Krugman on Mercury Regulation

Here is how Krugman used his extraordinary megaphone at the NYT blog to deal with the EPA’s decision. Krugman first quotes two paragraphs from Grist writer David Roberts, then returns to his own (Krugman’s) commentary:

David Roberts reports on the EPA’s decision, finally, to regulate mercury from coal plants:

Anyone who pays attention to green news will have spent the last two years hearing a torrent of stories about EPA rules and the political fights over them. It can get tedious. After a certain point even my eyes glaze over, and I’m paid to follow this stuff.

But this one is a Big Deal. It’s worth lifting our heads out of the news cycle and taking a moment to appreciate that history is being made. Finally controlling mercury and toxics will be an advance on par with getting lead out of gasoline. It will save…tens of thousands of lives every year and prevent birth defects, learning disabilities, and respiratory diseases. It will make America a more decent, just, and humane place to live.

[Back to Krugman writing:] Let me repeat part of that: it will save tens of thousands of lives every year and prevent birth defects, learning disabilities, and respiratory diseases. This is actually a much bigger issue, when it comes to saving American lives, than terrorism.

As Roberts explains, we’ve known about these costs of mercury pollution for decades, yet it took until now to get something done. The reason is, of course, obvious: special interests, hiding behind claims of immense economic damage if anything was done, were able to block action. [Emphasis in original.]

This is Krugman’s preferred M.O. when it comes to environmental issues: Copy-and-paste wild numerical claims, no matter how implausible on their face, and then pretend that all of the scientists agree with Krugman, while anyone who objects is either a fool or a paid shill of big business.

In this case, the numbers were so absurd that I decided to spend a few hours digging into the matter more deeply. Even those who are familiar with the progressive Left’s willingness to bend numbers to support their ideological causes may be surprised at what I uncovered.

The Origins of a Bogus Statistic: The Liberal Blogosphere Telephone Game

Most readers are probably familiar with the “telephone game,” in which one person whispers a statement to a second person, who whispers it to a third, and so on. With a big enough group, by the time the “statement” reaches the last person, it has morphed into something only faintly resembling the original utterance.

Something analogous partially explains what happened with Krugman’s over-the-top analysis. Glancing up again at the Krugman quotation, notice that the good doctor—in a post titled, “The Meaning of Mercury”—cited the claim that the EPA’s decision will “save tens of thousands of lives every year,” and then Krugman wrote, “[W]e’ve known about these costs of mercury pollution for decades.”

Because of Krugman’s title and discussion, the innocent reader would be led to believe that “the science” had shown that mercury pollution itself was responsible for at least 20,000 deaths annually, in the same way that (say) car crashes are responsible for a large number of deaths every year.

This is why my alarm bells went off. After all, in 2007 (the latest year of finalized data) the U.S. only had 2.4 million deaths total, with much of this number due to causes clearly unrelated to mercury. (For example, more than 123,000 died from accidents, some 35,000 were suicides, and 18,000 were homicides.) Was Krugman really telling us with a straight face that he thought at least 20,000—the lowest number that would render “tens of thousands” an accurate description—deaths were due to mercury emissions from coal-fired power plants?

We can see how Krugman’s version of reality starts to unravel, just by looking more closely at the very quote Krugman himself selected from David Roberts, who had written: “Finally controlling mercury and toxics will be an advance on par with getting lead out of gasoline” (italics added). Krugman, whether intentionally or through ignorance, led his readers to believe that this was a discussion about mercury, when, as we will see, the (bogus) statistic isn’t based on mercury emissions at all.

“Saving Lives” versus “Preventing Premature Deaths”

If we follow Krugman’s link to David Roberts’ piece, we don’t see any specific explanation of the “tens of thousands of lives” claim. However, in that piece Roberts’ links to this guest post at ClimateProgress (Joe Romm’s blog), by Daniel J. Weiss and Jackie Weidman. It is here that we start learning where the “tens of thousands of lives” number comes from, because the authors write, “These rules will remove millions of pounds of mercury, lead, arsenic and other dangerous pollutants from coal plants, preventing 17,000 premature deaths annually.”

Notice that the telephone game has struck again. Weiss and Weidman say the rules will prevent “17,000 premature deaths annually.” David Roberts incorrectly translated that into a claim that the rules will “save tens of thousands of lives.”[1] Besides being wrong numerically, it’s also misleading, since preventing a “premature death” doesn’t have quite the same ring as “saving lives.”

If a new air traffic control system reduces airplane crashes, so that fewer people die from “airplane crash” every year, then it is clearly saving lives, and the evidence for the efficacy of the new system is quite objectively verifiable. But if instead someone claims that a new pill will reduce “premature deaths” by a certain number each year, that is a much more abstract claim, dependent on a theoretical model. The new pill might in fact be a wonderful boon to public health, but the researchers in question have a lot more leeway to come up with a wildly wrong number when they can play with “preventing premature deaths.”

Reporting the Top of the Range Instead of the Range

Alas, even the “prevent 17,000 premature deaths” claim has fallen victim to the telephone game. If we follow the link that Weiss and Weidman provide, we are led to the EPA analysis fueling much of the progressive blogosphere’s commentary on the issue. Here we see, at long last, the origin of the factoid. On page 3 the report explains, “In 2016, these proposed rules would avoid: 6,800 – 17,000 premature deaths.” Thus, when Weiss and Weidman confidently asserted that the rules would “prevent…17,000 deaths annually,” they were reporting the very highest number in a range given by the EPA. (Note also that the low end of the range wouldn’t even constitute ten thousand, let alone “tens of thousands.”)

Bait and Switch: None of This Is About “Air Toxics” After All

We have already seen the telephone game’s ability to distort and inflate, resulting in Paul Krugman’s absurd implication that the scientific consensus has known for decades that mercury emissions from power plants currently cause at least 20,000 deaths annually, and that anyone who disagrees must be stupid or corrupt.

However, a reasonable person might respond, “Okay Murphy sure, the figures weren’t just about mercury, but ‘mercury and other air toxics.’ It’s also true Murphy that the actual number might be as low as 6,800 premature deaths avoided, rather than ‘tens of thousands of lives saved.’ But still, Krugman and his allies are only guilty of inflating the numbers and botching the summary of the facts. The basic spirit of their analysis is still sound, right?”

Unfortunately, what is happening here is far more Orwellian than a mere telephone game. The EPA’s analysis is based on a gigantic bait-and-switch, as Dr. Anne E. Smith explained in her August, 2011 technical commentary on the EPA’s proposed rule. From Smith’s summary of her findings:

EPA reports that the Proposed Rule will produce annual benefits of 6,800 to 17,000 avoided premature deaths and other types of health effects reductions, with an estimated value ranging from $53 billion to $140 billion, but these benefits have nothing to do with air toxics at all. The fact that none of these benefits are due to air toxics reductions is quite clear if one reads the Executive Summary (Chapter 1) of the RIA. [Emphasis in original.]

