Alexandria Ocasio-Cortez just revived a classic argument by conservative economist Milton Friedman about who pays for pollution

  • At a US congressional hearing, Rep. Alexandria Ocasio-Cortez asked, “Should Wells Fargo be held responsible for the damages incurred by climate change due to the financing of fossil fuels?”
  • This is an economic debate about the concept of “negative externality,” most famously addressed by the conservative Nobel-winning economist Milton Friedman.
  • Friedman believed the government should tax polluters.
  • Conservatives love Friedman, but they don’t talk about “negative externality” theory much.

Say what you want about US Rep. Alexandria Ocasio-Cortez, but she certainly isn’t afraid to talk about the fundamentals of economics.

On Tuesday, the democratic-socialist congresswoman from New York confronted Wells Fargo CEO Timothy Sloan on the issue of who should pay for environmental disasters financed by his bank.

She drilled into Wells Fargo’s relationship with the Keystone and Dakota Access oil pipelines, which she said had leaked five times since they were built, spilling 210,000 gallons of oil across South Dakota.

“Should Wells Fargo be held responsible for the damages incurred by climate change due to the financing of fossil fuels?” she asked during a hearing of the US House Financial Services Committee.

She suggested that the damages could be tallied by adding up the costs of building new sea walls, infrastructure repair, coastal-erosion prevention, oil-spill cleanups, and fighting wildfires.

“I don’t know how you’d calculate that, congresswoman,” he replied, adding: “We don’t operate the pipeline.”

It wasn’t a very satisfying exchange – unless you’ve read some of the work of Milton Friedman, the Nobel economist who died in 2006. His laissez-faire thinking still provides the modern underpinning for pro-free-market conservative thought. “The GOP has long prayed at the temple of Milton Friedman,” as the economist Maximilian Auffhammer put it in 2016.

One of Friedman’s most important ideas was ‘negative externality,’ and conservatives don’t talk much about it

But, as economists know, Republicans also cherry-pick their Friedman. One of Friedman’s most important ideas was on the concept of “negative externality,” and conservatives don’t talk much about it.

Put simply, a negative externality would be an oil spill from a pipeline. Oil companies and their customers are happy to enjoy their supplies of oil. But if that oil gets loose and pollutes a river, then the damage is inflicted on the local neighbourhood and wildlife.

The cost of cleaning it up is likely to be borne first by government agencies. Everyone ends up paying for the cleanup with higher taxes, or with excess medical bills, or by living in a polluted environment.

Friedman’s best answer to this problem came, improbably, on Phil Donahue’s TV show in 1979, when he said the role of the government in tackling car pollution should be “to impose a tax on the amount of pollutants emitted by a car” so as to “make it in the self-interest of the car manufacturers and of the consumers to keep down pollution.”

“There is a case for the government protecting third parties, protecting people who have not voluntarily agreed to enter” an economic exchange, he told Donahue, arguing that there was a better case for emission control than for mandatory airbags.

‘Who will pay for climate change?’

Milton FriedmanMultimedia EntertainmentMilton Friedman on Phil Donahue’s TV show in 1979.

The climate crisis is an extreme example of a Friedman-esque negative externality. Fossil-fuel companies are heating the planet’s atmosphere, which could ultimately make vast areas unlivable and drive some species into extinction. Yet the companies selling products with high carbon emissions aren’t paying for the damage.

“Institutions can engage in unlimited financing of fossil fuels, building unstable pipelines + reaping profits, but when the bill comes to clean up oil spills & fix damages – they can conveniently kick the can. So, who will pay for climate change?”Ocasio-Cortez tweeted after the Wells Fargo hearing.

Sloan’s answer – “we don’t operate the pipeline” – was brief but accurate.

Debt financing for infrastructure construction is notoriously complicated, involving multiple parties. Why not also attach liability to the investors in that debt? Or the people who offer credit derivatives that insure that debt? Or the investors who sell that debt onward in collateral loan obligations? Or the credit-rating agencies that rate the debt highly when they know it is destroying the planet?

The conversation would perhaps have been sharper if the CEO sitting in Sloan’s chair had been from TransCanada Corporation, or Energy Transfer, or MarEn Bakken, or Phillips 66 – the companies that own the Keystone and Dakota Access pipelines from which their oil spills. (They are also the people guaranteeing Wells Fargo’s debt.)

It’s a gauge of just how damaging their activity is that both Friedman and Ocasio-Cortez have suggested that the costs of their activity should be curbed.

The surprising twist is that Friedman occupies the more traditionally left-wing position here: He outright called for a tax on fossil-fuel pollution, but, interestingly, a carbon tax (the modern equivalent) is absent from her proposed Green New Deal for overhauling US energy infrastructure.

Business Insider Emails & Alerts

Site highlights each day to your inbox.

Follow Business Insider Australia on Facebook, Twitter, LinkedIn, and Instagram.