# Capitalism 3.0: Chapter 3

 Topics:

## The Limits of Government

Civil government, so far as it is instituted for the security of property, is in reality instituted for the defense . . . of those who have some property against those who have none at all.

In his essay “The Tragedy of the Commons,” Garrett Hardin envisioned only two ways to save the commons: statism and privatism. Either a coercive government would have to stop humans from mindlessly destroying the planet, or private property owners, operating in a free market, would have to do the job. In the next two chapters I’ll show why neither of these approaches suffices.

In considering the potential of governmental remedies, let’s clarify what we mean. We’re not talking about tyranny; we’re talking about legitimate forms of government activity such as regulation, taxation, and public ownership. Can these traditional methods effectively preserve common wealth for our children?

#### America’s Two Experiments

The notion that government should protect the commons goes back a long way. Sometimes this duty is considered so basic it’s taken for granted. At other times, it’s given a name: the public trust. Several states actually put this duty in writing. Pennsylvania’s constitution, for example, declares: “Pennsylvania’s public natural resources are the common property of all the people, including generations yet to come. As trustee of these resources, the Commonwealth shall conserve and maintain them for the benefit of all the people.” Note that in this constitutional dictum, serving as trustee of natural resources isn’t an option for the state, it’s an affirmative duty.

Yet here as elsewhere, rhetoric and reality differ. Political institutions don’t function in a vacuum; they function in a world in which power is linked to property. This was true when fifty-five white male property owners wrote our Constitution, and it’s no less true today.

America has been engaged in two experiments simultaneously: one is called democracy, the other, capitalism. It would be nice if these experiments ran separately, but they don’t. They go on in the same bottle, and each affects the other. After two hundred years, we can draw some conclusions about how they interact. One is that capitalism distorts democracy more than the other way around.

The reason capitalism distorts democracy is simple. Democracy is an open system, and economic power can easily infect it. By contrast, capitalism is a gated system; its bastions aren’t easily accessed by the masses. Capital’s primacy thus isn’t an accident, nor the fault of George W. Bush. It’s what happens when capitalism inhabits democracy.

This isn’t to say the United States government can’t, at times, restrain corporations. It has a number of tools at its disposal, and has used them in the past with some success. But the measures it can take are woefully inadequate to the task of safeguarding the planet for our children. Let’s see why.

#### Limits of Regulation

The idea of regulation is that, while markets should ideally be as free as possible, there are times when an external actor, not driven by profit maximization, must impose some rules for the common good.

When it comes to nature, government has many ways to regulate. It may require timely disclosure of toxic releases. It may grant, sell, or deny rights to use public resources. It may ban some pollutants altogether, limit others, or tell polluters what technologies to use. It may divide the landscape into zones and specify what kinds of activities can take place in each zone. It may tax certain activities and subsidize others.

This wide array of tools—plus the power to prosecute rule-breakers—seemingly creates in government a formidable counter-weight to corporations. Yet history has shown that government isn’t the regulatory tiger it appears to be. It faces fierce corporate resistance whenever it tries to exercise its powers. And time after time, its regulatory agencies have been captured by the industries they were intended to regulate.

The process of regulatory capture has been described by many scholars. Details vary, but the plot is always the same. A new agency is created to regulate an industry that’s harming the public. At first the agency acts boldly, but over time its zeal wanes. Reformers who originally staffed the agency are replaced by people who either worked in the industry earlier, or hope to do so after a stint in government. Industry-packed “advisory committees” multiply, while industry-funded “think tanks” add a veneer of legitimacy to profit-driven proposals. Lobbyists meet constantly with agency staffers. The public, meanwhile, has no clue about what’s going on.

This process has reached extreme proportions in recent years. As I write, the head of public lands in the Interior Department is a former mining industry lobbyist, the head of the air division at the EPA is a former utility lobbyist, the second in command at EPA is an ex-Monsanto lobbyist, and the head of Superfund cleanups at EPA (which makes industry clean up its toxic wastes) formerly advised companies on how to evade Superfund. Although today’s pro-industry bias may be more egregious than usual, the absence of outrage or resistance suggests it’s not far from the norm.

