Heritage economist David Kreutzer
In a new blog post, the Koch-fueled Heritage Foundation continues to defend the fossil fuel industry at the expense of American jobs. Heritage attacked Environmental Protection Agency administrator Lisa Jackson for testifying that stronger limits on dangerous air pollution could create over a million jobs. Her testimony was based on a study by the University of Massachusetts Political Economy Research Institute (PERI), which found that electric utilities would create 300,000 jobs (or 1.5 million job-years over five years) as they clean up aging, polluting power plants. The PERI report used figures from a study by Charles River Associates for utility giant Exelon, which found that “EPA air regulations can be implemented without adversely impacting electric system reliability.” The proposed transport rule would save up to 36,000 lives a year, worth hundreds of billions of dollars in health and welfare. Heritage’s David Kreutzer, on the other hand, argues the higher health standards are bad because “these regulations increase energy costs“:
On Wednesday, Environmental Protection Agency (EPA) head Lisa Jackson quoted this study to support her assertions the EPA regulations are net job creators. Under this logic, all regulations that have compliance costs create jobs. The PERI study claims that EPA regulations will add nearly 1.5 million jobs over the next five years (Note: They have completely confused a job and a job-year, which multiplies the errors in their results.) However, because these regulations increase energy costs, they cut consumers’ income while raising manufacturers’ costs of production. The net effect is both job and income losses.
Kreutzer’s argument boils down to the idea that a perfectly efficient economy will suffer if businesses — like electric utilities — are forced by burdensome regulations to make needless expenditures, taking money away from other sectors. Although that may be an economics-101 level understanding of the world, it’s certainly not sufficient to come anywhere close to reality. The Bush deregulation economy collapsed in 2008, creating not just massive unemployment but also a sharp decline in capital investment. Supported by the investments of the recovery act and by low interest rates, American corporations have rebuilt cash supplies, especially the banks bailed out by the Bush administration.
The output gap — essentially the difference between Kreutzer’s idealized full-tilt economy and the actual, high-unemployment, low-investment economy we have now — is huge. Incentives for companies to make capital investments are precisely what’s needed to restore economic health. And higher standards that get key industries like electric utilities to upgrade their power plants will do just that, as PERI study author James Heintz explains:
If the economy were operating at full-tilt, with low rates of unemployment and no excess capacity, there could be something to this argument.
However, the current reality is significantly different. Unemployment remains at historically high levels and one glance at the data on the financial sector, such as that provided in the flow of funds accounts, shows that lending has not recovered. Mobilizing idle resources through new investments does create jobs, since the resources were not productively employed in the first place.
Moreover, private investment is not just about spending in the economy. Investments to update and modernize the capital stock of the electricity sector generates real supply-side benefits in terms of greater productivity and improved efficiency. Such improvements lower the costs of production and support future growth.
Instead of ‘crowding out’ spending in other parts of the economy, such productivity-improving investments actually generate income. Given these considerations, there is no reason to believe the assertion that spending on capital improvements in the electricity sector will reduce spending one-for-one elsewhere in the economy.
History refutes Kreutzer as well, Heintz notes: “Indeed, since the 1990 amendments to the Clean Air Act were enacted, price trends from the U.S. Energy Information Administration show that the price of electricity, adjusted for average inflation in the economy, fell steadily as the electricity sector made sizeable investments in new capacity and pollution control technologies.”
Furthermore, if Kreutzer is going to worry about second-order effects of policies that create jobs, then we should also factor in the second-order effects of all the pollution if the standards weren’t enforced, and all the lost job-years from the lung diseases and death caused by more smog and soot in the air.
“A constructive engagement over the impact of regulations to reduce harmful emissions is welcome,” Heintz writes. “However, misrepresentation of the findings of this report, wherever they come from, only serve to undermine serious consideration of the issues.”