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For Release on D e l i v e r y Sunday, June 6 , 1971 3:00 p.m. E.D.T. ECONOMIC IMPACT OF POLLUTION ABATEMENT Remarks By Andrew F. Brimmer Member Board o f Governors o f the F e d e r a l Reserve System At the 1971 Commencement E x e r c i s e s of the U n i v e r s i t y o f Miami C o r a l Gables, Florida June 6 , 1971 ECONOMIC IMPACT OF POLLUTION ABATEMENT By Andrew F. Brimmer* One i s n o t s u r p r i s e d t o n o t e t h a t the problems o f c h e c k i n g p o l l u t i o n and i m p r o v i n g our environment a r e among the most p o p u l a r t o p i c s f o r commencement speakers t h i s y e a r . In fact, i f the issue were n o t such a v i t a l one, I m i g h t be i n c l i n e d t o a p o l o g i z e r a i s i n g the s u b j e c t a g a i n . unpleasant r e a l i t y : However, we a r e c o n f r o n t e d w i t h a s t a r k and many o f our l a k e s and r i v e r s themselves) a r e p o l l u t e d . for Much o f our a i r is (and even the oceans contaminated - - t o the p o i n t o f c r e a t i n g a s e r i o u s t h r e a t t o the h e a l t h o f some o f our i n s p e c i f i c areas. citizens I n a v a r i e t y o f ways, our o v e r a l l environment has suffered considerable deterioration. On an o c c a s i o n such as t h i s , there i s l i t t l e t o be gained by an a t t e m p t t o a s s i g n blame f o r the c i r c u m s t a n c e s i n which we f i n d ourselves. To a c o n s i d e r a b l e e x t e n t , a l l o f us — as c i t i z e n s o f a c o u n t r y w i t h the most s o p h i s t i c a t e d t e c h n o l o g y i n the w o r l d as w e l l as p o s s e s s i n g some o f the e a r t h f s r i c h e s t n a t u r a l r e s o u r c e s - - a r e guilty * Member, Board o f Governors o f the F e d e r a l Reserve System. I am g r a t e f u l t o s e v e r a l members o f the B o a r d ' s s t a f f f o r a s s i s t a n c e i n the p r e p a r a t i o n o f these remarks. Mrs. Susan Burch h e l p e d w i t h the a n a l y s i s o f the o u t l o o k f o r p r i v a t e spending and t h e assessment o f F e d e r a l p o l i c y f o r p o l l u t i o n c o n t r o l . Mr. David Wyss was r e s p o n s i b l e f o r the computer s i m u l a t i o n s t o assess t h e e f f e c t s o f i n c r e a s e d i n v e s t m e n t i n equipment t o c o n t r o l p o l l u t i o n . Miss H a r r i e t t Harper a l s o helped w i t h the paper i n the f i n a l stages o f p r e p a r a t i o n . -2- o f a l l o w i n g our environment t o be abused. On t h e o t h e r hand, we know a g r e a t d e a l about the main sources o f p o l l u t i o n , and we have a f a i r l y good idea o f the requirements t h a t must be met - - i f we a r e t o cope s u c c e s s f u l l y w i t h the problem. We know t h a t c e r t a i n i n d u s t r i e s , p a r t l y because o f the i n h e r e n t n a t u r e o f the p r o d u c t i o n processes which they employ and p a r t l y because o f h e s i t a n c y i n r e c o g n i z i n g t h e i r r e s p o n s i b i l i t i e s , have posed s e r i o u s dangers t o the environment: - A s i z a b l e share o f the a i r p o l l u t i o n can be t r a c e d t o e l e c t r i c power p l a n t s , t o coke ovens i n s t e e l m i l l s , and t o s m e l t e r s o f n o n f e r r o u s o r e s . - Paper m i l l s p o l l u t e streams, and chemical p l a n t s produce waste t h a t i s d i s c a r d e d i n l a k e s and oceans. - F a u l t y o i l w e l l s and a c c i d e n t s i n p e t r o l e u m t r a n s p o r t a t i o n p o l l u t e ocean waterways and damage beaches. - I n a g r i c u l t u r e , d r a i n a g e from feed l o t s s p o i l streams, and p e s t i c i d e s harm some b e n e f i c i a l p l a n t s , f i s h , b i r d s , and p e o p l e . - I n t r a n s p o r t a t i o n , a i r p l a n e s , buses, t r u c k s , t r a i n s , and o t h e r modes o f t r a n s p o r t a l s o add t o the p o l l u t i o n o f the atmosphere. But industry i s not alone. Governments a l s o c o n t r i b u t e s i g n i f i c a n t ways t o the d e t e r i o r a t i o n o f our e n v i r o n m e n t : - M u n i c i p a l i n c i n e r a t o r s r a n k h i g h as a source o f air pollution. - Garbage, dumps scar the landscape, f o u l t h e a i r , p r o v i d e havens f o r r a t s and o t h e r v e r m i n . and in -3- Arid