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January 2, 2008

Economist's View - 4 new articles

Have Polluting Industries Moved to Developing Countries?

Is the fall in air pollution since the 1970s because of improved abatement technology, or is it because we shifted dirty production to developing countries?:

What accounts for the clean-up of US manufacturing: technology or international trade?, by Arik Levinson, Vox EU: Antiglobalisation protesters display signs denouncing international trade's role in polluting the environment.[1] Pundits write Op-Ed pieces cautioning that increased trade has environmental costs.[2] And a majority of Americans agree that "freer trade puts the United States at a disadvantage because of our high ... environmental standards".[3]

Are they correct? Over the past thirty years, while the real value of US manufacturing output has increased by more than 70 percent, the total annual air pollution emitted by US manufacturers declined substantially, by 58 percent for the sum of four common air pollutants.[4]

One explanation for the clean-up of US manufacturing is that the protesters are correct, and that thanks to freer trade, the US now imports polluting goods it once produced domestically, and concentrates domestic manufacturing on goods less likely to incur environmental regulatory costs. Of course, there is an alternative explanation: thanks to improved technology (cleaner fuels, end-of-pipe abatement, process changes, etc.) US manufacturers may now be able to produce more output using less pollution. Which of these explanations, trade or technology, accounts for the dramatic clean-up of US manufacturing pollution?

Most of the economic research to date has focused on related causal questions:[5] Have US environmental regulations driven polluting industries overseas? Are polluting industries more likely to locate where environmental standards are less strict? Have lower tariffs enabled polluting industries to relocate from the US to less strict locales? These are important questions, but they are difficult to answer for several reasons. First, measuring the strictness of environmental standards poses difficult conceptual challenges. Some regulations may be strict but unenforced, while others are lax but tightly enforced. Regulations may mandate technology adoption, limit effluent quantities, or impose taxes. Ranking these multidimensional laws is difficult if not impossible.

Second, these questions of causality face the problem that international trade and environmental regulations are determined simultaneously. Polluting industries may be more likely to locate in lax jurisdictions, but jurisdictions that attract lots of polluting industries may impose tight standards. Disentangling the effect of regulations on trade from the simultaneous effect of trade on regulations requires long time series' of data and instrumental variables analyses. Recent empirical work using these techniques does seem to find that those industries that have seen the largest increase in pollution abatement costs in the US have also seen the largest increase in net imports, which suggests that increased trade may be responsible for some of the clean-up of US manufacturing.[6]

Whether or not US regulations have pushed US manufacturers overseas, this begs the question we began with. How much of the clean-up of US manufacturing can possibly be explained by increased imports of polluting goods, as opposed to technology improvements? That question turns out to be much simpler to answer, and may well be more important.

Voxeu1108

Grossman and Krueger (1993) laid out what has now become a standard framework for thinking about the effects of trade on the environment. Pollution can be thought of as the product of three components: the overall size of the economy ("scale"), the mix of sectors comprising the economy ("composition"), and the technologies employed in production and abatement ("technique"). Line (1) in Figure 1 plots the overall scale of the manufacturing sector, which grew by 71 percent in real terms from 1972 to 2001. If pollution increased one-for-one with manufacturing output, then pollution from US manufacturing would also have increased 71 percent. This is the scale effect.

Line (2) in Figure 1 depicts the actual pollution from US manufacturers, which declined by 58 percent.[7] The difference between lines (1) and (2) depicts the dramatic clean-up of US manufacturing. It must be accounted for by some combination of improved technology and changes in industrial composition (which itself may be the result of increased imports of polluting goods).

To calculate how much of the clean-up of US manufacturing can be explained by technology, I use a dataset created by the US Environmental Protection Agency (EPA) that reports for 1997, the amount of pollution emitted per dollar of value shipped by each of the 470 six-digit North American Industry Classification System (NAICS) codes that comprise the manufacturing sector.[8] I take these emissions factors as an estimate of the state of "technology" as of 1997. In each year from 1972 to 2001, I multiply each industry's 1997 emissions factor by its concurrent real value of shipments, which tells me how much each industry would have emitted in every year, if in every year each industry had used its 1997 technologies. For each year I then sum across all manufacturing industries, which tells me how much pollution would have been emitted by the entire manufacturing sector if it had its concurrent scale and composition but the 1997 technologies. Scale this series so that 1972 equals 100, and it becomes line (3) in Figure 1.

