Two (kind of related) economics questions

June 7, 2005 3:33 PM

EconomicsFilter: When someone claims that it's too expensive (i.e. would damage the economy) to upgrade an industry to a more environmentally clean process, I have always assumed this was a specious claim since the costs spent on one side would be added to the economy by the environmental company. Am I missing something? Is there a real loss here for the economy in general that I am not seeing?

Related (maybe): Why did we used to build nice public works (even outside of the WPA), but now we get ugly concrete and rebar piles of functionality? Was it labor costs? Material costs? How does inflation work such that it would (presumably) cost far more to build a public building out of real stone now?
[OK, these are totally separate questions (and they may both be badly phrased, but they are related by virtue of being economics questions.]

posted by OmieWise to work & money (32 comments total)

For your first question, this is because your reasoning is based on the Broken Window Fallacy.
posted by reverendX at 3:38 PM on June 7, 2005

My generic answer is that even though the net theoretical effect might be non-negative, the change is not instantaneous, but incremental. Like in (some) chemical reactions, the intermediate steps are a period of instability and high energy intake. People, in general, like stability and what they're used to. Depending on timespan required for change, many prefer makeshift adaptations rather than fundamental change.
posted by Gyan at 3:43 PM on June 7, 2005

But the Broken Window Fallacy does not apply here; the cost of resources applied to meeting more stringent environmental standards are passed on to consumers. It isn't that consumers then no longer have money to spend on something else; if they had not spent money on environmental benefits, they would spend money on, say, allergy medicine, respirators, Brita water filters, etc.

Where environmental costs are concerned, there is no free lunch, for either producer or consumer. BNF does not apply.
posted by AlexReynolds at 3:44 PM on June 7, 2005

Somewhat more detailed response to the first question (though the broken window thing is definitely on-point): the specific complaints about "X company will have to pay for the upgrades and may be forced out of business" are largely whining (i.e., lobbying) on the part of company X, except insofar as X actually provides a socially valuable service and society at large would suffer if it disappeared. consider, e.g., coal-burning power companies. If they were the only game in town for electricity, and if a leap to solar was so expensive that it would drive them out of business, then it would be bad for society as a whole to require such a switch, as it would result in a substantial reduction in the use of electric power, and all the hedonic benefits we get from it. Like even if you don't think TV is a worthwhile economic goal, for instance, surgery requires electricity, etc. So if environmental upgrades substantially increase the costs of providing a certain socially useful service, then yes, that upgrade does actually cause social damage.

On preview: I'm basically with AlexReynolds here.

Of course, sometimes the environmentally cleaner process is actually more efficient overall and in fact makes everyone happier. I'm thinking of power generation in particular here, and there was a huge spread about this in the NY Times magazine probably 12-18 months ago (sorry to be so broad, but you can probably track it down with a library card or Lexis subscription).

As to the second question, I suspect that the reason public buildings are so fugly in the last 40 years or so is the domination of architectural schools like Bauhaus and Brutalism throughout that period. But that's probably influenced by the fact that I personally hate Bauhaus architecture, its historic significance be damned.
posted by rkent at 3:50 PM on June 7, 2005

Probably should have provided some links:

Bauhaus architecture, at least some of it (yes, I realize that, taken as a school, Bauhaus is quite broad to be hated so generally).

Brutalism (see especially Boston City Hall).
posted by rkent at 3:53 PM on June 7, 2005

I don't know how widely applicable this is (or even correct in the one case) but when I was shown the relatively new buildings at a certain public university, my host apologized for them and explained that it's politically infeasible to spend public money to make nice buildings on public campuses.

