The central problem of governance
I’ve worked with my friend Stephen Decanio, an economics professor emeritus at UC Santa Barbara, for many years. He’s an economist who, like me, has a deep skepticism about the computer models used to analyze the economics of climate change. He’s also a keen observer of the politics around facing the climate challenge, so I take his musings seriously.
I sent Steve an article about the failure of our elected representatives to create the fundamental reforms needed in the financial system after the market collapse of 2008, and he replied “I’m becoming more and more convinced that the real problem doesn’t have to do with economics or technology, but with governance.” What he meant was that the challenges we face, whether climate change or financial meltdowns, have in common the failure of government or corporate governance to align private incentives with the public good.
What has been most disheartening to me about the debates over financial regulations, health care reform, and climate change in the US in the past few years is how obviously sensible solutions are sidelined by one side or the other based on ideology or political interest, without serious discussion of the real issues. Regulators and elected officials are “captured” by the industries they ostensibly control, and either fail or refuse to see the need for structural reform. The news industry has been reduced to entertainment, with little real analysis in all but a few news shows (some comedy shows even do better analysis than the best of the real “news” shows). And the lack of accountability for truly colossal mistakes (like the financial meltdown) breeds a depth of public cynicism that virtually ensures that further disasters lie ahead.
Yet none of this is inevitable. The founding fathers laid out a framework for government that stands to this day as a paragon of how to make self interest work for the common good, relying strongly on checks and balances and competing interests to prevent the accumulation of too much power by any one individual or group. The system hasn’t been perfect, but it has worked remarkably well (better than all competing systems, as Winston Churchill noted). It has weathered world wars and numerous financial crises, and thus far always emerged stronger than before. But the system only works when all participants share a commitment towards working together for the common good.
Now we face new realities, with technological and financial power beyond the imagination of the people of two centuries ago, and new environmental challenges that require new ways of working together (for one eloquent exposition of this idea, see David Orr’s book Down to the Wire). That means we must design institutions that recognize those realities, and use our new capabilities to align private interests with broader societal goals. Private enterprise is the best means yet devised for driving down costs and spreading the use of technology, but capitalism cannot survive without some check on the actions of corporations. Otherwise we end up with lead in children’s toys, testing of drugs on unsuspecting patients, fraud and theft by corporate cronies, and rivers that catch on fire.
The challenge is to create the right kind of check on corporate power, keeping the spirit of innovation alive while curtailing corporate excesses. In the US, at least until recently, we seem to have been moving away from limiting corporate action in any form. Somehow the pendulum needs to swing back, but some systemic problems prevent it, including people who worry greatly about excess government power but not about excess corporate power, and vice-versa. If you worry about both, I get it, but if you only care about one or the other, I think you’re missing the boat.
One important purpose of government is to promote what the US Constitution calls “the general welfare”. This means designing systems that result in economic efficiency and social justice, minimizing perverse incentives. For example, one of my former neighbors is a lawyer who defends developers against environmental lawsuits. In a recent case, one of his clients bought an old railroad yard and promised significant funding to clean it up, so that housing could be built on the site. A local environmental group, sensing an opportunity to get publicity, sued anyway, even after the company met with them and promised to go beyond current requirements. The problem in this case is that the incentives for the local environmental group (to get publicity) are not aligned with the social goal of spending money on cleaning up the toxic mess left at the old industrial site, and now hundreds of thousands of dollars will be spent on legal fees that could otherwise have gone to cleaning up the site. There are many such examples where the incentives for individuals and institutions do not necessarily align with the social good. Markets are pretty good at providing the right incentives (provided certain conditions are met) but they are not infallible, and need to be designed, operated, and regulated well, otherwise we get financial crises, polluted rivers, and toxic toys.
I do wonder if all great countries reach a point where they can’t reform themselves, because they are too rich, the entrenched interests are too powerful, and the people grow self congratulatory and self indulgent. I’m hopeful we haven’t reached that point, and I don’t see why it has to be that way. We live in a democracy, after all, and the American ability to reinvent ourselves has been proven time and time again. We just need to figure out how to get things moving in the right direction.
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This blog post draws from Chapter 7 in Jonathan Koomey’s latest book, Cold Cash, Cool Climate: Science-based Advice for Ecological Entrepreneurs, to be released by Analytics Press on February 15, 2012. Written for entrepreneurs and investors, this book describes how to profit from tackling climate change, one of this century’s greatest challenges. The author acts as your company’s scientific advisor, summarizing the business implications of the climate problem for both new and existing ventures. Koomey helps you effectively allocate scarce time and resources to the most promising opportunities, drawing upon his more than 25 years of experience in analyzing and implementing climate solutions.
