Externalities including global warming, health, news, and corruption

Craig Lubow interviews Spencer Graves about “Externalities including global warming, health, news, and corruption”. A research paper Spencer wrote on “Externalities, public goods, and infectious diseases” was accepted without revision and published last March in Real-World Economics Review, a refereed economics journal. It’s rare for the referees in a journal like that to accept a paper without revision. Spencer holds a PhD in Statistics and has spent time modeling economic data.

Externalities are costs and benefits to society that are not reflected in the price to the consumer. So people who are making decisions about whether and what to buy, when, are pushed to make decisions that may harm society, because the price does not reflect the all the issues involved in that economic transaction.

There is a general principle in economics that free competitive markets are the most efficient way known to allocate scarce resources to the extent that all the costs and benefits to society are appropriately reflected in the price to the consumer and the consumer can adequately judge quality.

Markets with externalities cannot function optimally to benefit society unless those externalities are properly internalized into the market transactions.

Fossil fuels like gasoline should be taxed in proportion to the damage they do to society. If that were done, the problem of global warming would gracefully disappear as consumers moved to consume less fossil fuels, do more work remotely via the Internet, and buy goods and services supplied using greener energy. Consumers would buy more electric cars and use more public transit. The demand for intercity passenger rail would likely increase.

Instead, fossil fuels receive subsidies, some dating back to 1789, when the very first US Congress slapped a tariff on the sale of British coal slipped into U.S. ports as ship ballast:¹ That tariff indirectly subsidized the US coal industry.

When it comes to gasoline, however, current taxes on gasoline are designed to pay for the costs of building and maintaining roads. The major petroleum companies actually get subsidies estimated at roughly 28 cents per gallon, when the price of gasoline should include a pollution tax of at least 42 cents per gallon.²

Fossil fuel subsidies have been continued for five reasons.

1. First and most obviously, the recipients of those subsidies make political campaign contributions without which many politicians cannot get elected.
2. Second, they pay an army of lobbyists to convince congress to continue those subsidies.
3. Third, fossil fuel companies advertise. That gives media organization that accept advertising a conflict of interest in honestly reporting on any favors those companies get from government.
4. Fourth, the major commercial broadcasters make lots of money from selling ads to political campaigns in election years. Any information that could help politicians get elected with a lower advertising budget would threaten their profitability.
5. Finally, every human thinks they know more than they do. That predisposes people everywhere to accept what they get from the media they consume. The vast majority of humans would be more successful in life if we spent a little more time identifying major issues than concern us and then seeking information that might conflict with our preconceptions. This was a key insight, documented in research led by Daniel Kahneman, for which he won the 2002 Nobel Memorial Prize in Economics, even though he’s not an economist. He’s a research psychologist. His research documented that the standard model that economists have used of a “rational person” is not how people actually think. In so doing, he invented a field now called behavioral economics in the intersection between psychology and economics.

The price of gasoline increased by close to 50 percent after Russia invaded Ukraine earlier this year.³ On 2022-06-22 President Biden asked Congress to suspend the gasoline tax for 90 days to reduce the pain that consumers feel as a result.  That’s probably smart politics, because it pleases most consumers and fossil fuel executives.  However, if the serious science about global warming has any merit, it’s the wrong thing to do for the future of humanity:  We need to increase the price of gasoline, not decrease it.

We could and should protect the poor and middle class from the ill effects of these price increases by sending people checks to cover the increase in the price of gasoline. That’s called a “carbon dividend”. We can pay for that carbon dividend by increasing taxes on gasoline and other fossil fuels. This combination is called “Carbon fee and dividend“, advocated by the Citizens’ Climate Lobby. They recommend placing the tax on fossil fuels when they are extracted from the ground. This is being done in Canada and Switzerland.

But there’s another aspect of the current Russo-Ukrainian War: Russian President Putin has threatened to use nuclear weapons. This means that a reasonable portion of our current foreign and national securities budgets are hidden subsidies for fossil fuels. We need national security taxes on imported fossil fuels to pay for foreign and military policies designed to deal with this issue.

Since the 1980s scientists in Russia, the US, and elsewhere have published increasingly sophisticated simulations of a nuclear war. If a nuclear war only targeted deserts and desert islands plus maybe a couple of cities like Hiroshima and Nagasaki, the impact on global weather and countries not involved in the nuclear exchange would be relatively small. However, a nuclear war would between the US and Russia would likely incinerate hundreds of cities lofting smoke to the stratosphere, where it would stay for years. Coupe et al. (2019) predicted hard freezes in the summers making it impossible to grow crops in the US, Europe and Russia during 3 years following such a war.  Only the southeast part of China would stay above freezing during the summer. The rest of the world would be similarly impacted but not to the same extent.⁴  Major famine would follow virtually everywhere.

