The Hot Mess Of The Free Market’s Side Effects

Ah, the sound of your neighbor’s car alarm going off in the middle of the night. The reeking smell of a cigarette smoker upwind. The tumor in your lung tissue caused by car exhaust on your drive to work.

In the incredibly sophisticated field of economics, we call these little gifts “externalities,” the side effects of economic transactions. When two parties in a market agree to buy/sell something, the effects of the decision aren’t confined to the contracting persons/entities. Instead, because we live in a world of butterfly effects, every agreement reverberates beyond those who make it. With complicated modern goods and services, that’s especially true.

In the field of economics, we like to celebrate markets for their efficiency. I have fifty bananas and want fifty dollars, you have fifty dollars and want fifty bananas, a voluntary market exchange makes everyone better off. But the sloppy side effects of commerce, the butterfly effects, cut into the level of efficiency a system can claim, because it’s no longer so clear-cut that “everyone” is benefiting from a transaction. Thus, in economics, there is a tendency to minimize the importance of externalities, to suggest they’re rare or insignificant.

This is why there are several widely-used synonyms for externalities in economics, and they share a tendency toward the cutesy and diminutive. One popular term is “neighborhood effects,” e.g. the car alarm example, where we admit there are external effects of commerce but they’re limited to your immediate vicinity and often have an “aw, nuts” character to them. Another euphemism is “spillovers,” since the ripple effects of economic activity “spill over” onto other parties. (Aw, we made a widdle spill!)

But externalities are no laughing matter. Global climate change, and every single ecological and economic ramification it comes with, is an externality. So are desertification and most of the wave of animal extinctions across the globe. In the aggregate these things get pretty serious, and can reach far beyond the horizon of any individual consumer. They undermine the pretense of economists that markets are highly efficient. If you want to find out why these “spillovers” matter, just ask a Gulf fisherman.

Consider a happy American, eating. The meal might be the enduringly popular fast-food model—a burger with fries and a soft drink. To the consumer, the transaction is simple: you drive to the McDonald’s, choose some greasy calorie dump, swipe your plastic card, and leave with a steaming bag of factory-processed food. As long as you think the food is worth the price, this market transaction is going to happen.

But there are side effects. For example, both the burger and the soda were probably produced with corn. American feedlot cows are often fed cornmeal to fatten their tissues, and the main U.S. soda sweetener is corn syrup. So what? Well in the developed world, we boost our farm productivity with fertilizers, chemicals produced from oil or natural gas that improve crop yields. A variety of commercial fertilizers are on the market, but often their main feature is to add nitrogen to the soil—nitrogen being a limiting element to the growth of many plants and crops. So the use of this fertilizer is a major part of producing your disgusting American fast food meal, including not just the corn but also the wheat in the bun and maybe the potatoes in the fries.

But fertilizers are added to many developed-world farms with great abandon, often with little care toward directing them to the growing plant roots, instead spraying them all around the rows. When the wet Midwestern winter and spring arrive, a good deal of this deployed fertilizer is washed off the farmland, directly from the surface or through shallow soil layers, and into the farm’s irrigation or wastewater system. This means the swept up fertilizer runoff ends up in the streams and creeks around commercial farms, and then accumulates in the great rivers draining agricultural regions.

Having all this spare nitrogen in stream and river water has real consequences. Eventually, the flow of fertilizers reaches the ocean. The huge volume of nitrogen compounds crazily and enriches the growth potential of this water, a process called “eutrophication,” a second-degree externality, caused by the first externality of the farm runoff. This, in turn, enables the growth of algae, which grow faster with additional nitrogen, just like our crops do. The suspended organisms collect into the bigger rivers as water flows down the regional basin, until reaching the ocean. The algae have short life spans and die. Once they do, their remains sink and are consumed by coastal ocean bacteria. This process consumes the dissolved oxygen present in fresh- and saltwater bodies. Because of the vast amount of nitrogen from making our American food, the amount of algae in the river outlets is huge, and the consumption of oxygen from their decomposition is likewise enormous.

It may seem weird to worry about the level of oxygen in the seas—everyone knows you can’t breathe underwater. However, people who are not self-injuring imbeciles may be aware that there is dissolved oxygen in most bodies of water in various amounts, and this of course is how animals like fish breath through their gill systems. Oxygen is essential for most forms of animal life, from fish to shrimp to squid. So the huge blooms of algae that occur in estuaries are actually a very big deal, ecologically and economically. Consider the Gulf of Mexico, the large saltwater body that the Mississippi River drains into, with water flowing from a giant part of the North American landmass. As the river dumps millions of tons of nitrogen-rich fertilizer into the estuary annually, and the resulting algae decompose, the oxygen levels fall to such low levels that sea animals can’t live—creating an area of very low dissolved oxygen, or “hypoxia.” These hypoxic regions are more often referred to as “Dead Zones,” with only some microorganisms able to survive.

