A Hidden Source Of Efficiency

Pollution laws boost productivity

Critics of environmental regulations and the huge costs these regulations entail for industry claim the rules have substantially contributed to America's sharp productivity slowdown since the early 1970s. Now a study by economists at the World Resources Institute offers strong evidence that this view is based on a faulty measure of productivity.

Total, or multifactor, productivity growth, as now measured by the government, reflects the difference between the growth of output (goods or services) and the growth of inputs (mainly labor and capital). But it ignores the negative impact that pollution imposes on the economy via health problems, corrosion, and environmental degradation.

Thus, notes WRI economist Robert Repetto, as long as output is measured without regard to the environmental harm associated with its production, the extra inputs of capital and labor needed to reduce that harm will drag down productivity growth. From the standpoint of consumer welfare and the economy as a whole, however, a ton of paper or a kilowatt-hour produced without pollution is qualitatively different from one that pollutes the environment.

What is particularly encouraging, says Repetto, is that environmental economists have developed ways of measuring such differences with a fair degree of precision. In fact, all major environmental regulations currently require hard estimates of projected benefits and costs. And that makes it possible to incorporate the net benefits of pollution control in the productivity measures of pollution-intensive industries.

In the capital-intensive electric-power industry, for example, government statistics indicate that multifactor productivity fell by about 0.35% a year from 1970 to 1991. But when the value of a sharp rise in output relative to emissions is factored into the equation (chart), the WRI economists estimate that total productivity in the industry rose by at least 0.38% a year. A similar calculation raises multifactor productivity growth in the pulp-and-paper industry over the same period from 0.16% a year to about 0.4%.

None of this means that environmental regulations can't be made more efficient, says Repetto. But it does indicate that they have already paid off in individual industries--and the overall economy--and that it's time to recognize such gains in productivity measures.

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