In 1991, the year before I started teaching, Ronald Coase received the Nobel Prize in Economics. In setting out his now eponymous theorem, a centerpiece of Chicago Law and Economics, Coase illustrated with fences and walls. As we enter the third week of the government shutdown, Trump’s border wall is morphing into a (perhaps invisible) fence.
Coase maintained that by focusing on the fairness of outcomes, welfare economists tended to emphasize questions of pure distribution over questions of allocative efficiency. His rejoinder, the Coase Theorem, demonstrated that with rules clearly understood in advance, parties are generally well positioned to contractually achieve efficient results, and also better suited than regulators to properly allocate the resulting gains. More formally, the theorem states that with zero transactions costs and perfect information, resources flow to their most highly valued uses without regard to liability rules. Although many legal scholars have mistakenly interpreted Coase to imagine a zero transactions cost world, his point was precisely the opposite; because transactions costs are typically high, it is critical that legal rules replicate what the parties would have achieved had they had a meaningful opportunity to negotiate outcomes in advance.
Imagine two adjoining plots of land, a farm and a ranch. With no fence, the cattle stray onto the farmer’s land, destroying the crops. Scholars tended to focus on whether it was more fair to impose the burden on the farmer to keep the cattle out or on the rancher to keep the cattle in. Coase eschewed the framing. For him, the more important questions were (1) which activity—farming or grazing (meaning crops or meat)—was more highly valued, and (2) do the neighbors have the proper incentives to bring about the preferred result. Coase demonstrated that with the theorem's express assumptions, the incentives would properly align whether the farmer had the right to enjoin the rancher, forcing her to erect the fence, or whether, instead, absent a liability rule for crop damage, the farmer held the burden to erect the fence himself. Coase then went a step further. On his stated assumptions, regardless of which party held the property right, if the other party valued the contrary right more highly, the parties would negotiate the transfer of the right, once more ensuring the efficient result. If the farmer had the right to enjoin the rancher, the rancher would erect the fence only if the crop value exceeded the grazing value; otherwise she would purchase the grazing rights. And if the farmer did not have the right to enjoin, he would only erect the fence on the same terms, if the crops were more valuable; otherwise, the rancher would pay him to maintain the unobstructed boundary, allowing her cattle to graze. (For a more detailed presentation, see https://faculty.westacademic.com/Book/Detail?id=18210 (chapter 1, part III, and passim).
Trump’s wall would separate Mexico from the US, allegedly to ensure that dangerous persons do not bypass legal means of entry across the southern border. In a press event, held the day the House turned over to Democratic control and that Nancy Pelosi was sworn in as Speaker of the House, Trump said that furloughed federal workers, who he had previously claimed were mostly Democrats, now strongly favored the shutdown as a means of ensuring the wall is resolved in Trump’s favor. Trump further claimed that wall support was unprecedented. In his campaign, Trump promised Mexico would pay for the wall. At the time, I surmised, following Coase, that if Trump somehow managed to offer Mexico a greater reciprocal upside, his promise was, at least theoretically, plausible. After all, if the best outcomes for the contiguous nations are achieved with a wall, then regardless of who pays for it, the wall should emerge. Of course, Mexico does not gain from having a northern border wall, and there was no plausible reciprocal commitment that Trump could offer to render the promise that Mexico would pay other than pure fantasy. The center of political gravity within the US, both in the 2016 presidential election, with Hillary Clinton receiving nearly 3 million more popular votes of nearly 60 million votes cast, and in the 2018 midterm election, with the House falling to Democratic control, has stubbornly remained slightly left of center, yet considerably distant from the Trump's far right base. The wall remains strongly opposed by a significant majority of US citizens.
But the Coasian wall story does not end there. It simply shifts to the political realm. The Coase theorem is indifferent to arguments about fairness and focused exclusively on incentives. Although not immoral, the theorem is, in that sense, amoral. On one side is Donald Trump, who made a promise he knew he could not keep, a Mexico-funded wall. For three reasons, we can dispense with his more recent claim that the savings generated by the new US-Mexico-Canada trade agreement is equivalent: (1) the claimed gains are likely exaggerated; (2) even if real, the gains are not captured tax revenues deployable to fund the wall; and (3) once more, even if real, the gains would arise with or without the wall, making the wall irrelevant to those gains. (Both parties are prone to such errors: contrary to the claims by Congresswoman Alexandria Ocasio-Cortez (D. NY) and Senator Bernie Sanders (D. VT), unless translated into tax revenues, the potential economic savings associated with single-payer health care will not render the program self-financing.) On the other side, we have the political reality that no one believed Trump’s Mexico-will-pay promise and that, by a significant margin, the majority of Americans continue to oppose the wall. From a Coasian perspective, even those domestic realities would not preclude the wall if Mexico stood to gain more from funding it than the US might save from failing to do so. The sole issue, per the Coase theorem, would be who bears the cost. But, of course, Mexico does not want the wall either, meaning neither side does. The only ones who do are Trump and his base, including, especially, particular conservative talk show hosts.
Still, Coasian bargaining looms large. We have two opposing positions, but this time with transactions costs that are enormously high. Every day that this goes on, federal workers go without pay, beneficiaries go without needed federal programs, and entire governmental institutions are halted. In this bargaining game, the negotiation is no longer over the wall; it is over allowing the federal government to resume operations. The wall has become mere side payment to Trump and his base to allow that to happen. Nancy Pelosi (D. CA) and Chuck Schumer (D. NY) put to Trump the proposition of a Continuing Resolution and of passing several pieces of legislation that, prior to the Democratic House takeover, had overwhelming majority, and yes, bipartisan, support. These are not bills that Trump or his supporters oppose, and they would reopen major governmental functions. At the now famous bipartisan meeting, these Democratic leaders asked why Trump would not allow this course of action, thereby avoiding the shutdown, with negotiations over the wall to follow. Although Coase helps with the answer, one needs no Nobel prize. Pelosi and Schumer certainly knew before asking. As long as Trump is imposing genuine pain by failing to carve the wall out of these larger negotiations over whether and when the government will resume business, he stands a shot at getting what he wants, or at least enough of a compromise to placate his base.
Donald Trump is not a nuanced thinker, but he is a consummate street fighter. He knew that despite having been elected as a challenger to the Republican establishment, he could only take that so far. Trump almost certainly never heard of Ronald Coase, but even so, he knew that the real opportunity to construct an ultimate Coasian bargain was after Republicans no longer controlled both Houses of Congress. Once Democrats took control of the House, with Nancy Pelosi now as Speaker, he could blame his nominal political opponents for the bargaining breakdown. An irony in all of this is that precisely because the wall is neither the desired nor efficient Coasian outcome, the only way to avoid the preferred result of failing to fund it is by ensuring that transactions costs are, and remain, painfully and prohibitively high. That, my friends, is precisely what Trump is doing.
As previously noted, the Coase theorem is amoral, not immoral. As for someone with the power to do otherwise, yet who willfully withholds income from eight hundred thousand federal workers and their families, and who suspends vital operations on which countless persons depend, all as a means of catering to his base, well that is quite another story.
I welcome your comments.