In an earlier comment on the fracturing of the U.S. Climate Action Partnership (USCAP), an industry-environmentalist coalition pushing for cap-and-trade carbon emission controls, Environmental Defense Fund president Fred Krupp repeated a commonly held misconception about government regulation when he said:  “It’s very unusual for big corporations to raise their hands and say, ‘We want to be regulated for something that we’re not regulated for now.”  Exelon, PG&E and PNW apparently make his point.

But as a matter of fact, industry support of regulation is not rare at all; indeed, it is the norm.  And in the United States it is as American as apple pie.

A somewhat casual investigation of business history reveals that it was the U.S. Chamber of Commerce, with the special assistance of General Electric president Gerard Swope, that supported passage of President Roosevelt’s 1933 National Industrial Recovery Act.  The Act, with its Blue Eagle codes affecting 2.3 million employers, attempted to place all American industry in a price-fixing cartel.  But while the Chamber and many large firms supported FDR’s cartel, many firms, including Ford Motor Company, did not.

Going back further, we are reminded by Howard Marvel, writing in the 1977 Journal of Law of Economics, that it was the owners of the newly built water-powered textile plants that supported the English Factory Acts (1802 and on), not the owners of older mills that used far more labor per unit of output.  The legislation limited child labor and hours and conditions of work, which raised the costs of labor-intensive producers.  The industrialists who joined with other crusaders to support the legislation are remembered as philanthropists.

In 1907 it was the electric utility industry led by Samuel Insull that lobbied for state regulation in the hopes of escaping a less predictable and intractable municipal control.  And it was in 1910 that American Telephone and Telegraph Company chairman Theodore Vail successfully called for federal regulation of long-distance telephone just when the Bell patents were expiring and new competition was, as he put it, “skimming the cream” from the market.  Even Magna Carta (line 35) specifies a standard width for all cloth sold in the kingdom — all in the name of consumer protection, scholars tell us.  The standard happened to be the width of looms operated by the London weavers.  The less fortunate Bristol weavers had to break and modify their looms to compete.

A focus on environmental regulation reveals a host of Bootleggers and Baptists who have coalesced, sometimes quietly, to support output restrictions.  In hearings before passage of the 1972 federal Water Pollution Control Act, industrialists located along the Ohio River argued for the law. They faced pollution controls imposed by the Ohio River Sanitation Commission and wanted a national level playing field.  Only federal regulation would solve their problem, and they supported it.  It was the coal interests in Ohio and West Virginia, along with environmentalists, that lobbied for the 1990 Clean Air Act amendments requiring scrubbers on newly built and modified coal-fired electric utilities.  As Bruce Ackerman and William Hassler famously noted in their 1981 book, Clean Coal/Dirty Air, the scrubber requirements eliminated the clean-burn advantage of western coal and kept the higher sulfur eastern coal producers happily operating.

Yes, industry support of legislation that imposes restrictions on output is commonplace, but one begins to understand this more fully after careful scrutiny of the lobbying process.  It is seldom the case that every firm in an industry supports restrictions.  When John Deere petitioned EPA (Environmental Protection Agency) to increase the stringency of the air-emission standard on small gasoline engines, it was because Deere had a patent on cleaner engines. When the Chicago meat packers lobbied Congress to pass the 1906 Meat Inspection Act, it was because of markets lost to consumer fear over Upton Sinclair’s The Jungle and Argentine beef producers who were invading the U.S. market with lower priced food.

And when nuclear-power producers Exelon, PC&E, PNM, and others lobby for a federal statute that would impose high costs on coal-fired competitors, there should be no question why.

These were the recently traded clunkers whose owners were “nudged” by federal policy to accept a handsome payment from the rest of us for ridding the nation of older, more heavily carbon-emitting vehicles and replacing them with shiny new machines that required a lot of energy to produce but would, on average, yield lower carbon exhaust and greater fuel efficiency.  The clunker statute gave consumers $3,500 vouchers if they purchased vehicles that yielded a four-to-nine mpg improvement in fuel economy, and $4,500 if the yield was ten or more mpg.

In all, according to Bloomberg, some $2.88 billion in tax money was provided to those who together purchased some 700,000 vehicles made up of the popular Ford Focus, Toyota Corolla, Camry, and Prius, along with some Hummers and Ford F-150 and F-250 trucks.  These and a wide variety of other cars and trucks moved quickly from dealer lots to the homes of the blessed. In fact, the speed of the transactions was more than government could handle.  The program was wildly popular.

