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The Independent Institute

Environmental Doom and Economic Slowdown: A Self-Fulfilling Prophecy

Although Americans have often expressed strong support for environmental protection in recent decades, much of the cost of “green” regulations has remained hidden from public scrutiny. That may soon change, however. In September, the House Government Reform Subcommittee on Regulatory Affairs held a hearing about the impact of Environmental Protection Agency regulations on U.S. businesses—specifically on the manufacturing sector, which bears most of their direct costs. Some testimony given at the hearing was highly troubling.

One study mentioned was particularly eye opening. In an analysis submitted by the Small Business Administration’s Office of Advocacy, economist W. Mark Crain found that in 2004 compliance with EPA regulations on average cost small manufacturers (those with fewer than 20 employees) a whopping $15,747 per worker, compared to $3,391 per worker for large manufacturers (those with 500 or more employees)—a cost difference of 364 percent!

Furthermore, for small manufacturers—which make up about three-fourths of all manufacturing firms—environmental compliance costs drastically outweighed the cost of other types of regulations, such as tax compliance ($2,582 per worker), economic regulations ($2,577), and workplace regs ($1,014).

If the U.S. economy turns sour, the huge costs of green regulations may become a major public worry. But workers already have plenty of reason for concern because for much of the past 30 years, environmental regulations have slowed the growth of U.S. labor-productivity and workers’ weekly earnings. To see why, first let’s put some economic statistics in their historical context.

From 1973 to 1995, the United States performed more like a traditional economy than the dynamic and innovative leader it once had been. After 1973, real annual GDP growth slowed by 22 percent—decreasing from 3.6 percent per year to 2.8 percent—a seemingly dry statistic when detached from the economic reality of millions of Americans struggling to eke out a living. (That economic slowdown would have been much worse had women not entered the labor force in large numbers.)

According to the 2005 Economic Report of the President, the decline occurred because labor-productivity growth slowed by about 40 percent from the two decades prior to 1973 to the years 1973 to 1995—a reduction in the annual growth rate from 2.5 percent to 1.5 percent. Consequently, real weekly earnings—what workers took home in inflation-adjusted dollars—actually decreased during much of the latter period.

The oil-supply shocks, stagflation and price controls of the 1970s have often been blamed for inaugurating the economic slowdown. But environmental regulations—particularly air and water pollution compliance—have taken no less a heavy toll.

It’s not hard to understand how this happened. The early 1970s witnessed an environmental awakening—some of it visionary, but much of it myopic. Along with Earth Day and popular campaigns to promote conservation came bestsellers such as The Limits to Growth, whose computer printouts gave a scientific veneer to the text’s prophesies of economic doom and massive loss of human life from overpopulation and environmental degradation. The era’s dystopian science-fiction movies helped bring such neo-Mathusian worries to a wider audience.

The Environmental Protection Agency, which was created in 1970, was not immune to the influence of the environmental doomsayers. Congress gave the agency broad discretionary powers but said little about how it should establish environmental priorities.

Unfortunately, the political will to over-regulate—and an unwillingness to restrain the EPA legislatively—may have been the single most important cause of this more than two-decade slowdown in productivity growth.

In a study published in the 1995 Yale Journal on Regulation, economist James C. Robinson, currently with U. C. Berkeley’s School of Public Health, found that environmental regulations accounted for much of the slowdown in U. S. manufacturing productivity growth between 1974 and 1986. Manufacturers’ direct costs of complying with environmental regulations had increased to just over one percent of the value of manufactured goods, but multifactor productivity—the efficiency of labor, machinery, and other inputs working together—had fallen about 11.4 percent short of where it would have been without the EPA’s heavy hand.

Productivity growth accelerated in the late 1990s due to just six economic sectors less affected by environmental regulation—computer manufacturing, semiconductors, telecommunications, retail, wholesale, and securities. The other 53 sectors, taken as a group, had almost no productivity growth from 1995 to 2000. After 2001, the U.S. economy finally experienced a broad-based resurgence of productivity growth, perhaps because the Bush administration made good on its pledge to ease restrictions that impede manufacturing growth.

In response to recent pressure to reduce environmental compliance costs, the EPA has selected 42 regulatory reforms to implement—from a list of more than 700 suggested by the public, an agency official testified at the hearings. Lawmakers should require the EPA to explain, case by case, why it rejected the vast majority of reforms suggested by the public. Making the agency more transparent would help make it more accountable and facilitate needed reform. Also, state lawmakers should make state-level environmental agencies more transparent.

Most importantly, Congress should reduce the EPA’s discretionary authority. It empowered the agency at a time when predictions of imminent economic meltdown from resource depletion and deadly pollution faced little skepticism. Those predictions haven’t panned out except in one respect: They fertilized a federal bureaucracy that has imposed huge costs on businesses—costs that have disproportionately dampened the growth of productivity and workers’ earnings. The time has come for policymakers and the public to re-think their commitment to the EPA’s costly environmental bureaucracy.

This article draws from Craig Marxsen’s chapter, “Prophecy de Novo: The Nearly Self-Fulfilling Doomsday Forecast,” in Re-Thinking Green: Alternatives to Environmental Bureaucracy, ed. by Robert Higgs and Carl P. Close (The Independent Institute, 2005).

Carl P. Close is a Research Fellow and Senior Editor at the Independent Institute, Assistant Editor of The Independent Review, editor of The Lighthouse, the Institute’s weekly e-mail newsletter. Mr. Close is also co-editor or the books Re-Thinking Green: Alternatives to Environmental Bureaucracy and The Challenge of Liberty: Classical Liberalism Today.

Craig Marxsen is an associate professor of economics at the University of Nebraska, Kearney, and an Adjunct Fellow at the Independent Institute.

From Carl P. Close
RE-THINKING GREEN: Alternatives to Environmental Bureaucracy
Re-Thinking Green exposes the myths that have contributed to failed environmental policies and proposes bold alternatives that recognize the power of incentives and the limitations of political and regulatory processes. It addresses some of the most hotly debated environmental issues and shows how entrepreneurship and property rights can be utilized to promote environmental quality and economic growth.