That made some sense, but I guess so does "we spent public money on this crappy building??"
posted by Aknaton at 4:10 PM on June 7, 2005

rkent-I agree about some of the problems with Bauhaus, and definitely about Brutalism, but I'm not sure that tells the whole story. Maybe I'm wrong, but it seems to have something to do with economics. You see it in road and bridge design, not just buildings. I'm sure some of it is style, and I wish I could articulate this better, but it does seem to be linked to economics and cost in some way.
posted by OmieWise at 4:10 PM on June 7, 2005

Isn't the claim that it's too expensive to convert specious rather for the reason that there are widespread costs associated with pollution, which are for the most part passed on to individuals or society at large? Sick people, damaged land, etc.
posted by kenko at 4:24 PM on June 7, 2005

First question, VERY short version:

It's a drain on the economy because the environmental company is not creating new stuff. The comparison would be if the government paid people to dig ditches all morning and fill them all afternoon. How does that reduce economic growth since people are still being paid? Their labor isn't being used to create new products, TV shows, movies, car washes, etc... instead it's just going to waste. Same for the environmental company. In that case the environmental company isn't a "waste" (there are positive benefits to having a clean environment), but labor isn't being used to produce something useful. The people who work at the environmental firm could have instead been employed by an industry making something new.

That's the VERY short version. The medium-short version adds the fact that increasing the cost of producing energy (or whatever you're adding scrubbers to) distorts the market in all kinds of fun ways.

As kenko pointed out it's possible that long-term not taking care of the earth might cause more economic harm, but in the short run it's a clear and unambiguous that increasing environmental standards slows economic growth. That doesn't mean we shouldn't do it, but instead we have to find reasons that overcome short-term economic slowdowns.
posted by thedevildancedlightly at 4:43 PM on June 7, 2005

But the Broken Window Fallacy does not apply here; the cost of resources applied to meeting more stringent environmental standards are passed on to consumers. It isn't that consumers then no longer have money to spend on something else; if they had not spent money on environmental benefits, they would spend money on, say, allergy medicine, respirators, Brita water filters, etc.

I think your analogy actually does prove that the Broken Window Fallacy does apply. Let's say the cost of producing electricity goes up by 20% because of new environmental regulations. Some energy company now gets 20%, and consumers pay 20% more. Those consumers now can't spend that 20% on Brita filters, shoes, housing, vacations, movies, etc etc etc.

Maybe I'm missing a key word in your argument.
posted by thedevildancedlightly at 4:51 PM on June 7, 2005

Why did we used to build nice public works (even outside of the WPA), but now we get ugly concrete and rebar piles of functionality?

(1) contemporary materials, when overused become boring.
(2) contemporary construction methods allow us to build much larger buildings at lower cost. You can go back to the old materials and build yourself a luxury mansion, but your business model won't work if you try to build a midrange apartment building with the same materials.

Before you get excited about old stone, keep in mind that concrete is crushed up stone. From a distance, the coloration and texture is not all that much different from natural stone. Some cities, such as Jerusalem, mandate traditional building materials. Take a look and see if they are really any different than modern concrete buildings. Sure, the mosques, temples, and churches stand out, but the ordinary buildings are faily bland. Tel Aviv, IMO, is a more aesthetically attractive city.

Fast forward to ultra modern cities (built within the last 5-10 years) and you will see glass rather than concrete. The building is still made of concrete, but colored glass covers the surface. Other buildings will use architectural granite or marble (very thin sheets of fine stone mounted on a rigid honeycomb backing).

Finally, piles of stone survive earthquakes, tornados, and hurricanes badly. You really want to be in a steel and concrete building when nature turns against you.
posted by b1tr0t at 5:14 PM on June 7, 2005

thedevildancedlightly:

I think the point was that it's better to not be able to afford brita filters but not need them, than it is to be able to afford them, but need to spend that money on them.
posted by -harlequin- at 5:16 PM on June 7, 2005

but in the short run it's a clear and unambiguous that increasing environmental standards slows economic growth.

What a load of crap! It sure is true if by economic growth you mean my factory where I am dumping radioactive waste onto the ground and my profits will be slashed in half for ten years while I change that process. However, the time frame for harm need not be long. Frankly, the clean-up usually costs more than the prevention. If your time horizon is only a year or two, maybe even five or so, then go ahead an pollute your neighbors. Perhaps you can skip out on the clean-up and pass those costs onto someone else.
posted by caddis at 5:48 PM on June 7, 2005

Why did we used to build nice public works (even outside of the WPA), but now we get ugly concrete and rebar piles of functionality? Was it labor costs?

If it were because of labor costs, concrete would never be used--it's about the biggest headache for labor costs there is because you basically have to build the building twice. Once in formwork, again when you pour the concrete. And you better pour it right the first time! Concrete's very difficult for making revisions!

