Cato Scholars Respond

Editors’ note: The discussion this month has focused to a greater than usual degree on the activities of certain Cato Institute policy scholars. The editors thought it appropriate to solicit responses, and we present them here in their entirety.


Regarding public transit, Randal O’Toole writes:

In response to Mr. Yglesias,

Thousands of years of human history have revealed only three ways of allocating scarce resources: markets, politics, and religion. It is trite to say there is no pure free market, socialist, or theocratic economy; all economies use a mixture of these three tools. The goal of the libertarian project has been to move our economy towards the free-market pole.

Personally, I consider myself a pragmatist, not a true libertarian. I want systems that work. Most often, this means using market tools, but I am not above allowing government some role if it works. Usually, however, government only works when it is tempered by market incentives.

Transportation policy is a good example. Mr. Yglesias says,

Consider the fact that Randal O’Toole is indignant about the prospect of public expenditures on mass transit systems, but appears to have little to say about public funding of highways. This, too, looks more like a case of narrow business interests than sterling free market principles.

In 1919, my home state of Oregon was the first state to approve a gas tax as a way of funding roads. Private toll roads could have worked, but tolls were slow and clumsy and the popular worry at the time was that private roads would be monopolistic the way the railroads had been.

By 1931, every state and the federal government had followed Oregon’s example of charging gas taxes as a user fee for driving on public roads. The system worked for many years because it offered feedback to both users and highway agencies. Users were paying for most of the cost of the roads and would limit the amount of driving they would do because of that cost. Agencies would not build bridges to nowhere because drivers wouldn’t purchase enough gas to pay for such bridges.

The system broke down when inflation raised the cost of road construction faster than the rise in cents-per-gallon gas taxes. While tolls could vary with the amount of traffic, gas taxes also failed to give users signals to avoid the congestion that resulted from inadequate highway budgets.

Rather than fix these problems, in 1983 Congress started diverting highway user fees to mass transit. Transit agencies sought to get as much of these taxes as they could and agencies that came up with the most expensive proposals ended up with the most money. While highway engineers had no incentives to build bridges to nowhere, transit agencies did have incentives to build rail lines to nowhere.

Suddenly they were no longer user fees, but taxes. So Congress started earmarking gas taxes to specific projects, something it had never done before. Those earmarks exponentially grew from 10 in 1982 to more than 6,000 in 2005.

In all of my writings—two books and numerous essays on the subject—I’ve urged that we go back to user fees. I’ve further argued that tolls make better user fees than gas taxes and modern electronic tolls solve the tollgate problems that drivers objected to in 1919. I’ve opposed measures to raise sales taxes to pay for roads in various cities around the country.

I’ve spent more time criticizing expensive transit proposals than expensive road proposals for a simple reason: there are a lot more inane rail transit projects than inane highway projects. Some of the best highways being built today—such as the Tampa-Hillsborough Expressway and the Ft. Bend Parkway—are toll roads paid for entirely out of tolls. But there are no rail transit projects whose user fees will cover operating costs, much less capital costs.

Pure libertarians argue that transportation should be completely privatized because a private company will be more efficient than a government agency, even one funded exclusively out of user fees. Maybe so, but for me it is too soon to debate that. First, we have to convince people that transportation should be funded out of user fees and not taxes.

The transit industry has people bamboozled into thinking that transit always loses money (it doesn’t), so therefore it should lose money (it shouldn’t), so don’t bother to count the subsidies or worry when some transit services cost taxpayers $1 a ride and others cost $100 a ride. Our allocation of scarce resources to transit is now based on a religion—call it envirotarianism—with the result that anyone who questions the cost is considered a tool of “narrow business interests.” In reality, the transit lobby is five to ten times bigger than the supposedly all-powerful highway lobby.

Despite all the talk of our “addiction to the automobile,” the history of highway construction in this country was never so extreme. So it is entirely appropriate for me to focus more of my attention on transit.

By the way, it is worth noting that I personally hate driving and love trains and long-distance cycling. If the United States were built for my preferences, we’d have high-speed passenger trains and bike paths everywhere. But the numbers in both the United States and Europe show this won’t work: rails are so expensive that our mobility and incomes would be a lot lower and transportation costs much higher.


Regarding carbon taxes, Jerry Taylor writes,

In the course of making his argument that Cato frequently makes counterproductive alliances of convenience (from a strict libertarian perspective, anyway) with corporate special interests, Matthew Yglesias writes:

The free-market case for a revenue-neutral carbon pricing scheme seems fairly impeccable to me. But instead of organizing its climate change efforts around seeking to ensure that any future carbon pricing plan be as close to revenue neutral as possible, Cato prefers to steadfastly defend the rights of industry to unload air pollution unimpeded.

