Lisa Jackson, Administrator of the Environmental Protection Agency. According to the WSJ, trade associations and businesses single out the EPA as the #1 target when they complain about stifling federal burdens.

Incredibly, a new study from the Political Economy Research Institute (PERI) claims that the EPA’s new regulations will be—you guessed it—good for the economy because it will create hundreds of thousands of jobs. (After all, it’s hard work complying with a bunch of new regulations.)

In the present post we’ll explain the flaws in their approach, and then we’ll give some suggestions for how to provide real economic stimulus.

No Pain, No Gain? PERI’s Case for EPA Job Creation

Here is how the E&E[i] summarizes the new PERI paper on the alleged job-creating benefits of the EPA’s mandates on businesses:

Despite claims that U.S. EPA’s regulations are destroying jobs at a time of already high unemployment, two new sets of air pollution rules for power plants would create hundreds of thousands of jobs over the next five years, according to a report released today.

The power sector is bracing for a slew of new federal requirements, including the proposed Clean Air Transport Rule (CATR), a program aimed at smog- and soot-forming pollution that travels across state lines. By next month, EPA must also propose new limits on mercury and other types of toxic air pollution to replace a George W. Bush-era program that was thrown out by a federal court.

Both sets of rules will require power plants to install new air pollution controls and build new power plants to replace older units.

And according to new research by the Political Economy Research Institute (PERI) at the University of Massachusetts, it will take about 1.46 million years of new labor to make those changes happen over the next five years — the equivalent of 290,000 full-time jobs.

…

The job-growth estimates were based on projections that the two rules will force the power sector to invest nearly $200 billion to design, build and install equipment between 2010 and 2015. Those costs include about $94 billion for pollution controls and $100 billion for power plants with about 68,000 megawatts of generating capacity, making up for power plants that would be retired.

The projects would directly create about 640,000 years of work through 2015, or 128,000 full-time jobs, the study says. Another 820,000 years of work would be created indirectly, as other companies provide goods and services to the projects.

This new PERI study resurrects the same “green jobs” fallacies in its previous ones, which we debunk here. Our argument is quite simple: The government doesn’t make the country richer by imposing new constraints on economic activity. On the contrary, new regulations hurt the economy because it is now costlier to produce the same amount of output, in this case, electricity.

Glancing through Appendix B of the PERI report, in which they explain the method by which they come up with such counterintuitive conclusions, shows that it truly is based on the crude “insight” that forcing businesses to spend money complying with new regulations, will cause them to hire workers. There is nothing in the PERI study showing that what these workers are doing is beneficial to the economy; it is the mere fact of their hiring per se that is supposed to be the benefit.

To demonstrate the problem with this approach, we’ll do the folks at PERI one better. To repeat their argument: they are claiming that the EPA’s new pollution regulations will create 640,000 years of work directly flowing from the need to comply with the new rules. But if that’s supposed to be a good thing, then why not pass a further regulation specifying that anyone performing upgrades to power plants must work with one hand tied behind his back? We haven’t done a formal simulation as the PERI folks have done, but we bet our augmented regulations would easily require 2 million years of work directly in the generation sector. So the IER plan creates far more jobs than the modest EPA proposal, especially when you factor in the indirect benefits flowing to the massage therapists who have a surge in arm and hand cramps to deal with.

The specific flaw in the PERI approach is that they ignore why people go to work in the first place. The purpose of employment is to create valuable goods and services. In a perfect world, we wouldn’t have to work; we would instead get to buy plasma screen TVs, new cars, and fancy dinners for free, and our electricity would come magically without anyone lifting a finger. But in the real world, we face the onerous task of having to produce things before people can enjoy them. To make sure we aren’t wasting valuable resources, businesses only hire workers who can produce things that customers want to buy.

In this context, if the EPA comes along and slaps on a bunch of new mandates, that doesn’t mean that the newly hired workers are “creating value” in a legitimate sense. Rather, it is more akin to the EPA laying demolition charges and then pointing to the rebuilding crews as proof of how helpful their actions have been.

How to Generate Productive Investment and Job Creation

It is true that right now, businesses are reluctant to hire, and millions of willing workers can’t find employment. Before we can prescribe a solution, we need to accurately diagnose the problem.

One of the biggest factors is that the rules keep changing. Businesses aren’t sure how much they will have to pay for their employees’ health insurance, and proposals for doubling the unemployment insurance tax are floating about. In this context, it’s not surprising that businesses aren’t eager to load themselves up with what may turn out to be huge financial liabilities down the road—i.e. new full-time employees.

Rather than force businesses to comply with new mandates—and thus “create jobs” that serve no productive purpose—the government should lift its restrictions on firms that are actually trying to produce desired goods. For example, earlier this month Royal Dutch Shell announced that it was postponing its arctic drilling program because it can’t obtain the necessary permits from the Obama administration.

Conclusion

If proponents of the EPA’s new regulations want to admit that they will hurt the conventional economy, but will yield benefits in the form of reduced air pollution or global warming, then that is at least a coherent argument. To see if the plan made sense, we would then face the empirical question of seeing whether the alleged environmental benefits came at too high a cost in terms of lost jobs and lower economic output.

But that’s not what the folks at PERI are claiming. Instead, they are mixing up their costs with their benefits. They are saying that it is a good thing that it will take more workers to produce electricity, and hence drive up electricity prices.

In reality, the way to help the economy is to adopt policies that stimulate productive investment and job creation. A great starting point would be to lift arbitrary restrictions on domestic energy production.

