How Clean Air Regulations Help the Economy

Stories from New Scientist.
April 1 2012 8:09 AM

Clean Air Helps the Economy

Environmental regulation doesn't kill jobs; it creates them.

(Continued from Page 1)

Generally, these direct influences cancel each other out. Even if they don't, the second reason for regulation's neutral effect on jobs comes into play: the central bank. In an effort to hit its overall inflation and unemployment targets, a nation's central bank—in the U.S., the Federal Reserve—will simply sterilize any change in job growth stemming from regulatory changes by adjusting interest rates to spur or slow economic activity.

So when the economy is behaving well, environmental regulatory changes are generally irrelevant to job growth. But when the economy is not functioning well, regulatory changes are very likely to create jobs.

There are three reasons for this. First, investments in pollution abatement and control do not threaten to crowd out other investments by monopolizing scarce financial capital and hence pushing up interest rates. Financial capital is not scarce during recessions, but opportunities to undertake real investment projects are.

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Second, increases in energy costs following the implementation of new rules are unlikely to be passed on to consumers. With lots of excess supply around, firms are not in the position to raise the price of their goods without worrying about the effects on demand. Further, profit margins in the U.S. corporate sector are at a 45-year high, meaning that increased costs can easily be absorbed by companies through reduced profits. Empirical research shows that high profit margins do indeed provide such buffers against price increases.

Lastly, the boost to employment provided by new investments accompanied by muted price responses will not be neutralized by the Federal Reserve, at least not in the next few years, as it has committed to holding interest rates low until unemployment returns to more normal levels.

In the specific case of the air toxics rule, my research indicates that the net impact of the regulations will be to add about 100,000 jobs to the U.S. economy by the end of 2015.

I should be clear: This would not make a large dent in the unemployment figures. But the toxics rule isn't meant to be a job creation program—it is meant to provide improvements to health and quality of life. And in this primary purpose the research is undeniable that it will hit its target. Holding up its enactment based on fear-mongering about jobs is exactly wrong. In fact, pushing forward with it while the economy is depressed would add a modest knock-on benefit of job growth to the much larger benefits it will provide to health and quality of life.

This article originally appeared in New Scientist.

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