I’m not sure how one might define a “free market case” for a revenue-neutral carbon pricing scheme, but the economic case for it would require evidence that (1) the benefits of the tax shift would exceed the costs, and (2) that the proposed tax shift is a less expensive means of addressing climate change harms than other possible remedies.

Regarding (1), the argument is intuitively plausible but is, in fact, quite problematic. And you don’t need to be a Cato libertarian to come to this conclusion. You will find great skepticism about the claim that a tax shift would on balance prove economically positive from economist Lawrence Goulder (a supporter of carbon taxes, by the way) in “Environmental Taxation and the ‘Double Dividend’: A Reader’s Guide,” National Bureau of Economic Research Working Paper 4896, October 1994. Also good is A. Lans Bovenberg and Ruud de Mooij, “Environmental Levies and Distortionary Taxation,” American Economic Review, September, 1994. As energy economist Stephen Smith observes after surveying the relevant economic literature on eco-tax shifts:

Ecotaxes are likely to involve distortionary costs at least as high as those involved in raising equivalent revenues through existing taxes. If the question is posed whether we would choose to use energy taxes, in preference for existing taxes on labour and other bases, in the absence of any environmental benefits, then the answer is almost certainly that we would not. Energy taxes would be likely to involve just as much distortion of the labour market as income taxes, and at the same time distort the commodity market. Only if there are expected to be environmental gains can the use of environmental taxes be justified, and the case for ecotax reform must be made primarily on the basis of the environmental gains that would result (Stephen Smith, “Environmental and Public Finance Aspects of the Taxation of Energy,” Oxford Review of Economic Policy 14:4, 1998, pp. 80–81).

Read that last sentence again. So, are the benefits that might flow from a carbon tax (defined at the monetarized value of the temperature reductions that might follow) greater than the costs of the same? Energy economist Richard Tol’s review of the published economic literature suggests that the monetarized damages that follow from a ton of carbon emissions at the margin (if mean estimates of future climate change from the IPCC are to be believed) likely works out to about $2 (Richard Tol, “The Marginal Damage Costs of Carbon Dioxide Emissions: An Assessment of the Uncertainties,” Energy Policy 33, 2005, pp. 2064-2074). Hence, if a carbon tax is set above $2 dollars, it will may very well deliver more social costs than benefits.

Regarding (2), Indur Goklany makes a strong case that adapting to climate change and applying targeted public policy initiatives to directly address subsequent harms is much cheaper—and much more effective—than a policy of reducing greenhouse gas emissions (Indur Goklany, “What to Do about Climate Change,” Policy Analysis 609, Cato Institute, February 5, 2008). Moreover, Goklany points out that this conclusion holds even if we accept the worst-case scenarios spun out in the Stern Review on the economics of climate change.

Of course, Matthew Yglesias is free to disagree with the above. But the case for a revenue-neutral carbon pricing scheme is not “fairly impeccable” … from an economic perspective, anyway. There are ample grounds for disagreement, and that’s true even if we ignore the debate about the underlying science.


Regarding intellectual property, Timothy Lee writes (also posted here),

In today’s installment of Cato Unbound, Dean Baker calls libertarians to task for their failure to take a more skeptical stance toward the government-granted monopolies we call copyright and patent protections:

Their enforcement efforts have required terrorizing people for making unauthorized copies of copyrighted material. In a recent case, a single mother was fined several hundred thousand dollars for allowing her computer to be used to download 24 songs over the web. The entertainment industry has gotten the government to prohibit the production of electronic devices because they had inadequate protection against duplicating copyrighted material. They had a Russian computer scientist arrested when he visited the United States because he gave an academic lecture that explained how an encryption lock could be broken. They even went after the Girl Scouts for singing copyrighted songs without permission.

The extraordinary abuses that we see every day as a result of patent protection for prescription drugs and copyright protection should be sending libertarians through the roof, and perhaps it does. But, where are the libertarians’ research programs on alternatives to patents for financing drug research or alternatives to copyrights for financing creative and artistic work?

My area of expertise is information technology policy, so I haven’t written much about pharmaceutical patents, but as a Cato scholar I’ve certainly spilled plenty of ink criticizing the excesses of copyright and patent law as it applies to information technology. Here is the study I did in 2006 criticizing the Digital Millennium Copyright Act, which was responsible for putting that Russian computer scientist in jail. Here is an op-ed I wrote for the New York Times last year pointing out that software patents have become an impediment to innovation in the software industry. Here is an article I wrote this summer for Reason magazine pointing out the problems the DMCA is creating for music consumers. And I’ve done dozens of posts at the Technology Liberation Front criticizing the recent expansion of copyright and patent restrictions. For example, in 2006 I did about 20 posts examining various software patents and pointing out how they were impeding progress in the software industry.

