Posts in Economic Growth

For over 40 years, the Precautionary Principle has offered a kind of Hippocratic Oath to environmentalists — a prevent-any-harm obligation to address risks even if scientific assessments are unsettled. Introduced as a catalyst for 1970s environmental policies in Europe, the Precautionary Principle is now referenced in numerous international treaties and declarations, as well as a growing body of case law. Prominent political figures from former Secretary of State George Schultz to President Barack Obama have also referenced the principle to build public support for clean energy.

Rather than preventing harm, however, precautionary measures can constrain economic opportunity while doing little if anything to improve environmental quality. To see this paradox, it is important to understand how economies grow and how growth can affect environmental quality. Almost nobody, ever, has enjoyed the economic opportunities available to Americans today. A Brown University economist, Oded Galor, reports that annual per capita income across all countries was only $500 until 1000 AD. And the next several hundred years weren’t much better.

After that point, social scientists like MIT’s Daron Acemoglu and Harvard’s James Robinson argue, institutions for private property took hold. Countries that adopted those institutions prospered, with the richest enjoying per capita incomes of over $50,000. The poorest, unfortunately, continue to stagnate at income levels that were typical over 1,000 years ago.

How did these institutions expand economic opportunity, and what is their relationship to environmental quality? By encouraging value creation rather than distributional conflict, competitive markets produced more of what people want (goods and services) from less of what they don’t want (environmental degradation, for example).

To the extent that clean-energy politics undermine this type of dynamism, it may be creating risks for both the economy and environment. Productivity differences between politically and market-driven investment, for example, suggest that every $100 billion of public support for clean energy can shave over 0.40% from GDP. Compounded over a generation, annual reductions like this would approximate today’s per capita income gap between the United States and Italy.

Productivity losses mean more scarce resources going into fewer goods and services, a process that appears unsustainable from either an environmental or economic perspective. In addition, precautionary policies like clean energy subsidies can shrink household budgets and thus weaken demand for environmental amenities. A widely cited 1990s study by Princeton economist Gene Grossman and current CEA Chair Alan Kreuger reports, for example, no evidence that economic growth systematically reduces environmental quality. Rather, this research suggests that environmental quality increases when wealth-levels pass a sufficiently high threshold.

More recent work from the National Bureau of Economic Research tells a similar story. Juan Moreno Cruz and M. Scott Taylor show, for example, how the remarkable power deficiency and voracious geographic demand of renewables like wind and solar combine to reduce environmental quality and economic welfare. Nobel Prize-winning physicist Robert Laughlin offers related views in a recent book.

Precaution can be good. Research reviewed here suggests, however, that precautionary environmental policies can also create unacceptable perils.

Cross-posted from the Bush Center's Economic Growth blog.

Mary Ellen Harte and Anne Ehrlich write,"Unsustainable population levels are depleting resources and denying a decent future to our descendants. We must stop the denial."

We are in denial for a reason. For more than 40 years, climaxing around the first Earth Day, the public has been bombarded with apocalyptic tales of disaster regarding population growth. Paul Ehrlich, for example, a Stanford professor, prominent prophet of population doom and contributor to this op-ed article, predicted in his 1968 bestseller "The Population Bomb" that millions of people would die of starvation during the 1970s because the Earth's inhabitants would multiply at a faster rate than the world's ability to supply food. Six years later, in "The End of Affluence," a book he co-authored with his wife, Anne Ehrlich, the death toll estimates increased to a billion dying from starvation by the mid-1980s. By 1985, Ehrlich predicted, the world would enter a genuine era of scarcity.

Paul Ehrlich's predicted famines never materialized. While too many people remain hungry, agricultural advances have fought off massive famines. Even as the world's population doubled, per-capita food consumption in poor countries increased from 1,932 calories a day in 1961 to 2,650 in 1998, and malnutrition in those countries fell from 45% of the population in 1949 to about 18%. Furthermore, fertility rates dropped from about five children per woman in the 1960s to about 2.5 today.

The authors also write that "the effects of overpopulation play a part in practically every daily report of mass human calamity." Floods, for example, "inundate more homes as populations expand into floodplains. Such extreme events are stoked by climate change, fueled by increasing carbon emissions from an expanding global population."

