If You Can't Explain It, It Probably Isn't Right

I spoke to a non-economist today about the housing crisis, credit crunch, financial crisis, bailouts and recession. She had some basic insights about supply and demand, listened and agreed with me that the policies were likely to blame (regulations pushing low-income loans, interest rates, subsidies and so on), and we agreed that expanding these policies would make it difficult for entrepreneurs to spur recovery. My explanation was consistent with - in fact was pretty much exactly - the Austrian position.

Could a Keynesian explanation and solution have been as easily explained? The person I spoke to was not predisposed toward a free market solution or a government answer. I wonder if some of the credit crunch explanations that get into all the complexities are necessary, and with their confusing intricate details and delicate cures, whether they are able to get at the essence of something so big and far-reaching.

Of course, some simple explanations - especially ones that blame some minority group - are a distraction, scapegoat. So, perhaps if the explanation is complicated, it is unlikely to be right, but if it is simple it could be right or wrong. Then it just comes down to common sense. Since anyone is able to understand it, it comes down to being rational and honest in examining the logic. What do you think?

Bureaucrats and Diapers

Recently, I came across this article. I laughed - it was funny. But, I kept thinking about it. It is really an important example of why regulations are dangerous. In this particular case the government just "promoted" the use of cloth diapers, they did not regulate disposable diapers, as far as I know, nor certainly ban them. But, the story illustrates why it is so good that they did not take that step.

It was lucky that they were able to discover their mistaken assumption - that in fact in order for cloth diapers to produce as little a carbon footprint as disposable diapers they must be washed at a moderate temperature and line dried. Typical use of cloth diapers produces a larger carbon footprint than typical use of disposables. If government had taken the "moral and responsible" step that many activists advocated and either banned, regulated or highly taxed the disposable diapers: it would have led to a larger carbon footprint.

The truth came out in this study - the truth about the carbon footprint. But even what this "carbon footprint" means is not entirely clear. We think we know what greenhouses gases do, which are the worst, what is the right way to combat them according to environmental science, etc. But the "truth" we know today is different from the truth we knew 10 or 20 years ago. New studies poke holes every year in things we thought we knew, or produce new information that changes what we think we know today.

Science is a constant evolutionary process. We are always learning. The market too is a constant evolutionary process, always evolving and innovating. The market immediately begins to adapt to every new piece of information, new signal about resources, and new evolving preferences. Fighting to better serve customers, firms make products more efficient - less wasteful. If consumers care about the environment then firms will respond with products with a small footprint. Even if consumers don't care about that, more efficient product innovations may reduce the footprint anyway.

But government commands are not an evolutionary process, they are an intervention into the evolutionary process which diverts resources along another path, interrupting the flow of information, blinding the actors involved in the learning process. Government itself has the wrong incentive structure. Fighting for their own self-interest but in a bureaucracy instead of a competing firm, government officials use rent-seeking to expand their power in the market instead of improving a product to sell to customers.

Anyway, I wrote this to the EPA:

It is noble to want to prevent disaster. Government is clearly trying to pursue a goal - less global warming. But, particularly when scientists cannot come to complete agreement on exactly how different technologies affect this goal, it is extremely dangerous to pursue the end through stringent government regulations that reduce personal and economic freedoms.

Government agencies can often become over-zealous in pursuing their goals, and may do much more harm than good. Recently, after promoting the "green" solution of reusable diapers for years, the Department for Environment, Food and Rural Affairs (Defra) in the UK did a study and discovered that, unless an "extreme" approach was taken to laundering, in fact disposable diapers produced a smaller carbon footprint.

Thankfully disposable diapers had not been banned. However, another lesson came from that incident -- the study was hushed. Embarrassed that they had been promoting the wrong choice for so long, not wanting their so-obviously "green" solution to be blemished, the agency instructed civil servants not to publicize the conclusions.

The bill proposed here would expand the powers of our own green energy agency, but we could make the same kind of mistakes and restrict freedom unnecessarily. We could do a lot of damage in pursuit of a noble goal but with limited information and limited means. The government can only command and ban, it cannot innovate and find creative solutions. And it is often wrong, and often over-zealous.

The private sector came up with efficient disposable diapers to serve a need. Despite the noble will and immense power of the government, the government was wrong about the need to intervene and return to a more primitive replacement, and then it tried to hide its mistake. If the government takes the further step to regulate or ban the product it perceives as harmful and if government does not stumble upon the science that redeems the product, or if it refuses to turn back, the harm could be much greater.

This proposal would give the EPA far too much power to regulate and ban products which may not cause the great harm which the agency perceives. I believe the agency is acting in an over-zealous manner and must be restrained.

Not that I expect self-restraint from bureaucrats. This will have to be decided in the Supreme Court (again) as usual.