Literature of Policy Final
Section One: Introduction
Yehezkel Dror noted the government reform movements of the 1960s, and subsequently policy analysis, included an ‘economic approach to public decision making.’ In this piece, I first examine the historical development that lead up to this reform and the antecedents of the economic way of thinking. Here, I point out the forefathers of this way of approaching things. This includes people who theorized, discussed, promoted, and advocated for things like efficiency, understanding motivation, working with market mechanisms in policy problems, the specialization of the workforce, and so on. In Section Three I articulate the pros and cons of this revolution and development, first by clearly stating the benefits and costs, and then, through the example of the SO2 Cap and Trade Marketable Permit Scheme, give a fundamental and paradigmatic example of the type of thing economists advocate for, and examining its pros and cons. I then conclude with a reflection on this topic.
Section Two: The Historical Development of the Economic Mindset
In this section I will endeavor to detail the historical development of the economic approach in the field of public policy. There are a number of key concepts that were antecedents of the full throated use of economics. These include specialization, efficiency, rationality, the use of science, social equity, motivation, and empirics. I will also give voice and example to counter arguments and responses that developed as a result of the economic way of thinking.
I: Early Public Administration and Antecedents
Going back to Robin and Bowman are the concepts that the administration is specially trained and separate from the people, as well as from politics. (classnotes, 1/30/23) Specialization is a key aspect of economic thinking. Further, that administration is more of a behavioral problem than a structural one is also relevant. This precedes an economic approach to policy because the forefathers of behavioristic approaches to policy viewed administration as having to do with humans, the basis of economics, though this had not yet been articulated. That administration must be modernized and enlightened, using more empirics and emphasizing science and efficiency are also of note. The placement of faith in numbers, or an empirical approach, is a precursor to economic thinking.
Wilson is also clearly relevant, with his emphasis on efficiency and science. That administration is a business devoid of politics is also important. The theorists of the early 20th century saw administration as a specialized profession. In a response to the spoils system, they thought to enlighten and ennoble administrators by making them a separate ruling class with specialized functions. However, this did not work out, and as a result a scientific basis was questioned. Wilson, however, wanted administration to be more like a business (Robin and Bowman) post Civil War. In his piece “The Study of Administration” Wilson asked what government can do, and how to do it with efficiency. This is clearly a precursor of economic thinking. He emphasized the science of administration by looking at the government in action. Administration was looked at as a business, with politics removed. Wilson wrote in a context. The frontier was closing. The previous solution was simply to move west. For the first time we had to confront one another as space dried up. Urbanization was beginning with all that it entailed, namely, crime, environmental issues, manufacturing, technology change, the railroad, infrastructure, industries, immigration, internationalization, and income inequality. The notion of the Politics Administration Dichotomy is summarized by the position that politics should be separate from administration. The elected decide on a policy, and the unelected execute this policy. This specialization is at the heart of modern economics. Wilson argued that we can learn from efficient countries, regardless of if they are oppressive. This preoccupation with efficiency is also a precursor to economic thinking.
Goodnow in his piece “Politics and Administration” emphasizes that the scientific, technological, and commercial elements of government are in the administration, which is a basis of economic thought. White’s work “Introduction to the Study of Public Administration” is also relevant as it states that there is one process to administration. Again, efficiency is emphasized, as is specialization of tasks and people. With the Industrial Revolution, laissez faire was dropped as there were new problems. Social cooperation was needed, with the state intervening for the weak. This is a new sort of economic thinking, or that of welfare economics.
The emphasis by Friedrich on keeping bureaucracy effective is similar. That experts and science, as well as empirical data, are privileged is also relevant. That there is objectivity, and that it should govern decision making is also of note. Both Finer and Friedrich emphasis a reliance on experts and science. For Finer, they are restrained by the elected, for Friedrich, by norms. Both assume human nature, which is again what economics does. For Finer, it is negative, for Friedrich, positive. The set up the conditions for the ‘man of reason.’ They privilege expertise and empirical data over experience, folk knowledge, and rules of thumb. It is an emphasis on pure rationality, and assumes self interest, as well as uses science. Objectivity should govern decision making. This is, in its core, based in the US Constitution, or that the typical American is a ‘man of reason.’
