smokestack regulation, rising incomes, and a veritable property rights rebellion are combining to force change. In the absence meaningful international competition, U.S. firms can gain from costly regulations that cartelize industries. When technology change is slow and obsolescence rates even slower, firms can gain with command-and-control technology-based regulation. Eventually, the true environmentalist begins to wonder what it's all about. If air and water quality is no longer improving, if Superfund sites are caught in a deadly gridlock that accomplishes nothing, if firms are required to spend huge amounts on trivial problems and little on more serious ones, eventually, environmentalists say "enough." Rapidly rising incomes generate demand for real environmental improvements, improvements that cannot be and are not being delivered by central authorities. And when countless ordinary people find that rights to use their land in customary ways are challenged and taken without compensation by regulatory authorities, they rebel. The house built on sand comes crashing down.

The Property Rights Rebellion

Led by Westerners fed up with increased interference with traditional land rights, ordinary people nationwide in hundreds of grassroots organizations took it upon themselves to remind the politicians of the Constitution's Fifth Amendment. "Private property rights will not be taken for public purpose without just compensation." Failing to get satisfaction in Washington, the movement turned to the states. Today, 24 states have passed some form of property rights legislation and legislation is pending in seven others. The geographic pattern that results is interesting. The Rocky Mountain states, Pacific Northwest, and western states that border Canada have all passed property rights laws. Just four Western states have failed to respond. By contrast, the Northeastern states have done practically nothing. In urban America, property rights are not an issue. City folks commuting on morning trains to New York, Hartford, and Boston know little about wetlands, Superfund, and endangered species. Indeed, they know little about the importance of basic property rights to land.

South Carolina's current property rights debate is a case in point. Aside from farmers, timber producers, and Lucas sympathizers-of which there are many-there just not a lot of interest in property rights. The opposition to compensated takings comes from the urban areas-the organized interests that support zoning, planning, and government ownership of environmental resources. And unfortunately, I would add, farming interests sometimes simultaneously lobby to support the sanctity of property rights while also lobbying to obtain statutory protection from common law suits that arise when odors and discharge from animal feedlot operations affect the property rights of neighbors.

Yes, there is friction in the workings of the property rights movement, but its force cannot be denied. Recognizing this, regulators have changed their behavior. They have backed away from the more blatant and arbitrary enforcement of rules. And gridlocked Washington is getting the message.

Following in the wake of the property movement, we see devolution of environmental protection to the states, where politicians recognize that they do not hold monopoly power over investors who might built and expand facilities and who know that they must deliver real environmental benefits to real people, not just promises .

But if the house of regulation falls, will another, even stouter one, take its place? Will property rights be more secure?

America's Golden Age

I leave these important questions on the table momentarily to tell you about the prospects for America's coming Golden Age. Think with me for a few minutes about this country 100 years ago, and then let us compare that time with the one we now face.

Three major forces played through the economy 100 years ago. First, massive waves of immigration-the largest seen in our history. People came to these shores looking for a better life, seeking opportunity to work and build. They came. Wages fell. Prices fell. Incomes rose. Second. There was a technological revolution. Electricity. Petroleum. Moving assembly lines. Interchangeable parts. Transportation. Communication. And third, massive restructuring of firms and industries-efficiency enhancing mergers, consolidations, alliances, spin-offs. The decades that followed delivered America's Golden Age. Rapid increases in income and wealth. Improvements in basic living conditions. The emergence of the Great American Bread Machine.

What do we observe today, 100 years later? Massive waves of immigration, a technology revolution, and cost-minimizing restructuring, mergers, consolidations, alliances, and the computer-driven virtual corporation.

Is there another Golden Age in the offing? I think so, but that is because I am extremely optimistic. Along with current features common with those one hundred years ago, we have higher taxes, a mountain of regulation, and a threatened system of property rights. To put is simply, we Americans face a daunting challenge. There is a Golden Age in the offing, but its realization is threatened.

Where Do We Stand?

Now, in closing, let me return to the question: Will a stouter regulatory regime replace the one that is falling? This, perhaps, is the most troublesome question, one addressed by the Kyoto Agreement. Out of that agreement comes an international authority, an international cartel manager, if you will, that seeks to coordinate nations worldwide in production and consumption activities that relate to carbon emissions. This parallels the earlier formation of the U.N. Commission on Global Governance, important elements written into the North American Free Trade Agreement, and the new powers of the World Trade Organization. These fledgling bureaucracies will naturally seek to build a global regulatory regime, a potential threat to property rights, free markets, and the coming Golden Age.

Final Thoughts

Paradoxes, property rights, and America's Golden Age. We live in a marvelous time. A time of expanding freedom, increasing wealth, and rapidly improving technical capabilities. It is also a time conditioned by regulation, bureaucratic controls, and property rights destruction. The Golden Age beckons. Will the Golden Age emerge? Will enforcement of constitutional constraints be strengthened? Will this time of environmental feudalism come to an end?

These are the questions that plague us. And the answers? The answers depend on human action, what you and I do to strengthen the case for liberty, individual responsibility, and meaningful protection of the biological envelope which contains and supports all life.