Regulating Automobiles: The Consequences for Consumers

November 19, 2013

A popular argument for regulation holds that leaving consumers and manufacturers to their own devices would lead to undesirable outcomes. First, in seeking to maximize profits, manufacturers may deceive customers into believing cars are safer than they actually are, and they might reduce manufacturing costs by sacrificing safety. Second, because both manufacturers and consumers are seeking the best deal for themselves, they may impose costs on third parties not involved in the transaction. For example, a buyer might wish to purchase a less expensive car that has poor environmental performance, rationalizing that one car, among the many thousands in the immediate area, can have no real impact on the environment.

The first scenario involves unethical and illegal business practices. The second is a classic public goods problem resulting in negative externalities. While these problems may be classic market failures that necessitate government intervention, the regulations purporting to provide solutions come at a cost. While regulations perhaps impose that cost more directly on the manufacturer, the consumer ultimately bears it, at least in part, in the form of higher prices.

Automobiles have served pivotal roles in Americans’ lives throughout the past century. Although initially only the wealthiest individuals owned automobiles, Henry Ford’s mass production of automobiles in the early 20th century made them affordable for less wealthy families.1 The affordability and convenience of automobiles, along with their relative cleanliness, led them to quickly replace horses as the dominant mode of transportation in the United States. In 1920 Americans owned twice as many horses as automobiles, but by 1930 they owned twice as many automobiles as horses.2 By 1927 half of American families owned at least one automobile and by 1970 that number had grown to 83 percent.3 Figure 1 shows the increasing prevalence of automobiles in the United States over the past century, as the number of automobiles per 1,000 Americans increased from less than one in the early 1900s to more than 800 today.

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Regulation in the Pulp and Paper Industry: Costs and Consequences

May 15, 2012

Abstract

The paper and pulp industry is one of the most heavily regulated industries in the United States. This working paper investigates the extent to which environmental and workplace regulations affect the industry and evaluate the impact of these regulations on the industry, its customers, its employees and society in general. A review of literature on this topic reveals that numerous scholars have attempted to discern the effects of specific regulations on the industry or attempted to place a dollar value on what pollution abatement costs paper manufacturers. In this paper, we will take their findings into account, identify which regulations affect the industry, and describe the total cost these regulations impose on society. We investigate the tangible and direct costs of regulation, meaning the amount that regulation actually costs companies within the industry in dollar terms, as well as the less-visible, non-monetary costs resulting from regulation. Regulation also inevitably creates unforeseen costs that neither the regulators nor participants in the market could have anticipated, and those unanticipated consequences of regulation often create the very types of problems the regulators intended to reduce or eliminate. Although the paper and pulp industry incurs a relatively high regulatory burden, firms in the industry also tend to be quite large, which gives them the advantage of being able to disperse the costs of regulation over more units. It therefore remains unclear whether regulation affects firms in this industry to a greater or lesser extent than the average firm in the United States in absolute terms, but the industry nonetheless serves as an example of the costs and consequences of government regulation.

Introduction

The paper and pulp industry represents one of the largest manufacturing sectors in the United States.[1] The industry brings in $160 billion of revenue annually,[2] employs nearly 400,000 individuals across the country,[3] and provides essential products such as paper, paperboard, and insulation to businesses and individuals around the world.[4] It also faces a great deal of criticism from activist groups—and regulation from government agencies—because of its impact on the environment and its comparatively dangerous working conditions.[5]

The paper and pulp industry faces constant pressure both to limit the extent to which it negatively impacts the environment and to limit the number of injuries and fatalities that happen in its workplaces. That pressure comes from both inside and outside the industry, since the industry benefits from improving its relations with employees and other groups affected by its activities. Federal regulation imposes numerous requirements on the industry with the presumed intent of reducing the undesirable effects on the environment and making its workplaces safer, but regulation also creates additional costs that can reduce their net benefits and impede the industry’s ability to provide important products and services. Moreover, the environmental benefits of lower pollution are somewhat offset by economic costs,[6] and are further offset by the foregone environmental benefits industry expansion would provide.