The debate between the Federalists and Anti-Federalists point to a division in the precursors to economic thinking. The debate is between a strong central government versus states’ rights. This fundamentally has two different views of society. The question is how are we meant to govern ourselves? Federalists want government driven by reason, objectivity, and capitalism. The Anti-Federalists through local associations, in person discourse, debate, and bottom up rather than top down. Both are indicative of different economic frameworks which were to flourish later in the 20th century.
Stivers notion of Bureaucracy Men, who are guided by science, efficiency, and fixing the system is important and exemplifies the economic tradition. This debate took place during the Industrial era. Following women’s enfranchisement, public administration became more technical and efficient. It was also ruled by a specialized class, or the elite. The response by Wamsley and Wolf that what is of the most importance is public equity, rather than efficiency, heralds a different governing economical model.
II: Scientific Management
The notion of “Scientific Management” from the inter war period by Taylor is clearly influential. During this time, the federal government was growing. Scientific Management is traditional public administration on steroids. The meritocracy that Taylor envisioned after his trip to Europe in the 1880s clearly has roots in economic theory. It is in essence a carrot and stick approach (classnotes, 2/13/23). You break down a task, and get less argument and favoritism after objective measurement of tasks. For Scientific Management, you get buy in from workers, people specialize, and knowledge is accrued, leading to an optimal output, all of which are connected to economics. Selection and development of workers, as well as combining science with trained workers, are also important. Collaboration being emphasized is also relevant. The move from rules of thumb to concrete measurements is also indicative of economic thinking. That many business schools took up Scientific Management is indicative of how deeply entrenched in Economics it is. In the public sector, it focused on waste and inefficiencies. However, there were critiques that this style was too rigid, overly reliant on management, dehumanizing, and caused overwork.
For Weber, that there are levels of authority or management and hierarchy is of note, as is specialization and following rules that apply to all. Gulick’s work “Notes on the Theory of Organization” emphasizes work division and specialization being the foundation of organizations is significant, as is the needing of authority by the organization and there being limits of time, energy, and knowledge. This brought Scientific Management into the public sector. As a head of an NY bureau, he differed from Wilson. Wilson wanted to stop specific abuses, such as the spoils system. Gulick advocated restructuring, rationalizing, professionalizing, and remaking government. Operating under constraints are clearly an economic issue. The division of labor and specialization are clearly economic concepts, as is the emphasis on technical efficiency. Gulick argues that both top down and bottom up structures are needed. This movement started in the private sector, then public sector academics, and lastly the public sector.
The accounting practices detailed by Rosenthal set the stage for scientific management to come to the fore. They emphasized control, hierarchy, numerical outputs, efficiency over lived experience, and numbers being abstractions of people. Barnard’s principles of cooperative action being effectiveness, efficiency, and related to motives is also of note. Simon’s preoccupation with efficiency and specialization are important.
III: The Human Relations Movement
The Human Relations Movement of the 1920s to 1940s offers an interesting reaction to Scientific Management. Before this, business studies predominated. Emphasis on the psycho-social was undertaken during World War I and World War II. During these wars, there was a large increase in the bureaucracy on both the left and the right. Notably, women entered the workforce, and the theoretical field became richer. At its core, HR looked at human motivation. This is very much in keeping with economics. Previously, a rational agent had been assumed, going back to philosophers such as John Stuart Mill or Adam Smith. Now, questions like what inspires public service, and what makes someone perform came to the fore. Motivation is key to economics, and is traditionally thought of strictly in terms of the carrot and stick. Maslow’s Hierarchy of needs was an important step, identifying that needs begin with the most basic physiological and continue up to the emotional, self esteem, and self actualization. McGregor is also of note. He argued that we are at a state of economic and political development that allows us to manage people differently, because they want to self actualize and have self esteem. Work became the means to do this. Decentralization was emphasized, and putting control lower down the hierarchy. This is in keeping with leftist economics. Merton’s position that we examine values, how we pay for things, and a budget as a statement of values all are relevant to economics.
