The Economy Vs. The Environment -- Is There A Conflict?
The Economy Vs. The Environment:
Is There A Conflict?
Executive Training
Program Presentation
Mountain View Chamber of Commerce
April 17, 1992
The truth, of course, is
that most of us care more about our standard of living than we do about
the health of some species we seldom if ever see. And the truth, even harder
to admit, is that most of us care more about our own welfare than we do
about that of persons living three or four or five generations hence. If
protecting the planet, for future generations and for other species, depended
on changing these operational values, then we would be in deep trouble.
And perhaps we are in deep trouble, but if we are, it is not because protecting
the planet requires neglecting our own interests. Think whatever you wish
about the moral standing of these operational values -- this is the reality.
It is a deeply held view that protecting the environment constitutes
a net expense to our economy. The popular wisdom these days is that environmental
concerns have faded from the political radar screen because of the recession.
Two years ago, with Earth Day 1990, all the polls showed that the public
attached great value to protecting the environment. Today, not even the
Democratic presidential candidates are declaring their intention to become
&the environmental president.&
To the extent that environmental concerns have faded in economic hard
times, and they have, it is a reflection of the fact that most of the public
and most of the leadership still believes that protecting the environment
represents spending money rather than saving it, represents consumption
rather than investment.
From this view, it follows that the task of public policy is to find
the proper balance between the two. In a recession, the balance shifts to
promoting economic prosperity and away from (quote) spending money (unquote)
on the environment.
Reality Versus Perception
Economic activity, both production
and consumption, relates to the environment in two fundamental ways -- we
draw resources (both renewable and non-renewable) from the environment to
produce goods and services, and we emit wastes into the environment in the
process of both producing and consuming.
Too often we think and act as if we were not part of nature. Rather than
thinking of ourselves as nested in nature and dependent upon it, we think
of ourselves as sitting on top of it, managing it. We think there is the
human world and the natural world, and we forget that we are ourselves,
with all our technology, part of nature.
So what is the reality? What will happen to our industrial civilization
if the supply of natural resources is constantly diminished relative to
demand? The answer is obvious. Our prosperity will be threatened. And the
solution is obvious. We must strive to obtain more goods and services from
our finite supply of non-renewable resources, and we must protect -- from
both extraction and waste impacts -- the natural productivity of our forests,
fisheries, agricultural and range land, and other renewable resources.
Yardsticks of Prosperity
Its obvious that our continued
prosperity depends on protecting both extractive potential and waste absorption
capacity. In thinking about how environmental protection expenditures relate
to future prosperity, we must first consider the yardsticks we use to measure
how we are doing in economic terms.
Growth in gross national product has become the seminal indicator of
the health of our economy. But how good a yardstick of our present or future
prosperity is it?
Gross sales of goods and services as a measure leaves something to be
desired. If an economic activity produces directly one million dollars in
product but also results in one million dollars of costs in health impacts
and destruction of essential assets, common sense might lead you to think
nothing has been gained. But health services and asset replacement are part
of the gross national product, and using GNP as a measure, the loss becomes
a gain. To the one million dollars in product is added one million dollars
in health services and asset replacement, yielding two million in GNP. Something
is clearly wrong with this picture.
Lots of things which enhance our quality of life do not contribute to
our GNP. For example, if we were to take extremely good care of our constructed
assets -- our homes, buildings, vehicles, industrial equipment and so on
-- we would spend less on their replacement. This would reduce our GNP,
but can anyone reasonably suggest that it would reduce our wealth. GNP measures
transactions, not net worth.
Beyond this, could anyone really suggest that human well being is adequately
measured by net worth? If we maximize net worth, but poison our bodies in
the process, would anyone really suggest that we would be better off?
Economic Impacts of Extraction
Waste Generation
As we look at our interest
in the world, we think in sequence -- individual, family, community, region,
nation and world. Conventional economic thinking says that prosperity is
a function of competitiveness, and that competitiveness is a function of
efficiency. But when economists think of efficiency, they usually consider
only the efficiency of labor and capital.
