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While traveling this weekend, I got a chance to begin Alan Greenspan’s new book, The Age of Turbulence. It’s a pretty fun read, blissfully light on Fedspeak.

(Apparently, Greenspan’s gift in that department was hereditary. Early in the book, he notes that his father had written a book on the New Deal entitled “Recovery Ahead!” The elder Greenspan’s inscription read: “To my son, Alan: May this my initial effort with constant thought of you branch out into an endless chain of similar efforts so that at your maturity you may look back and endeavor to interpret the reasoning behind these logical forecasts and begin a like work of your own. Your dad.”)

In the gazillions of reviews that have appeared so far, one passage from the book has been mentioned time and again. (The WSJ even sent out a news release highlighting it.) Referring to last November’s congressional elections, the oft-quoted passage asserts: “The Republicans in Congress lost their way. They swapped principle for power. They ended up with neither. They deserved to lose.”

Republicans these days have become big spenders and meddlers. I fear this may be an inevitable result of so-called “compassionate conservatism” — which has turned out to be a conservatism that doesn’t like to say no. Our Compassionate Conservative In Chief, for example, went nearly six years without picking up the veto pen. By contrast, Jerry Ford, who laid the groundwork for the regulatory reform movement, vetoed more than sixty bills in less than three years, signaling to Congress that pork and excessive intervention wouldn’t be tolerated.

Apparently, it’s not compassionately conservative to let farmers struggle and eventually have to change what they’re doing (i.e., to reallocate resources to a better use) when low-priced agricultural imports show up. So we got a $250 billion handout in the May 2002 farm bill, and utterly nonsensical ethanol mandates loom on the horizon.

And it’s not compassionately conservative to permit domestic steelworkers to suffer because of imports, so we got steel tariffs to go with our ag handouts. (The tariffs were subsequently lifted when the WTO cried foul.)

And it’s not compassionately conservative to the teachers and administrators at consistently bad public schools if we give parents of students the freedom to spend their federal education dollars on private schools. So we dropped vouchers from No Child Left Behind (but kept all the federal mandates).

I could go on for quite a while here, but you get the point.

The good news is that there’s another form of conservatism out there. While it might look a little gruff on first glance, it’s based on respect for individuals and is, I believe, ultimately compassionate.

Now I don’t fancy myself a conservative. I’m a classical liberal (or, as Stephen Bainbridge might say, a “small l libertarian“). But if I were to embrace conservatism, this is the type I’d choose. Greenspan paints a nice picture of it in describing his old boss, Ronald Reagan:

What attracted me to Reagan was the clarity of his conservatism. There was another line he often used on the stump: “Government exists to protect us from each other. Where government has gone beyond its limits is in deciding to protect us from ourselves.” A man who talks on such terms is clear on what he believes. Very rarely in those days would you find conservatives who didn’t fudge on social issues. But Reagan’s kind of conservatism was to say that tough love is good for the individual and good for society. That proposition starts with a judgment about human nature. If it’s accurate, then it implies much less government support for the downtrodden. Yet mainstream Republicans were conflicted about thinking or talking in such terms, because they seemed contrary to Judeo-Christian values. Not Reagan. Like Milton Friedman and other early libertarians, he never gave the impression he was trying to be on both sides of the issue. It’s not that there wasn’t sympathy for people who, through no fault of their own, find themselves in dire straights; nor would you find any less personal willingness than among liberals personally to assist the downtrodden. But that wasn’t government’s role, according to Reagan. Tough love, in the long run, is love.

The folks over at Lawyers, Gun$, and Money are chiding me for ignoring (or, as they say, never having heard of) positive externalities. A couple of days ago, I criticized a NYT editorial calling for the federal government to “throw its weight behind” private efforts to develop alternative fuels. My main point was that the best thing the government could do would be to let energy prices rise in response to forces of supply and demand. High prices, I argued, have spurred — and will continue to spur — private investment in alternative technologies. Government incentives to encourage R&D, I argued, could cause firms to make investment decisions aimed at appropriating government money rather than at pursuing the most fruitful avenues of research.

According to the folks at Lawyers, Gun$, and Money, this argument ignores the positive externalities (i.e., benefit spillovers) associated with research into alternative fuels: Because such research is likely to create public benefits that cannot be appropriated by the people doing the research, it is proper for the government to subsidize the research.

While I agree that research on alternative fuels likely does create positive externalities, I still believe the best policy is laissez-faire. If the mere existence of positive externalities could justify government subsidization of the process that creates them, the government would be subsidizing a heck of a lot of stuff. Seriously, think about it. All sorts of activities create benefits not appropriable by their creators, but the government subsidizes only a fraction of them. Now, one might argue that the externalities at issue here are so substantial that subsidization is warranted, but I’m not so sure. To see why I’m skeptical consider some insights from the Austrian and Public Choice schools of economics.

First the Austrians. A fundamental and profound insight of the Austrians (e.g., F.A. Hayek) was that the information necessary to determine how resources ought to be allocated to maximize social welfare is not given to anyone in its entirety. (See, e.g., here.) An implication of this insight is that centralized bureaucrats simply don’t know how the economy should develop — e.g., which technologies should ultimately dominate. Given their ignorance, bureaucrats should act modestly, attempting not to determine end states (i.e., how productive resources ultimately get allocated) but to create the sorts of institutions that allow markets to flourish. Markets, then, will generate prices that convey the information necessary to allocate resources their highest and best use.

Next, Public Choice. Theorists from that school have helped us see that individuals do not stop acting as rational self-interest maximizers when they step into the public square. Governmental power is a commodity to be bought and sold, as is government largess. An upshot of Public Choice theory is that a government that routinely doles out goodies is likely to be captured by well-organized interest groups, to the detriment of the general public. Interest groups that stand to gain from government hand-outs will reallocate resources away from production toward lobbying.

So it seems there are at least three relevant sources of potential welfare loss here: (1) the allocative inefficiency that occurs because of positive externalities, (2) the inefficiency resulting from bureaucratic mistakes in determining how productive resources should be allocated, and (3) the allocative inefficieny and deadweight loss that result when businesses chase after government hand-outs.

With respect to alternative fuels research, my hunch (and it’s admittedly a hunch) is that the last two potential welfare losses are, taken together, greater than the first. There’s huge money to be made by developing alternative fuels and, consequently, lots of private resources are being funneled toward such efforts. If government starts “throw[ing] its weight” around now, as the NYT suggests that it do, it’s likely to adversely affect how R&D dollars are spent. Governmental incentives are narrowly targeted, and legislators and bureaucrats at this point simply don’t know what’s the proper target. I’d rather see them stay out of the business altogether and let those closest to the action determine how productive resources should be allocated. Those folks will tend to send resources in the right direction, unless they’re distracted by the possibility of a governmental handout, in which case they’ll expend resources on lobbying (deadweight loss) and tailor their research efforts toward getting government’s goody.