"The Economist Magazine Offers An Illogical, Factually Incorrect Assault on Regulation"
Major Federal regulations have documented vast net benefits to Americans of $90 to over $500 billion a year
by Laurie Johnson, reposted from NRDC’s Switchboard
Last week, The Economist published a series of articles on the impact of regulations on the US economy and businesses. For a magazine normally regarded for insightful analysis, the poor quality of these articles is surprising. They represent more of an ideological treatise than a critical assessment of arguments offered by different sides of the debate and their supporting evidence.
In the opening introductory article, “Over-regulated America,” the writers argue that the economy is severely hobbled by an excessive number of regulations, and overly complex legislation written by Congress. The article claims two fundamental causes. First, legislators have the “hubris” to lay down rules attempting to govern every eventuality. Second, in so doing, they create huge incentives for industry to push for endless special exemptions.
While it is undoubtedly true that there are problems with the regulatory system, this line of reasoning is naïve at best. It understates industry’s role in the legislative process, and neglects the deceitful way in which opponents are framing the issue. Separately, the articles are short on facts (and long in fiction), and lack sophistication with regards to the inherently complex nature of regulation and the important role of specialization in society.
Industry’s role and disingenuous attacks
The Economist should be commended for acknowledging the significant role of industry lobbying, but it understates that role. Take its “supporting” example of legislation regulating financial market excess:
- “[R]ed tape in America is no laughing matter…Consider the Dodd-Frank law of 2010. Its aim was noble: to prevent another financial crisis…But Dodd-Frank is far too complex…Just one bit, the ‘Volcker rule’, which aims to curb risky proprietary trading by banks, includes 383 questions that break down into 1,420 subquestions.”
The Economist stopped short of its own diagnosis.
As the New York Times and the Huffington Post write, the Volcker rule was a relatively straight forward concept that expanded into reams of pages due to industry exemptions. Its goal was to restrict banks from earning profits by speculating on assets with taxpayer-insured deposits. The Post sums it up nicely: “The Volcker Rule in its purest form is an elegant and simple way to restore the firewall between commercial and investment banking created by the passage of the Glass-Steagall Banking Act of 1933.” The Economist laments the length of Dodd-Frank’s Volcker Rule, without discussing one of the two principle causes it offers for explaining the complexity of legislation—industry lobbying.
More fundamentally, the article is naïve in suggesting industry enters the game in response to legislator hubris. It is there before pens even hit paper, starting with the generous campaign contributions, and the effects of Citizens United, that influence who gets elected. Those who “help out” the most then get a corresponding number of seats at the drawing table.
Even still, the bill has some teeth, and industry is furiously fighting back to knock them out. With Dodd-Frank, the chickens finally came home to roost after decades of industry lobbying preventing meaningful regulation of an increasingly complex financial system. Unfortunately, it took a disaster to make the legislation possible.
In its other “supporting example,” The Economist contradicts itself, adopting the opposition’s position that the Environmental Protection Agency (EPA) should treat different forms of power plant pollution separately under different provisions of the Clean Air Act—apparently the complexity of the Clean Air Act makes sense to them in this context. It endorses industry’s stance by accepting the argument that the Environmental Protection Agency (EPA) should exclude from its cost-benefit analysis of the Mercury and Air Toxics Standard the benefits of reducing particulate matter, pollution responsible for many premature deaths, heart attacks and asthma attacks.
The rationale behind this is comprised of several (thin) layers. First, the benefits of reducing particulate matter should not be counted, because these reductions are an “ancillary” benefit of the rule (reducing toxic emissions also results in reducing particulate matter pollution). Second, they argue that these benefits should be counted only insofar as they result from implementing provisions of the Clean Air Act that deal with particulate matter, and only insofar as they are achieved by meeting the standard. Health benefits obtained from meeting other (air toxic) standards purportedly don’t exist and should be ignored.
Whether from a standpoint of chemistry, technology, or epidemiology, these arguments are nonsense. Many air toxins are also particulate matter. Indeed, in recognition of this fact, EPA establishes a particulate matter emission limit in the Mercury and Air Toxics Standard (MATS), with that single limit serving as the proxy for all toxic air pollution (like the heavy metals) that exist in a particulate form. Correspondingly, the necessary pollution control technologies that reduce air toxins will by definition reduce particulate matter. It is thus physically impossible to reduce some of the air toxins MATS deals with without also reducing significant amounts of particulate matter pollution. But, even if you could separate the pollutants from one another, or develop a separate control technology for each pollutant independently, that would be a ridiculous thing to do: would polluters really prefer to buy ten separate machines when just one will do the job? This is a straw man argument.
The epidemiological issue is more nuanced. The Economist unquestioningly accepts the incorrect assertion that there are no health benefits from reducing pollution below the established standard. It should have done a little homework on the science (see point 6)), because this claim is flat out wrong.
