Posts in Law

The New York Times tries to provide some perspective to the renewed debate over the economic effect of environmental regulation, and the effect of regulation on jobs in particular.  The story was prompted by President Obama’s decision to ask Environmental Protection Agency Administrator Lisa Jackson to withdraw a proposed revision of the National Ambient Air Quality Standard for ozone.  Business groups and many local government officials cheered the move; environmentalist groups were dismayed.

Part of the problem in evaluating the costs of regulation is that there have been few systematic studies of such costs after regulations are imposed.

“Regulations are put on the books and largely stay there unexamined,” said Michael Greenstone, an economist at the Massachusetts Institute of Technology. “This is part of the reason that these debates about regulations have a Groundhog’s Day quality to them.”

Mr. Greenstone has conducted one of the few studies that actually measure job losses related to environmental rules. In researching the amendments to the Clean Air Act that affected polluting plants from 1972 and 1987, he found that those companies lost almost 600,000 jobs compared with what would have happened without the regulations.

But Mr. Greenstone has also conducted research showing that clean air regulations have reduced infant mortality and increased housing prices, and indeed many economists argue that job losses should not be considered in isolation. They say the costs of regulations are dwarfed by the gains in lengthened lives, reduced hospitalizations and other health benefits, and by economic gains like the improvement to the real estate market.

The NYT story did not provide links to Prof. Greenstone’s research, so I added them above. For those interested in the subject, a third paper by Greenstone looks at the extent to which air quality improvements can be attributed to the federal Clean Air Act. Prof. Greenstone is, among other things, the former chief economist of President Obama’s Council of Economic Advisers.

The story closes with a quote from current Obama Administration “regulatory czar” Cass Sunstein, who’s in leave from the Harvard Law School.

“My view is that the Republican claim that ‘job-killing regulation’ is a redundancy is as ridiculous as the left-wing view that ‘job-killing regulation’ is an oxymoron,” said Cass Sunstein, head of the White House Office of Information and Regulatory Affairs. “Both are silly political claims that have no place in a serious discussion.”

I agree with Professor Sunstein that the debate over whether regulation kills or creates jobs is not very productive. As a general matter, when a firm is forced to spend money complying with environmental regulations, such expenditures are likely to take the place of more productive investments.  Some of these expenditures may benefit other firms, such as those which sell products or services that assist with compliance, but are still unlikely to offset the negative effects of the initial diversion.  As a consequence, whether or not there are net economic benefits from environmental regulation will usually depend on the magnitude and nature of the other benefits the regulation provides — benefits that may or may not translate into job creation. Even if an environmental regulation generates net economic benefits, this does not necessarily translate into increased employment.  But whatever the effect of regulation on jobs, and even assuming the effect could be predicted with any accuracy, this is only one factor to be weighed when considering the desirability of regulation.

UPDATE: Matt Kahn notes that Clean Air Act regulation is not uniform across the nation, and insofar as regulations adopted pursuant to that law have reduced employment in some parts of the country, this has been offset by greater job creation elsewhere.  Indeed, this differential effect is one reason why the Clean Air Act was amended to impose greater restrictions on “cleaner” areas, as B. Peter Pashigian documented in a 1985 paper.

Another interesting aspect of Clean Air Act regulation, relevant to President Obama’s recent decision, is that the economic consequences of tightening a NAAQS may be severe, but they are anything but immediate.  Once a new NAAQS is finalized, state and local governments have many years to develop plans to come into compliance, so no direct regulatory burden would have been imposed on private firms for many years.  Thus whatever the merits of withdrawing the NAAQS revision proposal, and deferring any tightening to 2013, it will not do much for the economy in 2011, except insofar as one believes the prospects of tighter environmental regulations in the future is a significant impediment to investment and job-creation in the present.

Originally posted at The Volokh Conspiracy.

by Andrew Balthrop, a PhD student in economics at Georgia State University and 2011 PERC Graduate Fellow.

Until this summer, the way I thought about externalities was pretty abstract: an externality was where one agent affected another agent’s utility without compensation. The solution was to get a social planner to tell each agent what to do, and society would be better off for it. I had never thought too deeply about why the two agents could not settle the problem themselves, or about the institutions that might help address the problem. It was merely an optimization problem with two possible solutions.

For most of the summer, I didn’t get why everyone at PERC hated the term. Often times a point was made that went something like, “If this is really a problem, why haven’t people dealt with it?”  I took that point as an assumption that the economy must always and everywhere be in equilibrium; I thought the senior researchers were ignoring the most amazing thing about the economy: its dynamism. People do get rich with new discoveries, the landscape is ever shifting, and if you don’t adapt, you get left behind.  But I will come back to this point.

What changed my view–what put me in my place as a graduate student–was listening to the senior fellows at PERC talk about Ronald Coase. I must sheepishly admit that what I had taken from Coase was only the first three pages of “The Problem of Social Cost.” I was exactly what the fellows railed against. My take away was that externalities were reciprocal, and that if “transactions costs” were low, and property rights clear, agents would achieve the efficient outcome. But I assumed the point of the paper was that  transactions costs were not low, and that property rights were not clear, and that is why you have to study Baumol and Oates. I didn’t understand that the court cases were a way to make property rights clear and transactions costs low–that the courts were a solution. I left that seminar with my mind blown, and a little embarrassed.