Taken together the average fuel economy of vehicles traded in was 15.8 miles per gallon, while the average for the clunker replacements was 24.9 miles per gallon.  And according to Ford Motor Company, this kind of fuel-economy improvement translates to a reduction of five to ten million barrels of oil consumed over the next five years. (The nation currently consumes nine million barrels a day.)  This will be oil that some other people can enjoy.

President Obama cheerfully termed the program “successful beyond anybody’s imagination.”  Secretary of Transportation Ray LaHood, who administered the program, said the effort was “a lifeline to the automobile industry, jump starting a major sector of the economy and putting people back to work.”  LaHood quickly added that while all this happened, “[W]e’ve been able to take old, polluting cars off the road and help consumers purchase fuel-efficient vehicles.”  Economist John Lott surmised that “Only in Washington could a program that is spending money 13 times faster than was planned be labeled a ‘success.’”

In their sober assessment of the program, the Obama Council of Economic Advisers (CEA) found that the program will spur the economy for months as the auto industry gears up to replace inventories and meet growing demand.  Putting all this into numbers, the CEA estimates Cash for Clunkers will raise third-quarter GDP by 0.3 to 0.4 percentage points and lift total employment by 42,000 jobs by the end of 2009.

While the clunker program has been hugely successful in the eyes of Obama administration officials, the auto industry, and the consumers who received transfers from the rest of us, there is serious doubt that the program is all that successful when final costs are counted.  The doubt arises for at least three reasons.  First, the program was supported politically primarily for its much touted environmental benefits.  Carbon emissions would be reduced.  But the reduction costs are at least ten times higher than alternate ways of removing carbon.  Second, there is Bastiat’s parable of the broken window to consider. And third, there is a serious matter of eroding social norms for conserving wealth.  A crushed clunker with a frozen engine is lost capital.

Let’s consider each of these points briefly.

University of California-Berkley economist Christopher Knittel has developed a rigorous assessment of the implied cost of carbon emissions under the clunker program. (“The Implied Cost of Carbon Dioxide Under the Cash for Clunkers Program” [pdf], Center for the Study of Energy Markets, Berkeley, The University of California Energy Institute.) Knittel made plausible assumptions about the average life remaining in vehicles removed from the road, the average fuel economy associated with those vehicles, and the resulting levels of carbon emission that would have survived in the absence of clunkers.  Eventually, of course, the clunkers would have died a natural but less dramatic death.  Knittel then estimated the carbon reduction gained when the large fleet of clunkers was replaced by a new fuel-efficient fleet.  When he ran the numbers, Knittel found the cost per ton of carbon reduced could reach $500 under a set of normal values for critical variables.  The cost estimate was $237 per ton under best case conditions.   And what does this tell us?  The much celebrated Waxman-Markey cap-and-trade carbon-emission control legislation estimates the cost of reducing a ton of carbon to be $28 when done across U.S. industries.  Yes, we are getting carbon-emission reductions by way of clunker reduction, but we are paying a pretty penny for it.

Frédéric Bastiat’s brilliant parable of the broken window reminds us that a street hoodlum throwing a brick through a window generates a series of job-generating transactions that might raise GDP by a trivial amount, if it could be measured.  Indeed, the idea seems so compelling that people today often speak of the silver lining found in the clouds that create hurricanes.  Think of the roofers that become employed.  But Bastiat’s key lesson is that a window has been destroyed—and it had value.  Before touting the total benefits of clunkers, we must take account of the destroyed vehicles and engines that represented part of the wealth of the nation.  As Tony Liller, vice president for Goodwill, put it:  “They’re crushing these cars, and they’re perfectly good.  These are cars the poor need to buy.”

Finally, over the eons, human communities have contrived all kinds of devices to transmit critical survival skills and compatible behavioral norms.  One of these has to do with conservation of wealth.  “Waste not, want not,” we are told.  “A penny saved, is a penny earned,” we are reminded.  Using politics to pay people who destroy valuable vehicles, or to hold crops off the market, or to produce ethanol that may use more energy in production than it adds when burned, teaches a lesson of anti-matter and wealth destruction.  When all these considerations are made, Cash for Clunkers sounds like a sorry idea that should not be the model for future policy.

Let’s stop Cash for Refrigerators before the idea spreads further.