Line (3) plots the combined scale and composition effects of changes in manufacturing on pollution emissions, holding technique constant. It increases by 17 percent over the 30-year period. The difference between line (1) -- the scale of manufacturing-- and line (3) -- the scale and composition -- is due the shift in US manufacturing towards less polluting goods. It accounts for 40 percent of the overall reduction in pollution from manufacturing. The other 60 percent, represented by the difference between lines (2) and (3), must be due to improvements in technology or "technique."

At this point, we are halfway to answering the question posed. We know that most of the clean-up of US manufacturing comes from improved technology, not from changing composition. If international trade were driving the improvement, most would come from changing composition. Since composition only accounts for 40 percent of the gap between lines (1) and (3), we know that trade can account for at most 40 percent of the clean-up. Some of that 40 percent, however, could be accounted for by changing domestic consumption patterns.

To estimate how much of the shift in the composition of US manufacturing towards cleaner goods could be explained by international trade, I conduct the following simple experiment. In each year, I multiply each 6-digit industry's net imports (imports minus exports) by the emissions factor reporting how much pollution is generated in the manufacture of that good (including the manufacture of its intermediate inputs). I then aggregate across all industries, which yields the amount of pollution that would have been produced in the US had all of those imported goods been produced domestically, and all of the exported goods been produced overseas. To show the change over time, I subtract from this series its value for 1972 to get line (4) in Figure 1.

Line (4) plots this "no-net-trade-growth" scenario. This line represents what air pollution emissions from US manufacturing would have been if every bit of increased net imports since 1972 had instead been manufactured in the United States, and holding technology fixed as of 1997. The line explains about 70 percent of the composition effect.

Conclusion

What is the bottom line? Increased net imports of polluting goods account for about 70 percent of the composition-related decline in US manufacturing pollution. The composition effect in turn explains about 40 percent of the overall decline in pollution from US manufacturing. Putting these two findings together, international trade can explain at most 28 percent of the clean-up of US manufacturing.

Why should we care?

If the 75% reduction in pollution from US manufacturing resulted from increased international trade, the pundits and protestors might have a case. Environmental improvements might be said to have imposed large, unmeasured environmental costs on the countries from which those goods are imported. And more importantly, the improvements in the US would not be replicable by all countries indefinitely, because the poorest countries in the world will never have even poorer countries from which to import their pollution-intensive goods. The US clean-up would simply have been the result of the US coming out ahead in an environmental zero-sum game, merely shifting pollution to different locations. However, if the US pollution reductions come from technology, nothing suggests those improvements cannot continue indefinitely and be repeated around the world. The analyses here suggest that most the pollution reductions have come from improved technology, that the environmental concerns of antiglobalization protesters have been overblown, and that the pollution reduction achieved by US manufacturing will replicable by other countries in the future.

References

Cole, M.A. 2004. "US Environmental Load Displacement: Examining Consumption, Regulations and the Role of NAFTA." Ecological Economics 48(4): 439–450. Grossman, G.M., and A.B. Krueger. 1993. "Environmental Impacts of a North American Free Trade Agreement." in The Mexico-US Free Trade Agreement (edited by P.M. Garber, Cambridge, MA: MIT Press) reprinted in Law and the Environment: An Interdisciplinary Reader (edited by R.V. Percival and D.C. Alevizatos, Philadelphia: Temple University Press, 1997). Kahn, M.E. 2003. "The Geography of US Pollution Intensive Trade: Evidence from 1959 to 1994." Regional Science and Urban Economics 33(4): 383–400. Leontief, W. 1970. "Environmental Repercussions and the Economic Structure: An Input-Output Approach." Review of Economics and Statistics 52(3): 262–271. Levinson, A. "Technology, International Trade, and Pollution from US Manufacturing" NBER working paper no. 13616, November 2007. Levinson, A., and M.S. Taylor. Forthcoming 2008. "Unmasking the Pollution Haven Effect." International Economic Review. US EPA.. 2000. "National Air Pollutant Emission Trends, 1900–1998." EPA-454/R-00-002. Research Triangle Park, NC: US EPA Office of Air Quality Planning and Standards.

Footnotes

1 Source. 2 Dorgan, Byron and Sherrod Brown. "How Free Trade Hurts" Washington Post. Saturday, December 23, 2006 p. A21; Myerson, Harold. "Why the Rush on Trade?" Washington Post. Wednesday, November 7, 2007 p. A21. 3 Source. 4 This is the unweighted sum of sulfur dioxide (SO2), nitrogen dioxide (NO2), volatile organic compounds (VOCs) and carbon monoxide (CO). These are the four monitored consistently over this time period by the National Emissions Inventory, and they decreased individually by amounts ranging from 30 percent for NO2 to 66 percent for SO2. 5 Cole (2004 and Kahn (2003) show that imports to the U.S. have shifted towards less polluting goods. An older literature (Leontief 1970) documents the degree to which composition changes in U.S. will have reduced pollution. But neither of these assesses the degree to which technology has reduced pollution in the U.S. 6 See, for example, Levinson and Taylor (2008). 7 Pollution from U.S. manufacturing based on the calculations described in Levinson (2007). I took the U.S. Environmental Protection Agency's "National Emissions Inventory" and summed the disaggregate emissions estimates from those sectors of the economy most closely matching manufacturing. 8 Abt Associates, Inc. 2004. "Trade and Environmental Assessment Model: Model Description." Prepared for U.S. Environmental Protection Agency (EPA), National Center for Environmental Economics. Cambridge, MA: Abt Associates.