This is outmoded. Japan and Germany produce their products with about
half the energy input of American industry. Energy represents about ten
percent of the cost of production, and so they achieve with their efficiency
about a five percent competitive advantage in world markets relative to
US goods. This advantage is certainly significant, but to it must be added
the price edge of using other natural resources more efficiently. These
efficiencies benefit countries, companies, and local communities. Using
our natural resource base in a more efficient way, and maintaining a larger
supply of both non-renewable and renewable resources relative to demand,
makes the products of a nation, a company, or a community more competitive
in the marketplace.
At the same time, we must begin to calculate into our economic reasoning
the costs imposed by wastes. When wastes reduce the productivity of natural
systems -- forests, fisheries, agricultural and range lands -- they reduce
our supply of economic inputs. When wastes damage our existing investments
-- acid rain eating our bridges, etc. -- they reduce our wealth. And when
wastes damage our health, they impose costs even as they add to GNP by generating
demand for health services.
Rational Given Today's Prices
We can see that even given
the prices of things today, environmental protection offers many substantial
economic advantages. But a big piece of the puzzle has still been left out.
Today's prices in many cases make no economic sense. Price signals don't
reflect the reality of the cost to provide goods and services.
When thinking about the operation of the market in metering the use of
natural resources, we must realize the extent to which we subsidize resource
use and thereby distort price signals.
Perhaps the most obvious and dramatic example of this is in transportation.
When we make transportation decisions, or when we make decisions about the
location of our housing and employment sites, we consider the cost of getting
from here to there. As the cost goes up, we are likely to decide to forgo
trips or situate our home and job closer together. Or we might decide to
use transit, or bike or walk, rather than drive.
The cost of automobile transportation is today subsidized enormously.
If the true cost is every expenditure that is generated by auto use, a brief
listing of some of these expenditures that are not actually paid by drivers
in proportion to their driving will illustrate the subsidy.
We build roads in many cases with general taxes. We also build roads
by putting the cost on new development, and the bill is ultimately paid
in mortgage and lease payments. We maintain, repair and rebuild roads for
the most part with general taxes. And we service them -- traffic patrol,
accident response, and so on -- also mostly with general taxes. Parking
(including the garages in our homes) is for the most part provided by mortgage
and lease payments -- and for commercial structures, is passed along in
the prices of products and services. If all of these costs were paid by
auto registration fees and gas taxes, or through other &use related&
charges, the cost of auto use per mile would go up dramatically. Certainly
it would at least double, and by many calculations might increase as much
as three or even four times.
Economics 101 teaches simply that anytime any good or service is subsidized,
the market undervalues it and its use goes up. If we paid all of the true
costs of auto use in per mile and per vehicle charges, powerful price signals
would be created to avoid unnecessary trips, shorten trip lengths, and shift
to transit. If these shifts were made in a revenue neutral way -- that is,
if general taxes, development fees, product prices and so on were reduced
to an extent equal to the increase in registration fees and gas taxes --
we would not pay more for auto use. We would just pay in a way that would
send much more accurate price signals.
The environmental impact of this would be dramatic. In California, auto
use is the single largest source of air pollution, greenhouse gases, acid
rain, imported oil demand, and urban land use. Better price signals for
auto use would have major environmental benefits, and at the same time,
again per Economics 101, produce a more economically rational and efficient
allocation of all the resources required for auto use.
So lets look at water. Most of us realize that water consumption, not
just for agriculture but for all uses, is enormously subsidized by general
taxes. The subsidy may exceed 90 percent for agriculture, but is substantial
for all uses. What if we paid lower taxes but paid the true cost of water?
The answer is obvious. We would become more efficient in our use of water.
How about solid waste? Although this is finally beginning to change,
most residents of California still pay flat garbage fees, and in many areas
of the country, garbage disposal costs are borne by the general taxpayer.
Would we work to throw away less if we paid for disposal by the pound?