Indeed, if one knows what to look for, this shocking revelation is implicit in the EPA’s own fact sheet (which the ClimateProgress writers Weiss and Weidman linked to). On the very same page that provides the “6,800 – 17,000 premature deaths” bullet point, the EPA document says:

The updated standards will provide certainty and level the playing field so that all power plants will have to limit their toxic emissions – ultimately preventing 91 percent of the mercury in burned coal from being emitted into the air. The rule provides up to 4 years for facilities to meet the standards.

EPA did not estimate the benefits associated with reducing exposure to air toxics or other air pollutants, ecosystem effects, or visibility impairment. However, the proposed toxics rule would cut emissions of pollutants that are of particular concern for children. Mercury and lead can adversely affect developing brains – including effects on IQ, learning, and memory.

In addition to the benefits of reducing exposure to air toxics, these standards would reduce concentrations of fine particles (PM_2.5) in our air. This will significantly improve public health by preventing hundreds of thousands of illnesses and thousands of premature deaths each year. [Emphasis added.]

Thus we see that the figures (both for premature deaths and economic benefits) cited by the progressive bloggers refer not to emissions of mercury by itself or even of mercury plus all other “air toxics” combined, but rather to a certain type of fine “particulate matter,” denoted PM_2.5. In other words, EPA proposed a rule to limit mercury and other “air toxics” emissions and then, to justify the rule, almost completely relied on a model of the costs and benefits of reducing PM_2.5 emissions, which would be an incidental byproduct of the rule. Thus, even if we accept the EPA’s analysis as gospel truth, the numbers of “lives saved” cited by Krugman have virtually nothing to do with mercury at all.

But wait, it gets worse. As Dr. Smith explains later (pp. 6-7) in her analysis, the modeling assumptions behind these PM_2.5 numbers are themselves quite dubious:

[R]eaders unfamiliar with the literature on PM_2.5 health risks should be aware that the estimates of PM_2.5-attributed deaths (such as the 6,800 to 17,000 that EPA is attributing to the Proposed Rule) are based entirely on statistical associations between total mortality rates in various locations of the US and their respective monitored, region-wide ambient PM_2.5 concentrations….EPA’s estimate of 6,800 to 17,000 PM_2.5-related premature deaths avoided in 2016 as a result of the Proposed Rule is based on an assumption that 130,000 to 320,000 deaths, respectively, of 2005’s US deaths were hastened by breathing ambient PM_2.5….And yet, EPA identifies not a single death during 2005 that was attributed, even in part, to exposure to ambient PM_2.5. If PM_2.5 is indeed having this estimated effect on the public health, there is no evidence indicating when or where these events occurred, or who was affected. Rather, these mortality estimates are merely inferences drawn after making a host of assumptions about how to convert a statistical association into a concentration-response function. No one really even knows what types of deaths might be implicated. A common belief among researchers is that the deaths are primarily cardiovascular in nature, but this is far from an established fact: everything from cardiovascular causes to diabetes to lung cancer has been mentioned as having such an association in one paper or another. There is no clinical evidence to inform these inferences either, despite at least 15 years of efforts by researchers to find a clear physiological mechanism to explain and lend credibility to these estimates based solely on statistical correlations.

Conclusion

The deeper one digs into the actual science backing up the wild claims of Krugman & Co. on mercury regulation, the weaker their rhetoric becomes. The implausible assertions in Krugman’s blog post were generated by a comedy of transgressions, ranging from (perhaps honest) poor paraphrasing, to reporting the top number of a wide range, to justifying regulations on air toxics emissions based on dubious models of the health effects of particulate matter.

In conclusion, let me be clear: No one is claiming that little kids should play with mercury. (In fact, will Krugman, David Roberts, et al. join IER in opposing the government’s phased-in ban on incandescent bulbs that will effectively force all schools and daycare centers—not to mention homes—to use mercury-filled CFLs? These guys keep telling us how dangerous mercury is, after all.) Yet the public should get mighty suspicious when the allegedly airtight evidence on the benefits of mercury regulation turns out to be so very fragile indeed.

First, the article contrasts a coal-fired power plant being forced to shut down because it can’t comply with EPA regulations, versus a natural gas plant that is opening. The moral is that regulations hurt some sectors and help others, so it’s basically a wash.

Even though this analysis omits some important details, it represents a lot of progress. Recently former EPA chief Carol Browner was on the Colbert Report, arguing that the EPA created jobs on net with its regulations. (Rep. Keith Ellison made a similar argument last month as well.) So at least now we’re dealing with a weaker claim, that federal regulations have no impact either way.

How does the WaPo reach this conclusion? It cites data from the BLS:

Data from the Bureau of Labor Statistics show that very few layoffs are caused principally by tougher rules.

Whenever a firm lays off workers, the bureau asks executives the biggest reason for the job cuts.

In 2010, 0.3 percent of the people who lost their jobs in layoffs were let go because of “government regulations/intervention.” By comparison, 25 percent were laid off because of a drop in business demand.

This type of argument is hardly conclusive, however. Regulations on business might cripple some firms, which in turn leads to “a drop in business demand” for others. For example, if an asteroid destroyed most of the continental United States, the entire globe would be plunged into an economic depression, even though Europe might not be physically impacted. Indeed, surveys of the businesses that had to shut down in France, Germany, Italy, etc. might learn that the two major reasons were, “Rising costs” and “Falling demand.” It’s possible no CEO would list “asteroid strike” as the primary cause of the problem, even though it clearly would be.

By the same token, increased regulations on conventional energy sources will make electricity and gasoline prices higher for American businesses and consumers. Certain investments and expansions might be postponed, while households might cut their discretionary spending in light of larger utility bills. Many of the affected businesses and workers would have no idea that energy-sector regulations were the primary culprit.

Ironically, the WaPo article concludes by quoting a Stanford professor who actually makes the case against new regulations without realizing it:

Regardless, regulatory experts say that viewing a rule solely through the lens of whether it will cost jobs misses the point.

Noll, [a] Stanford professor, said the government could outlaw tractors to create $5-a-day jobs for people working in the fields, but “that would not be a legitimate social goal.”

“The notion that we should deregulate everything because we have a recession is completely wrongheaded,” he said. “Whether a regulation is a good or bad idea is not a function of employment in the industry being regulated.

“The right question is: On balance, does our society benefit?”

Noll raises some excellent points, but they actually cut against the spirit of the article. He’s certainly correct to say the job creation per se shouldn’t be the goal—after all, the government could order people to dig holes and then fill them back up. In the long run, the labor market adjusts so that everybody who wants to work can eventually find a job. The problem with inefficient regulations isn’t permanently higher unemployment, but rather the problem is that they lead to lower wages, making (employed) workers poorer than they otherwise would be.

Yet that’s not what the current debate over regulations is about. The WaPo piece is explicitly criticizing Republican candidates or officials who blame “job-killing regulations” for the economy’s weak recovery. In this context, Noll’s observations don’t really do the job that the WaPo thinks.