From original question: When someone claims that it's too expensive (i.e. would damage the economy) to upgrade an industry to a more environmentally clean process,
TDDL: It's a drain on the economy because the environmental company is not creating new stuff.

TDDL, it seems like you're saying that the more environmentally-based company wouldn't be producing anything, and I'm not sure how that's true. I'm not sure how a relatively cleanly run factory that produces fuel-cel cars is really any different than a smoke-belching Hummer plant (just to use two extreme examples). Both produce consumer goods, just with different processes and different end products for the user. You seem to be saying that the environmentally responsible company would basically be doing nothing.

I see the "it'll cost jobs!" argument used when the government talks about increasing the minimum miles/gallon efficiency rating of new cars, or something of that nature. As far as I can tell, the only cost here is the initial cost of implementing the new procedures at the plant, and possibly retraining workers (I realize both those costs could be quite significant). If demand for that company's cars was the same after the conversion as it was before, meaning that they had the same size production runs, how would making a more environmentally sound product cost jobs in the long run? Isn't institutional inertia the only reason the company would object to the new efficiency requirement? Isn't the only real loss to the company the cost of implementing new procedures? If anything, it's the cost of implementing the procedures that causes the company to lay people off, not the new procedures themselves.
posted by LionIndex at 5:49 PM on June 7, 2005

The basic issue, architecturally, is really that movements like Bauhaus and Brutalism tried to forsake very obvious forms of ornamentation. If you choose to over-interpret that goal, you end up with a type of building that has a lot of advantages, from a small-minded bureaucratic mind-set.

They may or may not be a lot cheaper to build (they often are), but they're a lot easier to get approved. There's just a lot less to object to, and at this point, they've become so common, that it's easy to point to what everyone else is doing.

If you look at the buildings that really gained reknown, and established those movements, they have a lot of graceful (and expensive) details that are totally missing from the cheap cookie-cutter knock-offs that have become so familiar. The bottom line is that creating buildings that have the refinement and style of "good" modernism is just as expensive and challenging as some kind of Greek Revival with big marble pillars, etc. The problem is that if you do a half-ass job of copying the Greek classical style, it's _really_ obvious. If you do something that's kind of modernist, but just not very good, the difference is less glaring.
posted by LairBob at 5:59 PM on June 7, 2005

It sure is true if by economic growth you mean my factory where I am dumping radioactive waste onto the ground and my profits will be slashed in half for ten years while I change that process. However, the time frame for harm need not be long. Frankly, the clean-up usually costs more than the prevention. If your time horizon is only a year or two, maybe even five or so, then go ahead an pollute your neighbors. Perhaps you can skip out on the clean-up and pass those costs onto someone else.

I agree fully. Notice that the question was "in the short term" and the last paragraph of the answer said that there are other reasons why environmental protection is important.

TDDL, it seems like you're saying that the more environmentally-based company wouldn't be producing anything, and I'm not sure how that's true. I'm not sure how a relatively cleanly run factory that produces fuel-cel cars is really any different than a smoke-belching Hummer plant (just to use two extreme examples). Both produce consumer goods, just with different processes and different end products for the user. You seem to be saying that the environmentally responsible company would basically be doing nothing.

I read "the environmental company" to basically mean a company that is producing the exact same thing except adding more environmental protections. The comparison isn't a fuel-cell car factory to a Hummer factory, you have too many variables changing there (and fuel-cell cars ARE a new good). The comparison is two side-by-side power plants. One installs new scrubbers to reduce NOx and particulate emissions, the other doesn't. There is no way around the fact that adding (and maintaining) new scrubbers adds cost and labor that aren't present for the other power plant. Yes, they're still producing power, but all the time/money/materials that were put into adding scrubbers could have been spent on something different.

So, in a sense, you're right -- the scrubber-enabled power plant is still producing something. But, on the margin, all of the time/energy/resources put into building scrubbers are taken out of the rest of the economy.