And it’s not just regulatory agencies that have been captured. Congress itself, which oversees the agencies and writes their controlling laws, has been badly infected. According to the Center for Public Integrity, the “influence industry” in Washington now spends $6 billion a year and employs more than thirty-five thousand lobbyists, some two hundred of whom are former Congress members who enjoy easy access to their erstwhile colleagues. A glimpse at the corporate lobbying game shows just how rewarding it is. MBNA, the nation’s largest credit card bank, spent over$17 million on lobbying between 1999 and 2004. This is pin money compared to the sums it will reap from an industry-drafted bankruptcy overhaul, passed in 2005, which precludes all but the very poor from wiping out their debts and starting anew. (The great majority of Americans who file for bankruptcy are middle-class victims of job loss, huge medical bills, or family breakup.) A New York Times reporter described this scene as the bill was being marked up: “Lawyers and lobbyists jammed Congressional hearing rooms to overflowing. . . . During breaks, there was a common, almost comical pattern. The pinstriped lobbyists ran into the hallway, grabbed tiny cell phones from their pockets or briefcases, and reported back to their clients, almost always with the news they wanted to hear.”

Or consider the biggest influence group in Washington these days, the pharmaceutical industry, which boasts more than two lobbyists for every member of Congress. “You can hardly swing a cat by the tail without hitting a pharmaceutical lobbyist,” says Senator Chuck Grassley, chairman of the Senate Finance Committee. And with good reason: billions of dollars in drug company profits ride on actions taken—or not taken—by Congress. In 2003, for example, the industry won coverage for prescription drugs under Medicare, while blocking the government from negotiating prices downward. It kept Americans from importing cheaper medicines from Canada, and protected a system that uses company fees to speed the drug approval process.

Numbers can be put on this sort of thing, and Kevin Phillips, a former Republican strategist, has done so. “The timber industry spent $8 million in campaign contributions to preserve a logging road subsidy worth$458 million—the return on their investment was 5,725 percent. Glaxo Wellcome invested $1.2 million in campaign contributions to get a 19-month patent extension on Zantac worth$1 billion—their net return: 83,333 percent. The tobacco industry spent $30 million for a tax break worth$50 billion—the return on their investment: 167,000 percent. For a paltry $5 million in campaign contributions, the broadcasting industry was able to secure free digital TV licenses, a giveaway of public property worth$70 billion—that’s an incredible 1,400,000 percent return on their investment.”

The reason our political system works this way isn’t that our politicians are particularly venal. Rather, the cause is structural. Industries that benefit from government favors are wealthy and well-organized. They earn high and immediate returns from lobbying expenditures and campaign donations. And just because the money isn’t spent on outright bribes doesn’t mean there aren’t quid pro quos. Politicians and corporations have a symbiotic relationship. Politicians need money and corporations want favors. Neither side is dumb or shy. Politicians who hope for long careers won’t often offend money suppliers. At a minimum they’ll give them access, and in politics access is nine-tenths of the battle.

By contrast, ordinary citizens are cash-poor, unorganized, and ill-informed. They amble to the polls a few times per decade, if that. Of all the players in politics, they’re the easiest to fool. And though politicians do read opinion polls, these rarely concern the arcane favors corporations seek. Hence, disciplined cash-rich corporations easily prevail over ordinary citizens.

There’s even an economic theory explaining this: Mancur Olson’s logic of collective action. Olson, a Harvard economist, argued that unless the number of players in a group is very small, people won’t combine to pursue their common interests. For example, if the CEOs of five major airlines decide they want a $500 million government bailout, they pool their resources and hire a lobbying firm. Together they tell Congress that without the$500 million, their companies won’t survive, and the consequences of their collapse will be dire.

Who lobbies against them? No one. The reason is that, while the five airlines will gain about $100 million each, the average taxpayer will lose only$5 each. It’s thus not worth it for ordinary citizens to get off their duffs and fight.

On top of this, there’s an even deeper problem. Democracy responds at best to voters and at worst to money. Both voters and donors are living humans. Not even seated at democracy’s table—not organized, not propertied, and not enfranchised—are future generations, ecosystems, and nonhuman species. James Madison and his brethren could scarcely have foreseen this defect. In their day, politics was about the clash between living factions, not between living humans and their heirs, or between our species and the rest of nature. But that’s no longer the case.

The implications of Adam Smith’s quote at the beginning of this chapter are thus even graver than he thought. If government’s inherent bias is toward property owners, the losers aren’t only the poor. The losers are also future generations, ecosystems, and non-human species, none of whom own any property at all. The only positive news here is that the converse might also be true: if future generations, ecosystems, and nonhuman species did own property, they might have some economic and political power.

#### Limits of Taxation

Let’s set aside for a moment the question of whether government is inherently biased toward property and focus instead on a purely mechanical question: is taxation a good tool for preserving gifts of nature? I pose this question because economists have advocated “green taxes” for over eighty years, and it’s time to move beyond this hoary panacea.

The idea of using taxes to protect nature dates back to 1920, when Cambridge University’s top economist, Arthur Pigou, proposed it. At first blush the idea makes sense. If pollution is free, there’ll be lots of it. If it’s taxed, there’ll be less. Taxation forces polluters to internalize some of the costs they’d otherwise externalize.