According to NOAA, the National Oceanic and Atmospheric Administration, the dead zone in the Gulf this year is the biggest ever measured, with hypoxic conditions present in an area the size of New Jersey. The scientific literature documents how “Organisms that can swim, such as fish and shrimp, flee the area. But less mobile creatures, such as starfish and clams, desperately seek oxygen by abandoning the security of their sea-floor burrows or climbing to high points that might penetrate oxygenated waters. Some brittle stars even stand on their points, stretching to catch some oxygen.”

Some dead zones occur naturally, since even rivers draining undeveloped areas still bring in more nutrients than usual after heavy rainfall in the drainage basin, which can encourage far more modest blooms of algae in natural conditions. Geologists have found fossil records that prove previous episodes of natural hypoxic conditions in the Mississippi estuary after heavy rains and floods, going back to the early 19th century and well before the advent of large-scale commercial fertilizers.

But the artificial dead zones have grown with the worldwide growth of fertilizer use, taking off after World War II. The spike was especially dramatic in the U.S., at a time when driving and fast-food diets were becoming American staples. Jack Davis observed in the Alabama Review that “In a not-so-surprising correlation, the physical size of Americans in the lifetime of boomers grew together with the dead zone.” And thus, our fertilizers become infertilizers.

The state-sized dead zones have their own knock-on effects. Notably, they force the fishing industry to travel further, to find more oxygenated areas or even the margins of the hypoxic zones, where mobile marine life clusters. The conservative Wall Street Journal notes that “Gulf Coast shrimpers are having to travel farther to catch their harvest… Further travel… causes fishermen to crowd into more-limited areas and requires higher fuel expenses. The catch also tends to come in smaller.” Fishermen complain “It’s devastating for us… It kills everything in the water… Instead of talking about it, we need to start doing something about it.”

Traveling further to fill their nets of course implies that the zones are causing a third-degree externality, triggered by the original externality of the runoff and the secondary externality of the dead zone itself. This entails higher fuel costs for the often already-strapped fishermen, but of course also further increases carbon emissions, leading to a fourth-degree externality in the chain reaction kicked off by your Value MealTM.

An elaborate analysis in the Proceedings of the National Academy Sciences provides robust evidence that the dead zones are not only causing higher fuel use in the Gulf but also increasing the price of large shrimp relative to smaller shrimp. This is because low oxygen suppresses opportunities for shrimp growth and thus limits the harvests of large shrimp, driving up its relative price. This, too, is yet another side-effect of the commercial activity of farming a thousand miles away, another fourth-degree externality. Furthermore, it’s robustly expected among scientists that climate change itself will decrease the size of fish worldwide, as specimens reach their optimal metabolic rate earlier than fish in cooler oceanic eras. So the shrimp trawlers will not be alone in bringing in skimpier hauls in the future, even as the crop-damaging impact of higher temperatures is expected to be fought by farmers using more fertilizer. This means dead zones are self-reinforcing, causing and caused by higher carbon emissions.

But despite these grave environmental developments and rotten economic outcomes for the regional workforce, Americans can enjoy their McMuffins in peace. Environmental scientists with Iowa State surveyed fellow residents of the giant Mississippi basin, finding that only 11% “were even aware the dead zone exists.”

It should be remembered too that the oceans are already a pool of externalities, owing to far more of our economic activity than fertilizing crops. Numerous scientific reviews have documented the long-lasting scars of our serial oil spills, with the prominent US science journal Nature reporting previously-undescribed forms of seafloor slimes and wildlife harm from the novel combination of petroleum and detergents employed at the site of the Deepwater Horizon blowout. They suggest that the chemical dispersants, designed to be used on surface oil, effectively kept much of the oil from the surface where TV cameras could see it, and kept it at depths and forms that are especially deadly to young organisms, and “more likely to affect even the smallest creatures.”

The list of economic ripple effects in the seas is long, from the acidification of waters caused by chemical dissociation of carbon dioxide emissions to the behavior-warping, deafening noise of modern commercial shipping and naval vessels. Floating plastic patches in the centers of the oceans’ currents and the spiking species extinctions from habitat destruction add to the toll. It’s an open question just how many of these little “neighborhood effects” the ocean systems can handle before major collapses in function.

The role of the dead zones in this possible future may be bigger than we imagine. Both scientific and economic sources are observing that the measured relation of hypoxia to seasonal runoff suggests that the over-rich nitrogen is building up in the watershed over the years, in sludgy riverbeds and shallow wetlands, and that it will therefore persist long into the future regardless of how quickly humans may respond to the problem. Researchers studying past episodes of disastrous worldwide drops in oxygen levels due to historic climate change find their work is “destined to become uncomfortably applicable in the not-too-distant future.”