The reason we have high unemployment is that businesses can’t find jobs for workers to do, that will be productive enough to justify wages that the unemployed want to accept. It takes time for this search process to unfold.

One way to speed it up would be to remove federal shackles on energy development. Not only would this immediately make jobs in the energy sector more productive—and thus justify hiring more workers—but the lower energy prices would lead to more opportunities elsewhere in the economy.

Whatever the alleged benefit of the regulations (reduced carbon emissions, workplace safety, etc.) it must be balanced against the costs of reduced output in other respects. After all, if you have workers and other resources installing smokestack scrubbers rather than making TVs, then Americans have fewer TVs to enjoy.

However a person comes down on that tradeoff—weighing the benefits and costs of government regulations—surely the pendulum swings away from more regulations in the midst of a terrible recession. Simply put, Americans are less able to afford regulations that slow job creation at the moment.

Despite the claims of the WaPo article, economic theory and common sense support the idea that reducing federal regulatory burdens on domestic energy production would help stimulate economic recovery.

The EIA found that under the CES:

• Average electricity generation costs would increase by 16 percent in 2025 and 29 percent in 2035.
• Household electricity bills would increase by $115 in 2025 and by $211 in 2035 (in 2009 dollars).
• Expenditures on electricity would increase by $41 billion in 2025 and by $77 billion in 2035 (in 2009 dollars).
• Gross Domestic Product would be reduced by $127 billion in 2025 and $74 billion in 2035 (in 2005 dollars).
• Manufacturing employment would decline by 1 million jobs in 2025.
• Average natural gas prices would be 9.3 percent higher in 2025 and 5.4 percent in 2035. Natural gas accounts for much of the compliance with the CES in the early part of the projection period, resulting in the increase in price. As other compliance options become available, the price impact is lessened.
• Electricity prices in 2035 would increase by at least 40 percent in seven market regions: Texas (42 percent), Oklahoma (46 percent), Tennessee/Kentucky (47 percent), Colorado (48 percent), Eastern PA and New Jersey (50 percent), Long Island (51 percent) and Southern Illinois/Eastern Missouri (61 percent). Regions that are more dependent on generation fuels that are not CES-eligible, primarily coal, have a higher price impact.
• Coal-fired generation, which grows by nearly 23 percent between 2009 and 2035 in the Reference case, decreases by 46 percent between 2009 and 2035 under the CES. Coal is primarily displaced by increased natural gas generation, which is 38 percent greater in 2025 and 30 percent greater in 2035 under the CES. Generation from nuclear and renewable sources is also higher under the CES with nuclear generation increasing primarily after 2025. Nuclear generation is 30 percent higher in 2035 under the CES.
• Wind and biomass would be the renewable generating sources that have the largest generation increases under the CES. Wind generation almost doubles by 2035. Additional biomass generation is met primarily through increased co-firing in existing coal plants, but it decreases in the latter part of the projection period as new nuclear generation capacity comes online and existing coal capacity is retired.
• Electricity sector carbon dioxide emissions would be lower by 35 percent in 2025 and 60 percent in 2035.

Conclusion

It seems that the Obama Administration is pursuing energy policies that limit energy consumption or production, and increase energy prices. According to Chairman Ralph Hall, “This report—prepared by independent government experts—makes clear that the CES amounts to an expensive new electricity tax on the American people. With an anemic economy and unemployment stuck above nine percent, it is very troubling that the President continues to pursue an energy policy that would add billions to Americans’ energy bills.”[ii]

One of the major factors behind increasing fuel poverty in the UK is government policies instituted to meet carbon stabilization targets, the most aggressive in the world. Britain has a legally binding carbon dioxide reduction target of 80 percent of 1990 levels by 2050. As a result of current measures and increasing fuel prices, industrial electricity prices in the UK are already among the highest of any industrialized country in the world.[ii]

Current Statistics

The average annual bill for a customer using electricity and natural gas is about 6 percent of median household income now, up from 3.3 percent in 2004. Since 2004, the cost of energy in the UK increased by 117 percent–more than six times faster than UK household income (which only increased by 18 percent since 2004). If these trends continue, energy’s share of median household income in the UK will reach 7.4 percent by 2013, 8.2 percent in 2014, and 10 percent in 2015.[iii]

The data show that the majority of households in fuel poverty in the UK contain “vulnerable” individuals, defined by the government as elderly, disabled, the long-term sick, or children. According to Age UK, the UK’s largest charity for older people, almost half the people living in fuel poverty were over 60. Michelle Mitchell, the charity director of Age UK, said: “Research shows many older people are forced to choose between eating and heating their homes, causing illness and in extreme cases, needless deaths.”

Centrica, which owns British Gas, blamed rising wholesale costs, which increased 30 percent since last winter on higher global demand for natural gas and the impact on supply of unrest in the Arab world. However, government policies also have an effect on the increasing energy costs. Currently, UK “policy costs” add 10 percent to household energy charges, mainly because of the “renewables obligation”, which mandates electric utilities to buy a proportion of their electricity from renewable sources, and the European Union’s carbon trading scheme.

The UK Energy and Infrastructure Plan

The UK government put together a white paper that proposes a plan that will guarantee a fixed price for electricity and include a carbon price floor effective in 2013 that will make it more costly to run coal and natural gas plants. Using these mechanisms, the government plans to change the UK’s energy mix in favor of renewables and nuclear power. EDF Energy, a subsidiary of EDF of France, has plans to build four nuclear reactors in the UK. The UK also has a “renewable energy roadmap” setting a target of building 18 gigawatts of offshore wind generating capacity by 2020, predicated on reducing the cost of wind generation by almost 50 percent (from up to £190 per megawatt hour ($300 per megawatt hour) to £100 per megawatt hour ($158 per megawatt hour)). The UK government is investing £30 million ($47 million) of innovation support to this goal. To deal with the intermittency issue of renewable energy, the plan includes a capacity mechanism that would keep non-renewable power stations on standby to ensure permanent spare capacity. The plan also contains tougher environmental standards for coal-fired power stations, forcing them to add equipment for reducing emissions or close down.[iv]

The country has an official target to spend £200 billion ($316 billion) on new infrastructure by 2020, which includes the large expansion of wind power. The total cost of building power stations is expected to be £110 billion ($174 billion), which will lead to higher household bills. But according to the government, the average electricity bill would increase by £160 ($252) by 2020 under this plan, compared to an increase of £200 ($315) if current practices are continued. The assumptions behind the higher cost number for current practices are not clear, but most likely include the policy changes that lead to more renewables and nuclear power.