How about food? More than half of the resource use and environmental
impact of food production is related to meat. The cost of producing meat
is greatly reduced by water subsidies, but is likewise reduced by artificially
lower prices for energy, fertilizer, transport and refrigeration. Would
more accurate price signals mean change? Of course. What if we eliminated
price supports and direct agricultural subsidies?
How about clothing? You can begin to see the pattern. Subsidies to cotton
and wool production could be ended. Subsidies to the feedstocks of synthetic
fabrics could be ended. Subsidies to the transport of raw and finished clothing
products could be ended. The tax burden would go down. The cost of clothing
would go up. Maybe more of us would return to mending our socks.
It goes on and on. Natural resource use and environmental impacts are
increased by our pervasive addiction to subsidies for consumption. Economics
101 says this decreases efficiency. And by ending subsidies to consumption,
more would be saved and invested in increasing the then much more cost-effective
investments in increased efficiency.
Treating Capital Drawdown As
But all of this represents
but a fraction of our subsidies for consumption and environmental destruction.
A big part is our habit of treating consumption of our stocks of non-renewable
resources as pure income -- and likewise treating our unsustainable draw
of renewable resources as pure income. A friend of mine has a good way of
describing the economic irrationality of this. Valuing forest products as
equal to the cost of extracting them, he says, is like valuing our life
savings by the cost of driving to the bank to withdraw them.
Our forests, fisheries, agricultural and range lands, mineral resources,
fossil fuel resources, slow to recharge aquifers, and other natural resources
are being consumed. Yet in the national accounting system driven by GNP,
we fail to calculate net income. Our forests shrink, but we do not subtract
the shrinking asset value from gross income to see if we are realizing net
income. Our topsoil is lost, but we do not subtract its value from the value
of agricultural products. And so on, and so on, as we gradually impoverish
ourselves without even counting the costs.
In fact, tax policies push in exactly the opposite direction. We subsidize
extraction with tax credits and other favorable tax treatments. And the
federal government builds roads and other infrastructure needed for extraction
at a loss in order to improve the economics of withdrawing our natural resources
from the bank. Come to think of it, even if we did value our bank accounts
at the cost of driving to the bank to withdraw them, we would still be undervaluing
them because we would pay only a fraction of the true cost of that trip.
&Free& Waste Dumps
That Cost Us A Fortune
But even this doesn't end
the account of our subsidies of waste and environmental destruction. Most
of us understand externalities -- costs created by an activity that are
not internalized in the cost of that activity. Our national accounting system
just doesn't figure things right. When we produce and discharge to the environment
pollutants that degrade the value and productivity of our natural and manmade
systems, we count that discharge as &free.& We too often think
of the cost of pollution control as a net cost, when in fact, from a larger
perspective, it is often repaid, sometimes many times over, by costs avoided
elsewhere in the economy and by the value gained by preserving stocks of
non-renewable natural resources and by preserving the productivity of renewable
natural resources -- that is, again, forests, fisheries, agricultural lands,
aquifers, and so on.
We will not secure the efficiency and economic rationality of markets
until we also end these subsidies. And we will continue to harm or environment
and deplete our natural resources until we internalize these costs.
Discounting The Future
Finally, still one more major
factor must be considered if we are to truly appreciate how we undermine
market signals. Inflation and high interest rates devalue future savings.
When we invest today to save a forest for the next generation, we generally
consider the economic rationality of that investment by figuring the so-called
&net present worth& of that forest that will exist a generation
hence. The higher the interest rate, the lower will be the net present value.
Another friend has a way of illustrating this problem. A single mature
redwood tree can be worth tens of thousands of dollars. The net present
worth of a mature redwood tree planted as a seedling today would be less
that one cent. At this worth, none will ever be planted.
Recap To This Point
So, recapping the comments
to this point, we can see that even at today's prices and under today's
accounting systems and economic yardsticks, much that is needed in the way
of conservation of natural resources and protection of the environment will
enhance the efficiency, productivity and competitiveness of our economy.