above a l l , i n d i v i d u a l c i t i z e n s c o l l e c t i v e l y are probably t h e most i m p o r t a n t f a c t o r i n a i r and w a t e r p o l l u t i o n i n the U n i t e d States: - The p r i v a t e a u t o m o b i l e i s o b v i o u s l y the c h i e f source i n the household s e c t o r . - Some furnaces and the b u r n i n g o f l e a v e s and grass a r e a l s o m a j o r c o n t r i b u t o r s . - Drainage o f s e p t i c tanks contaminate the subs o i l and f o u l our l a k e s , streams and r i v e r s . - Discarded s o l i d waste d i s f i g u r e s our s t r e e t s and highways and t u r n s much o f the c o u n t r y s i d e i n t o a junk-heap. So, we must accept the f a c t t h a t the t a s k o f abatement i s b o t h l a r g e and u r g e n t . pollution T h i s c o n c l u s i o n seems s e l f - e v i d e n t - - even a f t e r we d i s c o u n t (as we should) many o f the o v e r l y d r a m a t i c c l a i m s o f some o f the more s h r i l l e n v i r o n m e n t a l i s t s , some o f whom do n o t d i s t i n g u i s h between the wise and c o n s e r v a t i v e development and use o f our n a t u r a l resources and the wanton squandering o f our h e r i t a g e . But we must a l s o accept the f a c t t h a t - - l e f t t o themselves - - some o f the p r i n c i p a l p o l l u t e r s (businesses, governments, and p r i v a t e individuals) would n o t c o r r e c t the s i t u a t i o n on t h e i r own r e s p o n s i b i l i t y . Y e t , the e x t e n t o f the p o l l u t i o n problem v a r i e s g r e a t l y from i n d u s t r y t o i n d u s t r y and even among f i r m s w i t h i n the same i n d u s t r y . Because o f d i f f e r i n g g e o g r a p h i c a l and c l i m a t i c c o n d i t i o n s , one area w i t h e s s e n t i a l l y the same i n d u s t r i a l s t r u c t u r e possessed by a n o t h e r may be r e l a t i v e l y f r e e o f a i r o r water p o l l u t i o n w h i l e the o t h e r i n smog o r swirls in effluvium. staggers So, what i s needed i s a n a t i o n a l policy -4- on p o l l u t i o n c o n t r o l - - a p o l i c y w i t h f i r m n a t i o n a l s t a n d a r d s , b u t one t h a t a l s o g i v e s due w e i g h t t o t h e d i v e r s i t y o f e x p e r i e n c e and c i r c u m s t a n c e s among i n d u s t r i e s and I realize, localities. o f c o u r s e , t h a t we do n o t need t o b e g i n scratch i n this e f f o r t . from Laws and r e g u l a t i o n s on t h e b o o k s , a t F e d e r a l , S t a t e and l o c a l l e v e l , have a l r e a d y c r e a t e d much o f n e c e s s a r y framework f o r such a p o l i c y . And i n a number o f the the industries, b u s i n e s s f i r m s have gone a l o n g way i n a d a p t i n g and u p g r a d i n g their facilities Moreover, i n an e f f o r t t o meet t h e more r i g o r o u s s t a n d a r d s . e x i s t i n g a n t i - p o l l u t i o n laws a r e b e i n g t i g h t e n e d , and new measures are being adopted. I n i m p l e m e n t i n g t h e s e more s t r i n g e n t r e q u i r e m e n t s p o l l u t i o n abatement, v i t a l role. In fact, the p u b l i c s e c t o r (at a l l levels) for does have a t h e F e d e r a l Government has p r o j e c t e d a s i z a b l e e x p a n s i o n i n t h e volume o f b u d g e t r e s o u r c e s t o be d e v o t e d t o pollution c o n t r o l i n t h e n e x t few y e a r s . fiscal year Nevertheless, i n the c u r r e n t ( e n d i n g on t h e l a s t day o f t h i s m o n t h ) , o u t l a y s f o r t h e s e programs may amount t o o n l y $ 1 . 2 b i l l i o n . And, d e s p i t e a r e l a t i v e l y i n c r e a s e p r o j e c t e d f o r next y e a r f s b u d g e t , o u t l a y s f o r large pollution abatement i n t h e y e a r ahead s t i l l may n o t exceed $2 b i l l i o n . M o r e o v e r , as we l o o k f u r t h e r i n t o t h e decade, i t is becoming i n c r e a s i n g l y c l e a r t h a t t h e r e s o u r c e s o f t h e F e d e r a l Government will be a l m o s t f u l l y c o m m i t t e d - - d e s p i t e t h e o u t l o o k f o r renewed economic e x p a n s i o n — t h r o u g h 1975. T h i s p r o s p e c t seems t o be v i r t u a l l y a s s u r e d because o f t h e f u r t h e r m a t u r i n g o f programs a l r e a d y i n force -5- and because o f the expected impact o f