Yes, Sen. Warren, the system is rigged — by Congress

Sen. Elizabeth Warren (D-Mass.), a leading candidate for the Democratic presidential nomination, has been openly critical of capitalism as we know it and is eager to offer a better path forward. As she puts it, the economic system is rigged in favor of industry. She wants a more accountable capitalism, one with more direction from the top. She is right about the rigging, but wrong about the solution.

Yes, the system is rigged. But how did it get that way? By way of deliberate regulatory actions taken by the U.S. Congress. Should we expect that same body to behave more benevolently in the future? Hardly. After all, petitioning government is a feature of democracy, but those who petition it most effectively usually prevail.

I once had a front-row seat to one such example: The federal government’s regulation of fuels consumed in the production of electricity. The case involves two of our most-plentiful fuels: Natural gas, among the cleanest-burning, and coal, one of the dirtiest. Some who worried about clean air supported use of natural gas.

But that was not the way the U.S. Congress saw the matter in 1978, when the Power Plant and Industrial Fuel Use Act of 1978 (FUA) was passed. As a part of other legislation dealing with challenges stemming from the Arab oil embargo, that law banned the burning of U.S.-produced natural gas in newly constructed power plants, urging the use of coal instead. Much to the joy of the coal lobby and the distress of natural gas producers, the system was rigged. 

At the time, a strange bedfellow, the 1970s environmental community, celebrated with the coal lobby in a textbook case of “Bootleggers and Baptists” politics. Environmentalist “Baptists,” seeking to regulate away a problem like old-school Baptists did with alcohol, argued that clean natural gas was too valuable to burn in bulk just to produce electricity. The coal lobby, like the bootlegger who profits when stores cannot sell liquor, must have loved it.

As FUA was being debated, I was a senior economist on the staff of President Carter’s Council on Wage and Price Stability, and a member of a small group charged with considering the economic impact of newly proposed regulations. Environmental regulation was my beat. In an effort to gain a better understanding, I met with an EPA scientist involved with his agency’s development of the law.

He showed serious concern about the greenhouse gases that would be produced from a possible complete switch to coal for electricity production. At the time, there was no scientific literature available for guidance. There was nothing to tell us what would happen in the upper atmosphere with such a massive increase in carbon and sulfur dioxide emissions.

He was worried about climate change, yet no one else seemed to be.

Yes, the system was rigged in 1978, and coal producers laughed all the way to the bank. Until, that is, the tables turned in 1987. The game was re-rigged when the U.S. Congress repealed sections of the 1978 law. By then, concerns about “dirty” coal had taken center stage, while natural gas was even more plentiful, and the price was low. With coal lobbyists working to keep their favored position, environmental organizations now allied with natural gas lobbyists. This time, coal lost out.

The reversal of FUA, combined with 2011’s new stricter Clean Power Plan rules on emissions from coal-fired electricity production, pointed coal toward the fuel cemetery. But then, wouldn’t you know, the hearse backed into reverse when President Trump entered office with the support of coal-producing regions such as West Virginia. Though no longer as competitive as it once was, coal became a legal contender for producing electricity. That’s where the rigging stands today.

Sen. Warren speaks sincerely when she discusses accountable capitalism. Any thinking person should want capitalists to be accountable. But the question is to whom? To Congress? The president? Investors? I favor accountability, too — to consumers. Had consumers not been steered toward coal in 1978, fewer harmful emissions might have entered the atmosphere.

And how might that accountability be achieved? There will be winners and losers any time government steps in to regulate market outcomes, and plenty to debate about which approach is best. But the use of “marketable permits,” as used in acid rain legislation, or taxes based on emissions discharged, allows competitive forces – the voices of consumers – to help determine which fuels are used, leaving us less reliant on lobbying or short-sighted legislation.

Given their track records, do we really want to put any president or the U.S. Congress in charge of fixing capitalism? I say we unrig the system by reducing political influence and looking for ways to open up competition by putting consumers back in the game.

Bruce Yandle is a distinguished adjunct fellow with the Mercatus Center at George Mason University and dean emeritus of the Clemson University College of Business and Behavioral Science.