Current practices mean more fossil-fueled plants. Dozens of new gas-fired power plants are being planned by energy companies in the UK. Scottish Power wants to construct a 1.2 gigawatt plant at Avonmouth, near Bristol; RWE npower is building a 2 gigawatt gas plant at Pembroke, South Wales and a 2.4 gigawatt plant at Willington in Derbyshire. It is also looking to build a smaller facility at Fawley, near Southampton. Smaller projects for gas-fired power include ones by Welsh Power, which wants to construct an 850 megawatt plant at Fleetwood in Lancashire, and Trafford Peaking Power, which is developing one in Manchester. As many as 30 potential gas projects that are either in late development stage or very early proposals have been identified. Utilities are building natural gas plants because they are relatively cheap to build and quick to construct. But, building those plants could result in a higher carbon emissions levels than the government’s plan that promotes renewable power and nuclear energy.[v]

What the government has not faced up to is that the shale gas revolution has decoupled the prices of oil and gas and is reducing natural gas prices significantly in the countries that have begun shale gas production. Recently, an estimated 200 trillion cubic feet of shale gas was discovered near Blackpool. Shale gas could supply the UK’s energy needs for a century and create an energy industry that would generate revenue and jobs unlike green energy and expensive subsidies. Shale gas could make UK manufacturing more competitive, reduce gas and electricity bills and reverse the rising trend in fuel poverty.[vi]

According to Deutsche Bank, the most effective policy to bring down energy costs would be to abandon the “renewables obligation” and the carbon floor price, cutting bills by 15 percent from 2015 levels. And, an additional 15 percent or more could be cut if the shale gas revolution was encouraged.[vii]

A New European Commission Study

The European Union (EU) study examines how it can meet its target of cutting greenhouse gas emissions to 80 to 95 percent of 1990 levels by 2050 through use of efficiency measures, renewable energy, nuclear power and carbon storage. According to the study, the EU’s green energy campaign could double household electricity bills by 2050. It predicted rising electricity prices over the next 20 years as Europe meets half of its electricity demand from wind farms, which provides 5 percent of its electricity currently. The result will be 50 percent higher bills by 2030 and 100 percent higher bills by 2050.[viii]

Conclusion

Energy costs in the United Kingdom are increasing due to higher fuel prices and government policies. Currently, the UK has over 5.5 million households that are facing fuel poverty, most of which are elderly or disabled. Policies currently in place such as a renewable obligation and a carbon trading scheme have increased prices by 10 percent. The government has a plan that will increase prices further by adding a carbon price floor, a guaranteed price for power, a requirement to ensure standby power to back up intermittent power sources such as wind, and a requirement to either make coal-fired power plants “clean” or retire them. That will increase energy costs further. By 2015, the average household in the UK is expected to be in fuel poverty.

[i] AFP, Fuel poverty on the rise amid energy price hikes, July 15, 2011, http://www.google.com/hostednews/afp/article/ALeqM5jX6Ox5adrhTfx2tYh41Aq-3JPPfQ?docId=CNG.d49bc7cdcf00b93d5c189e6d2d9ee1a0.451

[ii] City A.M., A few cold facts in the debate on high energy bills, October 18, 2011, http://www.cityam.com/forum/few-cold-facts-the-debate-high-energy-bills

[iii] Financial Times, Average household faces fuel poverty by 2015, October 10, 2011, http://www.ft.com/intl/cms/s/0/f4213ec2-f287-11e0-931e-00144feab49a.html#axzz1ag5hoWqf

[iv] Financial Times, Huhne aims for ‘cleaner energy future’, July 12, 2011, http://www.ft.com/intl/cms/s/0/c6aab426-ac70-11e0-bac9-00144feabdc0.html#axzz1alFujOXA

[v] The Guardian, Energy firms plan dozens of new fossil-fuelled power stations, July 17, 2011, http://www.guardian.co.uk/business/2011/jul/18/energy-industry-gas?CMP=twt_fd

[vi] City A.M., A few cold facts in the debate on high energy bills, October 18, 2011, http://www.cityam.com/forum/few-cold-facts-the-debate-high-energy-bills

[vii] Ibid.

[viii] UK News, GREEN ENERGY COULD DOUBLE HOUSEHOLD BILLS, October 18, 2011, http://www.express.co.uk/posts/view/278122/Green-energy-could-double-household-bills

Photo credit for natural gas flame: Public Service Commission of Wisconsin.

Rep. Ellison’s Plan for Job Creation

An article in Real Clear Politics reports:

Rep. Keith Ellison (D-Minn.) tells MSNBC regulations create jobs because a business will have to hire people to help them comply with the new requirement.

"I think the answer is no," Ellison said when asked if he believes regulations kill jobs. "And here is why: When we talked about increasing fuel efficiency standards, the industry responded, and they need engineers and designers and manufacturers, and they need actually more people to help respond to the new requirement."

"I believe if the government says, look, we have got to reduce our carbon footprint, you will kick into gear a whole number of people that know how to do that or have ideas about that, and that will be a job engine. I understand what you mean, because if anything adds a cost to a business, you could assume that that will diminish that business’s ability to hire. But I don’t think that’s actually right. I think what businesses want is customers and what — if they are selling product, if they have a product to sell they will do well even if they have some new regulations to meet," the Congressman said.

Although it would be tempting to dismiss Ellison’s views as silly, Nobel laureate Paul Krugman has made similar claims (though with more jargon). So it’s worthwhile to pick apart the fallacies.

Why So Timid?

First of all, let’s suppose Ellison is right. Let’s concede for the sake of argument that the federal government will “create jobs” in an economically meaningful sense by forcing businesses to reduce their carbon dioxide emissions. The way Ellison describes the situation, he clearly implies that the new regulations would be killing two birds with one stone—not only would we mitigate climate change, but we’d also reduce unemployment.

Yet hold on a second. If that really is the case, then why stop short? No one has been bold enough to suggest that the entire population of unemployed will be mobilized by carbon dioxide regulations. So why not double the potency of the regulations, by insisting that all workers involved in the compliance process tie one hand behind their backs? Then adapting to the new regulations will require twice as many (actually probably more) workers.

The Goal Is for Workers to Create Value, Not Jobs Per Se

Hopefully in light of our tongue-in-cheek proposal, the reader can sense that there must be something fishy with Ellison’s position. Specifically, the problem is that he narrowly focuses on “job creation” without looking at the big picture.

The ultimate reason people have jobs is to create goods and services that people value more than the raw materials going into the process. In a sense a worker “creates value” by mixing his or her labor with the other inputs on the job. That’s why the employer is willing to pay for the labor services.

A healthy market economy channels scarce labor resources into the most efficient lines. Absent government intervention, you would never see a firm paying one group of workers to dig ditches and another group to fill them up. No, the onerous task of labor is always directed into projects that are expected to yield a useful product or service to a paying customer.

In this context, imposing new constraints on businesses can only make us poorer. If it originally takes 100 workers to make a certain batch of computers, and then a new government regulation bumps the number up to 150, then society is that much poorer, because those 50 workers can’t be used elsewhere.

Mainstream environmental economists can make a case that there are “negative externalities” from carbon dioxide emissions, and that imposing a carbon tax or cap-and-trade will make society “richer” if we include aspects of the climate in our broad definition of wealth. But it will make us poorer compared to a baseline in which there were no threat of global warming.