new i n i t i a t i v e s whose a d o p t i o n appears t o be w e l l underway. S t a t e and l o c a l governments a l s o w i l l be h a r d - p r e s s e d t o r a i s e the revenue necessary t o f i n a n c e an expanding demand f o r p u b l i c services. Consequently, the major r o l e i n the campaign t o c o n t r o l p o l l u t i o n must r e s t w i t h the p r i v a t e s e c t o r . B u t , w i t h i n the p r i v a t e s e c t o r , the e f f o r t s o f households t o expand consumption and the e f f o r t s o f business f i r m s t o expand i n v e s t m e n t w i l l make heavy c l a i m s on our l i m i t e d resources. an i n e s c a p a b l e f a c t : Under these c i r c u m s t a n c e s , we must face s q u a r e l y t h e r e i s a fundamental c o n f l i c t between our e f f o r t s t o maximize the growth o f our gross n a t i o n a l p r o d u c t (GNP) as t r a d i t i o n a l l y d e f i n e d and our e f f o r t s t o devote a s u b s t a n t i a l share o f our r e a l resources t o p o l l u t i o n While a c t i v i t i e s control. t o check p o l l u t i o n and t o improve our environment w i l l u n d o u b t e d l y take many f o r m s , above a l l they w i l l r e q u i r e a s i g n i f i c a n t i n c r e a s e i n the l e v e l o f investment i n abatement equipment. T h i s w i l l mean a d r a s t i c change i n the p a t t e r n o f i n v e s t m e n t spending i n b o t h the p r i v a t e and p u b l i c Historically, pollution sectors. the v a s t p r o p o r t i o n o f the new i n v e s t m e n t i n p r i v a t e i n d u s t r y has been made t o i n c r e a s e p r o d u c t i o n c a p a c i t y , and o n l y a modest share has been devoted t o s u p p r e s s i n g the p o l l u t a n t s as a b y - p r o d u c t o f i n d u s t r i a l a c t i v i t y . To g e t a f i r m g r i p on the p o l l u t i o n problem w i l l r e q u i r e a c o n s i d e r a b l e priorities: generated reordering of investment a much l a r g e r share o f new i n v e s t m e n t w i l l have t o be -6- devoted t o making p r o d u c t i o n processes themselves f a r c l e a n e r and t o r e p a i r i n g t h e e n v i r o n m e n t a l damages s u f f e r e d i n the p a s t . And h e r e we encounter the t o u g h e s t c h o i c e o f a l l s the r a t e o f g r o w t h o f r e a l o u t p u t i n the U n i t e d S t a t e s — as i n any o t h e r advanced i n d u s t r i a l s o c i e t y — depends h e a v i l y on the pace o f ment i n p l a n t and equipment t o expand p r o d u c t i v e c a p a c i t y . more o f our n e t i n v e s t m e n t b e i n g channeled W i t h much i n t o p o l l u t i o n abatement, the r a t e o f e x p a n s i o n o f the American economy as a whole w i l l slow down p e r c e p t i b l y . invest- probably So, w i t h our p o p u l a t i o n c o n t i n u i n g t o grow, we would be f a c e d w i t h t h e l i k e l i h o o d o f a slower g r o w t h i n r e a l per c a p i t a income - - and i n our s t a n d a r d o f l i v i n g as defined. traditionally Some o f u s , o f c o u r s e , would a c c e p t such an outcome as a r e a s o n a b l e p r i c e t o pay t o h a l t the d e t e r i o r a t i o n o f our e n v i r o n m e n t . Others would d e c r y i t as an unwarranted p e n a l t y t o be p a i d p r i m a r i l y by those segments o f s o c i e t y l e a s t able t o bear i t -- under-developed r e g i o n s o f t h e c o u n t r y , the poor and d i s a d v a n t a g e d , h a r d - p r e s s e d urban communities — a l l o f w h i c h may b e n e f i t c o n s i d e r a b l y from a h i g h l e v e l o f s u s t a i n e d economic g r o w t h . And, f i n a l l y , s t i l l other observers would hope and s e a r c h f o r a v i a b l e means o f r e c o n c i l i n g these conflicting goals. That these goals a r e i n c o n f l i c t i s shown c l e a r l y i n the r e s u l t s o f a s y s t e m a t i c a n a l y s i s o f the e f f e c t s o f p o l l u t i o n abatement e f f o r t s w h i c h I u n d e r t o o k w i t h the a s s i s t a n c e o f the B o a r d ' s s t a f f and the computer-based econometric model w h i c h we have had i n o p e r a t i o n the l a s t few y e a r s . These r e s u l t s a r e n o t altogether comforting: for - 7 - w h i l e p o l l u t i o n a b a t e m e n t a c t i v i t i e s w o u l d u n d o u b t e d l y c r