One of the hot political debates raging in Washington is the effect the EPA—and specifically, its plans to regulate greenhouse gas emissions—is having on businesses. According to the WSJ, trade associations and businesses single out the EPA as the #1 target when they complain about stifling federal burdens.
Incredibly, a new study from the Political Economy Research Institute (PERI) claims that the EPA’s new regulations will be—you guessed it—good for the economy because it will create hundreds of thousands of jobs. (After all, it’s hard work complying with a bunch of new regulations.)
In the present post we’ll explain the flaws in their approach, and then we’ll give some suggestions for how to provide real economic stimulus.
No Pain, No Gain? PERI’s Case for EPA Job Creation
Here is how the E&E[i] summarizes the new PERI paper on the alleged job-creating benefits of the EPA’s mandates on businesses:
Despite claims that U.S. EPA’s regulations are destroying jobs at a time of already high unemployment, two new sets of air pollution rules for power plants would create hundreds of thousands of jobs over the next five years, according to a report released today.
The power sector is bracing for a slew of new federal requirements, including the proposed Clean Air Transport Rule (CATR), a program aimed at smog- and soot-forming pollution that travels across state lines. By next month, EPA must also propose new limits on mercury and other types of toxic air pollution to replace a George W. Bush-era program that was thrown out by a federal court.
Both sets of rules will require power plants to install new air pollution controls and build new power plants to replace older units.
And according to new research by the Political Economy Research Institute (PERI) at the University of Massachusetts, it will take about 1.46 million years of new labor to make those changes happen over the next five years — the equivalent of 290,000 full-time jobs.
The job-growth estimates were based on projections that the two rules will force the power sector to invest nearly $200 billion to design, build and install equipment between 2010 and 2015. Those costs include about $94 billion for pollution controls and $100 billion for power plants with about 68,000 megawatts of generating capacity, making up for power plants that would be retired.
The projects would directly create about 640,000 years of work through 2015, or 128,000 full-time jobs, the study says. Another 820,000 years of work would be created indirectly, as other companies provide goods and services to the projects.
This new PERI study resurrects the same “green jobs” fallacies in its previous ones, which we debunk here. Our argument is quite simple: The government doesn’t make the country richer by imposing new constraints on economic activity. On the contrary, new regulations hurt the economy because it is now costlier to produce the same amount of output, in this case, electricity.
Glancing through Appendix B of the PERI report, in which they explain the method by which they come up with such counterintuitive conclusions, shows that it truly is based on the crude “insight” that forcing businesses to spend money complying with new regulations, will cause them to hire workers. There is nothing in the PERI study showing that what these workers are doing is beneficial to the economy; it is the mere fact of their hiring per se that is supposed to be the benefit.
To demonstrate the problem with this approach, we’ll do the folks at PERI one better. To repeat their argument: they are claiming that the EPA’s new pollution regulations will create 640,000 years of work directly flowing from the need to comply with the new rules. But if that’s supposed to be a good thing, then why not pass a further regulation specifying that anyone performing upgrades to power plants must work with one hand tied behind his back? We haven’t done a formal simulation as the PERI folks have done, but we bet our augmented regulations would easily require 2 million years of work directly in the generation sector. So the IER plan creates far more jobs than the modest EPA proposal, especially when you factor in the indirect benefits flowing to the massage therapists who have a surge in arm and hand cramps to deal with.
The specific flaw in the PERI approach is that they ignore why people go to work in the first place. The purpose of employment is to create valuable goods and services. In a perfect world, we wouldn’t have to work; we would instead get to buy plasma screen TVs, new cars, and fancy dinners for free, and our electricity would come magically without anyone lifting a finger. But in the real world, we face the onerous task of having to produce things before people can enjoy them. To make sure we aren’t wasting valuable resources, businesses only hire workers who can produce things that customers want to buy.
In this context, if the EPA comes along and slaps on a bunch of new mandates, that doesn’t mean that the newly hired workers are “creating value” in a legitimate sense. Rather, it is more akin to the EPA laying demolition charges and then pointing to the rebuilding crews as proof of how helpful their actions have been.
How to Generate Productive Investment and Job Creation
It is true that right now, businesses are reluctant to hire, and millions of willing workers can’t find employment. Before we can prescribe a solution, we need to accurately diagnose the problem.
One of the biggest factors is that the rules keep changing. Businesses aren’t sure how much they will have to pay for their employees’ health insurance, and proposals for doubling the unemployment insurance tax are floating about. In this context, it’s not surprising that businesses aren’t eager to load themselves up with what may turn out to be huge financial liabilities down the road—i.e. new full-time employees.
Rather than force businesses to comply with new mandates—and thus “create jobs” that serve no productive purpose—the government should lift its restrictions on firms that are actually trying to produce desired goods. For example, earlier this month Royal Dutch Shell announced that it was postponing its arctic drilling program because it can’t obtain the necessary permits from the Obama administration.
If proponents of the EPA’s new regulations want to admit that they will hurt the conventional economy, but will yield benefits in the form of reduced air pollution or global warming, then that is at least a coherent argument. To see if the plan made sense, we would then face the empirical question of seeing whether the alleged environmental benefits came at too high a cost in terms of lost jobs and lower economic output.
But that’s not what the folks at PERI are claiming. Instead, they are mixing up their costs with their benefits. They are saying that it is a good thing that it will take more workers to produce electricity, and hence drive up electricity prices.
In reality, the way to help the economy is to adopt policies that stimulate productive investment and job creation. A great starting point would be to lift arbitrary restrictions on domestic energy production.
[i] Gabriel Nelson, “AIR POLLUTION: EPA’s power plant rules would spur job creation–report,” E&E February 8, 2011.