Empowered to regulate industry marketing practices, the FDA must develop warning labels that must cover 50 percent of the side space on cigarette packages. The labels must draw from a catalogue of congressionally sanctioned phrases that include:

WARNING: Cigarettes are addictive. WARNING: Tobacco smoke can harm your children. WARNING: Cigarettes cause fatal lung disease. WARNING: Cigarettes cause cancer. WARNING: Cigarettes cause strokes and heart disease. WARNING: Smoking during pregnancy can harm your baby. WARNING: Smoking can kill you. WARNING: Tobacco smoke causes fatal lung disease in nonsmokers. WARNING: Quitting smoking now greatly reduces serious risks to your health.

As dramatic as this all seems, this extension of FDA powers received a somewhat mixed response from the medical and health-advocate communities.

John Cohn, a lung-disease specialist at Thomas Jefferson University Hospital in Philadelphia said, “It’s sort of like asking the police commissioner to regulate prostitution.” Perhaps Cohn anticipates agency capture of the sort typically seen in Washington.

Matthew Myers, president of the Campaign for Smoke-Free Kids, a leading lobbyist for the law, took a more optimistic but still somewhat guarded position. “You can stay with the status quo, with industry controlling the level of nicotine in products—no one knows how much—and companies deciding what health claims to make. Or you can give control to an agency with a history of scientific expertise in regulating products. This fills an important gap.”

This somewhat tepid celebration was prompted by uncertainty about how the FDA would really manage its new authority. There is also the feeling that this statute, like many others, had a title that sounded more powerful that the content justified. The word “prevention” in the title sounds rather dramatic, but the teeth in the law itself are more like baby teeth than fully mature incisors. (Consider, for example, the exception made for menthol-flavored cigarettes.)

The politicians’ commentary that followed the law’s passage was much more boastful and self-congratulatory. Senator Edward Kennedy, long an advocate for more government control of the industry and sponsor of the Senate version of the law, exclaimed, “Miracles still happen. The United States Senate has finally said ‘no’ to Big Tobacco…. Public health experts overwhelmingly agree that enactment of this legislation is the most important action Congress can take to reduce youth smoking.”

Had Congress really said no?

In a way, Kennedy misstated what had actually happened. The Senate had not entirely said no. Indeed, the biggest of big tobacco, Altria Group, the producer of market-leader Marlboro, had lobbied long and hard for the bill’s passage. Altria’s two major competitors, Lorillard and Reynolds Tobacco, saw the law as giving Marlboro, with its market share locked and a lead in developing no-nicotine products, an unfair advantage. As is often the case, the Senate picked a winning horse and rode it. The Senate said yes to one and no to two others.

With Kennedy unable to lead the battle for his bill due to illness, Senator Christopher Dodd assumed leadership. Not quite as dramatic in his comment as Kennedy, but in a way equally inaccurate, Dodd said, “For more years than anyone can count, we’ve had an industry that’s gone basically unregulated.”

Unregulated Tobacco?

It is true that tobacco products have not been regulated by the FDA, though the agency has attempted to do so almost since its 1906 founding. But after decades of regulation by the Federal Trade Commission (FTC), the Federal Communication Commission (FCC), and Congress itself, hardly anyone who has followed the industry would say the industry has gone “basically unregulated.”

Instead, some would argue that it was regulation that defined the industry’s trade practices and, by doing so, maintained the industry’s high profits and expanded the sale of products in just those markets Tobacco Free Kids and others worry about. (See John Calfee’s “The Ghost of Cigarette Advertising Past,” Regulation, Nov.-Dec. 1986.)

How could this be? Consider the following capsules that come from a long tobacco saga (these and more can be found in Bruce Yandle, et al., “Bootleggers, Baptists and Televangelists: Regulating Tobacco by Litigation,” University of Illinois Law Review, 2008):

Industry-Serving Regulation

No, there is no evidence to suggest that the tobacco has until now been “an industry that has gone basically unregulated.” But there is ample evidence that tobacco regulation has served the interests of the industry and the politicians that broker favors to the industry. Meanwhile, consumers of tobacco products, who are generally a lower-income population, have been denied the benefits of competitively determined product information; they also have unwittingly become major sources of revenue for state politicians, who generally provide more benefits to higher income than lower income consumers.

One can only speculate about what might have happened had the FTC not outlawed health-effects advertising and had the industry not become one of the more regulated industries in America.