e a t e many new jobs, t h e a d v e r s e i m p a c t o f r e d u c e d o r d i s r u p t e d o u t p u t i n some s e c t o r s would p a r t l y o f f - s e t these g a i n s . There w o u l d a l s o be an a d v e r s e one o f t h e most d i s t u r b i n g a d v e r s e e f f e c t s is the impetus to t h a t t h e p o l l u t i o n abatement e f f o r t s w o u l d p r o d u c e . impact inflation W h i l e some o f t h e r e s u l t i n g i n c r e a s e d c o s t s and h i g h e r p r i c e s can be v i e w e d as r e f l e c t i n g higher q u a l i t y of output, further t h e r e u n d o u b t e d l y w o u l d be a s t r e n g t h e n i n g of i n f l a t i o n a r y pressures i n the American e c onomy. a w h o l e can a n s w e r . P u b l i c P o l i c y and P o l l u t i o n Control As I i n d i c a t e d a b o v e , t h e p u b l i c on t h e p r i v a t e private sector is r e l y i n g s e c t o r f o r i m p l e m e n t a t i o n o f a l a r g e measure o f s e c t o r w i t h t h e s t i c k o f j u d i c i a l p r o c e d u r e s and t h e o f a modest amount o f g r a n t a s s i s t a n c e . So f a r , F e d e r a l programs i s m a i n l y on w a t e r p o l l u t i o n . Federal o b l i g a t i o n s • a r e currently i n t h i s area, carrot t h e emphasis o f the A b o u t 80 p e r c e n t of w i t h the l a r g e s t o f f u n d s r e f l e c t e d i n g r a n t s and l o a n s f o r c o n s t r u c t i o n o f largely share municipal -8- waste t r e a t m e n t f a c i l i t i e s . lags far Air pollution control, i n second p l a c e , b e h i n d w i t h about 11 per c e n t o f the o b l i g a t e d f u n d s . Small sums a r e planned f o r a c t i v i t i e s r e l a t i n g t o the p o l l u t i o n o f l a n d , for example, f r o m mine d r a i n a g e , n u t r i e n t s , p e s t i c i d e s , and o t h e r substances. Most o f these funds w i l l be f o r research. A l t o g e t h e r , o u t l a y s f o r these programs i n f i s c a l 1971 a r e e s t i m a t e d a t a p p r o x i m a t e l y $1.2 b i l l i o n . I n f i s c a l 1972, o u t l a y s for p o l l u t i o n c o n t r o l and abatement a c t i v i t i e s a r e expected t o r i s e by a l a r g e p e r c e n t a g e amount (71 p e r c e n t ) b u t i n a b s o l u t e terms o n l y by $838 m i l l i o n . Budget a u t h o r i t y f o r these programs so f a r has been considerably greater than o u t l a y s . To some e x t e n t , diture figures r e f l e c t d i f f i c u l t i e s i n s t a r t i n g up programs, and perhaps t h e r e have been d i f f i c u l t i e s of the expenditure p r o v i s i o n s . these low expen- i n the o r i g i n a l d r a f t i n g o f some B u t , whatever the e x p l a n a t i o n , a u t h o r i t y f o r p o l l u t i o n c o n t r o l i n 1972 w i l l i n c r e a s e r a t h e r budget significantly — f r o m an e s t i m a t e d $1.8 b i l l i o n i n f i s c a l 1971 t o $ 3 . 1 i n f i s c a l 1972. On t h e o t h e r hand, these budget o b l i g a t i o n s a r e spread over a number o f y e a r s i n t h e f u t u r e , and t h e amounts a r e r e l a t i v e l y small. As o f t h i s d a t e , t h e A d m i n i s t r a t i o n ' s program f o r 1972 has n o t been passed, and t h e r e a r e a t l e a s t two major programs b e i n g c o n s i d e r e d by Congress. fiscal alternative However, t h e r e i s a s i g n i f i c a n t d e p a r t u r e f r o m p r e v i o u s p o l i c y i n the A d m i n i s t r a t i o n ' s new p r o p o s a l for water treatment p l a n t s . From 40 t o 60 per cent o f the c o s t o f waste d i s p o s a l i s a p p a r e n t l y d i r e c t l y t r a c e a b l e t o i n d u s t r i a l users, -9- and new p r o p o s a l s would r e q u i r e communities r e c e i v i n g waste treatment g r a n t s t o r e c o v e r from i n d u s t r i a l users t h a t p o r t i o n o f p r o j e c t t h a t i s a l l o c a b l e t o the t r e a t m e n t o f the s p e c i f i c company's costs waste. I n o t h e r words, t h e r e would be a user charge a s s o c i a t e d w i t h waste t r e a t m e n t , and i n d u s t r i e s would have a d i r e c t i n c e n t i v e t o economize i n t h e i r use o f w a t e r . T h i s c l e a r l y d i f f e r s from p a s t p o l i c i e s which r e l i e d on enforcement o f w a t e r standards t h r o u g h j u d i c i a l