Saving Energy, Growing Jobs is David Goldstein's book about the economics and politics of environmental regulation. Goldstein's argument is that environmental regulation does not inhibit economic growth, nor is it inconsistent with a market-based economy. On the contrary, for a variety of structural reasons, environmental regulations promote economic growth through innovation and competition, and are consistent with the smooth operation of today's complex markets. The Firedoglake Book Salon recently reviewed the book, and I encourage you to check out the discussion they had a few weeks ago.
What I found most interesting about this book was its fundamental structural critique of economic theory and the ongoing political debate between environmentalists and economic fundamentalists. Perhaps more interesting are the unstated applications of this critique. While Goldstein's critiques are discussed in terms of environmental regulation, many of these ideas could be equally well applied to a variety of contexts in which business behavior must be regulated, especially collective bargaining and labor relations.
The structural critique of economic theory is sound and extremely illuminating, particularly for someone (like myself) who has only a passing understanding of economic theory and an even shadier understanding of modern corporate management practice. Unfortunately, Goldstein's critique of the political landscape that shapes the environmental regulation debate is not quite as sound, and ignores entirely the existence of the modern conservative movement. There are still valuable ideas to be gleaned from this critique, but it is considerably weaker than the economic critique.
An environmentalist critique of economic theory and the reality of the marketplace
A central premise of Saving Energy, Growing Jobs is that the environmental regulation debate frequently pits environmentalists against economic fundamentalists, with the latter arguing against one environmental regulation after another on the grounds that regulation inhibits economic growth. Goldstein sets out to undermine that argument in two steps.
The first step is the critique of the economic theory to which economic fundamentalists are devoted. Economic theory is based on a number of assumptions, and in some cases these assumptions are so deeply ingrained in modern economics that they are not even explicitly stated in economics textbooks. Yet in many cases, these assumptions are invalid. Goldstein lists ten assumptions and suggests that the vast majority of them are incorrect, especially in matters that affect environmental health. To summarize the assumptions and the counterexamples that disprove them (and here I'm quoting, in large part, from chapter 4):
- Consumers have practically unlimited material wants, which are self-consistent and rational. Clearly, some material desires are irrational or internally incosistent.
- Consumer goods are limited. This assumption is largely valid.
- Firms provide goods that compete perfectly with each other. This assumption relies on the supposition that goods can be easily compared against each other. However, comparisons require definition; not all cars are the same, and standards are required to facilitate comparison. Often, government regulation has the effect of creating standards; for example, auto safety standards allow us to compare two cars, knowing that are defined by the government as safe.
- One person's consumption does not affect another's. This assumption does not take into account environmental "externalities", like pollution. If someone drives a car which produces air pollution and gives someone else asthma, then the second person will need to go to the doctor. This assumption also does not take into account the efficiencies introduced by scale - if many people buy energy-efficient light bulbs, then they become more available and cheaper for other people to buy them.
- Goods are traded in markets where infermation is perfectly available. This assumption is not valid in cases where information is difficult to understand or obtain. For example, it is often difficult to determine the energy efficiency of a household appliance before purchasing it, especially in the absence of good efficiency rating systems.
- Each person has a rank order of material desires, and one person's order does not affect another's. Clearly, peer pressure and other informal social cues affect our preferences; entire industries are built on that reality. In some cases, goods like luxury cars are marketed and priced based largely on their perceived popularity.
- People and corporations always act in their own economic self-interest and behave rationally. This is not always the case because the agents who make corporate decisions are people, and those people's interests do not always align with those of the corporation. Moreover, individual choices are not always rational in a number of ways, and behavior economists have proven repeatedly.
- Deals or transactions are real, and parties in transactions do not behave fraudulently. In a society with a strong government and a respect for the rule of law, this assumption is valid. However, this supposition by itself suggests that some measure of regulation and governmental action is necessary for a free market.