Again, that doesn't mean we shouldn't increase environmental protection. Environmental protection is a Good Thing. But we have to be honest about the effects. Claiming that there is no economic impact in general is a fallacy.
posted by thedevildancedlightly at 6:08 PM on June 7, 2005

thedevildancedlightly writes "So, in a sense, you're right -- the scrubber-enabled power plant is still producing something. But, on the margin, all of the time/energy/resources put into building scrubbers are taken out of the rest of the economy."

But wait, why isn't that money going back into the economy from the company installing the scrubbers? I thought I understood from your first post, but now I think that I'm missing something in your reply. If the first co. is producing dirty electricity, and the second company is producing clean energy, there's a third co. producing and installing the scrubbers.

You are right, though, this is not a question about the long-term arguments and cost-benefits. I'm pretty clear about that.
posted by OmieWise at 6:16 PM on June 7, 2005

This doesn't answer your question, but is just some observations on two recent public buildings that were made more decorative than concrete functionality:

The university I went to had a bunch of ugly concrete "bunker" buildings from the 70s. More recently however, the commerce building was done entirely covered with marble imported from Italy. This seemed a little over the top to a lot of people - in part simply because it was the commerce department, thus having an association with money matters. ("fitting" and "gauche" can be pretty close). If the dept had been something less wealth-oriented (eg English, History, the library, etc), I think it would have been appreciated more. But those departments had bare concrete bunkers, so the contrast of vast quantities of luxury materials right beside them took on demeaning/telling meaning (arts=worthless, commerce=$$$). The next building after that was done in concrete, but with interesting architecture, fountain facade at entrance, and vast amounts of metalwork exposed on the interior and exterior (glittering metal I-beams, labyrinths of silver ducting, etc, metal curved suspension mezzanines, etc). That building was more interesting to look at than the commerce building, was really quite ostentatious but in a strictly functional kind of way. I think people really liked it (while opinion was often negative about the Commerce white marble monolith). Context plays into so much.
posted by -harlequin- at 6:26 PM on June 7, 2005

But wait, why isn't that money going back into the economy from the company installing the scrubbers? I thought I understood from your first post, but now I think that I'm missing something in your reply. If the first co. is producing dirty electricity, and the second company is producing clean energy, there's a third co. producing and installing the scrubbers.

That's a twist on the broken window fallacy (hat-tip to reverendx).

Looking from the producer perspective, the company that is producing scrubbers is not producing a consumer good that brings happiness to people. And, ultimately, the whole point of this game is to produce consumer goods that make people happy. In my example above the company building/installing scrubbers should instead be producing new cars, widgets, gameboys, whatever. Less "stuff" is produced in the world since scrubbers don't directly bring anybody happiness. (see the last paragraph below)

Looking from the consumer perspective, the consumers are now paying higher rates for electricity because they are recouping the costs for the scrubbers to be installed. As their electricity bills go up they have less money to spend on DVDs, Britney Spears CDs, computers, cars, housing, whatever. Consumers are less happy because they have to spend more on electricity and less on fun.

In sum, the economy slows down by the cost of the scrubbers. That doesn't mean that there aren't benefits down the road (as many people have pointed out), but in the short-term there is a net economic cost. It might be a wise "investment" to install scrubbers, but we pay for it now... it's not "free" just because there is a new company making the scrubbers.
posted by thedevildancedlightly at 6:29 PM on June 7, 2005

the company that is producing scrubbers is not producing a consumer good that brings happiness to people. And, ultimately, the whole point of this game is to produce consumer goods that make people happy.

So continuing to have a habitable planet is not a source of happiness?
posted by jb at 6:58 PM on June 7, 2005

As to point two, there are still some public buildings that are done in the classic style, but only the Feds can afford can afford them.
posted by Marky at 7:00 PM on June 7, 2005

So continuing to have a habitable planet is not a source of happiness?

Again, please read the last paragraph. It might be a wise investment to put scrubbers on power plants. Personally, I think it is. But, it's not "free" just because there is a new company that builds the scrubbers and installs them. That's the only thing that's being explained -- the original poster was confused as to why GDP growth slows when environmental regulations are tightened. The question wasn't about weighing the costs and benefits in general.

