The Economic Efficiency of the Army's Maneuver Damage Claims Program: Coase, But No Cigar

• Author: Major Jerrett W. Dunlap, Jr.
• Pages: 04

MILITARY LAW REVIEW

Volumes 190/191 Winter 2006/Spring 2007

THE ECONOMIC EFFICIENCY OF THE ARMY'S MANEUVER DAMAGE CLAIMS PROGRAM: COASE, BUT NO CIGAR

MAJOR JERRETT W. DUNLAP, JR.*

It is my belief that the failure of economists to reach correct conclusions about the treatment of harmful effects cannot be ascribed simply to a few slips in analysis. It stems from basic defects in the current approach to problems of welfare economics. What is needed is a change of approach.1

I. Introduction

In November 2002, a column of tracked vehicles from 1st Armored Division plunged off the paved roads and into the plowed fields in the countryside near Baumholder, Germany. The tracks sent mud flying into the air as they conducted battle drills across the German landscape. The unit commanders recognized that the training value of the maneuver exercise was enhanced by the unfamiliar terrain.2 The cost of conducting the maneuver, however, was less certain. While the unit commanders were aware of the fuel and maintenance costs that would be incurred, they were not responsible for paying for the maneuver damage caused by the exercise.

The U.S. Army Claims Service, Europe (USACEUR) employs a civilian engineer, Mr. Craig Walmsley, to coordinate and investigate maneuver damage claims. During the preparation for a cavalry squadron training maneuver in Germany, Mr. Walmsley contacted the commander to discuss possible steps to reduce the maneuver damage caused by the tracked vehicles.3 Mr. Walmsley advised that the vehicles would cause dramatically less damage if the squadron were to replace their worn track pads with new track pads.4 In response, the squadron commander replaced the track pads because of the relatively minor replacement cost compared to the high maneuver damage costs the tracked vehicles likely would have caused otherwise.5

Although this example had a positive outcome, it shows a flaw in the current overseas maneuver damage claims process-commanders are not necessarily aware of the costs their maneuvers create. Commanders do not take such damage into consideration when planning their maneuvers because they do not pay for it. A more efficient result occurred in this case because Mr. Walmsley found a reasonable commander willing to spend unit funds in order to save another part of the Army from spending even more.6 Unfortunately, whether during an overseas training maneuver or a deployed operational maneuver, commanders do not always consider all the costs of their maneuvers.7 Regardless of whether the failure to take the costs into consideration is the result of a lack of information or is intentional, the result is often an inefficient allocation of resources.

This article proposes to shift the source of funding for overseas maneuver damage claims from the U.S. Army Claims Service (USARCS) to the unit responsible for causing the damage. As will be discussed, the underlying Law and Economics theory, relying heavily on the Coase Theorem,8 supports the proposed change. Next, the statutory mechanisms for paying overseas maneuver damage claims will be outlined. Historic trends and Army doctrine related to maneuvers will be examined. Finally, the Law and Economics theory will be applied to the overseas maneuver damage claims mechanisms. Ultimately, this article submits that if overseas maneuver damage claims were to be paid with funds directly from the Operations and Maintenance (O&M)9 budget of the maneuvering unit, rather than from USARCS funds, commanders would have to take those costs into consideration, resulting in a more efficient outcome.

II. Law and Economics Analysis and the Coase Theorem

Law and Economics10 is a well-established economic discipline that continues to generate substantial interest from both economists and legal practitioners.11 Scholarship in this area has expanded beyond the study of fields with obvious economic components, such as antitrust law, to such far-reaching legal fields as criminal law, family law and constitutional law.12 Law and Economics employs economic analysis of the law for three purposes: first, to predict the effects of the law; second, to evaluate the economic efficiency of the law; and third, to determine what legal rules will be implemented due to voter preferences.13 These objectives show the potential value that Law and Economics analysis holds for policy makers. They will have the tools to draft better law if they are able to predict the law's effects, its efficiency, and voters' preferences. At the center of the Law and Economics universe is the widely-recognized Coase Theorem.14 The Coase Theorem has been so far-reaching that Richard Posner calls it "basic to the whole economic analysis of law."15 Coase's groundbreaking article, The Problem of Social Cost,16 is at or near the top of the most highly cited articles by the legal community.17 The Law and Economics community has widely embraced the Coasian approach to dealing with actions that have harmful effects.18