procedures, w h i c h c o u l d r e s u l t i n l o n g d e l a y s and o f t e n were l i m i t e d t o a few conspicuous violators. For the l a s t 1 - 1 / 2 decades, the c e n t r a l theme o f F e d e r a l Government p o l i c y i n t h i s area has been t h a t most p o l l u t i o n must be e f f e c t e d by i n d u s t r y . I n 1956, Congress amended the F e d e r a l Water P o l l u t i o n C o n t r o l A c t and i n i t i a t e d F e d e r a l e f f o r t s t o w a t e r q u a l i t y standards and t o e n f o r c e them. establish F e d e r a l involvement grew s l o w l y , b u t the 1965 Water Q u a l i t y A c t p r o v i d e d F e d e r a l i n t h e e s t a b l i s h m e n t o f water q u a l i t y standards on a l l w a t e r ways. control supervision interstate As l e g i s l a t i o n now s t a n d s , F e d e r a l w a t e r p o l l u t i o n i s based on the r e q u i r e d development by each S t a t e o f water control quality standards f o r each i n t e r s t a t e l a k e , stream, o r c o a s t a l area w i t h i n its jurisdiction. P r o v i s i o n i s made f o r Federal and S t a t e n e g o t i a t i o n s on the problem and j u d i c i a l enforcement o f the agreed upon standards against p o l l u t o r s . To meet these s t a n d a r d s , i n d u s t r y has a l r e a d y i n v e s t e d l a r g e sums o f c a p i t a l . The p r e s e n t s t r u c t u r e o f legislation and the apparent shortage o f a v a i l a b l e government funds suggests, howe v e r , t h a t the b u l k o f the e f f o r t w i l l have t o c o n t i n u e t o be made w i t h out f i n a n c i a l a s s i s t a n c e from governments. -10- Recent and P r o s p e c t i v e P a t t e r n o f Business Investment These new i n v e s t m e n t r e q u i r e m e n t s w i l l o f i n v e s t m e n t a c t i v i t y by American i n d u s t r y . f o l l o w a heavy volume I n the 1960fs, the g r o w t h i n r e a l p r i v a t e b u s i n e s s i n v e s t m e n t o u t l a y s was p a r t i c u l a r l y r a p i d , a v e r a g i n g about 6 . 5 p e r c e n t a n n u a l l y — w e l l above t h e 2 . 7 p e r c e n t a n n u a l e x p a n s i o n d u r i n g the 1 9 5 0 ' s . I n 1970, r e a l p l a n t and equipment e x p e n d i t u r e s d e c l i n e d — p a r t l y because o f t h e g e n e r a l economic slowdown and p a r t l y because o f t h e lagged e f f e c t s o f monetary i n 1969. D u r i n g the n e x t few y e a r s , we expect o u t l a y s t o expand a g a i n a t a f a i r l y r a p i d pace, i f and i f restraint l o n g - t e r m c a p i t a l markets remain f a v o r a b l e i n v e s t m e n t and d e p r e c i a t i o n a l l o w a n c e s a r e made more In addition, if liberal. t h e i n v e s t m e n t t a x c r e d i t were t o be r e - e n a c t e d , too would p r o v i d e inducement t o expand d u r a b l e equipment it investment. More g e n e r a l l y , however, p a r t o f the u n u s u a l l y l a r g e volume o f investment i n recent years i s undoubtedly a t t r i b u t a b l e to ary psychology. inflation- The r a p i d r i s e i n the p r i c e s o f p l a n t and equipment ( e s p e c i a l l y i n c o n s t r u c t i o n costs) caused b u s i n e s s t o push ahead w i t h new programs even when t h e need f o r these f a c i l i t i e s was n o t immediately u r g e n t t o meet c u r r e n t demand. this As p r i c e i n c r e a s e s moderate, source o f s t i m u l u s t o i n v e s t m e n t s h o u l d fade somewhat, b u t i t w i l l b a b l y be q u i t e some time b e f o r e businessmen c o m p l e t e l y f o r g e t present i n f l a t i o n a r y c o n d i t i o n s and t h e p r e s s u r e o f r a p i d l y r i s i n g u n i t M o r e o v e r , s t r o n g consumer demand ( e s p e c i a l l y f o r d u r a b l e s w i t h pro- costs. their -11- g r e a t e r c a p i t a l i n v e s t m e n t r e q u i r e m e n t s ) , t h e expected demand from the p u b l i c s e c t o r ( p a r t i c u l a r l y from urban t r a n s p o r t a t i o n systems), and r e q u i r e m e n t s f o r changes i n the p r o d u c t i o n process t o keep up w i t h a c c e l e r a t i n g t e c h n o l o g i c a l advances w i l l u n d o u b t e d l y generate capital large requirements. Consequently, a d d i t i o n a l i n v e s t m e n t t o c u r t a i l p o l l u t i o n o f the environment w i l l add i m p o r t a n t l y t o a l r e a d y l a r g e c a p i t a l by p r i v a t e b u s i n e s s . outlays One r e c e n t survey e s t i m a t e s t h a t investment p o l l u t i o n - c o n t r o l a c t i v i t i e s by American companies t h i s year w i l l in rise by 46 per cent over l a s t y e a r , t o a t o t a l o f $3.6 b i l l i o n — or 4 . 