Barnard emphasized principles of cooperative action, in keeping with welfare economics. Effectiveness and efficiency were emphasized. The question of how an organization satisfies its motives was found to be efficiency. Elements of formal structure include incentives and authority. Cooperation is vital. Mayo in the 1930s with his “The Human Problem of Industrialization” was pre New Deal, pre Depression. Capitalism reigned unfettered. Researchers challenged business economic mindsets, and showed that there is a physical part to people working as well. The factory-ization of work, a very economic based movement, lead to monotony and fatigue, as well as melancholy and income inequality and globalization. More material wealth and less community was also common. The social world disappeared, and the state took this up.
IV: Iron Triangles
The 1960s to 1970s saw the rediscovery of politics with iron triangles. I won’t go into detail describing that phenomenon as it lies outside the purview of this piece, though I will explore some of the relevant thinking of some of the theorists of that time. Wilson asked why the private and public sector bureaucracies are so different. Bureaucracy was seen as out of control. Simon bridged the gap between Scientific Management and HR, and new politics. In the iron triangle set up, people generally act in self interest, which is in line with economic thinking. Waldo examined how different events impacted the rise of public administration, specifically that the wars lead to the expansion of PA. The governing ideology was science and efficiency, very in keeping with economics. He argued for a more decentralized administration and less hierarchy. He also noted that PA deals with the good life, however it is not a rational exercise to him. To him, it is not economics but political theory. He questioned what is public and private. Values were important, and he distinguished between management (scientific) and administration.
Lowi begins with the end of Capitalism. It was put forward that an economy can’t self regulate. There would be a transition from iron triangles to issue networks, where organized networks get what they want. “Interest group liberalism is socialism for the organized and Capitalism for the unorganized.” (classnotes, 3/6/2023). For Derthick and Quirk, iron triangles and issue networks inherently exposed bounded rationality, an economic concept that would come to the fore in the coming years.
V: Policy Analysis
Policy Analysis was another reaction that took theorists in a different direction. Values were emphasized, rather than process and procedure. What you are efficient at matters, where before efficiency in general was its own end. It found its roots in PPBS, which began in World War II and computers as well as analytical methods. It sought to allocate resources more effectively. The ‘whiz kids’ at the Pentagon said that government was not allocating resources rationally, and that budgeting ought to be done around programs. It was also argued that the Fed should be more rational. In the 1970s, the Ford Foundation got involved, they found that traditional PA was not analytical enough. The basic idea was that organizations would be training public servants around analytical tools of the social sciences, specifically Economics and Political Science as well as operations research, or optimization. MPP graduates were sought to be like MBAs, and were to be taught how to think, as well as how to approach problems. In the 1980s, MPP programs took off. APPAM was founded in the 1980s, and within it there was little management, with applied economics predominating. (classnotes, 3/20/2023)
VI: Thinking Like an Economist
In Elizabeth Popp Berman’s work “Thinking Like an Economist” she details the advent of economic style thinking in PA. Between the 1960s and 1980s, economics styled reasoning proliferated and impacted the structure and implementation of federal programs, including, “healthcare, environmental, housing, transportation, antitrust regulation and other forms of market governance.” (Ngumbah, 2023) This was proclaimed as neutral in values and based in economic logic. Efficiency was paramount, at the expense of equality and other values. “The economic style of reasoning is a loose approach to policy problems that are grounded in the academic discipline of economics but has travelled well beyond it. It is often perceived as politically neutral, but it nevertheless contains values of its own - like choice, competition and especially efficiency” (Berman 2022, Page 4). In this work, economic thinking became prominent across social policy, market governance, and social regulation. This thinking began in the 1950s and influenced policymaking between 1965 and 1985. This began in academia with economics PhD programs graduating students.