These modern day predictions are in stark contrast to claims of the same vein from the 1970s. In a popular 1970 speech at Swarthmore College, for example, well-known ecologist Kenneth Watt said, "If present trends continue, the world will be about four degrees colder for the global mean temperature in 1990, but 11 degrees colder in the year 2000. This is about twice what it would take to put us into an ice age."

Time has not been gentle with such prophecies. Four decades later, the world hasn't come to an end. Most measures of human welfare show the Earth's population is better off today than at any other time in human history. Life expectancy is increasing, per-capita income is rising, and the air we breathe and the water we drink are cleaner. And concerns about climate change have shifted from cooling to warming since the 1970s.

Given past trends, we are right to deny doom and gloom claims such as this one in Harte and Ehrlich’s op-ed article: "Perpetual growth is the creed of a cancer cell, not a sustainable human society."

New ideas and technologies proliferate at a much faster rate than population. They depend on individuals who are free to pursue their own interests and innovate with few constraints. As Stanford economist Paul Romer put it, "Every generation has perceived the limits to growth that finite resources and undesirable side effects would pose if no new recipes or ideas were discovered. And every generation has underestimated the potential for finding new recipes and ideas. We consistently fail to grasp how many ideas remain to be discovered. Possibilities do not add up; they multiply."

The trouble with the sky-is-falling claims is that they can lead to costly and restrictive government regulations and media biases. Harte and Ehrlich, for example, think the government should have a greater role in family planning and that we should "demand that media start educating the public every day on the role played by the unsustainable human numbers behind environmental degradation and human calamities." The public, they claim, "needs a constant message: It's time to stop growing and become sustainable."

In truth, it’s the opposite. Such regulations and media propaganda could aid in suffocating the kind of advances that have helped improve environmental conditions and human well-being.

Yesterday afternoon I attended a lecture by Michael Greenstone, the 3M Professor of Environmental Economics and former chief economist of the Council of Economic Advisers during the first year of the Obama Administration, addressing the question, “Will Adaptation Save Us from Climate Change?” This lecture was the keynote address at a PERC workshop on “Human Adaptation to Climate Change” I’ve been attending this week.

Greenstone set the stage by observing that there are three possible approaches to the threat of climate change: 1) mitigation — reducing emissions of greenhouse gases; 2) adaptation — responding to climate change by seeking to ameliorate its negative effects, and 3) geoengineering — attempting to modify the climate in some way to offset the effects of increased greenhouse gas concentrations. The first of these is unlikely to happen in the near term, as the United States and other nations have shown themselves to be quite resistant to adopting meaningful mitigation measures. The third, whether or not it is viable or desirable, is generally not considered an acceptable approach geo-politically. As a consequence, he suggested, in all likelihood we will have to engage in some degree of adaptation to climate change.

In Greenstone’s view, the question is not whether or not human civilization will survive. It almost certainly will. Nonetheless, climate change could have substantial negative conseuqences. Rather, the relevant questions are how adaptation will occur over various time frames, the cost of such adaptation, and how effective adaptive responses will be. There is some research that has investigated the costs and potential of near-term response to some degree of climate change, but not nearly enough on longer term responses to climate change and its consequent environmental effects. Insights can be drawn, however, from other research that documents individual responses to changes in environmental conditions. For example, Greenstone co-authored a paper showing that some individuals respond to local air pollution levels by, among other things, purchasing medications that relieve some of the respiratory effects of higher pollution levels. Such adaptation may reduce the negative effects of pollution, but it still comes at a cost.

Adaptation takes many forms. Some adaptation to climate change would involve changes in infrastructure and the like, but much adaptation is likely to occur at the individual level. To take a simple example Greenstone used in his talk (based on this paper): on hotter days, people use more air conditioning. This matters because high temperatures tend to correlate with increased mortality. Therefore, were it not for air conditioning (and other means of adaptation), an increase in temperature would cause a greater increase in mortality. With air conditioning, the mortality increase is less, though energy use is greater.  This illustrates how individuals can alter their behavior to compensate for some of the consequences of higher temperatures, albeit at some cost.

