Questionable Economics From The Economist

When the Obama administration moves forward with stronger environmental protection, some see a "phony theology" at work. But most thoughtful observers see a moderate administration steering a middle course, irritating businesses with increased protections when they are cost-benefit justified, but also frustrating environmentalists with a relatively slow pace of change.

Two recent pieces raise the question of whether The Economist is falling into the alarmist's trap. One accuses the Obama administration of over-counting benefits and the other frets that too many regulations are crushing the American economy.

The first piece complains about the degree to which the quantifiable benefits of a recent rule to cut mercury pollution from power plants come from lowering the level of particulate matter in the air. This was, and has been, a major industry talking point, and has now been picked up by anti-environmental voices in Congress.

Industry argues that because the pollution reductions come in areas of the country that already meet air quality standards, there is no health benefit to cleaner air. This is pure nonsense. The EPA Administrator does not have the power to deem air clean and thereby erase any negative health effect from pollution (just ask Christine Todd-Whitman).

Even where soot levels are low, there is reason to believe that there are important health benefits to further reductions. Yes, scientific uncertainty is greater at lower pollution levels (because studies are normally done in high pollution areas), but EPA has already taken all this into consideration and developed its health models on the best available science.

The Economist also discounts the private benefits to energy efficiency. The claim is that consumers could already choose more fuel-efficient vehicles, for example, but opt for gas guzzlers. But a large number of behavioral issues can interfere with optimal adoption of energy efficiency technology. The phenomenon is so well known in the economics literature that it has its own name: the Energy Paradox. Ignoring it is just bad economics.

The idea that regulations are strangling the U.S. economy, the subject of the second piece in The Economist, has been seriously debunked many times over. To begin with, gross domestic product, the standard measure of national economic health, has continued to grow over the last several decades even as more regulations have gone on the books.

And it goes without saying that the current recession was not brought about by over-regulation. If anything, it was too little regulation in the banking sector that caused problems.

While the piece lists a handful of silly-seeming rules, in reality, there aren't that many truly unnecessary regulations when it comes to public health. There are certainly some that could be updated where technology has advanced or times have otherwise changed. The Obama administration is already on the case here, requiring agencies to come up with plans to revisit old rules and identifying outdated regulations for the chopping block.

This strategy represents the most robust effort of any president to clean out cobwebs in agency rules.

The idea that regulations are crushing American ingenuity and economic vitality is silly. The cost of complying with regulations is a tiny percentage of total business costs and is responsible for a very small percentage of layoffs. It might make a good talking point in a yelling match on TV, but the idea that the economy is being held in shackles by regulators in Washington is not based on reality.

It's easy to try and find a bogeyman to blame for protracted economic malaise and lackluster job growth as the United States emerges from the Great Recession. Complex factors have led us to where we are today, from monetary and fiscal policy, to inequality and our decades-long failure to sufficiently invest in infrastructure and education.

These issues are not always easy to address or even to understand, but we have to at least try. Conjuring false images of overzealous bureaucrats just points us in the wrong direction.

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