There were two intellectual associations that came to be between 1960 and 1980. The Systems analysts from the Research and Development (RAND) Corporation and the Industrial economists. The former asked how should government make decisions, and the latter how should we govern markets? Some antecedents were Institutional economists and macroeconomists. The former began in the 1930s, but they had diminished influence post WWII. The latter came to be in the 1930s and peaked in the 1960s, and approached the entire economy, focusing on “employment levels, economic growth, inflation rates, and business cycles” (Berman 2022, Page 25). The Planning Programming Budgeting System (PPBS) began with large scale goals of agencies, finding programs that could be used to realize these goals, quantifying the cost effectiveness of these programs, and using that to influence budgeting. (Berman 2022, Page 43). This faction was strongly linked with the Kennedy Administration, and aimed to better government by improving budgets. PPBS’s influence waned following the 1970s, but the links between economists and policy makers remained. Industrial organization economists were from Harvard and Chicago, and began the law and economics developments of the 1960s. They sought to institutionalize an economic approach that sought to deregulate. Governance of markets was reprioritized, with emphasis on efficiency and deregulation and ignoring corporate power and market stability. Government increased regulation in the 1970s, and as a result those seeking deregulation coupled with economists pushing for efficiency and cost-benefit analysis. By the 1980s and 1990s economists sought to improve government, such as the SO2 Cap and Trade Marketable Permit Scheme, which will be examined in Section Three. It is important to note that the economic way of thinking places no emphasis on the non measurable, such as concepts like justice, ecology, equity, diversity, inclusion, and so on. This allied well with Republicans, with Democrats being sidelined.
VII: Political Economy and Public Choice
Political Economy and Public Choice then came to the fore. Rational Choice Theory from economics was taken up by political science. We all try to maximize self interest, it was argued. There are many assumptions. These included a static human nature, that we know our preferences, that preferences are fixed and stable, and that preferences change slowly. The adaptation to political science started with Anthony Downs, and his Median Voter Model. Here, voters go towards the middle, and parties do the same. The self interest is to maximize votes. In his piece, “An Economic Theory of Democracy,” Downs articulates the Rational Choice Theory. There are two hypotheses. Citizens behave rationally, and representatives try to get the most votes. Voters have rational preferences, they establish which party the prefer and vote. There is uncertainty, however, and voters can be influenced. Information helps curb this. Voters will consume information until cost equals the marginal rate of return. Parties try to maximize votes, but uncertainty restricts parties. Rationality is assumed. The criticism is that people don’t behave rationally. Also, another assumption is that elections are markets. Voters rely on cues based on which product to buy. Representatives are buying votes with policy. Niskanen and his piece “Bureaucracy and Representative Government” is a supply side model of public services. The bureaucrat maximizes utility. The social outcome is that bureaucracy is too big with too many public projects.
VIII: Street Level Bureaucrats
The study of street level bureaucrats is an extension of the HR movement, which asked how people behave inside organizations. It asks how people behave in the external environment. It looks at citizens, and sub populations. The big questions are how do bureaucrats serve stakeholders, what drives behavior of a bureaucracy, understanding motivations better, are they agents of citizens or regulators, and service of new populations. The attempt to better understand motivations is key to economic thought. Lipsky’s piece “Street Level Bureaucracy” had some HR, and some economic analysis. Fundamentally, the piece sought to understand bureaucracy. The main problem is scarcity of resources, a very economic issue. The SLB serves the population and makes choices. That bureaucrats are connected to each other can result in a better allocation of resources. This structure promotes decentralization, another economic concept. When there are scarce resources, there is a tension between the need to scientifically manage and dealing with people’s issues as they arise. When SLBs rationalize, they pass on cost, time, energy and red tape. New Public Management deals primarily with economics, whereas New Public Service deals with rights.