There’s one more way in which our current political economy creates problems with the free market theory: Markets for many goods and services in the US may be free from government regulation, but they are not competitive, because congress has routinely blessed mergers and acquisitions beyond reason.⁵

This is allowed for all the reasons mentioned above: Campaign contributions, lobbying, conflicts of interest that the major media have on honestly reporting on these kinds of things, and the fact that everyone thinks they know more than they do.

The recent paper on “Externalities and infectious diseases” contained one major key idea: If someone on the other side of the earth has a condition that might be due to an infectious disease, you and I should be willing to help that person get competent medical attention. The price to the consumer of tests, prophylaxis like vaccines and masks, and treatment should be the marginal cost of an additional unit minus the average benefit that you and I derive from how that reduces our risk of disease and death. In many cases, that means that vaccines, masks, and treatment for things like COVID should be free to the consumers, because doing so would reduce the spread of disease.

A spectacular story in this regard is the Smallpox Eradication Program. In the mid 1960s the global burden of disease for smallpox was estimated at 1.35 billion US dollars per year. At a cost of only $300 million spread over 13 years, smallpox was eradicated. Some people alive today would not be here without that eradication program. Some would have died of the disease. Others would not have been born, because their parents or grandparents would have died prematurely.

A program to eradicate polio is stalled, because the United States refused to try to bring Osama bin Laden to trial. In late September 2001, the Afghan government offered to consider extraditing bin Laden, but they wanted evidence. The US refused to provide that evidence and invaded instead.⁶ After the US-led invasion of Afghanistan and the subsequent 2003 invasion of Iraq, rumors spread around the Muslim world that immunization campaigns were using intentionally-contaminated vaccines to sterilize local Muslim populations or to infect them with HIV. Then in 2011 the Central Intelligence Agency (CIA) conducted a fake hepatitis B immunization campaign, hoping to collect blood samples from Osama bin Laden’s compound in Abbottabad to confirm the genetic identity of the children living there, and by implication his own presence. This secret was soon leaked and further inflamed the anti-vaccination campaign. This is another way in which the US approach to national security and foreign policy threatens the public health of the entirety of humanity.

The dissemination of news involves huge externalities. For example, if I know the perfect solution to some major societal problem, it won’t help me unless I can convince a critical mass of the electorate that my solution should be implemented. Conversely, if a critical mass of the electorate knows how to fix a major problem, it will get fixed, whether I’m aware of it or not.

The point here is that it is in my best interest to do what I can so everyone else is better informed. This is even true of my enemies in a war about anything that doesn’t have short term military implications. If my enemies are better informed, they are less likely to kill my friends and neighbors wantonly in a mistaken belief that they will be better off from having done so. More of my enemies will see that both sides tend to be better off if we limit our violence against each other and move to improve cooperation and collaboration. Leaders on each side that demonize the other are less likely to attract a following.

Beyond that, media scholar Robert McChesney has claimed that in the first half of the nineteenth century, the US had more newspapers and more publishers per person or per million population than any other country or any other time before or since.⁷ The result was a diverse, boisterous, cantankerous press that encouraged literacy and limited political corruption, both of which helped support the relatively steady economic growth in average annual income (Gross Domestic Product or GDP per capita adjusted for inflation) averaging between 1.5 and 2 percent per year for most of US history. The cumulative affect of these improvements in literacy and limits on political corruption have brought the US to its current position of domination of the international political economy.

Another example: If the beneficiaries of some major criminal enterprise suspect that I might be about to divulge something that could incriminate them, I might not live very much longer. It doesn’t matter if I have the information or not: What matters is that some of the major beneficiaries of that criminal enterprise think that they might benefit by making sure I cannot divulge what they think I know.

One more example: Dan Hale is serving time in a federal prison in Illinois for revealing a classified document that found that 90 percent of people killed by US drone strikes during a five-month period between 2012 and 2013 were not the intended targets. In my judgment, that information was classified NOT to keep it from any foreign enemy but to keep it from the American public. If the media routinely asked more questions about things like this, I think the US would have many fewer enemies. Instead, the major media in the US seem more concerned with protecting their major advertisers than the US public and US national security.

The January 6, 2021, United States Capitol attack may be the most spectacular event in a recent international trend of increasing political polarization.⁸ Periodic reports by Freedom House suggests that political rights and civil liberties were increasing until 2005 and have decreased since.⁹ A substantial portion of the US public believes the claims of former President Trump that the 2020 election was stolen from him. Many think that those who stormed the capitol on January 6 last year are patriots. Trump’s supporters could win control of the US House and Senate November 8.

But it’s not just Trump. Extremist Philippines President Duterte has been replaced by Ferdinand Marcos, Jr., a son of the former dictator. In Turkey Islamic fundamentalists are in control of the government and are increasingly mistreating many of their political and religious opponents. Indonesia is currently run by similar Islamic extremist. Hindu fundamentalists are winking at people who kill Muslims in India. The popularity of the French right wing extremist Marine Le Pen has been increasing. In 2017 she was the second most popular candidate for president of France, winning 34 percent of the vote. This year, she got 41 percent, cutting the vote spread almost in half. Right wing populists are in control of the governments of Hungary and Poland.

