The Debt Ceiling, and Evaluation Of Economic Efficiency

Now that the debt ceiling debate's been settled, a 12-member congressional commission will scrutinize where and how taxpayer dollars are spent. Presumably, some of those conversations will revolve around efficiency-which programs generate the most return for the taxpayers' investment. In that spirit, a couple items related to the Environmental Protection Agency (EPA) caught our eye and seem worthy of examination.

The EPA is one of those government creations with a nice sounding name and, we're sure, good intentions. But sometimes, those nice intentions don't add up to a return worthy of dollars spent. As discussed recently in The Wall Street Journal, the EPA has decided to fine gasoline refiners for failing to meet cellulosic ethanol purchase standards. The problem is no one produces the type of ethanol mandated in sufficient quantity. Yes, the federal government is proposing to fine companies for failing to purchase sufficient quantities of something that doesn't really exist. No matter your view of the desirability of alternative energy, it's hard to disagree penalizing companies for failing to comply with a mandate it's impossible to comply with is hardly the picture of economic efficiency (or common sense, really). Not to mention the fact that even if sufficient amounts of cellulosic ethanol were being produced, encouraging production through what amounts to a government subsidy is hardly the key to free market, economic success.

But that's not all. The EPA is mandating New York build a cover for a Yonkers reservoir to prevent cryptosporidium contamination. Now, obviously no one wants to get sick, but as the Journal notes, "The pathogen hasn't been found in the reservoir despite years of tests and is barely present in the city, with about 100 confirmed cases of illness each year due to the little critter." Yet the EPA claims covering the reservoir would prevent between 112,000 and 365,000 cases annually. Oh, and that reservoir cover is estimated to cost over $1.6 billion. $1.6 billion to prevent 100 confirmed cases of illness-that's a cost of $1.6 million per case.

Ultimately, both EPA mandates create higher prices- for energy in the former case and water in the latter. The problem isn't so much the policies' intent-there's value in alternative energy source development, and there's certainly a public health interest in ensuring safe, clean drinking water's provision. But the EPA rarely takes time to consider such mandates' costs. And make no mistake, there's definitely a cost. Consider: Potential penalties paid go to the government-instead of R&D or hiring more workers or, or, or. Such funds find nearly endless uses in the private sector's hands-limited only by sensible regulation and individuals' abilities to think innovatively. But the government's best use for money is generally on another program (some of which are inarguably critically provided by government, like national defense, infrastructure maintenance, etc.). And programs, like the EPA, that aren't in a competitive environment potentially detract from the private sector and don't have to justify their existence by showing a return on investment.

Now, none of this is to say we're opposed to all regulation-in fact, we're all for well-reasoned rules. After all, we're human, and good laws ensuring a level playing field for all are a plus for businesses and consumers-a basic value of our free-market society. But ill-advised regulations (like those frequently emanating from government entities like the EPA) can easily be drains on the economy and productive uses of capital longer term.

But as an investor, focusing on how the government should or should not spend taxpayer money is often a feckless exercise. Whether you like or loathe policy direction, remember, changing regulation creates winners and losers, propping up some businesses and industries (which might not otherwise survive in a free-market environment) and crowding out others. We'd argue, over the long term, firms that can ultimately survive because of their innovation and efficiency are likelier to grow and flourish. In the nearer term, regulation creates very real imbalances that may tip the scale in what might from an economic perspective be a surprising direction.

This article constitutes the views, opinions, analyses and commentary of Fisher Investments as of August 2011 and should not be regarded as personal investment advice. No assurances are made Fisher Investments will continue to hold these views, which may change at any time without notice. In addition, no assurances are made regarding the accuracy of any forecast made herein. Past performance is no guarantee of future results. A risk of loss is involved with investments in stock markets.