So far, so good. The devil, however, is in the details. For example, who sets the taxes? What algorithm do they use? How quickly can they act? To whom are they accountable? And where does the money go?

When the federal government sets taxes, the key players are the House Ways and Means Committee and the Senate Finance Committee. As any observer of Congress will tell you, the process of writing tax laws is ugly, contentious, and time-consuming. Bills are introduced, hearings held, politics unleashed. More than anything else, this is what keeps Washington’s lobbyists on their cell phones.

What algorithm drives committee members when they write tax laws? Most often, it’s what’s best for their reelection. They’re not economists, they’re politicians. They want to please donors and voters. Protecting nature, or future generations, isn’t foremost in their minds. Hence, pollution taxes will never be as high as they need to be.

Consider a real example here—carbon taxes. A tax on carbon emissions could, in theory, reduce global warming. But in order to make a difference, the tax would have to get extremely high. This means Congress would have to raise the prices of gasoline, natural gas, and electricity year after year, hitting every business and consumer in the pocketbook. That’s an improbable scenario.

In most situations, mainstream economists would shout, “Politicians shouldn’t set prices, markets should!” Prices should announce to the world, on any given day, what buyers are willing to pay and sellers are willing to accept. To the extent that government distorts or delays this process, it leads to inefficient allocation of scarce resources, not the least of which is Congress’s own time.

So why did Pigou and his followers give the price-setting job to politicians? Because, in their minds, there was no alternative. Someone had to set prices for pollution, and they thought no one else could do it. But there are other options.

Consider, for example, the Federal Reserve Board, created in 1913 to manage the nation’s money supply. The Fed is a hybrid entity. Technically, it’s a corporation whose stock is owned by member banks. However, the seven members of its board of governors are appointed by the president and confirmed by the Senate to staggered fourteen-year terms. The genius of the Fed is that its governors can make tough economic decisions without risking defeat at the polls. In particular, they can raise interest rates, which means higher borrowing costs for businesses and higher mortgage and credit card payments for millions of voters. No politician wants to do this, and thanks to the Fed, none have to. When constituents complain about high interest rates, Congress members point to the Fed and say, “Talk to them.” This model is so sensible that, nowadays, almost all countries use it.

One can imagine similar entities for managing carbon and other pollutants. Their governors would serve long terms and have a fiduciary responsibility to future generations. They could make tough economic decisions—such as raising energy prices—without committing political suicide. Such entities might appeal to elected politicians precisely because they permit a shifting of responsibility and blame.

And that’s not the only alternative to political price-setting. We know from “cap-and-trade” programs that markets can set prices for pollution. In such systems, politicians have an important task—they set up the system and assign the initial property rights—but once they do that, they can be off the hook on prices.

Two other questions about pollution taxes are who pays them and where the money goes. There’s little dispute about the first question. Consumers—which is to say, nearly everyone—pay them, even if the tax falls initially on polluters. That’s because any pollution tax paid by a business will be passed on to consumers in the form of higher prices. Consumers can reduce what they pay by buying fewer products that cause pollution; to that extent, they can “evade” the tax, and such evasions will benefit nature. But many consumers have little choice about reducing or shifting their purchases; they must drive to work and heat their homes. And because low-income households spend virtually all of their incomes on unavoidable consumption, pollution taxes fall disproportionately on them.

As for the second question—where does the money go?—it goes to government coffers. Like any tax, a pollution tax takes money out of private pockets and turns it over to the state. It’s then up to politicians to decide what to do with it. It’s possible that politicians will use the money fairly and wisely, but there are no guarantees. If recent history is any guide, they’ll use much of it to expand the military-industrial complex and lower taxes on campaign donors.

There’s another, more fundamental reason why taxes are a poor tool for guarding nature. It’s not higher pollution prices we want; what we actually want is less pollution. Taxes are at best a round-about way to get there. We assume that if we raise pollution prices, pollution will come down. But not even the smartest economist can know how quickly it will come down, or by how much. We can only proceed by trial and error. Much of the tax-setters’ time will be spent debating how much of a price hike will produce how much of a reduction in pollution, when in fact what we should be debating is how quickly we want pollution to drop. Once that debate is settled, we should be able to set a valve at the agreed-upon level. We can’t do that with pollution taxes.

Pollution taxes, in short, though better than nothing, are far from an ideal way to protect nature. They’d make polluters internalize some of the costs they now shift to others, but in a clumsy, regressive, and ultimately insufficient way. If another way to internalize costs is possible, we should consider it.