In other words, it is still costly for us to have to comply with the carbon tax, even assuming the standard models and policy recommendations were valid. Of course, we at IER do not endorse the conventional case for a carbon tax. The point is, even someone who believes a high carbon tax is crucial, has to concede that it will make us poorer in terms of forfeited output of conventional goods and services. Rep. Ellison misleads his listeners when he implies that carbon dioxide regulations will help the planet and the economy simultaneously.

What About Idle Resources?

The proponents of new interventions often respond to the above argument by pointing out that we are currently in a bad recession with high unemployment. Therefore, they claim, there is no “opportunity cost” in putting people to work revamping businesses.

Yet this argument only works if we adopt the Keynesian notion that unemployment is high because of a lack of “aggregate demand.” There are many economists who oppose this view, and blame our economic woes on continued government and central bank interventions. The stagflation of the 1970s showed that high price inflation and high unemployment can occur simultaneously. Imposing carbon dioxide regulations—which will raise energy prices and constitute a “negative supply shock” in econ jargon—could plausibly increase unemployment. In other words, for every job “created” by the new regulations, there would be a greater number of jobs destroyed elsewhere.

Conclusion

Congressman Ellison joins a long line of government apologists who make the incredible argument that shackling businesses with new regulations is the path to prosperity. If this were really true, then the government could cure the recession next week by banning the use of construction vehicles. (Think of how many construction workers would have to be hired to get a particular job done!)

In reality, limiting carbon dioxide emissions will hamper businesses, definitely leading to lower total output (conventionally defined) and likely leading to net job losses in the short term. If proponents of a carbon tax want to claim it will hurt the economy now, but help the climate in the long haul, that at least would be a coherent argument. But it is absurd to claim that we can spur job creation in the aggregate by taking away options from businesses.

 **UPDATE**  December 19, 2011

In the two months since we released this report, electricity producers have announced another 1.5 GW of impending plant closures as a result of EPA’s upcoming regulations. To see the updated information, click here for the updated report. 

 Download the report as a PDF

Are EPA regulations closing power plants in your state?

The United States has the world’s largest coal resources. In fact we have 50 percent more coal than Russia, the country with the next largest reserves. But coal use in the United States is under assault.

Before becoming President, Barack Obama promised to bankrupt coal companies. As President, he has tried various strategies to force Americans to use less coal. After failing to pass a national energy tax (cap-and-trade), the President vowed to continue his attack on coal stating, there is “more than one way to skin a cat.”

Currently, EPA is leading the Obama administration’s assault on coal with a number of new regulations. Two of the most important are the “transport rule” and the “toxics rule” (Utility MACT). Combined, these regulations will systematically reduce access to affordable and reliable energy. According to our report:

• EPA Regulations Will Close At Least 28 GW of Generating Capacity

EPA modeling and power-plant operator announcements show that EPA regulations will close at least 28 gigawatts (GW) of American generating capacity, the equivalent of closing every power plant in the state of North Carolina or Indiana. Also, 28 GW is 8.9 percent of our total coal generating capacity.

• Current Retirements Almost Twice As High As EPA Predicted

EPA’s power plant-level modeling projected that Agency regulations would close 14.5 GW of generating capacity.  That number rises to 28 GW when including additional announced retirements related to EPA rules, almost twice the amount EPA projected.  Moreover, this number will grow as plant operators continue to release their EPA compliance plans.

• Announced and Projected Retirements Higher Than Worst Case Scenarios

Analysis by the North American Electric Reliability Corporation (NERC), the entity in charge of grid reliability, projected that EPA’s Transport Rule and Toxics Rule would close 20 GW of generating capacity.  This list indicates that at least 28 GW will retire.  EPA’s Transport Rule and Toxics Rule push U.S. energy security past the NERC worst case scenario.

• EPA’s New Regulations Will Hit States Trying To Get Back On Their Feet

Current announcements and EPA projections indicate that EPA regulations have a dramatic impact on states reeling from economic hardship.

• Ohio: 2,894 MW retired, 8.6% of state total generating capacity.

• West Virginia: 2,448 MW retired, 14% of state total generating capacity.

• Indiana: 2,168 MW retired, 7.5% of state total generating capacity.

• Tennessee: 1,376 MW retired, 6.2% of state total generating capacity.

• Missouri: 1,325 MW retired, 6.3% of state total generating capacity.

• Wisconsin:  902 MW retired, 5% of state total generating capacity.

Download the spreadsheet of power plants by clicking here: Announced and EPA Projected Power Plant Retirements

The Context

In 2009, EPA had to decide whether or not greenhouse gases such as carbon dioxide endanger public health and welfare and therefore needed to be regulated using the Clean Air Act. At the time, IER and other groups warned EPA that Congress never intended EPA to regulate greenhouse gases. We warned EPA that if they went forward, the Clean Air Act would require EPA to not only regulate large sources of carbon dioxide emissions, but also 260,000 office buildings, 150,000 warehouses, 100,000 schools, 92,000 health care facilities, 58,000 food service buildings, 37,000 churches, 26,000 places of public assembly, and 17,000 farms. IER argued that these regulations would be incredibly expensive, that the regulations would be required by law, and that Congress never intended to regulate greenhouse gases from these, or any other sources, with the Clean Air Act.

EPA, however, announced steps to regulate greenhouse gases. To sidestep the clear letter of the law, EPA came up with two rules explaining why it was avoiding that the law required. The first is commonly referred to as the “timing decision,” with the official title of “Reconsideration of Interpretation of Regulations that Determine Pollutants Covered by Clean Air Act Permitting Programs,” 75 Fed. Reg. 17,004 (April 2, 2010). The regulation is known as the “tailoring rule,” or more officially, “Prevention of Significant Deterioration [PSD] and Title V Greenhouse Gas Tailoring Rule,” 75 Fed. Reg. 31,514 (June 3, 2010).

The tailoring rule in particular is an obvious attempt by EPA to avoid regulating smaller sources of carbon dioxide emissions, despite what the law states. In the tailoring rule, EPA states that it couldn’t follow the plain text of the law because that would lead to “absurd results.” At the time, we argued that EPA was getting it backwards. The only reason that following the law would lead to “absurd results” is because Congress never intended EPA to regulate greenhouse gases in the first place. In truth, it was EPA’s absurd decision to regulate carbon dioxide that now produced the predictably absurd results.

EPA is now in court because they deliberately violating the Clean Air Act.

They are asking the Court to allow them to implement the parts of the Act they want, and avoid the parts they know will cause political upheaval from sea to shining sea, proof that their decision to grant themselves more governmental powers was a political one. In the present post, we’ll concentrate on the sheer size and absurdity of the regulatory burdens of the EPA’s announced position, using the EPA’s own brief as our source.

