Saturday, October 03, 2009

The Blame Game: Has California's Green Push Caused A Deeper Recession Here?

In the 1970s, macro productivity indicators were declining at the same time that EPA regulation was increasing. Some claimed that there was a causal link between these facts. It was claimed that increased regulation lowered business productivity through increasing the labor and capital inputs required to comply with the new regulations.

In hindsight, nobody believes this claim is a big deal. In fact, the Porter Hypothesis has posited that regulation has negative costs as it pushes firms to rethink their business strategies (an inertia claim). I don't believe this story either.

Today, we find some of the leading candidates seeking Arnold S's job making this claim again. See this. Is Ms. Whitman right?

Local land use regulation in California (which is more stringent in liberal communities like Berkeley) helps to drive up real estate prices. This may push some jobs out of the state; especially commercial and industrial activity that is land intensive.

I have also wondered about union power in California. Listening to today's headlines about the LADWP, I see the power of the local unions. Dozens of economic studies have documented the job growth patterns across states and the "coincidence" that there is much greater job growth in Right to Work States (see Thomas Holmes 1998).
Holmes, Thomas, 1998. "The Effect of State Policies on the Location of Manufacturing: Evidence from State Borders," Journal of Political Economy, vol. 106(4), pages 667-705, August.

So, I agree with Ms. Whitman that an unintended consequence of liberal politics leading to land use regulation and labor regulation is to make California's economy less competitive. Why? They drive up the cost of land and labor and this raises firm's cost of doing business in the state and the cost minimizing firm seeks out cheaper (i.e Nevada) places for doing business.

But, is she right about environmental regulation's detrimental effects on the state economy? I don't think so. As I have argued before, California will continue to attract the next Googles if it is perceived to be cutting edge. Environmental regulation does not have to be extremely costly if the economists are brought in to design it. If we are invited in (and the Air Resources Board now has excellent economists working with them), then I am highly confident that environmental regulation can both achieve its direct goal of improving environmental outcomes in the state and helping to lead a push to job creation in new vibrant sectors.

So, California is liberal and liberal states have more land use regulation, labor regulation and environmental regulation. To quote Professor Meatloaf, "two of out three ain't bad". But on the last count, she is wrong. AB32 is not causing this recession.