Free Markets for You, Protection for Me

It's interesting that George Bush, who proclaims to be a strong supporter of letting markets work without government intervention, derived much of his wealth in a government protected industry:

It's not surprising Bush would praise a company like Cabela's though. His own fortune, as I show from the public record and from interviewing his friends and from his own tax returns, derives from a subsidy that was derived from a tax increase! There's an irony—George Bush got rich from a tax increase [a sales tax passed by voters in Arlington, Texas] that was funneled into his pocket inefficiently. The people who had to pay the tax got no benefit—most of them were not baseball fans—from this subsidy to build a stadium for the Texas Rangers [baseball team Bush owned].

And it's also worth noting that the team Bush owned was protected through baseball's anti-trust exemptions so it's hardly the case that he was subjected to the demands of a competitive marketplace. Could he have survived in a truly competitive baseball market? We'll never know because he didn't have to, but from what I've seen, I have my doubts.

Bush isn't alone in finding ways to enrich himself in a government protected environment. This interview of New York Times reporter David Cay Johnston appearing in the libertarian online magazine reasononline details how common this is:

The Cost of a Free Lunch, by Brian Doherty, Reason: ...David Cay Johnston['s] .... latest book, just out this week, is called Free Lunch: How The Wealthiest Americans Enrich Themselves At Government Expense (and Stick you With the Bill). It's valuable ... because of its detailed stories of government attempts to manipulate or adjust the market, leading—predictably, a libertarian might say—to benefits for the well-off and well-connected rather than the disadvantaged or the masses.

Free Lunch is full of sharp, heavily reported takedowns on eminent domain, expensive special favors for sports teams, legislative deals that put taxpayers on the hook for private train company's crimes and errors, giveaways from small towns to attract big-box stores, and how heavily government-managed markets in areas such as power and health care can enrich some at everyone's expense. ...

reason: What is the theme of Free Lunch, and what made you write it?

David Cay Johnston: Ronald Reagan famously asked Americans if we were better off than we were four year ago; Americans said "no" and elected him. This empowered a great change, supposedly, in government. It was supposed to lead to less government, more market solutions, and lower taxes.

What I'm asking in Free Lunch is: Are you better off than you were a generation ago when Reagan was elected? Government is just as big, there are vastly more regulations, and as I show, we have many new rules and regulations that handcuff the invisible hand of the market and instead, in subtle, sometimes hidden, ways, extract money from the pockets of the many and funnel it to the politically connected few. ... I would think libertarians would like everything in the book, except for the parts about health care [where he calls for nationalized health care, European-style]. ...

reason: Barron Hilton, Paris' grandfather, was in the news today for something related to a story in your book which discussed how he gained much of his fortune—in your reading, because of unconscionable appeals court decisions in California.

Johnston: Barron Hilton announced that he's giving 97 percent of his fortune to charity, and it got mostly uncritical press about his generosity, and poor Paris being shortchanged. Now, the Hiltons knew my book was coming and that its official publication date was [Thursday]. I can't prove it, but I think the timing of this announcement is connected with [my book]. I asked in Free Lunch, what kind of family produces a young woman as brazen and shameless as Paris Hilton?

The answer is, a family that derived its fortune not from hotels but by snatching it from poor children. [Paris' great-grandfather Conrad Hilton] left his fortune to the poor [via a foundation]. He left his son Barron a tiny, itsy bitsy sliver of fortune. Barron started scheming, and set in motion within days of [Conrad's] death to deny all that money to the poor and to take it from the charity through a complicated legal argument ... and lost at every turn. Finally one set of judges gave him a favorable ruling not in accord with 400 years of common law. He negotiated a deal to get 60 percent of his father's fortune. He may be turning that money back over to charity when he dies, but he diverted hundreds of million to his own pocket in the meantime.

reason: At times you go out of your way to traduce unfettered markets, but aren't all the practices you condemn in Free Lunch the result of government actions or decisions?

