How the Clean Air Act Holds Back the American Economy

by Reihan Salam

Should Americans care about the decline of manufacturing employment? I’m inclined to think that the answer is yes. Overall employment is increasingly weighted towards the nontradable sector — particularly health care, education, and government, heavily-subsidized sectors plagued by low productivity levels. The tradable sector, meanwhile, is dominated by knowledge-intensive services, a sector that employs a relatively small number of people, and which largely excludes the vast, non-college-educated middle of the skill distribution. This isn’t to suggest that manufacturing jobs are intrinsically superior to service jobs — it’s just that capital-intensive manufacturing jobs are more likely to support high wages than service jobs.

There are a number of reasons U.S. manufacturing employment has declined in recent decades. The main driver is rising productivity, which helps explain why manufacturing output has held steady as a share of GDP even as manufacturing employment has tumbled. Rising productivity is something we should absolutely welcome. But there are other contributing factors as well, including dollar appreciation, which increases the relative cost of goods manufactured in the U.S., and the high cost of complying with stringent regulations. These factors have contributed to the offshoring of manufacturing employment. Offshoring is not, in my view, an entirely bad thing. Low-wage, labor-intensive manufacturing jobs belong in the developing world. Yet these aren’t the only manufacturing jobs that are being offshored. So are capital-intensive jobs that can support high wages. Is there anything we can do to not just stop the outflow of such jobs but to generate more of them?

Recently, Oren Cass observed that the Clean Air Act, widely-viewed as one of the most successful laws in modern American history, “is forcing Americans to accept substantial economic sacrifices that they cannot afford, in pursuit of environmental gains that they do not need and that are not worth the cost.” The Obama administration has issued new regulations under the Clean Air Act that will make matters worse. Instead of just rolling back this latest round of regulations, however, Cass calls for reforming the Clean Air Act to ensure that it does a better job of balancing environmental priorities with the need for economic growth.

I won’t even try to summarize the maddening ins and outs of the Act, which Cass describes in detail. His main point is that one of its primary mechanisms for improving air quality is imposing far more expensive requirements on new or expanded facilities than on existing facilities. The perverse result is that many firms find it impracticable to upgrade their facilities, even when doing so would reduce pollution relative to the status quo. With this in mind, Cass calls for reforming the Clean Air Act to allow new or expanded industrial and energy-processing facilities under the same rules that apply to older plants.

These reforms would be the economic equivalent of removing a dam. The current discrimination against new investments holds back a reservoir of capital that would surge forward were it not for the costs and restrictions now imposed. American industry sits downstream, eager to grow and create jobs but restricted in its ability to do so. An action such as the new ozone regulation raises the dam wall that much higher.

Eliminate the impositions on new investments and, as quickly as analysts could revise their models, a host of construction projects previously considered infeasible would become attractive. Upgrades to existing plants, which had been shelved for fear of triggering new requirements for the plant, would go back on the drawing board. Plans for new plants, which had been rejected because the plants could not operate profitably, would suddenly find willing investors. Entirely new businesses, which had been deemed unlikely to succeed while established businesses enjoyed a sizable cost advantage, would begin hiring. Competition would increase, economic efficiency would improve, and prices would fall. New areas of the country would open up for energy exploration. And manufacturers would find themselves better positioned against international competition.

Better still, state governments would be free to impose stiffer regulations if they chose to do so. There is nothing in Cass’s proposal to stop Californians or New Yorkers from making it prohibitively expensive for manufacturers to build new facilities in their states. It will simply allow other states to choose a different, more constructive direction. I’d love to see conservatives in Congress take up Cass’s call for reform.

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