[i] Gabriel Nelson, “AIR POLLUTION: EPA’s power plant rules would spur job creation–report,” E&E February 8, 2011.

Contrary to the claims of the study, both the Obama administration’s “stimulus” plan and the House-passed Waxman-Markey climate bill will indeed lower living standards for most Americans. It’s true, some groups will benefit financially from the government’s massive deficit spending and power grab—solar panel manufacturers and Wall Street carbon dioxide allowance brokers are good examples. But the nation’s poor are not politically connected, and thus will not benefit from these backroom deals. Instead, the poor will suffer the most from rising energy prices and reduced transportation options.

Helping Business By Crippling It?

The fundamental flaw with the notion of a “green recovery” is that it overlooks all the jobs the government will destroy with its mandates and stealth taxes. For example, the PERI study tells us:

The building of a clean-energy economy in the United States can also serve another purpose: to create new ‘pathways out of poverty’ for the 78 million people in this country (roughly 25 percent of the population) who are presently poor or near-poor, and raise living standards more generally for low-income people in the United States. (p. 2)

Such claims sound good, but simply don’t hold up to scrutiny. The government can’t make the economy richer by siphoning resources away from the private sector and spending them on political pet projects, nor does it raise living standards by weaning businesses off the most efficient techniques of production.

The “green recovery” advocates are trying to have their cake and eat it too. Assume that some of the most dire global climate computer simulations are accurate, and that drastic reductions in greenhouse gas emissions are necessary to literally avert global catastrophe. Even in this case, the government’s preferred solution—taking away options from business and forcing them to make their products using less efficient energy—will lower total domestic economic output. To some, the tradeoff of averting the “what if” scenario would be worth it, but the point is, there would be a tradeoff. Americans would be forced to enjoy a lower material standard of living for the (theoretical) benefit of lower long-run temperatures.

To see how far-fetched the green jobs rhetoric is, notice that the argument has nothing intrinsically to do with “clean” energy. If cap-and-trade in carbon dioxide emissions will be such a boon to the economy, then why stop there? The government could also declare a cap on how many tons of steel businesses could use in a given year. By ratcheting down the steel cap every year (as they plan on doing with carbon dioxide), the politicians would force businesses to come up with other ways of making their products with less and less steel. According to the PERI study’s logic, this would be great because of all the new job opportunities in plastics and other soon-to-be invented sectors.

The Lower the Wage, the More Jobs You Can “Create”

The PERI study relies on a typical claim from the “green recovery” literature:

[O]ur findings show that clean-energy investments create more job opportunities than spending on fossil fuels, across all levels of skill and education. The largest benefits will accrue to workers with relatively low educational credentials. (p.2, emphasis added)

Sounds too good to be true, doesn’t it? That’s because it is. In a relatively free market economy, where for the most part lawmakers and unelected bureaucrats don’t control economic decision-making, labor and capital moves towards those sectors where they are the most productive. Some businesses, such as hair salons, are relatively labor-intensive, whereas other businesses, such as airlines or oil rigs, would be more capital-intensive. Loosely speaking, the economy’s overall output would be maximized, because every worker and machine would be deployed in the sector where they could produce the most value (and earn the most money).

Now enter the policymakers and bureaucrats who start rearranging resources. They look at businesses that generate electricity by harnessing wind and solar power, and then they look at businesses that produce electricity by harnessing coal power. Since it takes more workers to produce electricity from windmills and solar panels, they decide to cripple the coal burners and give subsidies to the wind harvesters to try to create a “green recovery.”

But if it really helped workers for them to move from efficient energy industries into “green” energy sectors, why would the government have to force them to do it? Part of the answer is that the new jobs will actually not be very high paying, as the PERI study unwittingly admits when it says, “Out of the 1.7 million net increase in job creation, roughly 870,000 of the newly available jobs would be accessible to workers with high school degrees or less.”

Saving Consumers Money By Taking Away Their Products

As bad as their arguments for “helping” workers are, the PERI approach to “helping” consumers is even worse. The government will “save” households money by forcing them to consume less energy and transportation. For example, in discussing the benefits of increasing the availability of mass transit—funded with taxes taken from the private sector—the PERI study says (p.3):

• The largest benefits will accrue to households that can replace a car with public transit.
• These households would see their annual transportation expenditures fall by roughly $2,000.
• This would represent a reduction in total expenditures for these families of about 10 percent.

Applying the same logic, if the government expanded public housing projects and doubled property taxes at the same time, that might encourage families to “save money” by moving into government-owned apartments, but it wouldn’t make them better off as a result.

What the PERI authors fail to explain is why the poor would need to be forced to reap all the benefits that will allegedly accrue from new government “green energy” mandates. For example, if it makes economic sense for a poor household to install better insulation and fluorescent lights, why does the government need to be involved at all? At best, PERI should conduct an educational campaign alerting poorer households of all these alleged savings. Or better yet, maybe they could provide free compact fluorescent light bulbs to citizens of modest means. Both would be certainly be less intrusive to the poor than fundamentally reorganizing energy markets, and consequently harming the U.S. economy, for the sake of promoting politically correct energy.

Conclusion

The $787 billion Obama “stimulus” (pork) package and the 1400-page Waxman-Markey energy tax bill will not help the poor. You don’t improve the economy or raise living standards by rearranging resources and imposing artificial constraints on the private sector. These two government programs do nothing more than siphon money from taxpayers and into the hands of lawmakers and bureaucrats to shower onto their politically connected friends. Unfortunately, the working poor are not lucky enough to be members of that exclusive club.