IX: New Public Management
New Public Management, or NPM, is a response to what came before, but is fundamentally ‘its own thing.’ (classnotes, 4/12/23). The implications of the classical model are that we seek self interest and we want to put ourselves out of business. In the 1970s, there was stagflation, or the co occurrence of high unemployment and high inflation. This was primarily due to the supply shock of the oil issues. This gave birth to NPM. This is an economic minded way of doing government. Market mechanisms are relied on. Contracting out was common, as was increased competition between agencies. Citizens were seen as customers rather than citizens with a stake in democracy. This is both a positive and a critique, depending on who you ask. Contracting out decreased the size of government employees, though government continued to grow. NPM started in the Commonwealth of countries, and then moved to the academia in the USA, and then was put into practice. It was fundamentally popularized during the Clinton Administration. Some examples of the rhetoric surrounding this would be Gore’s ashtray example, and the space pen example. It was seen as a solution to problems, including, being pro consumer, bringing prices down, having no waste, was non inflationary, appealed to conservatives because of smaller government. It opened up new areas of research in academia.
Government was seen as doing something innovative. However, NPM lead to a split between left and right. It was one thing to deregulate, and quite another to have environmental, health, and other outcomes significantly worsen. In “Breaking Through Bureaucracy” Barzelay articulated that the problem of PA is that it is inefficient. Bureaucracy was associated with hierarchy control, a lack of efficiency, and a lack of innovation. A new model is proposed. Government should be service providers to customers. Market mechanisms should be utilized because there are incentives and competition. The role of administration was reimagined. This is related to the HR movement. There is implicitly an appeal to responsibility, accountability, increased innovation, and increased problem solving. Also, there is more discretion for PA, and less hierarchy and control. Some critiques are who is the customer, what is a right, and is business influence good?
In “The Global Public Management Revolution,” Kettl looked at New Zealand in the 1970s. They struggled with socialism, which was inefficient. They looked to the Chicago School, where markets were successful. This approach went around the world, to Europe, the US, and academia. Reagan and Thatcher looked at markets, and NPM really began with Clinton. Government in the US did not shrink. Authority was sent to the states in the US. For big problems, a global government was sought. Some critiques are that this doesn’t look at the downside, some predictions didn’t work out, and there was fatigue. Some manifestations of NPM were school vouchers, agency score cards, and performance budgeting. Customer service was also an issue. In the US, this was a bit of a moderate movement, as Clinton ran as a moderate. What does NPM leave out? It ‘gets things done’ often at the expense of other values, as well as processes. These include diversity, equity, and inclusion.
X: New Public Service
New Public Service, or NPS, was a response to NPM, and somewhat of a critique. Some antecedents were Waldo, who was a skeptic of expertise, and Wilson, who moved PA to a field of expertise and supported public opinion. In their work New Public Service: Serving Not Steering, Denhardt and Denhardt argue that public value is not about markets but adding value. Communities should engage together and propose solutions. NPS also harkens back to the HR movement, due to its Humanistic component. It was sought to bring back dignity to public service and respect for expertise, as well as giving more discretion to act entrepreneurially. Civic engagement, or people directly participating in democracy was also relevant. Equity was also included in the positions of NPS. NPS emphasizes other ways of democratic participation than voting as well. Voting is important, however, as it is necessary to be a democracy, however. With rampant examples of suppression and challenges to voting, it was seen that NPS was bringing voting back into the fold. Mary Parker Follet saw the interpersonal process as important to democracy, which implicitly results in decentralization. McSwyte harkened back to the Anti Federalists, with his emphasis on discourse, debate, bottom up participation, and decentralization. In the 1990s, the emphasis was on Diversity, Equity, and Inclusion, or DEI. Talk began around globalization and minorities. NPS inspired new focus on DEI.
