Mr. Chairman and Members of the Subcommittee: I am honored by your invitation to appear today. My name is David Montgomery, and I am Vice President of Charles River Associates. I am an economist and I have been working, publishing and teaching in the areas of environmental and energy economics for the past 40 years. I will be discussing my own opinions which are not necessarily those of my employer or any of its clients.
I would like to concentrate on a study of green jobs released last week by Ceres and PERI, and use it as an example of how studies in this genre provide a biased and incomplete picture of the effects of regulation and of how jobs are created. I think I can summarize my testimony in a few key points.
First, the regulations at issue undeniably raise the cost of doing business. Tradeoffs must be made between economic costs and environmental benefits in designing laws and regulations, and pretending there is no cost does not help those deliberations.
Second, the PERI study and its like only reach their happy conclusions because they leave out of their calculations all the jobs lost in the rest of the economy because of regulations and the costs they impose.
Third, even PERI's calculations of jobs directly associated with compliance are exaggerated because they assume that 100% of the required new equipment will be manufactured in the United States. Testimony in this very hearing demonstrates how wrong that assumption is.
Fourth, all such green job studies miss the fact that any increase in investment or government spending will create jobs in a slack economy. Environmental regulation is a particularly costly way to promote job growth; even the PERI study shows that new regulations on utilities would cost over $300,000 per direct job in an economy in which the average employee’s wages and benefits amount to about $50,000 per year.
Beyond these problems with the approach of the PERI study, its analysis suffers from a number of more technical deficiencies.
First, “jobs” simply are not a meaningful indicator of economic impacts. Just requiring every utility to hire 100 workers to dig holes in the ground and fill them up would equally and more simply create direct and indirect jobs.
Second, the PERI study does not use a model of the U.S. economy – it simply uses numbers called multipliers that add to the direct jobs involved in producing pollution control and generating equipment an estimate of jobs supplying materials used in that production. If PERI used any comprehensive model of the U.S. economy, it would be forced to account for where its $200 billion came from.
When I used the same model of the electric power sector as PERI, but linked it to CRA’s broad model of the entire economy, I found exactly the opposite results from PERI. EPA’s utility regulations would reduce, not increase, total macroeconomic investment. The reduction in investment would be about $150 billion from 2010 – 2015. If these numbers were used with PERI’s multipliers the result would be net destruction of over 1 million jobs. I am not espousing either +1.5 million or -1 million jobs as a useful number, my point is that people would have had jobs doing something else if these regulations were not put in place, and it would be doing something that creates more wealth.
Third, PERI ignores important effects. We estimate that in 2015 wholesale electricity prices would increase by 1 – 3%, average worker compensation would fall by $100 - $150, output and employment in auto, heavy industrial, and energy intensive sectors would fall by about 1%, and coal output and employment would shrink by 20%.
Fourth, studies like PERI want you to favor industries that employ more employees per dollar of output. This is nothing more than the Luddite program to save jobs by breaking up productivity-enhancing machines. The overall effect of restructuring the economy toward labor intensive industries and processes can only be to lower output per worker and to lower average wages.
Fifth, and in conclusion, I note that the logic of the PERI report implies that the greater the unproductive investment caused by a regulation, the greater its impact on jobs. If that logic were really valid, rather than seeking cost effective regulation we should seek out the highest cost way to achieve environmental goals. The result is absurd because the ‘logic’ upon which it is based is nonsense.
In that spirit I will conclude with a quote from Professor Schmalensee of MIT: "As common sense suggests, we cannot regulate ourselves to prosperity." Thank you for this opportunity to address the Subcommittee.