So, yes, having a happy planet is a good thing. But taking the steps required to have a happy planet aren't free. We should be aware of that and make decisions weighing the costs and the benefits. Scrubbers are good, and unfortunately many good things in life aren't free.
posted by thedevildancedlightly at 7:02 PM on June 7, 2005

On the other hand, jb, you do (indirectly) raise the point that most measures of economic growth don't subtract environmental damage (or add environmental improvement). There are several research papers out there about various "GDP+" measures that would count environmental impacts as part of economic measurement and perhaps re-frame the "economy versus the environment" as one unified whole.
posted by thedevildancedlightly at 7:06 PM on June 7, 2005

It all does go to show how complicated these questions are. Consider the scrubber issue. Pollution from coal burning causes, for example, acid rain, which causes direct and significant property damage. That's an easy one. But what about the cost of damage to ecosystems. In some cases lakes have been essentially sterilized of their major fauna by acid rain. How do you quantify this loss in terms of its effect on the economy? If a forest ecosystem is seriously damaged, how do you quantify this loss? It may come out in a reduced water table, that has all kinds of potential economic fallout, very hard to quantify. It may increase erosion. It may reduce local biodiversity. There may also be public health costs.

There are all kinds of grey areas in terms of whether a particular activity is "good" or "bad" for the economy. In general I think that the money we've spent on environmental protection has been well spent... but it's an opinion that betrays my underlying sympathies. Long ago I worked for a non-profit think tank that tried to do these kinds of holistic life-cylce analyses, and it gets insanely complicated. Is the production of fuel grad ethanol a net energy gain? Does the car pay its way in the tax/spend equation? Is it really worthwhile to maintain the operation of a particular nuclear facility? The only thing I learned for sure from the experience is that anyone arguing a simple answer to these kinds of questions is arguing from a perspective of ignorance or deceit.

The cost of an ecologically motivated activity is often pretty direct, i.e. installing scrubbers to this power plant will add X amount of money to the cost of producing Y amount of electricity. The benefits are unfortunately often not nearly so clear, and their calculation is prone to both pro and con bias.
posted by nanojath at 7:09 PM on June 7, 2005

More recently however, the commerce building was done entirely covered with marble imported from Italy. This seemed a little over the top to a lot of people

Can't speak to thrirty years ago, but with new university buildings, you're dealing with donations and fundraising schedules. Most rich donors at the moment don't want their name attached to an ugly or cheap building - they demand stone or glass and atriums and canopies and cool sitework. LEED ratings and general sustainability too.

Recent mid- to high-profile public buildings aren't necessarily ugly, I do think they're getting better - and as b1tr0t points out above are more likely to be glass than concrete. GSA for one is encouraging better architecture, and are hiring top-end design teams for everything up to remote border stations.

If it were because of labor costs, concrete would never be used--it's about the biggest headache for labor costs there is because you basically have to build the building twice. Once in formwork, again when you pour the concrete.

Given recent steel costs (and the associated headaches they've given me over the last year or so), concrete has been the way to go for a lot of jobs! Concrete v steel (or concrete cladding vs stone cladding) is often a schedule-driven decision rather anything else, but some types of buildings (eg with laboratories within) require concrete for reasons of vibration. Some cities are "concrete towns" and sheer supply of labour and competition results in a lot of concrete.

I do question whether concrete and rebar is synonymous with ugly though!
posted by dublinemma at 7:10 PM on June 7, 2005

thedevildancedlightly, you have nailed the problem on its head.

Most measures of economic growth don't subtract environmental damage

More importantly, most individual companies and people do not account for environmental damage in their decision-making.

OmieWise, industries don't upgrade to more environmentally friendly processes, individual companies do. And as long as the cost of environmental pollution for the most part goes uncounted, these individual decision-makers have little incentive to change.

Think of it from the perspective of a company that owns a single widget factory. Its own contribution to environmental damage is probably negligible. Even if an individual factory owner did switch to a nominally more expensive but more environmentally friendly technology, his would be just one factory out of millions - the benefits to the environment would be minimal, and the factory owner would be poorer off for having made the switch.

It is important to keep in mind that although people toss around notions about "industries" and "sectors", these are mere conventions for describing large numbers of individual decision makers who compete against each other to provide similar goods and services. Assuming alternatives are available, the decision about whether or not to use a particular technology or process will never be the result of industries taking collective decisions, but rather millions of individual decisions adding up to an overall trend.