Representative Bureaucracy should be a microcosm of the larger society. This goes back to the 50s. The disappointment with neoliberal economics which didn’t deliver also fostered NPS. NPS was seen as an enabler of democracy, and the 1990s were ‘the decade that history forget’, sandwiched between the fall of the Berlin Wall and 9/11. During this time there was increased democracy, markets were good, the internet came to fruition, globalization was taking hold, and there was generally ‘irrational exuberance.’ There were no longer scarce resources, and public servants didn’t have hard choices. There was the ‘peace dividend’ which led to social programs rather than defense. Following 9/11 and the recession of 2008, however, things returned to the way that they were.
XI: The Legacy of Empire and Colonialism
During this time, western countries took a hard look at their colonial past. Their legacy of resource extraction and slavery came home to roost. This is directly tied not just to racism, as I will discuss, but the economic mindset. There is a familiar narrative about the origins of American public administration that is incomplete and self-serving. The narrative says the field emerged mainly out of municipal reform efforts between the 1890s and 1910s. America was different from Europe, which emphasized a top down and centralized structure. Americans preferred decentralization and democracy. PA became defined in the 1920s and 30s. This prevented racist ideologies that permeated other disciplines that began earlier. This narrative is incomplete. America experimented with Empire. PA scholars reinvented themselves as experts of colonial administration and justified themselves with appeals to the ‘white man’s burden.’ Citizens of the colonies were not considered American citizens, but members of ‘subject races’ and the colonists looked to Europe for lessons.
Goodnow was a key figure. “Goodnow believed that humanity was divided by color and degree of civilization, and that there was competition among races. The white race had reached the highest stage of civilization, mainly through its mastery of science and technology (Goodnow 1913). The brown and yellow peoples of India, China, and Japan were less advanced but still had some degree of civilization, while in South America interbreeding had produced “a new race ... vastly superior to the Indian race as the Spaniards found it”” (Roberts, Page 187). He believed that white countries had the right and obligation to establish empires. Often natives were considered unworthy of self rule. There was broad support in American academia for building an American empire. This was not separate from domestic administration, though it predated it. Scholars such as Young, Lowell and Munro also contributed to this body of work and college courses. Often it was thought that colonial administrators required unique and specific training. GWU was among the schools that thought of setting up schools of colonial administration. There was one exception. Sudhindra Bose, of the University of Iowa and an Indian native, condemned racial prejudice.
The study of colonial administration was a focus of American scholars’ work, and tied to reform within the US, using dependencies as laboratories for work, where rulers had complete autonomy. They argued that the Constitution did not apply to these areas. Reform could be done more quickly in the dependencies and then imported home. Scholars such as Willoughby cut their teeth as administrators in dependencies, only to come home to high status positions. Many thought the local populations were not ready for self government. In 1910 President Taft created the Commission on Economy and Efficiency which sought reforms at home, which was heavily influenced by municipal reform movement and applying the principles of colonial administration, emphasizing strong executive leadership by a white elite. Often these scholars returned to posts abroad to continue to spread their ideologies in practice. Again, Bose took issue with many of these positions.
More recently there have been calls on the field of PA to look more squarely at its racist past. “Many people who we count among the pioneers of public administration were deeply engaged in the study and practice of colonial administration between 1898 and 1918. They designed and operated systems for governing subject peoples and justified these systems by invoking theories of racial difference. They were unabashed in describing these as systems of white rule, designed to bring the “blessings of Anglo-Saxon civilization” to “backward races” (Roberts). This was unambiguously a project in “top-down state building.” Military forces were used to pacify the dependencies, often through brutal methods. The systems of civilian administration that were imposed afterward always reserved final authority in the hands of American administrators. People living in the dependencies were classified as subjects and not citizens (Roberts). Rather than distancing themselves from the experience of European states, American experts studied the European empires closely, searching for lessons on how to rule American colonies.” (Roberts, page 193). Non Teutonic US citizens were subject to immigration and naturalization restrictions, voting restrictions, restrictions on public employment and access to public services, controls on home ownership and mobility, and biased treatment by police and courts. Reformers did not seek to ameliorate these conditions, but endorsed them. This did not disappear when overt racism went out of fashion as PA was coalescing in the 20s, blatant discrimination still occurred. Experts in colonial administration were able to continue to speak this way because there were rarely representatives of the ‘dependent races’ present to challenge them.
