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Who Cooked the Jam?

Mises Daily: Tuesday, April 16, 2002 by


Recent swings in the oil price remind us how market prices respond to changes in supply. Traders are constantly speculating how this or that political event, whether in Venezuela or the Middle East, will affect resource availability. The social function of such price swings is to eliminate shortages and surpluses. As Martha Stewart would say, "It's a good thing."

But this system of market pricing isn’t permitted to work across the entire transportation sector. Consider traffic jams. They indicate a mismatch between supply and demand. But that is not the conclusion drawn by economist Paul Krugman, who observes traffic jams to conclude: "you don't have to be an elitist to think that the nation has been making some bad choices about energy use, and about lifestyles more generally. Why? Because the choices we make don't reflect the true costs of our actions" ("Nation in a Jam," The New York Times, May 13, 2001).

We'll let his contention that "the nation" makes choices slide. Krugman contends that "the nation" does too much driving, since each additional driver produces negative consequences--externalities--for other drivers. Let's set aside the question of how Krugman can tell what the cost of those externalities is, apart from market prices. We'll grant him his estimate that the cost of traffic congestion in Atlanta was $2.6 billion in 1999. Each additional person's decision to drive cost other people $14 in lost time.

Krugman fails to ask why those costs are not borne by the drivers in question. We don't go to the opera expecting to find several other people vying for our seat. We never encounter two-hour delays in the checkout line at the supermarket. Those resources are privately owned, and, in the interest of making a profit, the owners have a strong incentive to ensure that their customers have a pleasant experience. While it is true that private businesses usually desire more customers and sometimes fail to plan adequate capacity for those who show up, such situations are most often corrected quickly. No one wants to own the business that's "so crowded no one goes there anymore." If a private road owner found that his road was overcrowded, he would simply raise the price of using the road.

Recall the last time you met unexpected highway construction on the way to work. In my area, encountering such a project can easily add an hour to one's commute. Multiply that hour by the number of people stuck in the jam, and you can see that a whole heap of costs have been imposed on drivers by the road operator: the government.

Why is the government free to impose those costs? Both because we pay for government roads whether or not we use them and because the government has made it very difficult for private companies to build roads, the government has a near monopoly on routes for car travel. With the market process for evaluating the relative importance of roads, travel speeds, established property uses, pollution, and so on severely crippled, the government cannot rationally allocate scarce means among desired ends. Political pressure comes to dominate the allocation of resources.

For example, John Rowland, the governor of my state as I write this, commented on Connecticut's branch rail lines in 1997: "Given the ridership on these lines, it is by no means outrageous to say it would be cheaper for the state to purchase cars each year for most of the riders." On some lines, each passenger was being subsidized more than $18 per trip. But when Rowland's plan to eliminate those lines was faced with strong opposition, mostly from wealthy individuals who relied on the lines for access to New York City, the plan was dropped. We are entitled to wonder if the campaign contributions of the individuals in question didn't play a role in calculating the "cost" of closing those lines.

As Sanford Ikeda points out, such interventions also have the effect of making political action increasingly attractive, when compared to voluntary exchange. The more my economic well-being is determined by the political process, the more likely it is that I'll increase profits by lobbying than that I'll increase profits by producing. Further, the more my neighbors are using political pressure, the less resistant I will be to the idea of doing so. If no one else is using politics to achieve his personal ends, then I may be very reluctant to become the first to do so. But if many other people are pursuing that avenue, my resistance to joining them is likely to decline dramatically--after all, I can tell myself, I'm only trying to "even the score."

The state has repeatedly intervened in the transportation market. Roads are often provided at no extra cost to the users. The property on which the roads were built was often seized by eminent domain, so that the supposed construction cost did not reflect the true cost of acquiring the needed land. The supply of taxis and jitneys, which can to some extent substitute for having one's own car, has been artificially limited. Of course, other modes of transportation have had their own history of interventions. We have no idea of what a transportation market that had developed unhampered for the last several centuries would look like.

But it might strike us as odd that the very process that created the externalities in the first place--interventionism--is usually what is offered as the solution to them. Instead of seeking ways to allow the market in transportation to do its job, most recommendations call for further interventions intended to clean up the unwanted effects of past interventions.

For instance, Thomas Sowell, in his book Basic Economics, suggests that a law requiring mud flaps on cars is justified because: "Even if everyone agrees that the benefits of mud flaps greatly exceed their costs, there is no feasible way of buying those benefits in a free market, since you receive no benefits from the mud flaps you buy . . . but only from mud flaps that other people buy…" But Sowell's problem arises only because roads are publicly owned. The owner of a private road could internalize the benefit by requiring mud flaps and advertising the fact. Those who prefer to pay for mud flaps, as long as everyone else does as well, can make use of roads requiring them.

Krugman does not explicitly call for a particular policy in his column. But when he says that the government should place a high priority on "getting those incentives right," we are to understand that he means imposing new taxes on fossil fuels, on car ownership, and other interventions into the transportation market.

But there is no way for the government to "get incentives right" without market prices, the very thing eliminated by intervention. It is simply not possible for the government to guess the prices that might have arisen on an unhampered market. Each subsequent intervention intended to fix an earlier one will add new distortions and generate new unintended consequences.

Regulations that require a certain average miles-per-gallon figure for a manufacturer's sold cars led directly to the explosion of SUV sales. Since SUVs are considered to be trucks, not cars, they are held to less-stringent fuel efficiency standards. Government efforts to increase overall gas mileage steered consumers into buying less-efficient trucks, instead of station wagons, which were subject to the regulations. The general response has been, predictably, a call for new regulations on SUVs. Ford, for one, has tried to head off new legislation by increasing the fuel efficiency of its SUV fleet.

Often, some proponent of new regulation will contend that following the regulation will actually increase profits, and that it is the right thing to do for purely business reasons. For example, Steve Gregerson of the Automotive Consulting Group said of Ford's decision: "It's a smart business decision. They're creating a vehicle that is going to be accepted in the marketplace and has better fuel economy but offers some of the utilitarian functions of the SUVs" (Houston Chronicle, July 16, 2001).

But if it really is a smart business decision--and perhaps it is!--then surely some entrepreneur will do it without legislative pressure. Only if one believes that our best entrepreneurs just happen to be legislators does the argument make sense.

The free market is not a panacea. It does not eliminate old age, and it won't guarantee you a date for Saturday night. Private enterprise is fully capable of awful screw-ups. But both theory and practice indicate that its screw-ups are less pervasive and more easily corrected than those of government enterprises, including regulatory ones.

Gene Callahan, who writes frequently for Mises.org, is author of  Economics for Real People, forthcoming from the Mises Institute. See his Mises.org Articles Archive and send him MAIL.