As long as environmentally friendly technologies are more expensive than what is currently in use, they won't be adopted. Now, if the government stepped in and said, "Ok, now all you individual companies have to account for the cost of each X units of pollution you emit," it would change the rules of the game. Suddenly, that individual factory owner from above would be confronted with a different number for the cost of "business as usual" in his cost-benefit analysis. The moment that cost eclipses that of the cleaner process is the moment that decision-maker, and others like him, will make the switch. As long as the cost of pollution remains external to the factory owners' decision-making process, business as usual will prevail.

See also: Externalities, Tragedy of the Commons.
posted by nyterrant at 7:49 PM on June 7, 2005

The upgrade cost drives up the price of the final product, pricing some buyers out of the market.

If the price goes up enough that the product becomes unaffordable to most buyers, the company producing it does out of business (or overseas).

This, in turn, removes the economic contribution of the company from the general economy, and puts the business's employees out of work.
posted by orthogonality at 8:19 PM on June 7, 2005

More importantly, most individual companies and people do not account for environmental damage in their decision-making. ... Now, if the government stepped in and said, "Ok, now all you individual companies have to account for the cost of each X units of pollution you emit," it would change the rules of the game. Suddenly, that individual factory owner from above would be confronted with a different number for the cost of "business as usual" in his cost-benefit analysis. The moment that cost eclipses that of the cleaner process is the moment that decision-maker, and others like him, will make the switch. As long as the cost of pollution remains external to the factory owners' decision-making process, business as usual will prevail.

Dead-on. Moving the cost of pollution into the cost of production so that each produce has an incentive to clean up can make a huge difference. I'd love to see a good FPP on that if you get the chance.
posted by thedevildancedlightly at 8:56 PM on June 7, 2005

from the wikipedia article:

Note that the Austrian interpretation stems from the assumption that all resources are initially fully and appropriately employed.

Well, that sums it up perfectly. Is there a name for the economics fallacy that leads people to believe their models are perfect?
posted by Chuckles at 9:48 PM on June 7, 2005

An emerging trend is to equate pollution with inefficiency. If you address the root cause of the inefficiency, the pollution will decrease.

For example, if a coal power plant is producing particulates, it's probably not burning the coal completely. It will save money in coal costs and reduce emissions by moving to a process that is cleaner.

30 gallons of water are contaminated by cleaning the silicon parts in each computer. The costs of procuring and pumping this water are non-negligible, so if the fab could tighten things up so they don't use as much water, everyone would benefit.

Of course, the economic and environmental benefits may not be completely synonymous, in which case you then have to start also considering the negative public effects. Like, the silicon fab may only save 1% on their bills by cutting their water consumption, so it may not be worth it to them to pay the upfront costs. On the other hand, it might also increase their production rate.

There isn't a dichotomy between making things cheaply and making them environmentally-friendly. What's really needed is a lot more smart people developing efficient and clean manufacturing processes.
posted by breath at 9:52 PM on June 7, 2005

To address the question, the problem for the company which has to spend on the environmental upgrades is it increases its costs without increasing its output, so unit cost goes up, so (generally) sales and profits go down. Possibly if all the money stayed in the economy then the effects would be neutral but more likely the company would have invested the money it was compelled to spend on environmental protection in some way that allowed it to maximise its returns with a good chance of overall benefit to the economy. You could make the argument that the environment is a special case due to such impacts as additional health costs if pollutants are expelled into the environment. These can end up as additional societal costs which the company may not have to meet ("externalities"). The other aspect of this in terms of societal benefits is the potential that the money invested in environmental technology at the societal level may have in terms of knowledge and competitive advantage gained for the companies of a nation or state. For more info on this see the Porter hypothesis, which I have described with multiple links here before. This bascially suggests that states which introduce environmental regulation early may gain an overall international trading advantage in environmental technologies which outweigh the costs of that legislation. It remains controversial.
posted by biffa at 4:38 AM on June 8, 2005

Thanks everyone for the great responses.
posted by OmieWise at 5:57 AM on June 8, 2005