That’s a problem for our economy. But also for economists.

With our happy history of trivializing today’s overlapping, self-reinforcing externalities, it’s unsurprising that we economists have not built a stellar record of helping to address them. That hasn’t been made any better by the corporate money that floods the economics field, or the fact that Donald Trump has been appointing right-wing hacks to positions requiring the services of competent economists.

Consider the tenure of Scott Pruitt, former Oklahoma attorney general and shale drilling hand puppet, at the helm of the Environmental Protection Agency. Pruitt has made no secret of his antagonism to the basic mission of the EPA before and since his appointment, and has gone about aggressively dismantling its limited regulations with as much discretion and secrecy as possible.

One major Obama-era regulatory regime targeted by Pruitt is the Waters of the United States, which would expand existing federal regulations for larger bodies and extend them to adjoining wetlands and smaller rivers. Originally, the EPA’s staff economists had estimated the costs to farmers and real estate developers, ranging from $236 to $465 million. But they found the policy would also prevent costly pollution, creating an estimated savings of $555 to $572 million—an obvious net gain on sheer money terms, to say nothing of the inherent value of these natural systems.

The national press reports that in June, Pruitt’s lieutenants instructed the EPA economists to write a new analysis of the rule, one with the costs included but not the benefits. One of the many recent retirees from the Agency told the New York Times, “On June 13, my economists were verbally told to produce a new study that changed the wetlands benefit…They produced a new cost-benefit analysis that showed no quantifiable benefit to preserving wetlands.”

Anyone with experience arguing with conservatives will see how annoying this is, since the right-wing canard since the advent of the environmental movement has been that while liberals may point to nice benefits of government programs for environmental protection (or education or welfare), they fail to consider all the costs. These are alleged to include lower business investment and economic growth. So we get examples like Milton and Rose Friedman, the famous conservative authors, arguing against the EPA by insisting it has “no effective mechanisms to assure the balancing of costs and benefits.” To the Friedmans, this meant the EPA was bound to strangle business with endless burdensome regulations. Looking at the Pruitt case however, it appears that if the EPA has no mechanism for doing so it is because one of them has been fully chopped out of the picture—the one that argues for EPA action.

Likewise, consider the great U.S. libertarian Henry Hazlitt, who introduced Hayek and other right-wing Austrian School economists to American readers. He wrote that anyone favoring government intervention is failing to see the “secondary consequences,” which are held to be less favorable than the near-term positive results. So tax money spent building a bridge employs people, but the tax collections reduce consumer buying power which would have created other jobs in the free marketplace. Similarly, an increase in the minimum wage has the obvious outcome of raising immediate purchasing power for the low-wage workforce, but fear the heinous secondary consequences of higher inflation and unemployment!

But notably, these secondary consequences that Hazlitt refers to are only apparent among public policies. Side-effects of private commerce somehow fail to be included. This right-wing practice, of bringing out fine economists to draw attention to the secondary consequences of public policies but utterly failing to mention any in the capitalist marketplace, continues to this day. Every time a Freedom Caucus member goes on Fox News and rants red-faced against taxes collected by The Government, the spotlight focuses laser-like on the downside, and never mentions the legitimate benefits provided by public programs the Fox viewer typically relies on. So the Friedmans’ argument that costs are not considered alongside benefits by liberals has a mirror image—on the Right, the costs of the EPA and unions and public employment are foregrounded, while the benefits are neglected or just ignored. Meanwhile the benefits of entrepreneurs and investment are celebrated, while the side-costs and externalities are neglected. It is the conservative tradition, following its long heritage of intellectual opportunism, that is unavoidably guilty of its own accusation. Irony loves company!

We should cut through the despair a bit here and note that there are proposals to take near-term action to somewhat reduce the incidence of the dead zones. Simple protection of near-creek trees and wetlands allows for significant filtration of nutrient-laden runoff before it’s swept into headwaters, and tiered, two-stage ditches have been used in some states to further limit new additions to the built-up problem. However, the Mississippi River Gulf of Mexico Watershed Nutrient Task Force, set up to monitor and propose these ameliorative measures for hypoxia, found that the mid-summer area of hypoxia in the Gulf remains close to triple the task force target, and the main factor appearing to influence its size is how wet the spring was in the Midwest.

So, in consideration of this tangled mess of an economic-ecological system, will we be able to rise up to overthrow capitalism before its neglected “spillovers” utterly ruin the oceans and skies, along with beautiful species and essential ecosystem services? Or will the dead zones, and their cratering oxygen levels, only grow in the future?

Don’t hold your breath.

Illustrations by C.M. Duffy