Thinking Like an Economist How Economics Became the

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Figure 1 This iconic picture of the Cuyahoga River on fire was published by Time magazine. in August 1969 although it actually showed a fire that took place in 1952 Photograph from. the Cleveland Memory Project, http www clevelandmemory org speccoll croe acc17 html last accessed 30 August. effect of producing some good or service the cost of which was borne not by the buyer or. seller of these products but by third parties the breathers of air and drinkers of water It. was a real problem a market failure but the solution Congress had settled on rigid limits. on how much pollution could be emitted without any weighing of costs or benefits. created problems of its own 8, For one thing it made no distinction between pollution reductions that were relatively. inexpensive to make and those that would be extremely costly All polluters were simply. expected to achieve the same standard For another it took no account of the fact that the. more pollution was reduced the more expensive further reductions would be At some. point additional reductions might not be worth it Congress s approach also failed to. acknowledge that while pollution itself might be unwanted it was often the byproduct of. some otherwise desirable activity and limiting or banning it would come at a price. These observations seemed relatively obvious to economists whether liberal or. conservative As one wrote in 1970 the principle of identifying the point at which the. marginal cost of reducing pollution equaled the marginal benefit of producing it is so. simple that it is almost embarrassing to admit it is the cornerstone of economics 9. Moreover the Council of Economic Advisers CEA had been suggesting pollution taxes as a. potential solution to environmental problems since at least 1965 and had done so under. both presidents Johnson and Nixon 10, Many policymakers however found the idea of pollution taxes morally. objectionable The 1965 proposal was dismissed on the grounds that it might come to be. regarded as a purchased license to pollute and as an observer later noted environmental. groups had helped draft the Clean Air Act not merely to clean the air but to punish to. force firms that for decades had used the atmosphere as a free dump to pay the maximum. amount for past sins 11 Economists were represented in the White House and had. unprecedented influence over macroeconomic policy in the 1960s but when it came to. environmental laws their perspective was largely ignored 12 Indeed one economist. subtitled his retrospective analysis of the Clean Water Act passed in 1972 Why No One. Listened to the Economists 13, Two decades later the Clean Air Act was up for reauthorization The political mood was. more conservative but the public still expressed strong support for environmental. protection and George H W Bush had announced his intention to serve as the. environmental president 14 Different issues were at the top of the policy agenda though. than had been in 1970 acid rain in particular Required to limit local concentration of SO2. emissions by earlier legislation electric companies had built multi hundred foot. smokestacks While this cleaned up the air nearby these tall stacks simply channeled. pollution higher into the atmosphere producing acid rain that might fall hundreds of miles. from its source 15 The Clean Air Act Amendments of 1990 successfully tackled this new. problem through its centerpiece Acid Rain Program 16. Like its predecessor the Clean Air Act Amendments of 1990 created strong environmental. protections with broad bipartisan support But while economists had little influence on the. earlier Clean Air Act this later bill and especially its Acid Rain Program drew heavily on. economic insights Gone were the ecological references to harmony and the. interrelations of all components of the natural environment that had graced NEPA 17. Instead acid rain would be cut in half through new means by design ing. mechanisms which take advantage of the forces of the marketplace in our economy to. protect the environment in economically efficient ways 18. The Acid Rain Program did this by creating the first national cap and trade program in the. United States Rather than requiring power plants to install scrubbers that would remove. SO2 from their emissions it set a limit on SO2 emissions then gave producers allowances. for reductions they made beyond what was required These allowances could be sold to. other companies for whom reducing emissions was more expensive A market in emissions. allowances would reduce SO2 emissions more efficiently than if all plants were simply. required to limit their emissions by the same amount 19 Tom Tietenberg a Colby College. economist who had been writing about the possibility of tradable permits since the early. 1970s had fleshed out the idea and Harvard economist Robert Stavins included it in. Project 88 a bipartisan package of market friendly environmental proposals 20 The Acid. Rain Program was generally seen as a major success and later served as a model for cap. and trade programs around the world 21, The shift toward economics that took place in environmental policy between 1970 and.