How I should have been interpreting the comment of “If this is a real problem, why haven’t people dealt with it?” is actually, “You are talking in abstractions here. The real world is not a blackboard problem, and people are not hapless. If this is a problem, there must be specific institutional friction(s) preventing agents from solving it. Tell me specifically what that is, or you have not understood the situation.” This is why PERC researchers don’t say externality. Or spillover.

Common law legal actions can easily handle the simple case in which one property owner causes obvious harm to another, what about the not-so-simple case?.

That's the question Jonathan H. Adler addresses in the "tough questions" issue of PERC Reports. You can read Jonathan's article as well as the entire "tough questions" edition of PERC Reports here.

PERC's latest visiting fellow is Todd Zywicki, the Foundation Professor of Law at George Mason University and senior scholar at the Mercatus Center. He teaches is the area of contracts, bankruptcy, and law and economics. He is the co-editor of the Supreme Court Economic Review and a frequent commentator on legal issues in print and broadcast media. He blogs at The Volokh Conspiracy.

Todd is a 2011 PERC Lone Mountain Fellow researching the political economy of Takings law. We thank him for taking the time to answer our questions. See more of PERC's ongoing Q&A series here.

Q: You work is heavily influenced by Gordon Tullock and his contributions to the study of spontaneous orders and methodological individualism. How might Tullock’s work be applied to environmental policy and law?

A:  Tullock’s central insight is that the cost of government policy is not just the misallocation of resources—using resources for lower rather than higher-valued uses. There is an additional cost—the resources that people use seeking preferential treatment from the government. He refers to these as “rent-seeking” costs and they can be quite large. The lessons for environmental policy and law are important: whenever decisions about resource use are moved from the world of private property and contract to the public domain, there will inevitably be rent-seeking costs as well. Thus, even if government makes wise decisions in the end (which it often does not), there will still be the costs of operating the system. And those costs can be large.

Q: While you are at PERC you have been working on a project exploring the political economy of the “Takings” law. Can you offer a brief overview of the government’s eminent domain or Takings power?

A:  The Takings power permits the government to seize private property for public use so long as it pays “just compensation” for the property taken. This enables the government to seize property to build roads, schools, etc.

Q: You have pointed out that law and economic analysis has been invoked to justify increased discretionary power for the government to take private property for public use such as in the case of Kelo v. New London. What is missing from this analysis?

A:  In Kelo many law and economics scholars have posited that the challenges confronting a private developer seeking to assemble many parcels of land in order to build an office building are identical to those of the government when it wants to build a school or post office. The underlying problem, it is claimed, is a hold out problem that landowners might try to hold out for a premium price, thereby killing the project. I argue that the situations are not analogous. In particular, when building an office building there are many similar alternative sites where the building might be constructed and so as a result the developer can shop among many different parcels of land, thereby eliminating the hold out problem.  Governments might have less ability to do that (or perhaps not). So I argue that even if one supports allowing the government to use the Takings power to overcome hold out problems, that does not support using the power for private developers in a case like Kelo. Moreover, there is a second point—to the extent that there are not comparable substitutes in Kelo it is only because the City of New London, in that case, gave Pfizer a bunch of subsidies and benefits to encourage development there. As a result, Pfizer felt compelled to build in New London. But that is merely an artificial distinction among different parcels of land that should not justify using the Takings power to later overcome the hold out problem that prior intervention creates.

Q: When it comes to Takings law, there is a question over whether holdouts are strategic or a reflection of subjective value. Could you explain this distinction and how it relates to Kelo?

A:  Subjective value is the case when I have some property that is worth more to me than the market value. For example, I have an autographed picture by Franco Harris of the “Immaculate Reception” that I received as a gift. The fact that I received it as a gift means that one is more important to me than a different, otherwise identical picture. Strategic holdout occurs when I claim that I have subjective value in something and so I won’t sell it for a premium. But it could be that I am simply holding out for a higher price. This might occur, say, if a developer needs 20 parcels of land to build a shopping mall. If I own one of those parcels, I might refuse to sell unless the developer pays me a premium for my land. In that case I might be acting strategically.

It is impossible to tell in any given case whether I have sincere subjective value or strategic hold out power. I argue that we solve this problem indirectly by determining whether or not a hold out power is actually a credible threat in any given case, which relates to the question of whether there are market substitutes. If so, then we needn’t worry about the question of whether hold out is sincere or strategic. In Kelo, as I noted, I don’t think there really was a hold out problem.

Q: If not through the Takings powers, how should the government deal with strategic holdouts?

A:  If there truly are strategic holdouts then as a last resort the government may need to use the Takings power to address that. But it is important not to simply assume a holdout power where one does not exist.

Q: The Fifth Amendment requires that if property is taken for public use, the government must pay “just compensation” for the seized property. Judge Richard Posner has argued that, under certain assumptions, the justification for compensation is incomplete. You claim public choice theory provides a justification for this requirement. What’s your argument?

A:  Posner argues that the requirement to pay “just compensation” is not necessary to induce governments not to take land inefficiently because landholders can take steps to stop the taking—litigation, PR firms, political activity, etc. In theory, if the land is more valuable to the owner than the government, the landowner would be willing to outspend the government to keep it from taking the land. This should prevent inefficient takings.

But while that argument may be correct on its terms, it ignores a central public choice point: the cost of litigation, PR firms, etc., are costs diverted from productive activity to merely preventing this inefficient result. That is thus a loss to society as a whole. As a result, I argue that the purpose of the just compensation requirement is to reduce the stakes and thus provide incentives for people not to waste so much money on these activities.