Be Careful What You Wish For

On pages 48–49 of the EPA’s brief, EPA admits what we told them two years ago—that the Clean Air Act forces EPA to regulate over a million carbon dioxide sources and doing so will be incredibly expensive. Here’s what EPA’s brief says:

EPA studied and considered the breadth and depth of the projected administrative burdens in the Tailoring Rule. There, EPA explained that immediately applying the literal PSD statutory threshold of 100/250 tpy (tons per year) to greenhouse gas emissions, when coupled with the “any increase” trigger for modifications…would result in annual PSD permit applications submitted to State and local permitting agencies to increase nationwide from 280 to over 81,000 per year, a 300-fold increase…Following a comprehensive analysis, EPA estimated that these additional PSD permit applications would require State permitting authorities to add 10,000 full-time employees and incur additional costs of $1.5 billion per year just to process these applications, a 130-fold increase in the costs to States of administering the PSD program….Sources needing operating permits would jump from 14,700 to 6.1 million as a result of application of Title V to greenhouse gases, a 400-fold increase.…Hiring the 230,000 full-time employees necessary to produce the 1.4 billion work hours required to address the actual increase in permitting functions would result in an increase in Title V administration costs of $21 billion per year. [Bold added.]

These are astounding figures. And remember—these are the government’s costs in handling the new paperwork. The above estimates do NOT take into account the economic burden on the people who would be affected by the rules—building owners, hospitals, large nursing homes, large churches, as well as industry and regular consumers. But EPA’s argument here is that it’s really, really expensive and difficult to follow the law, therefore, EPA should not be forced to follow the law. We would like to remind EPA that we told them that this was the foreseeable outcome two years ago when they decided to regulate greenhouse gases.

EPA Is Reasonable?

The defender of the EPA might object, arguing that the purpose of the timing and tailoring rules is to mitigate the immediate impact of the new burden. So why are people still complaining? EPA recognized the absurdity of a brute-force application of the law, and so will exempt itself for a while.

But wait just a moment. Here’s where EPA states that it will move ahead with its plans to regulate millions of emitters of carbon dioxide (e.g. buildings, hospitals, churches, etc.), even though the administrative costs might still be prohibitively high in 2016. From page 83 of the brief:

While EPA acknowledges that come 2016, the administrative burdens may still be so great that compliance at the 100/250 tpy level may still be absurd or impossible to administer at that time, that does not mean that the Agency is not moving toward the statutory thresholds. To the contrary, through this regulatory process “EPA intends to require full compliance with the CAA applicability provisions of the PSD and Title V programs….”…(explaining that EPA will implement the tailored approach “by applying PSD and Title V at threshold levels that are as close to the statutory levels as possible, and do so as quickly as possible….”).

EPA admits that it is “absurd or impossible” to follow the law. That should give EPA and the courts pause. It if is “absurd or impossible” to follow the law, that’s because Congress never intended EPA to regulate greenhouse gases in the first place. That’s the most obvious conclusion. The US public is now seeing the corruption implicit in legislation which invites an agency like the EPA to make a determination whether it should be given more powers over our economy or not. Should we be surprised that they cunningly declare a serious national problem exists that requires their immediate exercise of power, but that they also choose a political answer, regardless of the law, since Congress has avoided the hard choices by giving them these powers?

Conclusion

The EPA’s latest brief is yet another example of the Kafka-esque world in which Americans now find themselves. When the Clean Air Act was passed, nobody would have possibly thought it would one day be used to regulate the emission of carbon dioxide—what plants breathe!—as a pollutant harmful to human health. The very notion would have struck most Americans as absurd—and indeed the EPA’s analysis confirms that intuition.

It seems that the only thing preventing the enforcement of absolute absurdity right now is the government recognizing that it itself wouldn’t be able to keep up with its own paperwork. That is small reassurance indeed. With private investment stalled and unemployment unacceptably high, the American economy needs regulatory certainty and lower energy prices, not ever more constraints and hurdles placed on job creators.

In this context, it’s not surprising that Krugman thought that the EPA should have gone forward with its plan to tighten ozone regulations—in order to create jobs. That’s right, Krugman wasn’t arguing (as an environmentalist economist might) that the benefits in human health outweighed the direct economic costs in terms of reduced output (and hence lower employment). No, Krugman actually claimed that it would stimulate the economy if businesses had been forced to spend money complying with the more stringent regulations.

Krugman on How to Fix the Economy

Let’s quote Krugman in his own words:

Let’s talk about the economics. Because the ozone decision is definitely a mistake on that front.

As some of us keep trying to point out, the United States is in a liquidity trap: private spending is inadequate to achieve full employment, and with short-term interest rates close to zero, conventional monetary policy is exhausted.

This puts us in a world of topsy-turvy, in which many of the usual rules of economics cease to hold. Thrift leads to lower investment; wage cuts reduce employment; even higher productivity can be a bad thing. And the broken windows fallacy ceases to be a fallacy: something that forces firms to replace capital, even if that something seemingly makes them poorer, can stimulate spending and raise employment. Indeed, in the absence of effective policy, that’s how recovery eventually happens: as Keynes put it, a slump goes on until “the shortage of capital through use, decay and obsolescence” gets firms spending again to replace their plant and equipment.

And now you can see why tighter ozone regulation would actually have created jobs: it would have forced firms to spend on upgrading or replacing equipment, helping to boost demand. Yes, it would have cost money — but that’s the point! And with corporations sitting on lots of idle cash, the money spent would not, to any significant extent, come at the expense of other investment.

There are (at least) two main problems with Krugman’s analysis. First and most important, he is neglecting the (obvious) fact that adding new constraints on economic activity is hardly the way to jumpstart a stalled economy. Second, he is wrong when he claims that business investment to comply with the new regulations would largely come out of “idle” cash. On the contrary, much of their spending would come at the expense of other investments—assuming the firms in question didn’t go out of business or relocate out of the country.

Kicking the Economy When It’s Already Down

Although he acknowledges the “Broken Window” fallacy (which I discuss at length in this article), Krugman nonetheless violates its commonsense lesson: It doesn’t “help the economy”—certainly not in any meaningful sense—to force businesses to spend money just in order to get back to their original starting position. Contrary to Krugman’s earlier analyses, the 9/11 attacks, the Japanese nuclear scare, and a hypothetical alien invasion hoax would not help us out of recession.

In the case of the proposed ozone regulations, Krugman doesn’t even discuss the disastrous impact on the “supply side.” Instead, he narrowly focuses on demand. Krugman thinks the problem with the economy right now is that people aren’t spending enough; he doesn’t realize that the EPA would have seriously hampered the economy’s ability to produce enough.

The EPA had proposed to reduce ozone standards down to 0.06 parts per million, or 60 parts per billion. That concentration works out to less than a cup of water in an Olympic-sized swimming pool. To understand just how draconian that threshold would have been, consider that the EPA itself conjectured that up to 96 percent of the monitored counties in the nation would have been in non-attainment. One study estimated that the tighter threshold would cost more than $1 trillion.

Environmental economists can argue about the pros and cons of such regulations. (Even the EPA’s own numbers, however, make a dubious case.) Yet Krugman hasn’t even attempted such a balancing act. What if the EPA banned the use of all fossil fuels? Imagine the huge burst of investment spending, as Americans loaded up on bicycles and skateboards!

