Edward Betts
If you're wondering why the stock market has risen in recent months despite uninspiring economic news, look no further than the Federal Register. This massive volume, where all new regulations are published, promises a bright economic future that should ease anyone's concern over the direction of the U.S. economy.
Agencies are required to conduct cost-benefit analysis for regulations estimated to cost more than $100 million. Thankfully, there are hundreds such rules underway, and they forecast tremendous growth for our sluggish economy.
Consider one such regulation, the Utility Mercury and Air Toxic Standards (MATS), which applies to coal-fired power plants. Finalized by the EPA in 2011, the regulation is estimated to cost the economy about $10 billion per year. But the EPA claims the annual benefits from the rule will be between $37 billion to $90 billion. In other words, its benefits will be four to nine times higher than its costs.
The EPA doesn't claim such benefits are theoretical. The agency says they are "monetized," meaning they will show up in higher gross domestic product. And since GDP is about $16 trillion, this one rule should add as much as half a percent of growth to the economy—hardly a trivial amount.
Regulations have costs as well, a fact the EPA acknowledges. Implementing the MATS rule will result in the loss of 23,000 megawatts of electricity production and 200,000 jobs by 2015. It's just one of seven major rules that will eliminate between 544,000 and 887,000 jobs and cause a 1.5 percent reduction in the nation's electric generation capacity.
But this loss is swamped by the economic benefits of lower carbon emissions resulting from the MATS rule. The government asserts that the value of carbon not emitted into the atmosphere is somewhere between $12.60 and $119 per ton. Whether you take the high or low value doesn't matter. The benefits of environmental regulations clearly exceed their costs. Exactly how these benefits are monetized in the economy is not explained, but the EPA asserts they are real, so the regulations must provide a fabulous rate of return.
Such growth-inducing regulations are being implemented for a wide range of products and industries from microwaves to cement manufacturing. The Department of Energy, for instance, recently issued new energy standards for residential furnace fans. The agency's analysis admits that the industry will lose 21 percent of its value, but that loss will be more than offset by energy savings for consumers and, even more, by billions of dollars in benefits from reduced carbon emissions. A single microwave regulation is said to produce benefits that are 35 times higher than its costs.
The benefits of regulation are derived primarily from the social cost of carbon, as it has been divined by a panel of experts. An interagency working group determined the price of carbon based on estimates from the Intergovernmental Panel on Climate Change of the future impact of carbon emissions. Those estimates are routinely used to justify nearly any regulation. Investments in carbon reduction, the experts tell us, will pay off for decades to come and will show up in GDP.
Anytime now, the benefits from all these regulations will reveal themselves and drag the economy out of its rut. The value of carbon, as decreed by experts, will finally materialize into real economic growth. Then the forced allocation of resources by the EPA and other regulatory agencies will make perfect sense.
Until then, we can sit back and relax knowing that growth is on its way. And if we're lucky, even more regulations will be justified as economic stimulus. Nearly any proposed environmental regulation should pass the cost-benefit test. With central planners promising such extraordinary economic returns from regulation, what could possibly go wrong?
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