Environmental regulations are not the key source of U.S. economic difficulties, according to a new RFF study. Indeed, say the contributors to Environmental Regulation and the U.S. Economy, the direct effects of pollution control expenditures on the economy have been rather small. On the other hand, they find the form that environmental regulations have taken to have substantial implications for the economy.
Critics partly right
Critics of regulation are correct, conclude the researchers, in asserting that environmental regulation has had an adverse effect on price levels, economic growth, productivity, and international trade. But so far the effect has been small, and often far outstripped by other factors. Moreover, these economic indicators reflect the costs but ignore the benefits that result from environmental controls and thus give a poor indication of the overall effect of environmental regulation on social well-being.
Take, as an example, the notion that regulation may be a principal cause of lagging U.S. rates of productivity growth. This has gained a good deal of credibility because it sounds so plausible. But many other factors—the energy "crisis," changes in the age-sex composition of the labor force, and shifts in the composition of production from manufacturing to services, to name just a few—also have contributed to productivity declines. Indeed, probably only 8 to 12 percent of the recent decline in growth rates should be attributed to the direct costs of environmental regulation.
Chilling effect
Perhaps more important than the direct costs, however, are the adverse effects on the economy that often result from the poor implementation and administration of regulations. It is impossible to account fully for costs associated with regulatory delay, for example, or from increased paperwork burdens, but the costs are nonetheless real. An especially important in-direct cost is the uncertainty inherent in the regulatory process: industry does not know how or to what degree regulations will be implemented and whether standards may change in the future. The result is a chilling effect on investment, new plant construction, technological innovation, and thus on growth and productivity.
The study proposes other ways of protecting the environment that are designed to be cheaper and more effective while producing the same or higher levels of environmental quality. In general, approaches based on economic incentives are preferable to the standard regulatory approach currently used. The Environmental Protection Agency's experiments with its "bubble" and "offset" policies are steps in the direction preferred by the authors, but they also would recommend wider use of marketable pollution permits and effluent charges in place of present standard-setting and enforcement regulations. The result, they assert, would be greater efficiency and less interference with the functioning of the economy.
Efficiency makes sense
The book concludes that regardless of whether environmental regulation has a small (or large, for that matter) adverse effect on the economy, the search should continue for ways to reduce its cost where it can be done at little or no loss of environmental quality. As the authors put it, regulatory reforms to reduce the cost of maintaining the same level of environmental protection make sense at any time—why, after all, pay more for anything that can be had for less? Given the economic tenor of the times, however, such reforms not only may be sensible, but also essential if environmental protection is to be afforded increasing or even current levels of support.
This partial abstract of Environmental Regulation and the U.S. Economy was written by Resources editor Kent A. Price. General editors of the study are Henry M. Peskin, Paul R. Portney, and Allen V. Kneese.
A version of this article appeared in print in the March 1982 issue of Resources magazine.
