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.