At the same time, we can see that today's prices, accounting systems and
economic yardsticks are badly flawed, and that removing subsidies and developing
better accounting systems and yardsticks would contribute enormously to
both economic prosperity and environmental protection.
What Does This Mean For Economic
So what does this mean for
economic growth. Business leaders generally assume that economic growth
is essential to future prosperity. Environmental leaders sometimes assume
that economic growth is the enemy. But economic growth is measured in dollars,
and a growth in transactions does not necessarily mean a growth in environmental
Dollars saved by natural resource efficiency will be spent on something.
To the extent that that something is less resource intensive and pollutant
generating that the expenditures replaced, the environmental impacts of
the economy will decline.
Removal of massive subsidies to material consumption will not end economic
growth but redirect it. As we meet our basic material needs -- for food,
shelter, transport, clothing, etc. -- we naturally tend to shift in our
wants. We don't generally want more and more, but we generally want better
-- better tasting food, more attractive, safer and more durable structures
and goods, more access to entertainment, culture and information, more leisure
to enjoy our lives, and so on. To the extent that material consumption is
priced at its true cost, we will make more efficient use of it and shift
our economic demands to less resource intensive and polluting products and
Imagine this future. Per capita income has doubled. The share of income
spent on material goods has halved. The resource inputs and pollutant outputs
of producing materials goods has halved. In this future, our prosperity
has doubled but our environmental burden on the Earth has fallen dramatically.
Investment Vs. Consumption
The Key To Prosperity
There is much confusion these
days about what will produce prosperity. A few weeks ago a group of leading
economists advised the President not to introduce a middle-class tax cut
to stimulate our way out of recession, but rather to craft a program based
on increasing investment. They proposed, among other things, a fifty billion
dollar transfer to the states and local governments to support investment
in infrastructure and education.
I agree. The key to our future is investment, and this investment must
mean reduced consumption. Reducing and eventually ending subsidies to consumption
will help generate the investment capital, and if we invest properly, the
process will build on itself.
We need to invest in non-renewable resource efficiency, natural renewable
resource protection and restoration, renewable energy, recycling, restoration
of the safety and educational systems of our cities, mass transit and energy
efficient vehicle technology, affordable and environmentally benign housing,
industrial R&D, family planning, child development, and more. An investment
program can be crafted which would at one and the same time yield growing
prosperity and shrinking environmental destruction. As my comments I think
make clear, such a program is unlikely without large scale reform in government
taxing, spending, and regulatory policies.
The Opportunity From
Different Perspectives
Let me comment on these matters
for a few minutes from several different perspectives.
First, from a global perspective. There is no realistic possibility of
increasing per capita incomes and preventing the destruction of the global
environment without halting population growth and at the same time promoting
massive economic development and economic growth.
The real question is the nature and direction of that growth and development.
Investment must be directed to those technologies which can improve living
standards without destroying the natural resource base.
Population stabilization probably depends more than anything else on
increasing economic security in the developing world. At the center of this
is improving health care and economic opportunity for women. This requires
economic growth -- the right kind of economic growth.
Protecting the living and productive natural systems in these countries
-- their forests, fisheries, agricultural lands, etc. -- depends in turn
on halting the slide into desperate poverty. A starving population will
strip every twig and blade of grass to survive. We face the prospect of
utterly destroying much of the natural world in developing countries unless
a successful economic program is created.
Next, from a national perspective. First, we must invest in the rest
of the world as well as in ourselves. Today there is a net flow of capital
from the poor to the rich in the world. Much is said these days in the political
process about reducing foreign aide. Granting that massive change is needed
in how and for what that aide is given, we cannot survive as an island of
prosperity in a declining world. Our long-term future depends on helping
to promote and capitalize global development.
At the same time, we must focus on increasing our competitiveness in
the economy of the developed world. The investment program described above
will do this, and will do it without destroying our nation's environment
and natural resource base in the process.