Many scholars blame this on the “click economy”, invented by Google, which went public in 2004 and copied by Facebook when they hired Sheryl Sandberg from Google in 2008.

Facebook, Google, Twitter, and other Internet companies are wonderful to the extent that they make it easier for people to get the information they want and need to live happier, more productive and satisfying lives. They are terrible to they extent that they create filter bubbles, herding people into echo chambers that reinforce their own preconceptions about the world and suppress information people need to understand their opposition.

For example, if I complain on Facebook about illegal aliens, I will likely get fed stories that talk about how evil and criminal they are. I will likely NOT see reports of research documenting that “Sanctuary Cities”, which are more friendly to such people, tend to be safer and have higher median incomes. If, on the other had, I complain on Facebook about “undocumented” people, which is another term for the same thing, I will likely hear about the research results regarding sanctuary cities and not the anecdotes of criminal illegal aliens. H. R. McMaster, President Trump’s second National Security Advisor, said that Russian President Putin is using Facebook to weaken the US and its allies.

What should we do about this?

For externalities like pollution, many economists agree that it would be best to increase the price to the consumer by adding a tax. That’s rarely easy, because it’s difficult to build a consensus on what dollar value to assign to the damage done by pollution, partly because the people who benefit from not having the pollution taxed typically make campaign contributions and control major advertising budgets, as indicated above.

For negative externalities impacting public health, it’s best to provide subsidies. That is difficult in the US, because the so-called ethical health care industry in the US does not want those changes, and the major media have a conflict of interest in disseminating information that might offend major advertisers.

For externalities associated with the news, media scholar Robert McChesney’s latest proposal is to distribute 0.15 percent of national income, Gross Domestic Product (called GDP) to local news nonprofits in proportion to votes in local elections with at most 25 percent of the money going to one local news nonprofit. I don’t want government bureaucrats nor corporate bureaucrats censoring our media. Right now in effect we have corporate bureaucrats censoring the media to the detriment of everyone except for those corporate bureaucrats and the money they represent. That censorship makes it difficult to get a political consensus to implement any sensible reform.

For externalities associated with Internet companies like Google and Facebook, media advocacy organization Freepress.net has advocated a modest tax on Internet advertising. Economist Dean Baker and others have advocated changing the law of the Internet, so Internet companies are liable for any content they disseminate from which they make money — ads and click bait. Along with that, I think it would be important to require all media organizations to submit copies of ads, click bait and underwriting to a central database like the Internet Archive, the Wayback Machine, to make it easier for people to research, because right now, individuals and groups are routinely defamed on social media, and they are rarely caught, because the people who are defamed rarely see those fraudulent or misleading messages.

Copyright 2022 Spencer Graves, Creative Commons Attribution Share-Alike 4.0 International License (CC BY-SA).

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1. Jeff Johnson (2011-12-19) “Long History Of U.S. Energy Subsidies“, Chemical & Engineering News, 89(51).  Nancy Pfund and Ben Healey (2011-09) “What Would Jefferson Do?” DBL Investors.  
2. Spencer Graves, Stephen Melton, and Craig Lubow (2021-12-27) “Political economy of global warming“, EcoRadioKC, KKFI.org.
3. Carly Hallman (2022) “Gas Prices Through History“, TitleMax.
4. Joshua Coup, Charles G. Bardeen, Alan Robock, and Owen B. Toon (2019) “Nuclear Winter Responses to Nuclear War Between the United States and Russia in the Whole Atmosphere Community Climate Model Version 4 and the Goddard Institute for Space Studies ModelE“, Journal of Geophysical Research: Atmospheres, 124: 8522-8543.
5. ‘A survey of 568 member economists of the American Economic Association (AEA) in 2011 found a near-universal consensus, in that 87 percent of respondents broadly agreed with the statement “Antitrust laws should be enforced vigorously’, cited in the Wikipedia article on “United States antitrust law“, accessed 2022-07-11.
6. John Mueller (2021-09-03) “What if the US Didn’t Go to War in Afghanistan after 9/11?” Cato Institute.
7. Robert W. McChesney (2004) The problem of the media (Monthly Review Pr., esp. pp. 34-35).
8. Thomas Carothers and Andrew O’Donohue, eds. (2019-10-01) Democracies Divided:  How to Understand the Global Spread of Political Polarization (Brookings Institution Press)
9. I downloaded “Country and Territory Ratings and Statuses, 1973-2022” from FreedomHouse.org then averaged the Political Rights and Civil Liberties numbers by year.  This showed that freedom had been generally improving until 2005 and has generally decreased since.

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