1990 was real but the change was subtle both laws after all helped to limit pollution And. while economic reasoning did become more integrated into environmental policymaking. that did not mean environmental policy more generally came to reflect economists. preferences Indeed Congress s ongoing failure to take any meaningful federal action to. reduce greenhouse gas emissions despite overwhelming support for such action from. economists across the political spectrum keenly demonstrates the limits of their. influence 22, Yet even though economists lacked the power to push the U S government to tax carbon or. otherwise address climate change the expansion of economic reasoning had real effects on. environmental policy It shifted away from a moral approach that that stigmatized. polluters and toward one that saw pollution as an externality to be priced It moved. attention from identifying permissible levels of pollution and toward identifying the most. efficient means to achieve them It drew focus away from technologies of pollution. reduction and toward technologies of market design. And a growing requirement that environmental claims be made in economic terms at least. if they were to be taken seriously by federal agencies and the courts changed the political. space for making them During the 1970s and 80s the range of environmental regulations. subject to cost benefit analysis expanded and health impacts were reconceived in terms of. risk assessment translatable into dollar terms 23 Ecological arguments so integral to the. passage of NEPA rested on the idea that organisms and their environment depend on one. another in complex unpredictable ways these did not translate easily into economic terms. Instead the 1990s saw ecology rethought in terms of ecosystem services priceable. contributions the environment made to human well being like pollination water. purification and climate regulation so that such services could be incorporated into cost. benefit calculations Yet the ecosystem services concept failed to capture the deep. interdependence of the living and nonliving elements in an ecological system while also. lacking the moral appeal ecological thinking had held for many 24. Similarly as people of color organized in the 1980s to call for environmental justice in. response to the long history of disproportionate pollution and degradation of their. communities they drew on the language of the civil rights movement to demand political. voice and assert the right to participate in environmental governance as equal. partners 25 Yet when the EPA finally responded it did so by turning demands for racial. justice into procedures for calculating the relative risk burden borne by low income and. racial minority communities measuring that burden including loss of health or life in. economic terms 26 Gone were the calls to end toxic waste production and references to the. sacredness of Mother Earth 27 While part of the power of economic reasoning has been its. ability to bring new concerns whether they be with the value of pollinators or the siting. of landfills in minority communities into its framework rethinking competing values in. the language of economics often came at the cost of some violence to the originals. The Acid Rain Program itself suggests other implications of centering economic reasoning. in the policy process Certainly environmental laws grounded in economic reasoning can. achieve significant environmental improvements and SO2 emissions did drop dramatically. in the 1990s But the Acid Rain Program also benefited from fortuitous circumstances a. rapid drop in the cost of shipping made it less expensive to transport low sulfur coal across. the country independently contributing to the reduction 28 While the Acid Rain Program. became a global model in other contexts like the European Union s CO2 trading scheme. cap and trade has been less demonstrably successful in lowering emissions due in part to. an overabundance of permits 29 Indeed a focus on designing the most efficient way to. achieve a certain level of emissions reduction can distract from the more fundamental. problem of building the political will to set ambitious reduction targets in the first place. And the Acid Rain Program bracketed the distributional effects of permit trading a stance. that has often though not always characterized economic reasoning Yet in practice. permit trading shifted SO2 emissions toward the more populated eastern seaboard of the. U S resulting in more people being exposed to those emissions Recent research suggests. that the negative health effects of this additional exposure actually outweighed the. efficiency gains from trading permits 30 While economic reasoning is often advanced as a. politically neutral means of making decisions policies always have winners and losers on. the ground and choosing not to consider who will win and who will lose is not neutral but. a political choice of its own, This story of policymaking being understood in increasingly economic terms with real but. subtle political effects is not only the story of environmental policy Indeed a wide range of. policy domains adopted the language of economics between the 1960s and the 1980s. Analogous changes took place to a greater or lesser degree in social domains from poverty. to health to urban to education policy Economics also gained influence in antitrust policy. regulatory policy and related areas like transportation energy and communications In. many of these arenas economics was almost irrelevant in the early 1960s by the 1980s its. language had shaped the terms of debate in all of them including ones once seen as well. beyond its scope, This book tries to understand that change in two ways First it shows historically how. economic reasoning spread and was institutionalized in new parts of the policy process. between the 1960s and the 1980s Two intellectual communities committed to an. economic style of reasoning were critical in this process One was a group of systems. analysts who came from the RAND Corporation and brought new answers to the question. how should government make decisions The other was a loose network of industrial. organization economists who came to Washington to ask how should we govern. markets Both of these projects were initially led by center left economists who believed. government could solve social problems and make markets work better and in only the. latter case did Chicago advocates of free markets ever play a meaningful role Their. projects carried them across a wide range of policy domains and strengthened the. economic style of reasoning in ways large and small. Second the book looks at the political effects of this change Specifically it argues that. while the spread of economic reasoning has at times constrained conservatives as well as. liberals the predominant effect of this spread has been to reinforce the conservative turn. that began in American politics in the 1970s in part by undermining the left s traditional. arguments for challenging that turn This consequence was often unintentional on the part. of those advocating for the economic style who often hoped to make government work. better for all Americans Yet the effect of the economic style of reasoning and in particular. the high value it placed on efficiency incentives and competition along with persistent. blind spots around power politics and distribution was to make claims grounded in the. language of rights policies that aimed at universalism and preferences that prioritized. equity harder to advance,The Puzzle of the 1970s, Understanding how economic reasoning changed the policy process is critical to. understanding a much larger set of political developments The 1970s once seen as a. decade where nothing happened has over the last fifteen years come to be understood. as a historical turning point between two distinct political eras 31 Culturally the nation was. becoming more liberal Explicitly racist attitudes were declining and Americans became. steadily more accepting of new roles for women a wider range of sexual behaviors and. different family structures These attitudinal changes would not reverse even as politics. turned rightward 32 Economically the nation was changing as well Whether one dates the. Thinking Like an Economist How Economics Became the Language of U S Public Policy Elizabeth Popp Berman Draft version under contract with Princeton University Press Chapter 1 The Preferences of Economists In the summer of 1969 Time magazine featured a cover that became a potent symbol for the burgeoning environmental movement Ohio s Cuyahoga River improbably on fire The picture

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