This suggestion isn’t merely intended for humor. It is the same principle as that espoused by Krugman; the difference is merely one of degree. It would obviously be economic suicide if the EPA banned the use of fossil fuels. By the same token—though of course not nearly to the same extreme—it would be economically damaging if the EPA had gone through with its tighter ozone regulations.

“Idle” Cash Isn’t Really Idle

Krugman commits a subtler mistake in his analysis when he says that new spending on regulatory compliance wouldn’t come at the expense of other investment spending. He claims that because firms are currently sitting on huge balances of “cash” (which means short-term, liquid assets, such as Treasury bills, and not paper currency in a piggy jar), they would have no reason to curtail other expenditures if the EPA foisted new rules on them.

Krugman is simply wrong on this count. Just like households, firms hold liquid assets for a reason. They are currently holding large sums not because they “did all their spending” and had a bunch left over. Rather, when determining the optimal composition of their portfolios, firms have decided—because of the tremendous economic uncertainty—that it is prudent to carry a much larger share of their wealth in the form of “cash” than they normally do.

The EPA certainly wouldn’t make firms more relaxed about the future, if it tightened the screws on ozone regulations and thereby rendered the firms even more financially precarious. It’s true, firms might pay the compliance expenses partially by drawing down their cash balances, but they would also spread the pain around their other investments too. Ironically, Krugman has to agree with me, because I am merely repeating the same analytical framework that he deployed to (erroneously) criticize Eric Cantor’s position on hurricane disaster spending.

Conclusion

Contrary to the views of Nobel laureate Paul Krugman, shackling the economy is not the way to grow out of a recession. Rather than imposing new regulations that would drive up the prices of energy and other goods, the government should remove constraints on production.

Earlier this year, President Obama tapped General Electric (GE) CEO Jeff Immelt to head the President’s Council on Jobs and Competitiveness.  Immelt knows a great deal about creating jobs – just not in the U.S.  China has been a huge beneficiary of GE’s job machine since Immelt took over.  Having Immelt as your lead advisor on domestic job creation and competition is akin to offering Bernie Madoff the job of government investment advisor: you’re not going to like the results (though in Immelt’s case, there will likely be no illegality involved).

I’m not sure whether Immelt is himself a committed environmentalist, but the corporate “Ecomagination” program is his baby and it’s all about green technologies.

There is just one problem, most of the energy products in the Ecomagination portfolio don’t work as well as the products they are replacing, can’t compete in the marketplace and thus need government support – big government support.  Under Immelt’s leadership GE has gone from a company that competed well in the marketplace to one that curry’s favor with dictators (in China for example), sucks on the government teat at every turn, supports policies that are bad for consumers, bad for our energy security, bad for GE’s workers.  For example, despite GE’s long history of making high quality incandescent light-bulbs, GE under Immelt’s leadership supported a Federal ban on incandescents.  GE’s last incandescent bulb factory closed in 2010 and its new CFL bulbs are made in China.

Immelt’s GE is also one of the biggest boosters of the Obama administration’s plan to limit greenhouse gas emissions.  Any scheme to limit emissions necessarily raises the costs of energy in general, but of fossil fuel generated energy in particular – which would help wind and solar power reach price parity.

Under GE’s previous CEO, the famous (some would say infamous) Jack Welch, GE made money by serving consumer demand for well-made, cost-competitive products.  Under Immelt, GE receives (notice I didn’t say earns) an increasing share of its revenue in the form of government subsidies, grants and tax credits.  Rather than competing to satisfy consumer demand, Immelt’s GE tries to bugger the competition with costly regulations while encouraging consumers to want different products, and, absent that, forcing them to purchase the goods he believes in his green wisdom, they should desire.

I have written about the effect that Immelt’s initiatives have had GE’s stock price, value and taxes paid elsewhere – check it out, I think you’ll find it interesting reading.

If anything, President Obama’s choice of John Bryson for Commerce Secretary is even worse news for the economy than his choice of Immelt.

Mr. Bryson may be many things but a friend of capitalism and free markets – especially for energy – isn’t one of them.  He was a co-founder of the Natural Resources Defense Council one of the most aggressive environmental lobbying groups fighting through lobbying, lawsuits (Bryson was a lawyer for them), and grass roots organizing against almost every technology that modern industrial civilization was built upon and which Americans’ relatively high standard of living still depends upon.  They have fought to shut down power plants – and to prevent new ones from being built – they have helped to foist numerous environmental regulations and costly conservation requirements on factories, power plants, and consumers – raising the price of energy and consumer goods and causing unemployment in the process.  In the last 40 years almost no government agency has done more to retard economic progress than the U. S. Environmental Protection Agency, and it has had no greater friend (directly and indirectly) in these efforts  than the NRDC.

Since his time with the NRDC Mr. Bryson has gone on to work in the both the public and private sectors – hurting the economy every step of the way.  When he served on the California Public Utilities Commission, under his influence, it separated utility profits from power use in an effort to force conservation upon utilities and ratepayers.  Later, when he joined the utility Edison International as CEO and chairman he worked with the California Public Utilities Commission to define the terms of the state’s catastrophic electric restructuring.

California’s restructuring led to blackouts, energy shortages, near bankruptcies – and ultimately did little or nothing to reduce consumer prices or increase competition. In short, Bryson, both in the public and private energy sector in California, has overseen or helped shape a situation in which, while power use is down, prices are among the highest in the nation and even with a declining economy and companies and jobs fleeing the state, California lives just one hot day away from blackouts  – planned and unplanned.

In addition, Edison, under Bryson’s leadership, has been front and center in pushing the potentially catastrophic cap and tax energy plan that the Obama administration would like to foist upon the nation.

Bryson is also on the board of a number of green energy companies and associations, all of which depend upon government support and/or mandates for their existence and continued growth.

It’s not surprising that Bryson, with his background as  a leading environmental lobbyist would support these companies, what is surprising is that with his support of these companies he would even be considered to represent the U.S. economy and trade to the world.  Rather than a proponent of free markets and consumer choice – what the position of Commerce Secretary deserves – he is like one of the bad guys in an Ayn Rand novel: a welfare industrialist who supports industries and companies that people won’t freely choose to support and thus can’t compete and so uses the force of government to gain power and advantage.

The President Agrees: Rising Oil Prices Are Bad!

Although we won’t have many kind things to say about the speech, at least the president acknowledged what many interventionists refuse to concede: rising oil prices hurt Americans, in particular working families with kids. Here is the president on this presumably obvious point:

Now, for the last few months, gas prices have just been killing folks at the pump.  People are filling up their tank, and they’re watching the cost rise — $50, $60, $70.  For some families, it means driving less.  But a lot of folks don’t have that luxury.  They’ve got to go to work.  They’ve got to pick up the kids.  They’ve got to make deliveries.  So it’s just another added expense when money is already tight.

