Monday, April 05, 2010

Why dirigisme doesn't work

Glenn Reynolds has a great column in the Washington Examiner using the theories of Friedrich Hayek explaining why the sort of dirigisme that looks to the state to organize society and the economy to provide the most equitable distribution of wealth and services is doomed to failure. There is no way that any group of the most intelligent and purest motivated government bureaucrats can direct the country's economics.
n his "The Use of Knowledge In Society," Hayek explained that information about supply and demand, scarcity and abundance, wants and needs exists in no single place in any economy. The economy is simply too large and complicated for such information to be gathered together.

Any economic planner who attempts to do so will wind up hopelessly uninformed and behind the times, reacting to economic changes in a clumsy, too-late fashion and then being forced to react again to fix the problems that the previous mistakes created, leading to new problems, and so on.

Market mechanisms, like pricing, do a better job than planners because they incorporate what everyone knows indirectly through signals like price, without central planning.

Thus, no matter how deceptively simple and appealing command economy programs are, they are sure to trip up their operators, because the operators can't possibly be smart enough to make them work.

Hayek's insight into economics and regulation is often called "The Knowledge Problem," and it is a very powerful notion. But recent events suggest that it's not just the economy that regulators don't understand well enough -- it's also their own regulations.
Reynolds then goes on to use Henry Waxman's outrage that companies like AT&T, John Deere, and Caterpillar had to report out their expected losses coming out of Obamacare to demonstrate that even the regulators writing the regulations can't know every element of their elaborately constructed government plans.
Obamacare was supposed to provide unicorns and rainbows: How can it possibly be hurting companies and killing jobs? Surely there's some sort of Republican conspiracy going on here!

More like a confederacy of dunces. Waxman and his colleagues in Congress can't possibly understand the health care market well enough to fix it. But what's more striking is that Waxman's outraged reaction revealed that they don't even understand their own area of responsibility - regulation -- well enough to predict the effect of changes in legislation.

In drafting the Obamacare bill they tried to time things for maximum political advantage, only to be tripped up by the complexities of the regulatory environment they had already created. It's like a second-order Knowledge Problem.
Even if you have the highest respect for Henry Waxman's intelligence and good will, there is still no way that he could understand the thousands of pages of regulations that companies have to follow. No one person can. And so when they start adding in thousands of pages of new regulations, it is inevitable that there will be unintended consequences.
We're governed not just by people who do screw up constantly, but by people who can't help but screw up constantly. So long as the government is this large and overweening, no amount of effort at securing smarter people or "better" rules will do any good: Incompetence is built into the system.
Reynolds thinks that there is an upside to all this - that people will come to have increasing skepticism towards the power of government. I'm not so optimistic. Even if people come to have more doubts about having government run so much of our nation's economy, it will be too late to take government out of our markets. Even if Obamacare is fully repealed, we're just back to where we were before with Medicare costs spiraling out of control.

Henry Payne has another example of what inevitably happens with government regulations.
On April 1, the Obama administration’s EPA issued final rules forcing automakers to increase their vehicles’ fuel economy by 40 percent in five years. The next day, the very same EPA favorably reviewed an ethanol fuel mandate that would force autos to get up to 5 percent worse fuel economy.

You can’t make this stuff up.

Follow us here. By the same date — 2015 — that the new 35.5 mpg EPA mandate is due to go into effect, oil companies are also mandated by Congress to double the amount of corn ethanol use (from 2007 levels) to 15 billion gallons. The current mandate of a 10 percent ethanol mix in fuel won’t get us there, so the powerful corn lobby is demanding EPA increase the mandate to a 15 percent ethanol mix.

Trouble is, a gallon of ethanol is 30 percent less efficient than a gallon of gas meaning that the more ethanol you mix in, the worse your gas mileage. Department of Energy studies show steadily decreasing fuel economy as ethanol blends rise from so-called E10 (fuel composed of 10 percent ethanol and 90 percent gas) up through E15 and E20 — with E20 suffering a 7.7 percent fuel efficiency loss.

Yet DOE’s green-zealot-in-chief Steven Chu still favors an increased mix of ethanol. So while automakers are sweating under the federal gun to make increasingly fuel-efficient engines, the government is mandating they do it with less-efficient fuel.

We’re still not making this up.
But their intentions are so dang good. Doesn't that count for everything?