More on this later—I’m back on the road, talking housing policy in NV, where they seriously need some good housing policy—but I’m starting to think that if I could get America in one big room to talk about what’s important this year in terms of political economy, I’d talk about…wait for it…wait for it…
Basically, an externality in econ is the market failure that occurs when some action isn’t captured in the price system. So, if my factory pollutes your water supply, and I don’t have to pay for it, I’m not facing the true cost of my actions and you’re worse off for it. Or, to pluck something from current events, if my invincibility delusion leads me to forego buying health insurance, but I get sick, get treated, and you foot part of the bill through higher premiums, that too is a negative externality.
This is largely what I was getting at here in listing all the ways in which government action is needed to offset market failures—in this case, necessary components of modern economies that markets will under-provide.
The reverse Robin Hood stuff—spending cuts for the poor, tax cuts for the rich—is truly nuts for sure. But after that, the thing I worry about most is that anti-government ideology trumps the pragmatic necessity to offset these externalities.
And it has as much to do with efficiency as fairness, i.e., you don’t have to care a whit about what’s fair to get behind this agenda–markets will simply under-provide the necessary public goods, regulation, education and training, safety nets, retirement security. If we forget that, the negative externalities will drown us.
I don’t mean to be melodramatic, but if you really want to hurt America—not just the poor, the middle class or any particular group, but our general ability to grow and prosper—this is how to do it.
(As long as I’ve got the nation in the room, I’d also talk about the inequality chain and its role in the transformation from virtuous to vicious cycle, but that’s related to the NE problem as well.)