4 per c e n t o f t o t a l c a p i t a l i n v e s t m e n t i n t h e 26 i n d u s t r i e s compared t o 3 . 1 per cent l a s t y e a r . of l a s t January, i t To meet l e g a l standards s e t up as i s e s t i m a t e d t h a t , from the end o f l a s t year the mid-1970 1 s , i t w i l l - - and i t surveyed take a aumulative through t o t a l o f more than $18 b i l l i o n i s p o s s i b l e t h a t standards w i l l be s t i f f e n e d f u r t h e r i n the years ahead. Seven i n d u s t r i e s w i l l p r o b a b l y have t o spend more t h a n $1 b i l l i o n a p i e c e , w i t h e l e c t r i c u t i l i t i e s b e i n g h a r d e s t h i t w i t h an e s t i m a t e d cleanup b i l l o f $3.2 b i l l i o n . E l e c t r i c u t i l i t i e s plan to spend $679 m i l l i o n t h i s y e a r , compared w i t h o n l y $127 m i l l i o n i n 1966. A l t e r n a t i v e Approaches i n Assessing P o l l u t i o n Abatement Costs The above o u t l a y s a r e o b v i o u s l y l a r g e , and they should make a s i g n i f i c a n t impact on i n d u s t r y ' s c a p a c i t y t o cope w i t h p o l l u t i o n . ever, an economist would want t o pose a number o f s p e c i f i c q u e s t i o n s Howin -12- o r d e r t o make a f a i r l y good assessment o f the p r o b a b l e c o s t s o f i n v e s t m e n t necessary t o meet the more s t r i n g e n t p o l l u t i o n the standards. I addressed such a l i s t o f q u e s t i o n s t o r e p r e s e n t a t i v e s i n two industries ( s t e e l and e l e c t r i c power g e n e r a t i o n ) , and they were h o p e f u l o f res- ponding i n t i m e t o p e r m i t an a n a l y s i s o f t h e r e p l i e s i n c o n n e c t i o n w i t h these remarks. Unfortunately, the answers were n o t available. I n t h e absence o f such d a t a , I d e c i d e d t o t r y a d i f f e r e n t approach t o o b t a i n an assessment o f t h e i m p l i c a t i o n s o f c h a n n e l i n g a g r e a t e r p r o p o r t i o n of p r i v a t e investment to c o n t r o l p o l l u t i o n . For t h i s p u r p o s e , I r e l i e d on t h e F e d e r a l Reserve B o a r d ' s s t a f f and the modern, computer-based econometric model w h i c h the s t a f f has had i n o p e r a t i o n d u r i n g the l a s t few y e a r s ^ Essentially, I wanted t o know what would be t h e g e n e r a l economic impact - - b o t h d i r e c t and i n d i r e c t -- o f d e v o t i n g a l a r g e r share o f b u s i n e s s i n v e s t m e n t i n p l a n t and equipment t o p o l l u t i o n abatement. To answer t h i s q u e s t i o n , i t was f i r s t necessary t o have an i n d i c a t i o n o f t h e c o n t o u r s o f investment and the l e v e l and c o m p o s i t i o n o f GNP i n t h e absence o f s p e c i a l t o change the c o n f i g u r a t i o n Of i n v e s t m e n t spending. econometric model, a "base p r o j e c t i o n " o f r e a l GNP efforts Using the B o a r d ' s a*id i t s principal 2/ components i n 1975 — was prepared.— a r e shown i n the a t t a c h e d The r e s u l t s ( i n c o n s t a n t 1958 d o l l a r s ) table. J./The model was developed w i t h t h e t e c h n i c a l a s s i s t a n c e o f a t the Massachusetts I n s t i t u t e o f Technology and t h e U n i v e r s i t y Pennsylvania. economists of 2/Key assumptions u n d e r l y i n g t h e e x e r c i s e were t h a t t a x r a t e s were unchanged and t h a t r e s o u r c e s were f u l l y u t i l i z e d , w i t h unemployment i n the neighborhood o f 4 per c e n t i n 1975. -13- A c c o r d i n g t o these e s t i m a t e s , r e a l GNP m i g h t r i s e $724 b i l l i o n i n 1970 t o $893 b i l l i o n i n 1975. Producers' from durables equipment ( t h e most l i k e l y p l a c e where o u t l a y s f o r p o l l u t i o n abatement would be r e g i s t e r e d ) m i g h t be i n the neighborhood o f $63.6 billion, r e p r e s e n t i n g about 7 . 1 per cent o f GNP, compared w i t h $ 5 6 . 