TCS Daily

Risk and Animal Spirits

By James K. Glassman - April 28, 2003 12:00 AM

Editor's note: The following is a speech TCS host James K. Glassman delivered last week in New Orleans.

Perhaps it's too early in the morning to intone dramatic, principled phrases, but let me start with one anyway: we are, says the Declaration of Independence, endowed by our creator with certain inalienable rights - rights that cannot be taken away. Among them are life, liberty and the pursuit of happiness - which I take to mean the pursuit (the pursuit not necessarily the achievement) of the good, that Aristotelian ideal that we all know but can't quite define.

Our government, unlike any other in the world, was formed to protect those rights. In short, to protect freedom.

Now, the wonderful thing about freedom - Hayek defined it as a personal sense of being "in which a man is not subject o coercion by the arbitrary will of another or others" - is that it just happens also to produce the most prosperity. Over and over, academic studies and common sense show this: the more freedom, the more economic growth and the higher the standard of living.

If freedom produced low growth, I would choose it anyway.

But we don't have that difficult a choice - freedom is both a boon in itself and an economic boon as well. If that's true, an interesting question is why we don't have more freedom.

I offer two answers: first, the people who are supposed to protect our freedom have built powerful institutions whose own aggrandizement takes on a kind of internal elephantine dynamic; in other words, government keeps getting bigger. There are few examples where this is not the case. All we can say good for government is that the private sector in a free society tends to outrun it.

The second answer is that some people fear freedom and prefer a life that they take to be safer and more secure. What they really fear is the unknown future - something all of us face. Along with this fear comes other nasty emotions like envy.

The U.S. economy, the most free in the developed world, has come a long way. Today, our Gross Domestic Product - more than $10 trillion a year and climbing - is greater than the GDPs of the next five countries combined: Japan, Germany, the UK, France and China. As far as I know, this is unprecedented in human history. The market value of all the companies listed on US stock markets is greater than the value of all the companies listed everywhere else in the world combined.

We have gone through some tough times lately, but since 1982, our economy has never had a year in which real GDP did not increase, with the exception of 1991, when it dropped by one-half of one percent. Our GDP last year grew faster than every large developed country, and it is expected to do so again this year. Our unemployment rate, while higher than a few years ago, is, at 5.8 percent, considerably lower than Germany's, at 10.6 percent or France's at 9.2 percent.

But comparing us to self-satisfied socialist regimes is not particularly inspirational.

What should inspire us is what we can achieve. And it is not all that difficult.

Roadblocks to economic freedom remain, especially in technology. They must be removed for this country to grow at 4 percent, 5 percent, even 6 percent a year. Those aren't just abstract numbers. At 5 percent, the standard of living of the average US family would quadruple in less than a generation.

Let me talk about some of these roadblocks.

In the early 1980s, Judge Greene broke up Ma Bell, creating a long-distance company called AT&T and seven regional Baby Bells, regulated local-service monopolies. AT&T was immediately plunged into competition with other firms, including Sprint and MCI. The results were better service and far lower rates for consumers. Seeing how well competition worked with long distance, Congress and the President enacted a blueprint, the Telecommunications Act of 1996 - with the backing of every conservative member of the House and Senate - to produce the same results for local service. The idea was to remove this huge obstacle - called monopoly - that was impeding innovation and economic growth.

But now, after years of foot-dragging and lawsuits, things are starting to change - and, as usual, the change is coming from the states not from Washington. At the end of last year, 10 million Americans enjoyed local service from a company other than one of the four Bells, the regional monopolists, using what is called UNE-P, or unbundled network elements platform, which allows competitors, at a cost, to lease parts of the Bell network, which was built with taxpayer subsidies and government protection.

The result: better service, more innovation and lower costs for consumers, who at last have a choice. Again, it is a case of freedom producing the best economic results.

The liberation of long distance used the same kind of leasing to get the ball rolling. After many years, MCI and Sprint built their own robust networks, and competition has been intense.

The Bells, who are adept not so much at management and innovation as at political gamesmanship (after all, SBC hired William Daley, former head of the Gore 2000 presidential campaign, as its president), started screaming bloody murder. They also got Michael Powell, the FCC chairman, son of the Secretary of State and former top aide to Joel Klein, Clinton's antitrust chief - the man who started, in my view, the tech-stock bust, by prosecuting Microsoft - they got Powell to try to take the authority of the states away and give it to the unelected members of the FCC.

Powell was thwarted in February by a new FCC majority, headed by Kevin Martin, a loyal supporter of President Bush. It was a close call.

As Business Week said after the FCC vote: "Competition will flourish. The FCC's ruling may finally turn the residential market into a competitive battleground like long distance."

Many conservative groups, some of them represented here, opposed Powell's attempted power grab. It was a matter, they believed, of states' rights and, as Martin puts it, competition first. I agree, but the battle is not over. The roadblocks remain in another key part of telecom: fast broadband connections to the Internet.

And speaking of Microsoft: despite the company's victory, at huge cost, in the courts, it too is beset with legal challenges, both here and abroad. Eternal vigilance is the price of freedom. It's not over.

The second large topic I wanted to address this morning under the rubric "obstacles to economic freedom" involves the precautionary principle. Its most vivid manifestation can be found in the issue of climate change. This has been a major focus of our work at TechCentralStation. While President Bush rejected the Kyoto Protocol as 'fatally flawed" in early 2001, mini-Kyotos are popping up in states all over the country, including Maine and New York.