The insincerity of the opposition goes further still. Industry representatives are even now attacking the very same provisions of the Clean Air Act they argue should be used to reduce particulate matter “instead of” the Mercury and Air Toxics Standard. And they cry out that extended rulemaking procedures and lengthy court challenges create burdensome regulatory uncertainties; at the same time they rely heavily upon these to postpone and weaken standards. The delay of, and over three dozen legal challenges against, the Cross State Air Pollution Rule is a perfect example. Another example is strong industry opposition to strengthening the Clean Air Act’s air quality standards for particulate matter (PM2.5 and PM10) (July 25, 2011 edition of InsideEPA).
And sometimes the rulemaking procedures, which allow extensive comments on proposed rulemakings before they are finalized, actually allow firms to help regulators find low-cost pollution controls (February 24th edition of Politico—subscription required) without compromising standards—isn’t that exactly what we want?
Facts ignored by The Economist
Remarkably, The Economist’s arguments are based upon unsubstantiated claims made by the very same special interest groups to which the magazine assigns blame (e.g., National Economic Research Associates, the National Association of Manufacturers, the Chamber of Commerce; click here, here, and here, to see examples of these organizations’ gloom-and-doom “analyses” of various regulations). The only supporting evidence given is a study by the Small Business Administration discredited by both the non-partisan Congressional Research Service and the World Bank (the source of the study’s data).
Contravening evidence goes unmentioned. For example, reports issued by the Office of Management and Budget (OMB) consistently find that the overall benefits of regulation exceed costs. The most recent report, released last year, concludes:
- “The estimated annual benefits of major Federal regulations reviewed by OMB from October 1, 2000, to September 30, 2010, for which agencies estimated and monetized both benefits and costs, are in the aggregate between $132 billion and $655 billion, while the estimated annual costs are in the aggregate between $44 billion and $62 billion.”
An even broader analysis by the Economic Policy Institute also finds net gains to society from regulations.
Interestingly, the OMB report concludes that net gains are highest in the same environmental rules attacked so viciously by The Economist. Benefits from regulations issued by the Environmental Protection Agency’s (EPA) Office of Air, for example, were estimated to be between $77 to $535 billion per year, compared to $19 to $24 billion in costs (click here for a summary of EPA’s cost benefit analysis of the Clean Air Act, and here for a description of the rigorous peer review it underwent). The fact that this assessment comes from OMB should not be underemphasized: it is a tough critic of EPA regulations.
Similarly, The Economist ignores evidence that, if anything, environmental regulations generate net employment gains, due to both a healthier work force and to higher labor requirements in the pollution control industry compared to other investments. Moreover, these gains are accomplished at far lower costs than industry’s inflated estimates, and even significantly below EPA cost projections. I review more of the evidence in my analyses of Obama’s misguided decision to abandon the ozone standard—especially now during the weak economy—and environmental regulation in general. Paul Krugman’s piece provides a good complement to my reviews.
Why complex regulations are often needed
The last point I’d like to make is that complexity isn’t necessarily the terrible thing The Economist makes it out to be.
Yes, an ideal world would be one in which all pollutants could be regulated simultaneously under one rulemaking. One in which we could invent a machine that reduced every kind of pollutant all at once. One where we could scientifically estimate the perfect combination of pollution levels across all pollutants, with health and environmental benefits maximized at minimal cost. One where such a machine could reduce all pollutants to exactly their scientifically and economically optimal levels.
It would be a world in which the banking system was comprised of only one type of lending institution or investment firm, and one type of financial asset. One in which each asset was distinct, and affected only one market and one sphere of societal well being. But it’s a messy world. I would wager that anyone you ask on the street would sigh in exasperation over how extremely complex financial markets have become (click here and here for some academic analysis, and here again for the Huffington Post article). It turns out that it’s impossible to deal with the financial market collapse without also dealing with credit rating agencies, firm debt, household debt, mortgage markets, insurance markets, etc. Or to restructure the financial system without also affecting people’s housing security, or the effects foreclosures have on poverty, minorities, homelessness, and neighboring property values.
This “ideal” world is the one The Economist seems to think exists, one in which everything is separate from everything else. All pollutants are chemically unrelated to one another, and each causes its own distinct health problem. Financial instruments don’t have thousands of different assets bundled into one commodity. And so on.
The reality the opposition would like you to believe exists does not, and it is dishonest to suggest that it does. What industry lobbyists and politicians are really attacking are strong standards that protect people from the vagaries of an otherwise productive market economy—from things like pollution and economic calamities that may be quite profitable to a few, but are beyond the control of many and to their detriment.
Rather than using fake arguments and painting themselves as helpless victims, industry should take responsibility for its complicity in making our regulatory system one that sometimes gets bogged down in delays and lawsuits—both of which work so strongly in their favor. And when the regulatory system works well, they should applaud it.
Laurie Johnson is the Chief Economist at the Natural Resources Defense Council. This piece was originally published at NRDC’s Switchboard.