- People and corporations can actually act on their preferences. This is not the case when a person or corporation lacks sufficient credit. For example, mortgage lending rules may enable a family to buy a cheap home in an exurban subdivision, with high transportation costs, while forbidding that same family from buying a more expensive home in a smart growth development with low transportation costs - even if the family's combined housing and transportation costs are cheaper in the smart growth development.
- Real markets will deliver an optimal amount of well-being, if it exists, beforeunderlying conditions change. This assumption presupposes that a single, globally optimal amount of well-being can be achieved. However, in a complex economy it is possible that there are many locally optimal points - that is, amounts of well-being that are merely a bit better than those we are accustomed to - and that the economy can muddle its way towards these local optima without making the large changes needed to reach a much larger amoutn of overall well-being. Furthermore, while economic progress happens slowly and incrementally, technological change happens quickly; while the economy is slowly muddling its way towards improved well-being, technological change can much more quickly completely redefine the notion and degree of well-being.
This is a fairly lengthy summarization, and I included it this way because I think it's particularly incisive in attacking conservative economic dogma. The apparently still-popular notion that tax cuts engender economic growth is closely relate to the conservative argument that government regulation inhibits growth; and that argument, in turn, rests on an economic theory based on all of the above assumptions. Many of those assumptions are invalid, and others presuppose strong government regulation. In other words, Goldstein's critique is, in some ways, a good general-purpose critique of conservative economic theory.
Goldstein furthermore enumerates a number of ways in which real markets fail to produce optimal well-being. Again, I think this section (chapter 6) is a particularly solid critique of market fundamentalism, so I'll try to provide a reasonably concise summary here. Market failures include:
- Market failures - small-scale failures that inhibit competition, such as:
- Imperfect information
- Split incentives (scenarios in which one person's investment would increase overall well-being, but the benefits would accrue mostly to another person - for example, a commercial landlord weatherizing an office building in which tenants pay heating bills)
- Uncertain performance (scenarios in which a consumer is uncertain whether a new product will perform as promised)
- Market failures
- Diffuse decision making (scenarios in which multiple parties are responsible for jointly making a decision; e.g., building development, in which the developer, contractor, and laborers all must decide whether to build a new building using new energy efficient methods or conventional, inefficient methods)
- Inadequate or ineffective private regulations, such as mortgage lending rules which do not take into account combined transportation and housing costs
- Price competition for new products - new products, like electric or hybrid cars, are frequently sold at high prices initially, because they do not have a sufficient scale of consumption to support the kind of mass production which amortizes high capital costs; that in turn inhibits consumption and adoption of the new technology. This problem is particularly acute in cases where an innovative technology "leaks" from one company to its competitor.
- Human failures
- Peer pressure - informal pressure exerted by one member of a trade or industry on another can be a powerful factor in promoting, or inhibiting, a new practice. Moreover, peer pressure can inhibit competition, as peers within an industry will not want to excessively "rock the boat" with colleagues. On the other hand, peer pressure can also create collegiality and informal standards of ethics and responsibility within an industry.
- Not paying attention - Individuals only have so much time and knowledge, and may therefore miss important opportunities to save money or make a profit. This problem can be particularly acute in the case of energy efficiency, because energy costs are frequently among the more minor line items in a company's budget.
- Loss and risk aversion - Numerous studies have indicated that many people are naturally risk averse, and will intentionally eschew a potentially profitable investment, because they do not want to pay for the up-front investment. Along similar lines, there is "status quo bias" - many people would rather do things the way they have traditionally been done, rather than risk trying a new approach.
- Institutional failures - In particular, Goldstein critiques the role of trade associations in crafting industry policy. Proceeding from a game-theoretic analysis, Goldstein suggests that the development of trade associations to lobby for policies friendly to an industry are perfectly natural. They are also inherently anti-competitive, because trade associations want to promote policies which support the operation of all of their members, without creating competitive opportunities that would tend to favor the interests of some members over those of others; similarly, trade associations tend to promote policies which support economic incumbents an inhibit the entrance of innovators within an industry. The lack of studies on the policymaking role of trade associations is a serious problem, and Goldstein argues for much deeper study of trade associations.
