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The Independent Institute

Are Workers Earning Less Than They Used To?

For the past 30 years, environmental regulations have been largely well received by the American public, a reflection of the fact that many now consider themselves strongly pro-environment. Other manifestations of the “greening” of American attitudes surround us: schools give Earth Day as much attention as many of our longest-lived holidays; corporations market their products as good for the environment; and politicians say that their policies are good for both jobs and the environment.

One reason for this public opinion sea-change is that the costs of environmental regulation have largely remained hidden from view. In fact, decades of “green” regs have significantly dampened the growth of the American worker’s real wages. To see why, it is helpful to review some economic history.

Economists have noted a slowdown in the growth of output in the U.S. economy from the early 1970s to the mid 1990s. After 1973, when the cool-off began, the annual increase in real GDP fell from 3.6 percent per year to 2.8 percent. In human terms, this meant that millions of Americans had to delay the purchase of a new home or car, buy cheaper quality clothing, and save less of their incomes than they would have had the economy remained vibrant. For those at the margins of our economy, slower growth meant a precarious existence between the Scylla of a dead-end job and the Charybdis of the welfare state.

According to the 2005 Economic Report of the President, the growth of real output declined because annual labor-productivity growth slowed from 2.5 percent (prior to 1973) to 1.5 percent (from 1973 to 1995). Consequently, real weekly earnings—what workers took home in inflation-adjusted dollars—actually decreased during much of the latter period.

Although the oil-supply shocks, stagflation and price controls of the 1970s have often been blamed for inaugurating the economic slowdown, environmental regulations—particularly air- and water-pollution compliance—also took a heavy toll. 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 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. Furthermore, 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 edicts of the Environmental Protection Agency (EPA).

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 books 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 EPA, 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.

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

In response to pressure to reduce environmental compliance costs, the EPA recently selected only 42 regulatory reforms to implement. These reforms were taken from a list of more than 700 suggested by the public, according to an agency official who testified at a congressional hearing on the issue last September. This may seem promising but is insufficient. 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, as well as facilitate needed reform. Similarly, state lawmakers should make state-level environmental agencies more transparent.

More 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 economic costs—costs that have disproportionately dampened the growth of productivity, and thus workers’ earnings.

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.