Moreover, we’ve written extensively about methods for producing creative works without copyright protection. These include free software, selling advertising, catering to core fans, selling security, and selling services. Cato published an excellent study in 2006 about the rise of “amateur-to-amateur” culture, which largely thrives outside the constraints of copyright. The growth of these alternative approaches to content creation suggests that in the future, copyright is likely to be less, rather than more, important than it was in the 20th century.

With that said, I can’t agree with Baker that all copyright and patent monopolies are illegitimate. Copyright and patent protections have existed since the beginning of the republic, and if properly calibrated they can (as the founders put it) promote the progress of science and the useful arts. Like any government intervention in the economy, they need to be carefully constrained. But if they are so limited, they can be a positive force in the American economy.

In the patent context, I understand that Baker advocates policies that would have the government more directly involved in rewarding specific innovations by giving cash prizes to innovators who solve hard technical problems. This post isn’t the place to evaluate that proposal in detail, but let me just note two flaws that come immediately to mind. First, while rent-seeking is a problem with any government program, patents included, a prize system seems like it would be particularly prone to gaming by interested parties. The rules would almost certainly be designed so that the best-connected firms, rather than the most innovative firms, get the most prizes.

Second, even if such rent-seeking could be minimized, the more fundamental problem with a prize regime is that the most important inventions tend to solve problems that people didn’t even realize they had until someone came along and found a solution. A scheme of government funded prizes will be inevitably backward-looking, rewarding people for solving the problems that are regarded as important today, while neglecting problems that are less widely recognized but may turn out to be more important in the long run.

Regardless, I agree with Baker that the copyright and patent systems have serious flaws, and I am glad to see scholars on the left advocating reforms. Indeed, one of the nice things about these issues is that they don’t break down along predictable ideological or partisan lines. The DMCA was signed by Bill Clinton, and the most damaging changes to patent law were enacted by a Democratic Congress in the 1980s, so there’s plenty of work to be done educating politicians on the left-hand side of the political spectrum. I think Baker will find the proposals in the copyright and patents chapter of the forthcoming edition of Cato’s Handbook on Policy congenial, and I hope he’ll forward it to his favorite members of Congress. Like him, I’m less interested in keeping score and more interested in promoting good public policy, regardless of the ideological label attached to it.

Also from this issue

Lead Essay

  • In this month’s lead essay, philosopher and libertarian theorist Roderick T. Long draws a sharp contrast between corporatism and libertarianism properly understood. He argues that liberals, conservatives, and even libertarians have all been guilty to some degree of obscuring this difference, and that the quality of our political discourse has suffered accordingly. He suggests that libertarians should guard themselves against falling into the trap of “vulgar libertarianism,” in which all things good spring from business, and particularly from business as usual. Corporations, he argues, should be no more free from scrutiny than any other institution in society, and often businesses have done more than their share to hamper free economic relations in the industrialized world.

    One implication of all of this is that the truly free market is farther away than we imagine. Long suggests several ways in which a freed market would be different from what we see around us today. Notably, nearly all of these differences are to the benefit of the consumer and the small or start-up business. These likely outcomes of laissez faire suggest new grounds for left-liberals and libertarians to revise their thinking on economic issues and on politics more generally.

Response Essays

  • In his response to Long, Matthew Yglesias argues that although corporations naturally seek to win special privileges from the state, libertarianism is far from the obvious solution to the problem. Instead, he reiterates the charge that libertarians often act as corporate apologists and suggests that the net effect of any “free market” advocacy will tend strongly toward corporate power. Liberals may have much to learn from libertarians on certain issues and in some policy areas, but the laissez-faire solution to corporate political influence is unworkable.

  • Steven Horwitz offers several examples of so-called “de-regulation” that only served to benefit corporations, while leaving the government, and therefore the taxpayers, to shoulder the risks of the market. He argues that market competition is a form of regulation, albeit a kind worth wanting, as it forces corporations to respond to consumer demand and punishes them when they fail to meet it. He takes issue with Long’s lead essay by arguing that “playing defense,” that is, defending today’s corporations when they act consonantly with a fully freed market, is a valuable part of libertarian advocacy. One must nonetheless take issue with these same corporations when they violate the principles of laissez faire and distinguish carefully between these cases.

  • In his response essay, Dean Baker declines to tally up a “score” of how well libertarians, or other groups, have defended a truly impartial, laissez faire economy. Instead, he suggests intellectual property as an obvious area where libertarians must challenge corporate power to distort the market. Patents that make health care more expensive and copyrights that artificially restrict whole areas of our culture are obviously concessions to corporatism, and the “extraordinary abuses” undertaken to enforce these privileges should be vigorously challenged. Although libertarianism has been skeptical of both patents and copyrights, Baker suggests that this is an area deserving still further attention, and one in which liberals could perhaps become solid allies.

  • The discussion this month has focused to a greater than usual degree on the activities of certain Cato Institute policy scholars. The editors thought it appropriate to solicit responses, and we present them here in their entirety.