We’ll be sure to place this quotation in the file, to deploy it the next time someone from the Obama Administration touts the wonders of a carbon tax or cap-and-trade scheme.

Are Tax Hikes the Way to Boost Production?

Although he started strong by acknowledging the importance of lowering fuel prices for Americans, Obama then strayed into trouble when diagnosing the causes of this dire situation:

[T]his is not a new problem.  For decades, we’ve left our economy vulnerable to increases in the price of oil.  And with the demand for oil going up in countries like China and India, the problem is only getting worse.  The demand for oil is inexorably rising far faster than supply.  And that means prices will keep going up unless we do something about our own dependence on oil….

At the same time, it’s also true that there is no quick fix to the problem.  There’s no silver bullet here.  But there are steps we can take now that will help us become more energy independent….

So I’ve laid out an energy strategy that would do that.  In the short term, we need to increase safe and responsible oil production here at home to meet our current energy needs.  And even those who are proponents of shifting away from fossil fuels have to acknowledge that we’re not going to suddenly replace oil throughout the economy.  We’re going to need to produce all the oil we can.

But while we’re at it, we need to get rid of, I think, the $4 billion in subsidies we provide to oil and gas companies every year at a time when they’re earning near-record profits, and put that money toward clean energy research, which would really make a big difference.  (Applause.)

We at IER agree that the federal government shouldn’t be subsidizing oil and natural gas production; it was the first plank in our recommendations to the new Congress early this year. But neither should the government be subsidizing solar, wind, biomass, electric vehicles, or any other energy technology. Also, when it comes to the matter of subsidies, people need to remember that adjusted for the energy output, subsidies to oil and natural gas are dwarfed by those to the politically-favored techniques. According to new data from the Energy Information Administration, solar is being subsidized by over 1200 times more than coal and oil and natural gas electricity production, and wind is being subsidized over 80 times more than the more conventional fossil fuels on a unit of production basis (ie. the amount of energy output per dollar of subsidy).

Yet if we put aside the principled issue of whether the government ought to be picking winners and losers, there is an inconsistency in Obama’s rhetoric. On the one hand, he argues that the supply of oil is having trouble keeping pace with increases in demand, and that the government should do everything it can to encourage domestic oil production. Then he states matter-of-factly that raising the tax bill on U.S.-based energy companies is the right thing to do.

Just because a firm is having a profitable year, doesn’t mean that the laws of economics suddenly stop applying. By effectively raising taxes (through ending the “subsidies” in the tax code etc.) on oil and natural gas companies, President Obama would reduce their incentives to find and develop new deposits to meet the rising demand. By the same token, if the government suddenly imposed a 50% surcharge on the incomes of Hollywood actors, they would make fewer movies per year, even though their after-tax income would still make them “obscenely rich” compared to most Americans. Incentives matter.

Obama: Taking Credit for Something Companies Would Have Done Anyway?

Let’s return to Obama’s speech and specifically the role of fuel economy standards:

And that’s why we’re here today.  This agreement on fuel standards represents the single most important step we’ve ever taken as a nation to reduce our dependence on foreign oil.  Think about that.  (Applause.)

Most of the companies here today were part of an agreement that we reached two years ago to raise the fuel efficiency of their cars over the next five years.  And the vehicles on display here are ones that benefited from that standard….

And today, these outstanding companies are committing to doing a lot more.  The companies here today have endorsed our plan to continue increasing the mileage on their cars and trucks over the next 15 years.  We’ve set an aggressive target, and the companies here are stepping up to the plate.

By 2025, the average fuel economy of their vehicles will nearly double to almost 55 miles per gallon.  (Applause.)  So this is an incredible commitment that they’ve made.  And these are some pretty tough business guys.  They know their stuff.  And they wouldn’t be doing it if they didn’t think that it was ultimately going to be good business and good for America.

Think about what this means.  It means that filling up your car every two weeks instead of filling it up every week.  It will save a typical family more than $8,000 in fuel costs over time.  And consumers in this country as a whole will save almost $2 trillion in fuel costs.  That’s trillion with a T. [Bold added.]

We’ve asked this before and we’ll repeat the question: If a government intervention into the energy markets is supposed to be so good for business…then why does the government have to force the businesses to do it? Obama should simply fax his suggestions to these “pretty tough business guys” and then, once they see the light (that it took government officials to discover), they’ll gladly produce the more fuel-efficient vehicles without government prodding. After all, it’s good for business, right? Why would the government have to force companies to do something that is profitable, especially if they agree with the claim, as the president is here saying?

CAFE Standards Kill

What Obama is ignoring with his claims of saving trillions of dollars is that there are downsides to raising fuel efficiency standards. The automakers aren’t dumb. They know that gasoline is expensive and that, other things equal, a more fuel-efficient care is more desirable to their customers.

Yet other things aren’t equal. Engineers have already plucked the “low hanging fruit” when it comes to vehicle design. In order to make vehicles more fuel efficient, the increase must come with a sacrifice in some other desirable feature, such as size or weight of the vehicle. That is why interfering with the optimal tradeoff—as it would be determined in a free market—will lead to undesirable consequences, such as more traffic fatalities.

Writing for The American Thinker last year, J.R. Dunn summarized the lethal legacy of CAFE standards:

Fuel standards are the longest-lived of an entirely futile array of attempts to address 1970s oil shortages. They first went into effect in the 1975 Energy Policy and Conservation Act as the Corporate Average Fuel Economy program, better known as CAFE. Under the CAFE standards, domestic and foreign automobile manufacturers had to meet a certain mileage standard in their cars and light trucks. They were allowed a very short time to carry this out before fines were levied, so they met the challenge in the easiest way possible: by designing small engines that used less fuel while lowering the size and weight of new vehicles to preserve performance.

…

The new regulations did accomplish one thing — they killed drivers and passengers in large numbers. By lightening cars and removing material, auto companies were inadvertently discarding the armor that protected motorists in the event of a crash. Similarly, the compressed new models lacked space for impact forces to attenuate before causing damage and injury. Drivers in lightweight cars were as much as twelve times more likely to die in a crash. It was once said about American autos that they were “built like tanks.” Many of the new models from the late ’70s onward more closely resembled go-carts — and proved to be about as sturdy.

…

How many deaths have resulted? Depending on which study you choose, the total ranges from 41,600 to 124,800. To that figure we can add between 352,000 and 624,000 people suffering serious injuries, including being crippled for life. In the past thirty years, fuel standards have become one of the major causes of death and misery in the United States — and one almost completely attributable to human stupidity and shortsightedness.

Conclusion

Consumers desire fuel efficiency in their vehicles, but that isn’t their sole criterion—if it were, we’d all be riding bicycles or skateboards to work. The president’s claim that higher fuel efficiency mandates will be good for business is absurd on its face, because if that were true, no mandate would be necessary. In order to comply with the new regulations, automakers will produce vehicles that will be more dangerous. Americans may save money at the pump, but fewer of them will be alive to enjoy the savings.