#### Limits of Public Ownership

Because of historical circumstances, America has a long tradition of public land ownership. When Europeans first arrived, North America was held in common by an assortment of tribes. As these tribes were dispossessed, the federal government acquired their territories. Some of the federal holdings were given to states as they entered the union. Though most of what the federal and state governments owned was then sold cheaply, much was retained. Today, nearly a third of the land in the United States is government-owned.

To say that land—or any asset—is “government-owned,” however, isn’t to say it’s managed on behalf of future generations, nonhuman species, or ordinary citizens. Consider what the federal and state governments have done with the lands they own.

Outside of Alaska, about 5 percent of government-owned lands have been designated as wilderness. In such areas, humans may enter on foot but not use motorized vehicles. Mining, logging, and hunting are also prohibited. On the other 95 percent of government-owned land, private and commercial use is regulated by various agencies. National forests are managed by the U.S. Forest Service, grazing and mineral lands by the Bureau of Land Management, hunting and fishing by the U.S. Fish and Wildlife Service.

As a general rule, politics—not fiduciary duty—determines what uses are permitted and what prices are charged. A classic example is the Mining Act of 1872, under which private companies can stake claims to mineral-bearing lands for $5 an acre, and pay no royalties on the minerals they extract. Every attempt to reform this antiquated law has failed because of the mining companies’ political clout. In the same vein, the U.S. Forest Service has for decades been selling trees to timber companies for below-market prices. On top of that, it spends billions of tax dollars building roads in virgin forests so timber firms can harvest the people’s trees. This is, of course, economically irrational and a huge subsidy to private corporations. It also addicts Americans to cheap forest products and destructive logging methods. These practices occur because the Forest Service is not a trust committed to ecosystem preservation, but a politically influenced agency dedicated to “multiple use” of government-owned forests. There are exceptions to this dismal pattern. One involves trust lands given by the federal government to states. Such gifts began with the Land Ordinance of 1785, which reserved one square mile per township for the support of public schools. Later, the Morrill Land Grant College Act of 1862 gave more land to states to support colleges of agriculture and mechanics. And in 1954, Congress gave Texas title to oil-rich coastal lands, providing that all revenue from them be placed in an endowment, or permanent fund, that generates income for public schools forever. Today, twenty-two states hold about 155 million acres in trust for public schools and colleges—which is to say, for future generations. Like the federal government, the state trusts lease much of their land for oil drilling, timber cutting, and cattle grazing. The trusts’ duty is to preserve not the land itself but the income streams it generates. This creates beneficiaries (educators, students, parents) who monitor the land managers closely. One result, according to University of California professor Sally Fairfax, is that state trust lands are better managed than federally owned lands. Whereas the U.S. Forest Service “has been hiding the ball on cash flows and returns to investments for most of this century . . . the state trust land managers know how to keep books and make them public.” Further, even though the state trusts aren’t bound to protect ecosystems per se, they tend to do so because they have a long-term calculus. An interesting variant of the typical state land trust is the Alaska Permanent Fund, created in 1976 to absorb some of the windfall from leasing state land to oil companies. The aim was to create an endowment that would benefit Alaskans even after the oil is gone. To this end, the Permanent Fund invests in stocks, bonds, and similar assets, and off the earnings pays yearly dividends to every resident. Originally, the dividends were to be allocated in proportion to the recipients’ length of residence in Alaska, with old-timers getting more than newcomers. But the U.S. Supreme Court ruled that, because of the Equal Protection clause of the Fourteenth Amendment, Alaska couldn’t discriminate against newcomers that way. The dividend formula was then changed to one person, one share. #### Lessons for the Future Three points are worth making here. First, ownership isn’t the same thing as trusteeship. Owners of property—even government owners—have wide latitude to do whatever they want with it; a trustee does not. Trustees are bound by the terms of their trust and by centuries-old principles of trusteeship, foremost among which is “undivided loyalty” to beneficiaries. Second, in a capitalist democracy, the state is a dispenser of many valuable prizes. Whoever amasses the most political power wins the most valuable prizes. The rewards include property rights, friendly regulators, subsidies, tax breaks, and free or cheap use of the commons. The notion that the state promotes “the common good” is sadly naive. Third, while free marketers are fond of saying that capitalism is a precondition