A Bet I Wont Take

Kevin Drum likes the California initiative to slow global warming. He likes it so much he is willing to put his money where his mouth is…sort of. And Jane Galt/Megan McArdle seems willing to take the bet. I wouldn’t take this bet.

Kevin tends to take a really narrow view of what economics costs are. For example, he completely ignores things like opportunity costs. That is, if jobs under this initiative are going to be X, and without the initiative they’d be Y, and Y > X he wont count that as a loss. He has insistend in the past that any and all claims of decreased economic activity due to environmental laws and regulations are bogus or exaggerated by businesses (which should raise the question of, if Kevin is right, why are businesses opposed to such laws and regulations?).

This isn’t something that I’m making up out of whole cloth. Here is one study that looks at the 1970 and the 1977 amendments to the Clean Air Act.

I find that in the first 15 years after the Amendments became law (1972- 1987), nonattainment counties (relative to attainment ones) lost approximately 590,000 jobs, $37 billion in capital stock, and $75 billion (1987$) of output in pollution intensive industries.

Now, there is the Porter Hypothesis which suggests that when there is a severe environmental regulation it could result in innovation which improves the firms performance with either partially or fully offsets the negative impact of the regulation. While this is possible, it is a hypothesis that strikes me as not being generally true. If it were true, then all we’d need to do is institute extremely draconian environmental regulations and live in an environment with little or no polution and no loss of economic well being. Sounds like a bit of a stretch to say the least.

Ian over at Truck and Barter also has a problem with the bet.

Here’s my question: what about all of the diverted activity from companies that choose, on the margin, to avoid Cali to begin with. Stores not opened, factories not built, workforces and facilities not expanded…and so on. And, if California experiences growth, what would be the counterfactual? Would there have been more or less growth absent the new bill?

Or more simply, how are we going to measure the “negative impact”. If a business doesn’t open that means 1,000 less jobs that is a loss for California. But you wont read about that in the paper nor will it show up in any official statistics.

Like Ian I wouldn’t take this bet. At least not without nowing how we are going to try and asses the costs/benefits of this legislation. This doesn’t mean that implementing policies to improve/protect the environment are bad, but that one shouldn’t have these have-your-cake-and-eat-it-too attitudes about it either.

FILED UNDER: Economics and Business, Science & Technology, , , , ,
Steve Verdon
About Steve Verdon
Steve has a B.A. in Economics from the University of California, Los Angeles and attended graduate school at The George Washington University, leaving school shortly before staring work on his dissertation when his first child was born. He works in the energy industry and prior to that worked at the Bureau of Labor Statistics in the Division of Price Index and Number Research. He joined the staff at OTB in November 2004.

Comments

  1. Wouldn’t a reasonable way to measure the “opportunity cost” of the measure be to compare California to the national and neighboring states economies (Jobs created, population emigration/immigration, state GDP, etc) and see if they go up or down relative to each other? While this would not be an absolute because other factors could impact the business other than this law, it would be a reasonable starting place. An example of ‘other factors’ would be if the world suddenly decided that it wanted twice as much or half the Hollywood product, I suspect that would also have a huge impact on the state.

    You could also measure across industry trends. If a segment of business grows nationally, but stays flat or declines in California, that would be an indication of the laws impact. That would also help to identify the “1,000 less jobs in California” if the industries most impacted don’t keep up with the national trends.

    As an example, if I remember correctly, California and the rest of the Northwest had several Aluminum smelting plants shut down because they were large electricity users during the shortage. I think they even found it more cost effective to get paid by the power plants to shut down and thus keep the workers on the payroll, but idle. If this measure would increase electricity costs, then this industry would likely be one of the canaries in the mine.

  2. Michael says:

    While we’re speculating at the possible future revenue the state will no longer get, why not continue the speculation about all the new jobs created by non-polluting companies who do move to California because it has been cleaned up and people with talent are moving back there.

    Yeah, it’s a stretch, but so it calculating economic costs based on things that may or may not have happened one way or the other.

  3. Michael says:

    Just to clarify, I’m not arguing with the fact that raising the cost of doing business in California will create job loss. I’m arguing with the idea of calculating the loss of something you don’t know you were ever going to have.

  4. the Pirate says:

    My question is who is going to fill these “new jobs”? I work in the environmental engineering business here in California and I see the same thing happening at almost every pubic agency & private consultants, there is a lot of work to be done, a lot of jobs available and not enough people to fill the open positions. Great it may create new environmental jobs, but who is going to fill them (other than people like me for a “nice” pay raise)?

  5. Wayne says:

    I think justanotherjohn has a good starting point. Such things as rolling blackouts, shortages of resources, population growth and prices for a given product compare to other states can be indicators as will.

  6. the Pirate says:

    Oh and for the inevitable, new grad, more student approach… We don’t have enough students in the civil/environmental engineering field and retention of those student to a degree isn’t the best (a often discussed topic in the engineering education community) and the demand is so great for them, many students at Universities I have been associated with around here have students getting job offers and signing bonuses up to a year before they graduate. More job opportunities just makes it harder on recruiters and drives up what those grads will cost.

  7. Jim says:

    A week or two ago the New York Times did a profile on one of the old Oregon lumber towns. As eniviromental regulations became more stringent, the mills gradually closed. One of the refrains from the time is that such activities such as enviromental tourism would offset the job loss. In the article, the town has never recovered and has a mininum wage economy for those who have jobs (P.S. Walmart is nowehere to be found in the area). Just an interesting thought.

    http://select.nytimes.com/gst/abstract.html?res=F70E13F63E5A0C738EDDA10894DE404482

  8. geezer says:

    Driving undesirable business out of Kali to attain a greener economy would seem to be the whole point here. Theoretically, the libs pushing for it won’t lose any sleep if companies decide to relocate. Realistically, they may wind up with a lot less of “other people’s money” to spend on their pet dreams.

    Almost sounds like G. Davis is still governor.

  9. Mark Jaquith says:

    It makes sense, but there’s likely no way to prove it. There are too many variables in the equation, and no one will ever be able to conclusively state that cause X was responsible for Y damage. At best, you can label it a “contributing factor” and both sides will spin the level of contribution in their favor.

  10. M1EK says:

    The inconvenient truth for the polluter-lovers in all of this is, as people have pointed out in Drum’s comments, that despite the already existing and presumed crushing burden of environmental and other regulation, California’s GDP growth EXCEEDED that of the rest of the country for the last (quite a while).

  11. Steve Verdon says:

    The inconvenient truth for the polluter-lovers in all of this is, as people have pointed out in Drum’s comments, that despite the already existing and presumed crushing burden of environmental and other regulation, California’s GDP growth EXCEEDED that of the rest of the country for the last (quite a while).

    And this proves what? Nowhere is there the claim that environmental regulations have to result in only non-positive growth.

    Your goal post moving is duly noted.

  12. M1EK says:

    Steve,

    What it ‘proves’ is that the supposedly crushing burden can’t be all that bad if California’s GDP exceeds the rest of the country. Derrr.

  13. Steve Verdon says:

    What it ‘proves’ is that the supposedly crushing burden can’t be all that bad if California’s GDP exceeds the rest of the country. Derrr.

    And who said that GDP growth had to be negative, or that it had to be less than the rest of the country’s? Boring old guys who are concerned about logic call this a red herrring. Derrrr.