Within developed countries, environmental quality and workplace safety tend to improve over time, because people tend to demand more of both as their income increases. Therefore, regulations that seek to enhance environmental quality and workplace safety essentially attempt to accelerate developments that would occur even in the absence of regulations, so the exact extent to which regulations have affected those aspects of the economy is not clear. Between 1970 and 1998 the paper and pulp industry significantly reduced its emissions of air pollutants—carbon monoxide, sulfur dioxide, and particulate matter—by 32 percent, 36 percent, and 89 percent respectively. The industry kept pace with the average reduction of emissions for all industries in the United States with regard to carbon monoxide and sulfur dioxide, and it exceeded the national pace with regard to particulate emissions.[7] The industry also dramatically reduced its contribution to water pollution during the same period as a consequence of technological advancements, particularly with the adoption of solid waste incinerators that generate electric power by burning organic waste. Such waste previously contributed substantially to the pollution of lakes and rivers.[8]

Additionally, between 1994 and 2010 the number of workplace injuries in the paper and pulp industry declined at a faster rate than the national rate for all private industries. The table below shows the number of workplace injuries per 100 workers in the paper industry, in the manufacturing sector overall, and in private industry overall.[9]

The visible economic costs and unintended consequences of federal regulation, combined with the difficulty of assessing its benefits, mean that the less obvious aspects of regulations must be seriously investigated and taken into account when determining their overall effect on society. The following sections will go into greater depth on the specific regulations that affect this industry, and will describe their effects.

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The U.S. Experience With Fiscal Stimulus

April 5, 2012

Can government spending activities have a positive impact on economic activity? Do federal spending programs designed to offset a recession’s negative effects add a boost to GDP growth? Can government purposefully and successfully take steps that will increase employment?

In essence, do government stimulus programs really work?

These questions were a constant part of the public debate following the implementation of the American Recovery and Reinvestment Act signed into law in 2009. When it was first launched, economists in the Obama administration predicted that the program would generate or avoid the loss of almost 4 million jobs and that the unemployment rate would not go above 8%. However, the rate immediately rose to 8.2% and jumped to over 10% in October 2009.

As shown below, the unemployment rate in early 2012 seemed locked in a range that rotated around 8.5%. This was true in spite of the $787 billion the government spent in a deliberate attempt to bring down unemployment, more than a trillion dollars obligated to bail out auto companies, insurance companies, mortgage lenders, and banks, and ongoing war expenditures that ran a billion dollars a day. Put together, fiscal, monetary, and defense policies did not seem able to put meaningful wind into the economy’s flagging sails.

This report goes far beyond the most recent recessions in an effort to assess stimulus effectiveness, including every recession since WWII. It examines the history of stimulus efforts as revealed by presidential statements found in the ERP and determines if stimulus actions have affected economic performance. The review of issues of the Economic Report of the President that coincide with recessionary periods has uncovered key dimensions of the development and practice of White House stimulus policy:

Stimulus through the decades

1953 under Dwight D. Eisenhower

1961 under John F. Kennedy

1969 under Richard Nixon

1974 under Gerald Ford

1977 under Jimmy Carter

1981 under Ronald Reagan

1989 under George H.W. Bush

1993 under Bill Clinton

2008 under George W. Bush

2009 under Barack Obama

Examination of a large number of data points shows that the economy responds either negatively or not at all to increased government spending, which is to say that GDP growth does not follow stimulus spending.

The Relationship between stimulus spending and economic growth during recessions

As Figure 11 shows, from approximately 1950 to 2010, increases in federal spending were not associated with significant increases in per-capita GDP growth. Blue and red symbols represent quarters of expansion and recession, respectively.

As Figure 13 shows, from approximately 1950 to 2010, increases in federal spending were associated with decreases in per-capita GDP growth.

Deliberate efforts to stimulate the US economy through government fiscal policy have been a formal part of the political economy for more than eighty years. The analysis uncovers a rich but at times confused history of efforts to spend our way out of recessions on the one hand but then deal later with an inflationary economy by way of monetary policy. While there can be appearances of strong favorable responses to fiscal medicine, the more rigorous statistical analysis of relationships between stimulus spending and GDP growth presented a mixed bag of evidence.

Continue reading the working paper as a PDF