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When the Color of Unemployment Is Green

Monday, October 31, 2011

Environmental regulations can have many benefits. But they can also kill jobs. So what should be done today?

Arguing that environmental regulations are job destroyers, Republican presidential candidate Rick Perry recently asserted that Environmental Protection Agency (EPA) regulations on power plant emissions were responsible for the loss of 500 jobs at Texas power generator Luminant. However, on MSNBC, Representative Ed Markey (D-Massachusetts) said “environmental regulations create more jobs.” Perry’s disagreement with Markey raises an important question for policy makers: At a time of high unemployment, should we relax environmental regulations to enhance job creation?

This question runs up against the philosophy of the Obama administration, which argues that we should promote environmental regulations now because they will create green jobs in the future. As the White House website says, "The transition to clean energy has the potential to … create millions of jobs.” For instance, the administration contends that regulations on greenhouse gas emissions will ultimately stimulate job creation in alternative energy as businesses shift their activities in response to the regulations. In his New York Times blog, Paul Krugman explains the logic: "Tighter ozone regulation would actually have created jobs: it would have forced firms to spend on upgrading or replacing equipment, helping to boost demand.”

But while environmental advocates can imagine future green jobs that could result from environmental regulation, their calculations often miss the existing not-so-green-jobs that the regulations eliminate. Business adherence to environmental rules imposes costs that could have been spent on other purposes. This means that environmental regulations come at the cost of lost jobs.

While environmental advocates can imagine future green jobs that could result from environmental regulation, their calculations often miss the existing not-so-green-jobs that the regulations eliminate.

For example, MIT economist Michael Greenstone found that changes to the Clean Air Act eliminated 590,000 jobs over a 15-year period (1972 to 1987). A July 2010 paper in the American Economic Journal: Applied Economics by Rema Hanna found that U.S.-based multinationals increased their non-U.S. assets by more than 5 percent and overseas production by more than 9 percent in response to Clean Air Act legislation. Thus, as Hanna concludes, “American environmental regulations have contributed to the flight of manufacturing.”

The experience in Europe is little better. The American Enterprise Institute’s Kenneth Green finds, “Green programs in Spain destroyed 2.2 jobs for every green job created, while the capital needed for one green job in Italy could create almost five jobs in the general economy.”

Of course, as Case Western Reserve University Professor Jonathan Adler rightly notes, environmental regulations have many benefits. They improve our health and let us live longer, and that’s something we all want. Paul Krugman explains on his blog that much economic analysis shows that we need more environmental regulation because “pollution does real, measurable damage, especially to human health.”

Academic economists evaluating the costs and benefits of environmental regulation rightly tend to focus on social welfare–whether we are better or worse off overall from that regulation. Hanna, for example, is careful to write that “these findings should not be misinterpreted as a criticism of environmental law nor a call to reverse environmental policy within the United States. Extensive research has shown that these policies are effective at reducing air pollution concentrations and that cleaner air provides substantial health benefits. Thus, it is possible that the welfare gains from the shifting investment abroad may still outweigh the costs.”

At a time of persistently high unemployment, improving social welfare may be too abstract a goal for most Americans, who simply want jobs.

Focusing on overall costs and benefits might be the right way for academics to evaluate environmental regulation, but that approach is wrong for policy makers right now given the need for our elected officials to focus on Americans’ key objective: immediate job creation. The EPA has already put many safeguards in place since it was founded in 1970. Right now isn’t the time for adding more regulations and risking the loss of jobs or undermining the potential for job creation. At a time of persistently high unemployment, improving social welfare may be too abstract a goal for most Americans, who simply want jobs. After all, most unemployed people would benefit from having a job, even if getting a paycheck again meant the river cutting through their downtown wasn’t as clean as they would like.

Much like the Federal Reserve does not worry much about fighting inflation when unemployment is the problem, when jobs are scarce, creating them should be our highest priority. Until we get our unemployment problem under control, we should impose a moratorium on any new environmental regulations. Now is the time to stimulate job creation. We can worry about adding environmental regulations in the future, when unemployment is less of an issue.

Scott Shane is the A. Malachi Mixon III Professor of Entrepreneurial Studies at Case Western Reserve University.

FURTHER READING: Shane also writes “Karl Marx’s Long Shadow in Eastern Europe,” “Understanding Just How Harmful Obama’s Tax Hikes Would Be,” “Scrap the Accredited Investor Rule,” and “Why Small Business Wants Repeal of ObamaCare.”

Image by Darren Wamboldt | Bergman Group

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