XII: Current and Future Theorists
The Rational Choice Movement, or RCM, is deeply steeped in economics. Some antecedents are Simon’s bounded rationality. More recently, the response to NPM has been more critical. In recent times, with the advent of tech, NPM was characterized as removing bureaucratic discretion, being neutral, and making policy problems technical problems. This did not work. NPM tries to quantify everything, for better or worse, to automate, and take human inputs and quantify. However, often these algorithms are biased at best, and discriminatory at worst. In “Automating Inequality” by Eubanks we are shown the depth to which this can happen, and what it bodes for the future. This is a response to NPM, and its economic basis, and represents a shift to a more human way of doing things. Here, the solution is NPS. The poor need to be organized, so that they can effect political change.
Section Three: Pros and Cons, and a Tangible Example
The effects of economic thinking on policy and policy analysis have been variegated. As detailed in the history, there is a long legacy of economics and its antecedents being utilized in theory about policy and PA. Some of the positives include introducing concepts that improved policy making. This includes an emphasis on efficiency, specialization, incentives, market mechanisms, and motivations for work. Much of this is down to the ‘rational man’ assumption. Some of the negatives include the factory-ization of work and corresponding fatigue and alienation, abstracting into numbers to the extend that it is dehumanizing, using economics as justification for slavery and colonialism, and removing power from the public and putting it in the hands of specialists.
It is most informative to study the pros and cons of economic thinking in its effect on policy by examining a case study, namely, the SO2 Cap and Trade Marketable Permit Scheme. The first attempt at dealing with SO2 was put forward under the 1970 Clean Air Act. The 1990 CAA Amendment sought to revise and improve on the original CAA by implementing a Cap-and-Trade (CAT) system for SO2 emissions. The hoped-for advantages of the new program were clear from an economic perspective. Free trade and market mechanisms would lead to efficient operation, while the over-arching objective of decreasing pollution control would be realized. All that was required for the successful operation of such a program and efficient abatement would be done by cost-minimizing utilities and an efficient market for trading.
As the primary goal of the CAAA under Title IV was to set SO2 emission levels at half that of 1980 levels, an aggregate nation-wide cap was set at roughly 8.95 million tons. This overall goal was to be achieved in two stages. The first stage began in 1995, and targeted the 110 dirtiest coal-fired power plants in the nation. Stage 2 began in 2000, and opened coverage to smaller power plants that produced at least 25 megawatts of electricity, as well as those plants which had a fuel sulfur content of greater than 0.05%.
The program issued a total number of permits which were equal to the desired cap, with each permit allowing the owner to emit one ton of SO2. The historic heat output of each plant was used as a baseline for how many permits were issued to any individual firm. Thereafter, firms could trade these permits with outside firms, or among subsidiary plants. In addition, if a particular firm, at the end of a given year, had in its possession more permits than were needed in that year, they were allowed to bank the extra permits for later use or trade. Therefore, for a given calendar year, total average aggregate emissions must equal or be less than the cap, plus any outstanding unused banked permits from previous years.
The amount of permits issued to a firm by the government was for the most part below its current level of emissions. Should this be the case, a firm could then reduce emission levels to the amount of permits in the firm’s possession. This abatement generally causes production to be moved from dirtier to cleaner production facilities, burning coal with a lower content of sulfur, or installing ‘best available technology,’ which was usually scrubbers. In no situation does the government mandate by what means a given firm should decrease its pollutant emissions to the level that they have allowances for; they leave this up to the firm, as well as the market. In the end, all that is required of a firm by CAT is that a particular firm can only emit SO2 to that amount which they have permits for. This is where the market component comes into play. If a firm cannot decrease the amount of SO2 emitted, it has one final possibility. A firm could either purchase permits from other firms which do not have immediate need for them, or the firm can reallocate the possession of permits throughout it’s company, therefore realigning SO2 emissions in a more efficient way. This allows the utilization of ‘pollution rights’ by those that truly value them. Those firms that operate at high marginal abatement cost buy permits from those firms with lower MAC.