This section of the book is particularly interesting because it suggests a positive role for environmental policy, and government regulation in general, which is pro-competitive. Indeed, it appears that in some cases it is the market itself which is anti-competitive, and the supporters of economic incumbents who are in fact limiting economic growth.
I'd go a bit further than Goldstein does, in fact, and recommend this section of the book to anyone who wants to reform corporate behavior or the operation of the market generally. Union activists in particular would be smart to review this section, because unionization is so frequently critiqued from the vantage point of simplistic economic theory. While I'm not entirely familiar with the literature on the economic impact of unionization on a company or an industry's performance, there are encouraging case studies at companies like UPS that suggest that unionization can help stabilize a company's workforce, improve morale, and boost productivity. In A Country that Works, Andy Stern argues that unionizing an industry makes the cost of labor more or less uniform within that industry. That means that companies can't become artificially competitive by exploiting their workers, but must instead innovate by bringing new products to market, improving their operations, changing their marketing strategy or cost structure, etc. In short, it's possible that although many of Goldstein's arguments are based on an environmentalist critique, they could easily be adapted to make the case that unionization and other progressive market reforms enhance competitiveness and market behavior.
Analyzing the political landscape
Another part of Saving Energy, Growing Jobs analyzes the political landscape of environmental policy. This part proceeds by looking at the rhetoric on both sides of the debate. One chapter lists the myths that economic fundamentalists have about the environmental lobby, and the next lists the myths that environmentalists have about the economic fundamentalist lobby.
On the whole, this part of the book is not entirely surprising, and will sound very familiar to anyone who has spent some amount of time reading op-eds on one side or the other of the debate. There were some interesting insights, however. For instance, Goldstein critiques the practice of environmentalists who blame environmental problems on a solitary actor or corporation. While some charges along these may be literally true, it is often inaccurate to suggest that a complex environmental problem is caused by a single bad-faith actor. It is similarly misleading to suggest that environmental problems are the cause of excessive greed; indeed, Goldstein suggests that sometimes insufficient attention to profitable opportunities arising out of innovation or better efficiency is the cause of environmental problems.
While this section summarizes the debate on both sides reasonably well, it makes two key mistakes. First, it portrays environmentalists and economic fundamentalists as two essentially matched lobbies, both vying for control of the debate. There is a "pox on both houses" flavor to the writing which is a bit unsettling in the face of reality. In fact, environmentalists vastly outnumber economic fundamentalists in sheer numbers (in terms of broadly-stated public policy positions in opinion polls, if not always in terms of actual ballots on election day). At the same time, economic fundamentalists have in recent years outmaneuvered environmentalists, at least at the federal level, because they have more money and are better-organized in terms of lobbying efforts and media infrastructure.
The second problem is related to the first: this section ignores the history of the conservative movement, and its impact in establishing and empowering economic fundamentalists. At times this side-step seems almost convoluted and intentional, as though the phenomenon of business interests coalescing around a set of shared fundamentalist goals is merely a bizarre accident of such factors as peer pressure. In fact, there has been an extraordinarily well-organized effort to unite business lobbies against progressive goals and around economically fundamentalist ones. The Powell memo lays out the plan for that effort in pretty good detail, and the conservative movement followed that plan almost to the letter over the past thirty or forty years.
These problems are significant, because in the last section Goldstein suggests a political plan for implementing sustained environmental change. Some parts of this last section are quite interesting and reflect Goldstein's long experience with sensible environmental regulation - in particular, there's a fascinating comparison of the strengths of weaknesses of regulatory tactics like cap-and-trade, cost-based incentives, and performance-based incentives. But on the whole, the inability to grapple with political reality causes Goldstein's political strategy for change to fall flat.
Still, Saving Energy, Growing Jobs is an insightful and worthwhile read. It goes far beyond the facts and figures about environmental regulation and economic growth. It's a useful handbook for any critic of the market and of corporate behavior.