Johnston: Markets are the very best mechanism to determine the price of things, but all markets have rules. ...

reason: It seems to me Free Lunch goes beyond an investigative reporter "just the facts" attitude. You do seem guided by a principle more or less like, if something seems to benefit the rich, you're against it….

Johnston: There is definitely a moral tone to the book. I cite Adam Smith, Andrew Mellon, and the Bible at length on the proposition that one of the most morally offensive things is to take from those with less to enrich those already rich. ... I have no objection to people getting wealthy. Just get wealthy off hard work and enterprise, not getting government to pass rules no one knows about that reach into my pocket and take money out of it. ...

reason: I'm curious if you ever get to the point, studying example after example of how government works to prop up the powerful, where you just throw up your hands and decide that it's government itself that is inherently the problem here...

Johnston: When people say a problem is intractable, I think that's the most un-American thing you can say. The whole idea of America is that we will solve our own problems. We recognize people abuse power, so we limit it—put in checks and balances. We will solve these problems when people decide they care enough to solve them. I think a big problem is many Americans are giving up on democracy. I never throw my hands up about these problems, and if I did, that would be saying that I don't think this ingenious idea, the Constitution, can work, and I do.

I am not as anti-regulation as reasononline, I think there are times when regulation is necessary to ensure that competitive conditions are approximated, to protect the vulnerable, and so on. Many of the regulations discussed above, however, work the other way - they limit rather than enhance competition with the benefits flowing to those who own or control businesses in the protected industries.

Telling one type of regulation from the other can be difficult - regulations that protect and limit competition are often touted as enhancing efficiency (e.g. some licensing requirements). There are other aspects to this debate, but this characterizes a difference between those who lean toward libertarian beliefs, and those who are more apt to call for market intervention. Libertarians believe that, on balance, government intervention distorts and redistributes wealth and income in inefficient, inequitable ways. Activists believe that while government is far from perfect, it can, on balance, promote rather than hinder the market process through interventions that prevent abuses and market failures from pushing outcomes away from what would occur with competitive markets.

Our response to the use of government to protect and enrich certain segments of the economy as documented above should not be to remove all regulation, to stop enforcing rules against having too much monopoly power or the wholesale removal of safety standards, for example. We can always do better - sure - but in the process of weeding out the protectionist type rules and regulations let's not also throw away the rules that are needed to protect the vulnerable and promote efficient outcomes. Those who rail against government intervention in the marketplace are often upset that government prevents them from fulling exploiting their economic power to their advantage. Government can be an agent of unfair or inefficient consolidation of wealth and power, or a counterbalance to it, and too few rules and regulations to limit abuses of power can be just as harmful as too many.

"Alan Greenspan's Continuing Legacy"

Robert Reich discusses the constraints that Alan Greenspan placed on our ability to address domestic problems and help the middle and lower classes improve their standard of living:

2008 and Beyond: Alan Greenspan's Continuing Legacy, by Robert Reich: Alan Greenspan's ... libertarianism [is] based on his early interest in the philosopher and social critic, Ayn Rand. ...

Greenspan's worst legacy sprang from ...[this] source. Ayn Rand had made virtues out of individualism and enlightened self-interest and was deeply suspicious of all collective effort. Greenspan grew to share Rand's views. In particular, he was sceptical about efforts to help the less fortunate. "What attracted me to Reagan", he explains, "was the clarity of his conservatism which was to say that tough love is good for the individual and good for society." This "implies much less government support for the downtrodden".

Bill Clinton was elected in 1992, in part to reverse what Reagan had wrought. Clinton promised to provide all Americans with the health care, education, job training and other supports they needed in order to adapt to a fast-changing economy, as well as repair the nation's roads, bridges and ports, which had been neglected for many years. Yet by the time Clinton came to office, the federal budget deficit had grown so large he had to trim his ambitions. Ironically, that deficit had ballooned largely because Ronald Reagan had cut taxes and increased spending, mostly on the military. Although he was chairman of the Federal Reserve Board during Reagan's final years in the White House, Greenspan's memoirs don't suggest he warned Reagan against the widening deficit. It seems more likely that Greenspan agreed with Reagan and others in his administration that deficit spending as Reagan undertook it would serve to "starve the beast", forcing any subsequent Democratic President – such as Bill Clinton – to offer less support to the downtrodden.