for democracy, what they neglect to add is that capitalism also distorts democracy. Like gravity, its tug is constant. The bigger the concentrations of capital, the stronger the tug. We face a disheartening quandary here. Profit-maximizing corporations dominate our economy. Their programming makes them enclose and diminish common wealth. The only obvious counter-weight is government, yet government is dominated by these same corporations. One possible way out of this dilemma is to reprogram corporations—that is, to make them driven by something other than profit. This, however, is like asking elephants to dance—they’re just not built to do it. Corporations are built to make money, and the truth is, as a society we want them to make money. We’ll look at this further in the next chapter. Another possible way out is to liberate government from corporations, not just momentarily, but long-lastingly. This is easier said than done. Corporations have decimated their old adversary, organized labor, and turned the media into their mouthpiece. Occasionally a breakthrough is made in campaign financing—for example, corporations are now barred from giving so-called soft money to political parties—but corporate money soon finds other channels to flow through. The return on such investments is simply too high to stop them. Does this mean there’s no hope? I don’t think so. The window of opportunity is small, but not nonexistent. Throughout American history, anticorporate forces have come to power once or twice per century. In the nineteenth century, we had the eras of Jackson and Lincoln; in the twentieth century, those of Theodore and Franklin Roosevelt. Twenty-first century equivalents will, I’m sure, arise. It may take a calamity of some sort—another war, a depression, or an ecological disaster—to trigger the next anticorporate ascendancy, but sooner or later it will come. Our job is to be ready when it comes. What constitutes readiness? Three things, I believe. First, we must have a proper view of government’s role. That role isn’t to run the economy, or even to manage the commons directly; it’s to assign common property rights to trustworthy guardians who will. Second, we must have a plan to fix our economic operating system, not just to put patches on symptoms. And third, we must recognize that the duration of any anticorporate ascendancy will be brief, and that we must use that small window to build institutions that outlast it. Laws, regulations, and taxes are easily rescinded or weakened when corporations don’t like them. Property rights, by contrast, tend to endure, as do institutions that own them. So we should focus on creating such institutions and endowing them with permanent property rights. Make no mistake: it will take more than a few wand strokes to bring capitalism into harmony with nature and the human psyche. This is a thirty- to fifty-year project. During this time, we must be locked on a steady course. For this reason, I wouldn’t place much faith in slim and fickle majorities in Congress. As we’ll see, I would place it in the hands of commons trustees, empowered with property rights and bound as much as humanly possible to generations hence. ## Notes 1. statism and privatism: Hardin, “Tragedy of the Commons.” 2. regulatory capture: Richard Posner, “Theories of Economic Regulation,” Bell Journal of Economics and Management Science, Autumn 1974; George Stigler, “The Theory of Economic Regulation,” Bell Journal of Economics and Management Science, Spring 1971; Gabriel Kolko, The Triumph of Conservatism (New York: Free Press, 1963); Mancur Olson, The Logic of Collective Action (Cambridge, Mass: Harvard University Press), 1965. 3. U.S. governement officials: Robert F. Kennedy Jr., Crimes Against Nature: How George W. Bush and His Corporate Pals Are Plundering the Country and Hijacking Our Democracy (New York: HarperCollins, 2004), p. 32. 4. “influence industry”: Alex Knott, Special Report: Industry of Influence Nets More Than$10 Billion (Washington, D.C.: Center for Public Integrity, 2005).
5. MBNA lobbying: Courtney Mabeus, “Big Donors Go for Broke with Bankruptcy Bill,” Bankruptcy Reform News, Mar. 4, 2005.
6. lobbyists’ behavior: Philip Shenon, “Lobbying Campaign Led by Credit Card Companies and Banks Nears Bankruptcy Bill Goal,” New York Times, Mar. 13, 2001.
7. pharmaceutical lobbying: Jim Drinkard, “Drugmakers Go Furthest to Sway Congress,” USA Today, Apr. 26, 2005.
8. broadcasting lobbying: Kevin Phillips, Wealth and Democracy: A Political History of the American Rich (New York: Broadway Books, 2002), p. 326.
9. using taxes to promote nature: Arthur C. Pigou, The Economics of Welfare (London: Macmillan, 1920).
10. Federal Reserve Board: See Board of Governors of the Federal Reserve System
11. “has been hiding the ball . . .”: Sally Fairfax, Lessons for the Forest Service from the State Trust Land Management Experience (Washington, D.C.: Resources for the Future, 1999), Discussion Paper 99–16, pp. 22–23.
12. Alaska couldn’t discriminate: Zobel v. Williams, 457 U.S. 55, 1982.
13. Economist Vernon Smith: Sean Butler, “Life, Liberty, and a Little Bit of Cash,” Dissent, Summer 2005.

 This is a chapter from Capitalism 3.0: A Guide to Reclaiming the Commons (e-book). Previous: Chapter 2. A Short History of Capitalism  |  Table of Contents  |  Next: Chapter 4. The Limits of Privatization

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