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Fables about Economics and the Environment

The United States can’t afford stronger environmental protection; it would interfere with growth of the gross national product.

In 1990, William K. Reilly, then head of the U.S. Environmental Protection Agency, reported that the direct cost of compliance with federal environmental regulations was more than $90 billion per year-about 1.7 percent of the nation’s GNP. But Reilly also pointed out that, during the two decades when the United States made substantial environmental progress, “the GNP increased by more than 70 percent.” Thus, at worst, it seems that environmental regulation may slightly slow growth in the most commonly used measure of economic progress.

But that said, it should be noted that there is a growing distrust of the ability of GNP to mirror such progress, or more specifically, the enhancement of social well-being assumed to go along with it. In fact, between 1957 and 1992, although U.S. per-capita income doubled, the percentage of people considering themselves “very happy” declined from 35 to 32 percent.

One of the most prominent critics of GNP as an indicator of well-being has been economist Herman E. Daly of the University of Maryland, formerly with the World Bank. Daly has suggested a new measure of economic well-being, the index of sustainable economic welfare (ISEW), which attempts to incorporate environmental factors including depreciation of “natural capital,” such as soil lost to erosion, in its calculation. Between 1951 and 1990, the U.S. per-capita GNP in inflation-adjusted dollars more than doubled, whereas the ISEW grew considerably less than 20 percent and actually declined slightly between 1980 and 1990. “Economic welfare has been deteriorating,” Daly says, largely because of “the exhaustion of resources and unsustainable reliance on capital from overseas to pay for domestic consumption and investment.”

Other nations are also actively seeking better indicators of human satisfaction, especially those that include the critical factor of depreciation of natural capital, from the microbes that maintain soil fertility to fresh water stored in aquifers. Norway has started accounting for its remaining balances of mineral and living resources. France now has “natural patrimony accounts” that track the status of all resources influenced by human activity. And the Dutch government has instituted an accounting system that includes environmental damage and the costs of repairing it. Sweden, Germany, and the United States are all moving in the same direction, with the U.S. Department of Commerce developing a “green gross domestic product.” In short, recognition is growing that once a nation has attained a certain level of individual material comfort, boosting the GNP alone is no longer a sufficient aim.

Stricter environmental regulations will cost American jobs by forcing industries to relocate in nations with weaker standards.

Certainly environmental regulations can cost some jobs, especially in extractive industries or when outdated factories are forced to close because the costs of installing emissions controls exceed the value of the plants. It should be noted, though, that some of the industries (such as mining and logging) that complain the loudest about jobs lost to environmental regulation are of the boom-and-bust variety-set to move on anyway when local resources are depleted.

Other companies pressed by regulations may indeed choose to relocate to nations with weaker environmental laws (and cheaper labor). But as they do, other new jobs are often created, such as in high-tech businesses that favor areas where environmental quality is high, both because clean air and water are essential for their operations and because a healthy local environment helps them attract skilled labor. Moreover, even if factories required to install pollution-control equipment close down and throw their employees out of work, others will purchase smokestack scrubbers, thus creating jobs in firms that make such equipment. Overall, environmental protection is not a major cause of job losses and can be a significant source of new jobs.

Economics, not ecology, should guide policy decisions.

A politician who says something like, “The time has come to put the economy ahead of the environment,” clearly doesn’t understand that the economy is a wholly owned subsidiary of natural ecosystems, and that the natural environment supplies humanity with an indispensable array of goods and services. In fact, expressed in standard economic terms, the value of ecosystem services is enormous. For example, the ability of the ecosystem to control pests could be worth $1.4 trillion annually, since without natural pest control there could be no production of agricultural crops. Ecosystem services might be valued at a total of about $20 trillion per year-almost equal to the gross global product. But these valuations only hint at the actual value of the services, for without them there would be no human society to enjoy their unsung benefits.

All economists understand that economics is supposed to seek wise ways to allocate resources to meet human needs. As traditionally practiced, however, economics has often considered only the delivery of conventional material goods and services while ignoring environmental goods and services. That economics is not a wise guide for environmental policy decisions is underlined by economists themselves, who say they detect few “signals” indicating serious environmental problems. They are, of course, waiting for price signals reflecting shortages of resources while remaining ignorant of the depletion of many of the most critical resources such as biodiversity, water quality, and the atmosphere’s capacity to absorb greenhouse gases without catastrophic consequences, which are not priced by markets.

One Planet, One Experiment

A quick review of some compelling statistics reveals how wrong-and indeed how threatening to humanity’s future-proponents of the notion that we have nothing to worry about can be. The roughly 5-fold increase in the number of human beings over the past century and a half is the most dramatic terrestrial event since the retreat of ice-age glaciers thousands of years ago. That explosion of human numbers has been combined with a 4-fold increase in consumption per person and the adoption of a wide array of technologies that needlessly damage the environment. The result is a 20-fold escalation since 1850 of the pressure humanity places on its environment, as indexed by energy use, the best single measure of a society’s environmental impact. Despite such ominous trends, the antienvironmental proponents continue to hammer away in print and over the airwaves, sowing confusion and doubt in the minds of many citizens about the seriousness-if not the very existence-of environmental deterioration. Thus efforts on behalf of the environment have been limited mainly to grassroots initiatives such as curbside recycling, ecotourism, and enthusiasm for anything “organic.” While we applaud such endeavors, they are utterly insufficient steps that may divert attention from much more basic issues. Instead, society needs to take a longer view and recognize that to be sustainable, the economy must operate in harmony with earth’s ecosystems.

Civilization’s highest priority must be lowering the pressure on those vital ecosystems, seeking a sustainable food-population balance, and safeguarding human health against global toxification and emerging pathogens alike. Achieving this will require humanely reducing the size of populations worldwide by lowering birthrates to below death rates, reducing per capita consumption among the rich to make room for needed growth in consumption among the poor, and adopting more environmentally benign technologies.

Global society is running a vast and dangerous experiment. If the experiment goes wrong, there will be no way to rerun it. In the end, we can only hope that science and reason will prevail and that the public and political leaders will heed its warnings.

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