The question we faced at the start of the Clinton administration was how much deficit reduction was necessary, and how much of Bill Clinton's original agenda would have to be jettisoned as a result. Greenspan urged Clinton in no uncertain terms to make deficit reduction the priority and sacrifice everything else. ... What Greenspan did not tell Clinton, but admits in his memoirs, was that Clinton had been saddled with Reagan's profligacy – almost exactly as Republicans had planned it. "Reagan had borrowed from Clinton, and Clinton was having to pay it back." Greenspan's advice to Clinton came with an implied promise and threat. If Clinton cut the deficit, Greenspan would reduce interest rates and allow the economy to expand briskly. This would make the "latter part of the 1990s . . . look awfully good", thereby improving the odds of Clinton's re-election. But if Clinton failed to cut the deficit adequately, Greenspan would not reduce interest rates, and the economy would continue to limp along, perhaps threatening Clinton's re-election. Greenspan admits he was "not oblivious to the fact that 1996 would be a presidential election year". He was, in short, engaging in political extortion. The choice was Clinton's, but Greenspan held a gun at his head. "Either he could opt for a package of spending programs that would fulfill some of his campaign promises, or he could opt for a deficit-cutting plan . . . there was no in-between – we couldn't afford both." Several of Clinton's advisers, of whom I was one, did not believe the budget needed to be cut as much as Greenspan wanted... As Greenspan puts it, "the conflict extended to within the White House, where key people were still pushing for an agenda less compatible with Wall Street". But only Greenspan had a gun. So he and Wall Street won.

The ensuing boom seemed to validate the choice Clinton made, but in reality it only validated Greenspan's power. Lower interest rates had the desired effect, at least in the short term. The economy surged forward, and Clinton won re-election. In the ensuing years, tax revenues exploded, the budget deficit disappeared, and by the start of the Bush administration the federal government had a significant budget surplus. For the first time in decades, America had the resources it needed to provide health care, education and job training, and repair the nation's infrastructure. But Greenspan did not trust the government to do any of this. He threw his support behind a tax cut, instead: "Chronic surpluses could be almost as destabilizing as chronic deficits," he writes. "Spending would have to be raised or taxes cut, and to me the preferable course seemed clear. ..."

Greenspan's testimony before Congress in 2001, calling for a tax cut, was critical to George W. Bush's successful mustering of the political support he needed for his mammoth tax cut, the benefits of which have gone mostly to wealthy Americans. The Bush tax cut drained the federal treasury, eliminating the entire budget surplus within months. Greenspan writes that he didn't intend to endorse the Bush tax proposal specifically, but this seems disingenuous. ... Greenspan must have known his testimony would be interpreted as support for Bush's tax cut. He had spent decades in Washington and well understood the ways of the capital city. ...

What Greenspan still views as "dangerous" was a tragically missed opportunity to redress the nation's long-term problems. They ... must still be dealt with if middle- and lower-income Americans are to have any chance of improving their standard of living. In the new global economy, private investment will go anywhere around the world it can get the highest rate of return. The only aspect of a nation's economy that remains unique is its people – especially their education, health and the transport and communications systems linking them together. These generate lasting productivity gains. But partly owing to Greenspan the libertarian, even if a Democrat were to retake the White House in 2008, the government wouldn't have nearly enough money to do what is needed. America's primary and secondary schools will lack the necessary resources to provide young people from lower-income families with the education they need. Tens of millions of Americans will continue to lack health insurance and tens of millions more will barely be able to afford the insurance they do have. America's infrastructure will continue to deteriorate. ....

Alan Greenspan the Ayn Rand libertarian has caused the nation grave injury.

[There's a bit more in the original, and Reich does say a few kind words about "Greenspan the empiricist" that I left out.]

In his discussion of Greenspan's impact on our ability to address domestic problems, Reich doesn't mention the cost of the war, something else Greenspan actively supported. But having to pay for the war doesn't make it any easier to deal with domestic issues either.

I don't know for sure how often or how effectively Greenspan used his power as Fed chair to influence political and economic decisions outside the Fed's purview, more than I'd like to see in any case, but it does seem clear that Greenspan had too much power to control the outcome of rate decisions. Without the power to control the outcome of rate-setting meetings, if he cannot credibly threaten to keep interest rates high or low independent of the state of the economy, then he has little ability to make the kinds implicit political threats described above.

There are indications that Ben Bernanke is more willing to share power and to listen to other voices on the Committee than Greenspan was. If so, then that's a healthy development. In addition, Bernanke has a different personality than Greenspan and that might help too. A big part of Greenspan's power came from the treatment he received in the press (even now he seems to have the need to make headlines on a regular basis - I'm sure there are times when Bernanke and other members of the FOMC wish he would just be quiet, at least for a little while). To the extent that the press is less willing to embrace Bernanke in the way they did Greenspan, and if because of that he has to share power within the FOMC more than Greenspan did, then that's a good development too.

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