Upon first examination, it would appear quite evidently that CAT’s success buttresses the position that economic, free-market solutions led to unbridled success. Examining the literature behind the matter, however, shows us that there is still some debate about the topic. Specifically, there are concerns that CAT may have led to the development of unforeseen externalities, as CAT placed no regional or temporal controls on the trading market. SO2 is a highly regional pollutant, predominantly affecting those in the immediate vicinity of the pollution site. While the aimed-for level of aggregate national emissions may reach the desired level, there may still be dangerous concentrations of pollution in specific areas. Concentrations of SO2 at harmful levels may well arise as the result of trading and banking. While it may be cost-effective for firms in the west to sell a large proportion of their permits to eastern counterparts, this may still have dire consequences. In this example, inhabitants of the surrounding area of the eastern power plants, however, may be exposed to a much higher level of pollution than their western counterparts, who are exposed to much lower concentrations. It seems reasonable to hypothesize that this could lead to economic costs in the east that exceed the benefits accrued. While it may remain true that net national economic benefits of CAT may be positive, very real negative effects may be felt by the inhabitants of a region in which pollution increases as a result of the trading of permits.
The fact that permits can be banked indefinitely may also cause similar damage. As of yet it seems that firms were generally over-complying, and were banking a large proportion of their permits in anticipation of future need or unforeseen events. Should this trend continue, it may well come to pass that future emissions could be significantly over the capped amount. This was already shown to be the case during the first few years of stage 2. As a result, firms may emit SO2 at considerably high levels, given the temporal nature of banking. This would lead to a lack of pollutant symmetry similar to the geographic concern, though of a temporal nature. Before we so whole-heartedly accept CAT as a uniformly unambiguous success, these concerns must be addressed.
The CAT program was an amendment to previous legislation governing such emissions, and as such plants must continue to abide by local standards as well. It should still, however, be highly informative to establish which states and counties, if any, experienced an increase in SO2 emissions in either stage 1 or stage 2, relative to stage 0, as states and counties can often be outside of attainment, purposefully or unpurposefully obfuscate attempts at measurement and regulation, and cause aggregate state or county level effects of SO2 emissions.
We have with this example an encapsulation of what NPM sought to put forward. Namely, that we can employ market mechanisms for policy objectives. We also see both the benefits and pitfalls of such a tactic. Through the implementation of the program, emissions fell to the number of permits issued, but localized and temporal hotspots, or externalities, occurred as a result. This shows both the promise and the peril of economics’ influence upon policy decisions. Other perils include, as described above, colonialism and slavery, as well as ignoring certain fundamental human values such as DEI.
Section Four
This piece has examined the history of economic thinking in PA from numerous concepts including motivation, value, market mechanisms, efficiency, specialization, and so on. It has also pointed out those in opposition to this framework. In section three, I delve explicitly into the pros and cons, and give a detailed example of a paradigmatic program, the SO2 CAT scheme. The pros and cons are clear. Efficiency is clearly beneficial, as it replaces waste with thrift. Policy makers are presented with scarcely resourced budgets, and are expected to do the best with them. This is what economists have to offer. They help us think of how to deal with scarce resources. However, there are negatives associated with this. DEI is not included, and at its worst, this way of thinking leads to the abstraction of human lives into numbers, and at worst outright oppression, slavery, colonialism, and so on. The only way that we can take the good and omit the bad is with a thorough understanding of each. This is what this piece hopes to do.
Section Five
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