There are two problems with climate-change mitigation, Kyoto-style. First, there is a lack of sound science behind predictions of calamitously rising temperatures over the next 100 years. More and more research lately is casting doubt on the computer models that predict the change. And a study led by two Harvard researchers, Sallie Baliunas of TechCentralStation and her colleague Willie Soon, both of whom work at the Harvard-Smithsonian Center for Astrophysics - shows how the 20th century was not the warmest. Long before SUVs, 1,000 years ago, the Vikings were cultivating Greenland. Temperatures move in cycles, perhaps influenced by solar activity. Humans have the hubris to believe we do everything, but nature is a lot stronger.

Anyway, behind Kyoto is a political agenda, directed by people who detest freedom. Science is not at the root of their cause; it is only a weapon to wield.

Second, even if the alarmists are right, Kyoto is no solution. It would plunge the world into recession for at least the next 10 years. That would harm developing countries, which depend on our market to sell their own goods. Estimates are that U.S. GDP would drop by 3 to 4 percentage points, and European GDP would fall even more since Europe is less resilient.

Kyoto would set draconian targets on emissions of carbon dioxide, the stuff we exhale, the stuff that makes plants grow. CO2 is not a pollutant. It is the opposite of a pollutant. It is a non-polluting emission that results when pollutants are removed from the air. Yes, CO2 can heat the atmosphere, but no one knows how much humans influence that heating. Certainly, the vast majority of CO2 emissions occur without human intervention.

Cutting CO2 emissions is extremely costly since the only way to do it at this point in history is to reduce the use of fossil fuels, and since those fuels are the inexpensive leverage that allows an economy to grow, cutting down on them can be disastrous to economic growth.

Yet we are now seeing mini-Kyotos popping up all over. They have been introduced in two dozen states. The Heartland Institute, in a study that our website commissioned, looked at the costs to state budgets of these bills. The results in New York state are mind-boggling, yet the legislature there is seriously considering a mini-Kyoto bill.

Kyoto is an example of the precautionary principle run amok. As Cass Sunstein of the University of Chicago recently wrote: "The most serious problem with the precautionary principle is that it offers no guidance... It forbids all courses of action, including inaction." He cites, for example, genetically modified food, which offers significant health and economic benefits and to date has been safe in the United States, where GM corn and soybeans have been consumed since the mid-1990s.

Is there any risk at all in GM food? Of course. And since we have not consumed such foods for a long time, the risk can't be precisely quantified. For that reason - not to mention the promotion of isolationist policies that help domestic farmers - Europe has banned GM imports.

But the truth is that we can come to an approximation of the benefits, which are enormous, and the risks, which appear small. The same for the use of nuclear power.

There is really no definition of the precautionary principle except the most vague. Sunstein puts it this way: "the principle counsels that we should avoid steps that will create a risk of harm; until safety is established through clear evidence, we should be cautious." In other words, just the possibility of harm is enough to ban an activity or substance.

As the Wingspread Declaration of 1998, issued by a group of environmentalists, states: "When an activity raises threats of harm to human health or the environment, precautionary measures should be taken even if some cause-and-effect relationships are not established scientifically."

In other words, forget the science. Just ban it.

Consider the case of smokeless tobacco - chew, snuff or dip are some of its more common names. This product has been banned in the EU and Australia while cigarette smoking, despite its proven harmful effects, remains legal throughout those same parts of the world. And Europeans really know how to smoke! I am not advocating that cigarettes be banned, of course. I just find it absurd that the precautionary principle should apply to the non-proven activity and not to the proven activity.

Now, some of the same people who pushed for the ban are starting to reconsider. They are advocating that smokers switch to snuff as a way to reduce health risk. The reason: science has shown they were wrong. Sweden is the only country in Europe where sucked snuff can be sold, and an article in a professional journal found that not only does Sweden have the lowest incidence of smoking diseases in Europe, but according to Prof. Robert Nilsson of Stockholm University, "it has not been possible to detect any significant increase in the incidence of cancer of the oral cavity or pharynx" among Swedes.

Clive Bates, director of Action on Smoking and Health, a British group, said that "the use of nicotine through oral snuff is much less harmful than smoking." And David Sweanor, senior legal counsel to the Non-Smokers Rights Association in Canada, draws the obvious conclusion: "It is increasingly being recognized that many of the existing 1 billion smokers worldwide are unable or unwilling to quit smoking. Support is therefore growing for the proposal that tobacco-related health risks may be reduced by switching existing smokers to less harmful nicotine-containing products."

In an article in the Wall Street Journal Europe earlier this month, Roger Bate, a fellow of the International Policy Network and a TCS columnist, quotes a statement by anti-smoking advocates who actually challenged the precautionary principle in the case of snuff.

Next month in London, TechCentralStation is co-sponsoring, with the group, a conference titled "Panic Attack" - which tries to set risk in perspective. Risk-taking is at the heart of the "animal spirits" that have made free-market economies prosper. But, government, in league with environmentalists and other political groups, is using the possibility of risk as a way to limit freedom.

We can't let it happen.

Technology has the potential to exponentially increase our freedom, which is why government and the sycophants and cynics who try to use it for their own selfish ends, want to limit biotechnology, telecom competition, revolutionary software, the Internet itself. And at the same time, these people want to suck capital out of the private sector for use in the public, raising more and more taxes.

Yes, government has an important role in preserving freedom against real threats from people who want to destroy this nation - as we have seen in Iraq and Afghanistan. But too often, government is an obstacle to freedom - an obstacle we need to remove. Now.

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