1 b i l l i o n and 7.7 per cent o f GNP i n 1970. E x p e n d i t u r e s on p r o d u c e r s ' structures (mainly p l a n t and o t h e r n o n r e s i d e n t i a l s t r u c t u r e s ) would approximate $25.7 b i l l i o n , s l i g h t l y more than i n 1970, and e q u i v a l e n t t o 2.9 per cent o f t o t a l o u t p u t . R e s i d e n t i a l c o n s t r u c t i o n expenditures might amount t o $24.7 b i l l i o n compared w i t h $ 2 0 . 6 , c l a i m i n g the same share o f t o t a l o u t p u t ( 2 . 8 per c e n t ) i n b o t h 1970 and 1975. This pattern o f p r i v a t e i n v e s t m e n t and the o v e r a l l s t r u c t u r e o f GNP a s s o c i a t e d w i t h it should be k e p t i n mind: w i t h o u t a conscious e f f o r t t o m o d i f y the f l o w o f i n v e s t m e n t , we m i g h t expect t o see a s l i g h t l y smaller p r o p o r t i o n o f our r e a l resources devoted t o c a p i t a l a c c u m u l a t i o n i n the p r i v a t e s e c t o r , and ( the i n c r e a s e i n investment i n p l a n t and equipment would aceount f o r about 6 per cent o f the r i s e i n r e a l o u t p u t between 1970 and 1975. The n e x t s t e p was t o determine the e f f e c t s o f r a i s i n g the l e v e l of investment t o cope w i t h p o l l u t i o n . I t was assumed initially t h a t p o l l u t i o n c o n t r o l d e v i c e s a r e added to new equipment purchases b u t t h a t o l d equipment i s n o t a l t e r e d . Greater investment i n pollution -14- c o n t r o l equipment would i n c r e a s e the amount o f c a p i t a l r e q u i r e d p e r 3/ u n i t o f output— - - because no i n c r e a s e i n p r o d u c t i o n c a p a c i t y would be a s s o c i a t e d w i t h a more expensive - - b u t l e s s p o l l u t i n g - process. production The r e s u l t o f t h i s second e x e r c i s e i s l a b e l e d "new equipment p r o j e c t i o n " i n the table. I n t h i s p r o j e c t i o n , r e a l GNP m i g h t r i s e t o $918 b i l l i o n 1975 w i t h i n v e s t m e n t i n producers 1 d u r a b l e equipment a t $69.5 a c c o u n t i n g f o r 7 . 6 p e r cent o f t o t a l o u t p u t . — / in billion, P e r s o n a l consumption e x p e n d i t u r e s would be h e l d t o p r o p o r t i o n a l l y l e s s t h a n i n 1970, 64.9 p e r cent o f GNP compared t o 6 5 . 9 . P r o d u c e r ^ s t r u c t u r e s and r e s i d e n t i a l c o n s t r u c t i o n a l s o would be h e l d t o proportionally s m a l l e r shares o f t o t a l o u t p u t t h a n i n 1970 as more i n v e s t m e n t s h i f t e d t o new p o l l u t i o n abatement equipment. is The unemployment r a t e , however, would drop s u b s t a n t i a l l y below t h e 4 per c e n t l e v e l , and the p r e s s u r e on p r i c e s and i n t e r e s t r a t e s would be i n c r e a s e d significantly. The f i n a l s t e p i n t h e e x e r c i s e was t o e s t i m a t e the e f f e c t of r a i s i n g t h e l e v e l o f i n v e s t m e n t t o cope w i t h p o l l u t i o n i n b o t h new equipment and t h e c o s t o f u p g r a d i n g equipment a l r e a d y i n p l a c e . It 3/Economists r e f e r t o the c a p i t a l r e q u i r e d per u n i t o f o u t p u t as the'fcapital-output r a t i o " . I t was assumed t h a t the p o l l u t i o n c o n t r o l d e v i c e s add 5 p e r c e n t t o the c o s t o f a u n i t o f p r o d u c e r s 1 d u r a b l e equipment. 4 / A t e n - y e a r s i m u l a t i o n i n d i c a t e s t h a t r e a l GNP i n the "new equipment" p r o j e c t i o n w i l l drop below t h e l e v e l f o r the "base p r o j e c t i o n " i n about seven y e a r s , compared w i t h 3 - 1 / 2 years f o r the p r o j e c t i o n discussed below. -15was assumed t h a t r e h a b i l i t a t i o n o f t h e o l d s t o c k o f p r o d u c e r s 1 durable equipment would c o s t $3 b i l l i o n a year from 1971 t h r o u g h 1975.—^ The r e s u l t i n g p r o j e c t e d GNP ( l a b e l e d " u p g r a d i n g " i n the a t t a c h e d t a b l e ) was $887 b i l l i o n , n e a r l y $5.5 b i l l i o n l e s s than the base p r o - j e c t i o n ( w i t h o u t s p e c i a l a n t i - p o l l u t i o n e f f o r t s ) and $31 b i l l i o n less t h a n the p r o j e c t i o n f o r i n v e s t m e n t i n new equipment p r o v i d e d w i t h p o l l u t i o n control devices. As expected, p r o d u c e r s 1 d u r a b l e equipment, a t $70.6 b i l l i o n i n 1975, claimed an even g r e a t e r share o f t o t a l GNP (8 per c e n t ) t h a n w i t h e i t h e r o f the o t h e r p r o j e c t i o n s , w h i l e p l a n t h e l d the same r e l a t i v e share. The i n c r e a s e i n i n v e s t m e n t accounted f o r 10 p e r c e n t o f the i n c r e a s e i n GNP from 1970 t o 1975. In addition, a l t h o u g h they accounted f o r a s l i g h t l y g r e a t e r p r o p o r t i o n o f the total ( 6 6 . 