An insidious fallacy of contemporary policy-making holds that regulation creates jobs. The argument: Regulation necessitates investment, and investment breeds jobs. Adherents to this view support their case by citing expenditure on projects instigated by new regulation and pointing to consequent hiring. To call that job creation ignores much, including costs elsewhere in the economy and the ephemeral nature of employment unaffiliated with profit.
The fallacy welters in a study purporting to support claims that two new rules of the US Environmental Protection Agency will create nearly 1.5 million jobs.
'Jobs will be created'
"As companies invest in upgrades to their older, less efficient power plants to comply with EPA air pollution rules, jobs will be created at suppliers' manufacturing centers all the way down the supply chain to the actual construction sites," said Mindy Lubber, president of the environmental coalition Ceres, which produced the study with the Institute of Clean Air Companies (ICAC).
Her comment appeared in a press release citing two factors in the research. One is a Bureau of Labor Statistics estimate that every $1 million invested in a construction project fosters 11 new jobs. The other is an estimate by EPA "and others" that $94 billion in "investment" will be needed for compliance with EPA's Cross-State Air Pollution Rule (CSAPR) and Mercury and Air Toxics Standards Rule (MATS).
"There is an unprecedented amount of capital sitting on the sidelines of the economy," said ICAC Executive Director David Foerter. "There's also a large pool of skilled labor not being utilized. Eliminating the uncertainty around these rules will connect those two dots."
By this way of thinking, there's no distinction to be made between spending $94 billion on environmental compliance and investing it in profitable activity. All that capital has been "sitting on the sidelines" not because investors feared overregulation but simply because they didn't, until now, know the rules. With details now clear, investment will flow like rainwater down a bank's roof.
That view is thoroughly wrong. It ignores opportunity cost. Money spent to comply with regulation isn't investment and isn't available for investment; it's a cost of participation. Investment is the expenditure of capital in hope of earning a profit. Money spent complying with regulations seldom boosts profits and can't be invested in projects that might. Investment creates jobs; cost doesn't.
Furthermore, operators of many plants hit by new EPA rules won't spend capital unprofitably on upgrades; they'll close the facilities. As the Ceres-ICAC study appeared, Fitch Ratings was estimating effects of EPA regulations, mainly CSAPR and MATS, on generators of electric power.
Fitch looked at coal-fired power-generation units smaller than 400 Mw and more than 40 years old needing new or substantial enhancement to emissions-control equipment for compliance with new EPA requirements. On that basis, Fitch saw 83 Gw of generation capacity placed at risk for retirement by toughened EPA regulations. Arithmetic suggests at least 200 power plants might be closed by EPA initiatives such as CSAPR and MATS. People work at those plants. They will lose their jobs if the plants close. In terms of effects on national employment, the losses offset jobs related to toughened environmental regulations—worker by worker.
Ignoring costs
To ignore those effects—those costs—in service to rosy claims about a link between job creation and environmental regulation is indefensible. The lapse should not guide public policy.
The Ceres-ICAC study eagerly asserts "ripple effects" of employment related to increased environmental regulation—but not of costs. Shareholders of affected companies will need to recoup what they can of the $98 billion diverted to unprofitable use from—guess who!—energy users. Higher energy costs thus will propagate through the economy, lowering profits and investment and exterminating jobs in ripple effects of the costly kind. Policy-making must not ignore these effects, either.
Employment doesn't grow because of regulation. It grows because of profitable enterprise. Regulation, by raising costs, works against job creation. It always has. It always will.
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