1. Overview of the Coase Theorem

   1. The Pigouvian Approach to Welfare Economics

      An understanding of the Coase Theorem begins with Arthur C. Pigou's The Economics of Welfare.19 Pigou was the chair of Political Economy at Cambridge when he wrote The Economics of Welfare.20

      Consistent with his predecessors at Cambridge, Pigou espoused economic theories that intended to maximize societal welfare through legal or governmental mechanisms such as taxes.21

      A hypothetical example will illustrate Pigou's approach to welfare economics22 and the effect of tort liability rules.23 In this example, pollution from a cement factory injures the property of a neighboring landowner.24 The amount of damages to the landowner is $2000. If the tort liability rules hold the cement factory owner liable for the damages to the landowner, then the factory owner will only produce cement if her profits exceed $2000.25 Any profit less than $2000 would result in a net loss to the factory owner after compensating the landowner. However, if the cement owner has profits in excess of $2000, then it will be profitable to produce the cement and pay the landowner for the pollution damages. Therefore, according to Pigou, establishment of tort liability rules by the government will lead to an economically efficient result.26

      This example highlights several key economic principles related to welfare economics. First, in economic theory, a "perfectly functioning market" produces an optimal number of goods at a corresponding price.27

      Under the Pigouvian approach, the pollution case is an example of an imperfectly functioning market because the social benefit of producing the good is not optimal relative to social costs.28 Economists today refer to this kind of market behavior as an externality.29 The pollution generated by the cement factory, which injures the landowner, is a negative externality30 because the factory owner's activity imposes a cost on the landowner for which the market economy's pricing system does not charge the factory owner.31 In other words, the cost is external to the pricing system.32 Generally, Pigou viewed government-imposed tort liability rules, or some form of tax on the producer of the negative externality, as necessary to force the factory owner to internalize the

      pollution costs in order to remedy the market inefficiencies caused by a negative externality.33 It is this result that Coase attacks.

   2. The Coasian Alternative

      In The Problem of Social Cost, Coase refers to the pollution example described above and concludes that Pigou's "suggested courses of action are inappropriate, in that they lead to results which are not necessarily, or even usually, desirable."34 Coase demonstrated that Pigou failed to consider an alternative to forced cost internalization that would prevent the predicted market inefficiencies,35 that is, the prospect that the landowner and the factory owner may bargain with each other for an economically efficient outcome even without tort liability or another forced internalization.36

      Coase demonstrated his position by using a hypothetical case involving a rancher who owns cattle that have a tendency to stray into a neighbor's crops.37 The hypothetical involving the landowner and polluting factory owner also demonstrates his point. Let us assume there is no tort liability and the factory owner's profits will be less than the $2000 in damages that the pollution causes to the landowner. Pigou would argue that only government intervention would force the factory owner to internalize the costs and make an economically efficient production decision.38 But what would stop the landowner from offering to pay the cement factory owner to not pollute? Using Coase's analysis, if the cement factory owner's profits were $1000 and the landowner's damages were $2000, then the landowner could offer the cement factory owner $1500 to not pollute.39 This would result in an economically efficient outcome that is advantageous to both parties, without requiring government intervention.40

      Coase's hypothetical demonstrates an important outcome called the Coase Theorem. It provides that regardless of any tort liability rule in

      effect, if the parties to a potential agreement are able to bargain without costs related to bargaining, they will reach an agreement that results in "an increase in economic efficiency,"41 if such an outcome is possible.42 This has also been expressed as follows:

      Given perfect knowledge about all alternatives to any problem, and assuming transaction costs are zero, disputants will always rearrange their rights, liabilities, and entitlements in a manner which produces a net gain in their combined well-being.43

      The Coase Theorem lies at the center of Coase's criticism of Pigou.

      Coase stated his Theorem not for the sake of the Theorem itself, but as support for his larger contention that the traditional Pigouvian approach to negative externalities should be reexamined. 44 The purpose of Coase's...