The Bogus Trade-Off Between the Environment and Jobs

Paul Krugman has a NY Times column arguing, from a Keynesian point of view, that Obama’s climate change program won’t cost jobs.  One of my  posts a couple of years ago suggested the same idea: in a slack economy, regulatory requirements are a form of stimulus that can actually create jobs because industry has to spend money to comply.  That seems very plausible, if you’re a Keynesian and think the cause of our current problems is a shortfall in public and private spending.  But maybe you’re not a Keynesian. In fact, just given political realities, if you buy into the job loss theory, you’re almost certainly not a Keynesian.  There’s still no need to worry, though: the job loss idea is even more obviously bogus if you’re a free market enthusiast.

Here’s why.  As Krugman explains, the negative impact of regulation on jobs is due to increased prices.  Energy prices go up, so people buy less energy and fewer goods and services that require a lot of energy.  As a result, people making those goods and services might lose their jobs.  Does that mean that we’re left with unemployment — people who want work but can’t get jobs?  Not if you believe in the free market it doesn’t.  Markets adjust to changes, whether it’s a bad corn crop, cheap natural gas from fracking, or EPA regulations.  Maybe if the changes are sudden and severe like the OPEC oil crisis, there could be painful dislocations, but we’ve got plenty of notice in this case that new regulations may be on the way.  So people will shift their buying away from energy-intensive purchases toward other kinds of goods and services, production of those goods and services will rise, and the labor market will readjust until everyone who wants to work has a job. Problem solved!

So if you’re not a Keynesian but instead believe in the omnipotence of the market, you should come to the same conclusion as Krugman: regulation isn’t a job killer.  It might have other economic problems but increased unemployment isn’t one of them.

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Reader Comments

5 Replies to “The Bogus Trade-Off Between the Environment and Jobs”

  1. Here in Texas we do not have cap and trade and other such useless, wasteful, incoherent, junk-science regulatory programs which are typical in California and other blue states. Many businesses continue to relocate to Texas so as to avoid the costs and burden of vicious little regulatory tyrants. This is how climate change creates jobs in Texas and destroys jobs in California.

  2. Dan — this post is ridiculously silly. I get the Keynesian argument as a theoretical matter. That’s an argument for another time. But your caricature of the free market argument is ridiculous. By this logic, breaking window creates jobs because new windows have to be made! Yes the market adjusts, but no free market economist believes that such adjustments never results in job loss. The real free market argument why regulations reduce employment is that regulation tends to divert funds to less productive investments, resulting in less economic growth and less employment over time. One also has to consider how regulation alters the relative costs of factor inputs, as this can have employment effects as well. So, for instance, increasing the cost of energy may cause producers to substitute labor for energy, which could increase employment in a particular industry, though it may also have an effect on wages. The question of whether regulation reduces employment is also separate from the question of whether regulation is a good idea.

    Ultimately the question whether environmental regulation reduces employment is an empirical one, and the best empirical studies of this question (conducted by noted right-winger Michael Greenstone, chief economist for the CEA in the Obama Administration) says yes, there are job losses.
    http://www.nber.org/papers/w8484

    I summarize some of the research here:
    http://www.volokh.com/2011/09/05/jobs-vs-the-environment-one-more-time/

    JHA

  3. I agree with jh’s arguments. But I remember Republicans arguing, during Bush’s first term, that there weren’t enough skilled boilermakers in the US to install the equipment needed to meet stricter pollution regulations. Now those same (mostly still proposed) regulations are said to be costing jobs.

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About Dan

Dan Farber

Dan Farber has written and taught on environmental and constitutional law as well as about contracts, jurisprudence and legislation. Currently at Berkeley Law, he has al…

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