In his recent opinion piece (June 5, Page C1) Arthur Foulkes provides two bits of economic common sense combined with two fundamental errors in economic reasoning and a handful of statements that are simply not true. The whole adds up to a skeptical analysis of recent initiatives of the Obama administration that, while appealing to an undiscriminating reader, ultimately makes little sense.
One bit of sense is that social well-being is not promoted by resource use, but by wealth creation. Although wealth creation often involves the productive use of resources, the focus should be on the former rather than the latter. The other bit is realizing that creating a job in one activity (say, green energy production) may well destroy a job in another (say, coal mining). So job creation, like resource use, should not in general be a policy objective. But this cuts both ways. Just as pursuit of green jobs may not result in net job creation, neither does environmental regulation result in net job destruction.
The two fundamental errors are ignoring the current underutilization of the nation’s resources and assuming that output measured by gross domestic product (GDP) is the appropriate measure of wealth creation. The selective examples in Foulkes’ essay ignore that a significant part of the American labor force is idle. Finding ways to get these people back to work, which is the central objective of the macroeconomic policy undertaken by the Obama administration, will lead to greater output without leading to job destruction elsewhere. In a situation of full employment and no growth in the labor force, the creation of jobs in one sector would, of course, imply that jobs elsewhere are lost. But this is not the current condition of the nation’s economy. We have a growing labor force that is significantly underutilized.
Foulkes makes a common error in identifying the conventional measure of output, GDP, as the source of social wealth. True, the provision of food, clothing, shelter and the like, captured in this measure, do contribute to social well-being and thus to wealth. But so does environmental quality — which is not captured by GDP. The mistaken logic is evident in his statement that “banning one form of production to stimulate an alternative form of production seems like a strange way to make people better off.” This is strange only because of the distorted and limited context Foulkes provides. By recognizing that different degrees of well-being are created by different forms of production, including the production (or preservation) of environmental quality, shifting between alternative forms of production makes a lot of sense.
The fundamental point — that GDP is not an appropriate measure of a nation’s wealth creation — is contained in every basic economics textbook I have ever read (and I’ve read several). The creation of the system of national accounts, on which the GDP is based, was never intended for this purpose. GDP has been hijacked by journalists and unenlightened policy makers for this use, but this is a mistake and leads to mistaken policies. Thus even if the Obama administration were to pursue green jobs in a situation of full employment, destroying other jobs in the process, it would not necessarily be contrary to the goal of wealth creation.
The Obama policy is actually clever by pursuing two goals at once. As long as a federal stimulus is called for to restore economic output to its potential level, why not use the opportunity to shift the composition of output away from polluting activities? This makes a lot of sense if the prior composition underrepresented environmental goals.
Since environmental goals are not well represented in markets, because of ill-defined property rights (a point that seems to escape Foulkes despite his common refrain on property rights), public policy that shifts the balance toward less environmental damage is eminently appropriate. And, by the way, the “cap and trade” system for addressing carbon emissions, which has been much maligned in Indiana, is essentially a mechanism for creating and trading relevant property rights.
Further misunderstanding of economics is evident in Foulkes’ implicit suggestion that environmental goals should just wait for more wealth creation. Then they will be taken care of by market processes with no need for regulatory intervention. After all, we see a clear correlation between wealth levels and environmental quality.
There is so much wrong with this that I cannot correct it all in the space allowed, so I will make two short points. First, in countries where we see better environmental quality we also see it supported by regulation. Second, environmental quality is not merely a consumption good, but is also an input to production. Healthy people and healthy fisheries produce more — even of conventional output as captured in GDP. Thus the cause behind the correlation runs in part from environment to wealth rather than the other way around.
— Richard Lotspeich
Department of Economics
Indiana State University
Flashpoint
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