Environmental quality is a jobs-growth strategy

Oct 6 2011 - 1:19pm

It appears that Americans are divided into two camps on the promotion of environmental quality and the role of the EPA to enforce environmental quality standards. One camp, dominated by Tea Party activists and many conservative politicians, asserts that environmental regulations are killing jobs, hence the EPA should be abolished or environmental regulations should be scaled down. Many of them trust the free market to improve environmental quality. The other camp is demanding that EPA should vigorously enforce environmental quality standards and believe that more regulations may be needed to head off climate change.

Let me first clarify a point that is a source of misunderstanding. In a market economy, private goods benefit only those who are able and willing to pay prices for those goods. In markets, with property rights for private goods, demand and supply determine prices at which goods are traded. However, markets cannot efficiently provide public goods. Like national defense, most environmental goods, e.g., air and natural waterways, are public goods.

Take the case of air quality. First, clean air use by someone who pays for it does not diminish its quantity to others who do not pay for it. Second, use of clean air by those who do not pay for it cannot be prevented without incurring substantial cost. Third, the extra cost of providing clean air to an additional person is close to zero. These characteristics of air quality prevent emergence of a market for clean air. Since property rights to any entity cannot be defined, allocated and enforced, the market fails to provide clean air. Environmental quality is an externality, and it faces the usual common problem in which common property is overused and despoiled. Only collectively clean air could be provided at a shared cost. That collective mechanism is the EPA, created during the Nixon administration. A conservative president saw the value of preserving our natural assets so that generations of Americans could continue to reap their rewards.

Promotion of environmental quality is pro-productivity and hence a pro-growth strategy. We need economic growth to create more jobs. Arthur Okun, chairman of the Council of Economic Advisors under the Johnson administration, proposed a simple rule that states that a 2 percent increase in the growth rate of real gross domestic product (GDP) is associated with a 1 percent decrease in unemployment rate.

Environmental quality is essential for a healthy work force. It preserves health capital and thus enhances human capital in the present and in the future by keeping children healthy. No amount of spending on education and training of workforce will preserve and promote human capital unless workforce and children are healthy. Earth Policy Institute reports 70,000 deaths annually due to air pollution in the U.S., 1.75 times annual traffic fatalities. Similarly, environmental pollution degrades physical capital and natural resources, such as forestland and natural waterways, at a faster rate and hence adversely affects productivity and growth. Our environmental record does not give us bragging rights. Resources for the Future reports that in 2006, U.S. ranking on Environmental Performance Index, based on 16 indicators developed by Professor Daniel Esty of Yale University, is 28th from the top among 133 countries in the world.

I do not see a conflict between good air and water quality and jobs. Conservatives who think that promoting environmental quality kills jobs are mistaken. Improvement in environmental quality requires allocation of resources to the production sectors that contribute to environmental quality and jobs. A well thought-out strategy could be instrumental in guiding labor, capital and natural resources to cleaner activities. A comprehensive study by Florentin Krause, Stephen Decanio, J. Andrew Hoerner and Paul Baer, in Contemporary Economic Policy, October 2002, showed that an integrated least-cost strategy to achieve Kyoto greenhouse emission reduction targets would have added $250 billion in 2010 and $600 billion by 2020 to GDP on net present value basis.

In a recent study in the American Economic Review, August 2011, Nicholas Muller, Robert Mendelsohn and William Nordhaus proposed that damage to the environment should be part of GDP accounts. They calculated air pollution damage by industrial sectors, labeled as Gross External Damage (GED). They find total GED of $184 billion in 2002 in 2000 prices in all 19 industrial sectors combined. However, most of the GED is concentrated in nine sectors and one-third of the GED is in the utility sector. One least-cost policy to enhance environmental quality and create jobs would be to tax damaging economic activities and shift tax revenues to cleaner jobs activities.

If conservatives and their sympathizers believe in productivity, growth and jobs creation, they should support EPA and regulations to promote environmental quality.

Good environmental quality not only creates jobs, but also assures robust economic growth with environmental amenities that enrich the lives of all Americans now and in the future.

Mathur is former chair and professor of economics, Cleveland State University, Cleveland, Ohio. His articles also appear at vijaymathur.blogspot.com. He also writes original blogs for the Standard-Examiner at http://blogs.standard.net/economics-etc/.

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