Increasing resource efficiency will lower the cost of our products in
the world market. Investing in cities, children, and education will improve
the quality of our workforce. And investing in technology development will
give us the tools we need.
Next, from a community perspective. Urban sprawl and unbalanced land
use imposes immense costs on communities, both in economic and quality of
life terms. We need compact, balanced, affordable, transit served, clean,
healthful and safe communities. None of this can be achieved with sprawl.
Sprawl and unbalanced land use increases costs -- for infrastructure,
utilities, housing, schools, transportation, public safety and community
services, and more. And sprawl escalates the environmental impacts of a
community.
Let me digress for a moment to talk about land and markets. Given what
I have said earlier, it might be thought that a more market based approach
to land use decision making would be a good idea. And indeed, under the
right circumstances, it would have many advantages. Today, however, a market
based approach to deciding land use would be a disaster -- and that arises
primarily because we have so distorted the market. As long as transportation,
water, energy and so on are massively subsidized, market forces in land
use will push toward sprawl. Today's land use regulation is part and parcel
of how we have messed up our whole system.
From the perspective of businesses and corporations, unbalanced land
use at low densities drives the increasing cost of doing business locally.
Labor costs go up to attract and retain employees in spite of high housing
costs and unpleasant commutes. Tax burdens go up to pay for the infrastructure
and service facility and personnel increases necessitated by sprawl. Utility
costs go up as utilities must expand their distribution grids and production
capacities. Facility costs go up with escalating land costs. Shipping and
work based trip costs go up as congestion gets worse. Sprawl and imbalanced
land use burdens the economy at the same time it produces air pollution,
greenhouse gases, acid rain, water pollution, energy and water waste, and
A program for better planning, environmental protection, and ending consumption
subsidies would clearly help some businesses and hurt others. This should
not distract from the reality that as a whole such a program would help
business. And this reality should not blind us to the fact that -- given
today's business capital investments, land holdings, market position, product
mix, etc. -- some businesses will oppose the program outlined above because
of impacts on their particular short-term interests.
The other side of the coin is that environmental protection offers many
business opportunities. That is particularly true here in the silicon valley.
Information processing technology, biotechnology, and high technology in
general will play a central role in improving both natural resource efficiency
and pollution reduction. And the market for our technologies will be helped
as consumers shift their demand away from material and energy intensive
goods and services and demand more goods and services in the areas of information,
culture, entertainment, education and so on.
And finally, from the perspective of individuals. If I can cut my utility
and transportation bills in half, have lower cost housing, and maintain
a growing local economy, I'm going to have what I regard as a higher standard
of living. And if I can cut the time I spend in traffic jams and the hours
I spend at work just to meet my minimum material needs, and if I can increase
my access to clean air and water, open space, information, culture, entertainment,
education and similar items, I'm going to have what I regard as a higher
quality of life.
A Vision For The Future
A Sustainable Economy
The world needs a new detente
today -- one between advocates for economic prosperity and advocates for
environmental protection. While some of my comments may have made sense
to you and some may not, I hope that they have at least suggested that there
are many ways to pursue both prosperity and environmental protection that
reinforce rather than compete with each other.
The Political/Educational Challenge
Change is much in vogue in this political year. And indeed we need change.
But to get the right kind of change we will need a massive educational effort.
Our contradictory feelings about government taxing and spending -- we want
the taxing to go down but the spending on our needs to go up -- are a reflection
of the fact that a large part of government spending represents support
for middle class consumption. Entitlements programs transfer funds not nearly
so much from the rich to the poor as from the future to the present. Our
taxing and spending policies subsidize middle class consumption.
We will not change these things easily. We will not get the government
out of the business of picking our pockets unless we are equally willing
to get it out of the business of shoving money in.
But most of all, we will not think clearly or rationally about public
policy unless we stop this foolish business of pitting the economy against
the environment and fess up to the fact that we want both prosperity and
a sustainable planet.
It is time we started to work together to craft a program that will produce
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