In poorer, less-developed nations, such as India, on the other hand, the results are somewhat different. As Greenstone explained, compared to the United States, India has less adaptive capacity, so the mortality effects of warming would be greater – far greater. There is a lot of adaptive capacity in wealthy, industrialized nations, but not so much in poorer, less-developed nations. Moreover, the United States’ adaptive capacity has improved dramatically over the course of the past century. That is, the relationship between high temperatures and increased mortality in the United States has weakened over time as the nation has become wealthier and more technologically advanced, making it easier for individuals to adapt to temperature changes.

One possible response to Greenstone’s analysis is that if wealthier nations can adapt to climatic changes more readily than poorer nations, as much attention should be paid to making poorer nations wealthier – and improving their adaptive capacity – as to figuring out how to reduce global greenhouse gas emissions so as to mitigate the threat of climate change. From an economic standpoint, the costs of mitigation could be compared to the costs of adaptation, and if the costs of mitigation are greater, this would provide an economic justification for focusing on adaptation instead of mitigation – and some would certainly endorse this view. Indeed, many in developing nations embrace this view. In any event, even if mitigation policies are eventually adopted, there will need to be some degree of adaptation, some of which will be undertaken at the individual level.

Originally posted at the Volokh Conspiracy.

The New York Times tries to provide some perspective to the renewed debate over the economic effect of environmental regulation, and the effect of regulation on jobs in particular.  The story was prompted by President Obama’s decision to ask Environmental Protection Agency Administrator Lisa Jackson to withdraw a proposed revision of the National Ambient Air Quality Standard for ozone.  Business groups and many local government officials cheered the move; environmentalist groups were dismayed.

Part of the problem in evaluating the costs of regulation is that there have been few systematic studies of such costs after regulations are imposed.

“Regulations are put on the books and largely stay there unexamined,” said Michael Greenstone, an economist at the Massachusetts Institute of Technology. “This is part of the reason that these debates about regulations have a Groundhog’s Day quality to them.”

Mr. Greenstone has conducted one of the few studies that actually measure job losses related to environmental rules. In researching the amendments to the Clean Air Act that affected polluting plants from 1972 and 1987, he found that those companies lost almost 600,000 jobs compared with what would have happened without the regulations.

But Mr. Greenstone has also conducted research showing that clean air regulations have reduced infant mortality and increased housing prices, and indeed many economists argue that job losses should not be considered in isolation. They say the costs of regulations are dwarfed by the gains in lengthened lives, reduced hospitalizations and other health benefits, and by economic gains like the improvement to the real estate market.

The story closes with a quote from current Obama Administration “regulatory czar” Cass Sunstein, who’s in leave from the Harvard Law School.

“My view is that the Republican claim that ‘job-killing regulation’ is a redundancy is as ridiculous as the left-wing view that ‘job-killing regulation’ is an oxymoron,” said Cass Sunstein, head of the White House Office of Information and Regulatory Affairs. “Both are silly political claims that have no place in a serious discussion.”

UPDATE: Matt Kahn notes that Clean Air Act regulation is not uniform across the nation, and insofar as regulations adopted pursuant to that law have reduced employment in some parts of the country, this has been offset by greater job creation elsewhere.  Indeed, this differential effect is one reason why the Clean Air Act was amended to impose greater restrictions on “cleaner” areas, as B. Peter Pashigian documented in a 1985 paper.

Another interesting aspect of Clean Air Act regulation, relevant to President Obama’s recent decision, is that the economic consequences of tightening a NAAQS may be severe, but they are anything but immediate.  Once a new NAAQS is finalized, state and local governments have many years to develop plans to come into compliance, so no direct regulatory burden would have been imposed on private firms for many years.  Thus whatever the merits of withdrawing the NAAQS revision proposal, and deferring any tightening to 2013, it will not do much for the economy in 2011, except insofar as one believes the prospects of tighter environmental regulations in the future is a significant impediment to investment and job-creation in the present.

Originally posted at The Volokh Conspiracy.