3 per c e n t ) , p e r s o n a l consumption e x p e n d i t u r e s were lower than i n the o t h e r p r o j e c t i o n s , amounting t o $588 b i l l i o n i n 1975. Outlays r e s i d e n t i a l c o n s t r u c t i o n and consumer d u r a b l e s were h e l d t o lower t h a n i n the base p r o j e c t i o n . for levels The unemployment r a t e h e l d a t the same l e v e l as t h a t o f the base p r o j e c t i o n when no m o d i f i c a t i o n s were planned f o r p o l l u t i o n abatement, and i n t e r e s t r a t e s r o s e o n l y slightly. The most d i s t u r b i n g a s p e c t o f t h i s e x e r c i s e i s the p r o j e c t e d e f f e c t on p r i c e s . P r i c e s as measured by the GNP d e f l a t o r began t o r i s e more r a p i d l y w i t h the a d d i t i o n a l investment i n p o l l u t i o n c o n t r o l . This, o f c o u r s e , r a i s e s the whole q u e s t i o n o f n a t i o n a l a c c o u n t i n g v s . a f u l l e r J5/This assumption appears c o n s i s t e n t w i t h r e s u l t s o f the survey c i t e d on page 11. industry -16- set of s o c i a l accounts. cost of e l e c t r i c i t y , I n a v e r y i m p o r t a n t sense, when we add t o the f o r example, by i n s i s t i n g upon p u t t i n g a c o s t on t h e use o f n a t u r a l r e s o u r c e s such as w a t e r and a i r , we a r e a d d i n g t o social costs. Since our t r a d i t i o n a l measures o f c o s t cannot e a s i l y be a d j u s t e d f o r e n v i r o n m e n t a l s a v i n g s , t h e s t a n d a r d p r i c e indexes continue to r e g i s t e r will increases. I n summary, the i n c r e a s e i n p r o d u c e r s 1 d u r a b l e investment f o r p o l l u t i o n c o n t r o l was purchased a t t h e c o s t o f s l i g h t reductions i n e x p e n d i t u r e s f o r p l a n t and r e s i d e n t i a l h o u s i n g , and s i z a b l e drops i n p e r s o n a l consumption and t o t a l GNP. Concluding Observations: B e f o r e c l o s i n g these remarks, I want t o emphasize a g a i n t h a t I p e r s o n a l l y share t h e concern b e i n g expressed i n c r e a s i n g l y by young p e o p l e ) over t h e q u a l i t y o f our e n v i r o n m e n t . handful of c r i t i c s (and i t (especially Fortunately, i s good t h a t t h e r e a r e so few) who t r y the to m i n i m i z e t h e s e r i o u s n e s s o f the p o l l u t i o n problem have n o t been a b l e d i v e r t a t t e n t i o n from the genuine t h r e a t t h a t c o n f r o n t s u s . from now on, we w i l l i n s i s t t h a t c o n s i d e r a t i o n o f to Hopefully, environmental consequences be p l a c e d h i g h on the agenda o f any r e s o u r c e development p r o j e c t s - - whether p u b l i c or p r i v a t e . We can no l o n g e r defend a scheme s i m p l y because i t w i l l expand t h e s u p p l y o f e n e r g y , i n c r e a s e the a v a i l a b i l i t y o f b u i l d i n g m a t e r i a l , reduce t r a n s p o r t a t i o n c o s t s , i n o t h e r ways add t o the m a t e r i a l w e l f a r e o f o u r c i t i z e n s . t o the environment must a l s o be added i n t h e c a l c u l u s o f or The c o s t s decisions. -17- On the o t h e r hand, I c e r t a i n l y would n o t stand w i t h s m a l l band o f i n t o l e r a n t men and women (ami here a l s o i t that i s good t h a t t h e r e a r e so few) who would so e l e v a t e e n v i r o n m e n t a l concerns t h a t we would be v i r t u a l l y p r e c l u d e d from u s i n g our economic and n a t u r a l r e s o u r c e s t o improve the l o t o f the poor and d i s a d v a n t a g e d , t o spur t h e g r o w t h o f depressed r e g i o n s , or t o ease t h e p l i g h t o f our c i t i e s . a l l o f these a r e a s , t o a , we a r e s t i l l unfinished tasks. In faced w i t h a l o n g agenda o f They a l s o have l a r g e and l e g i t i m a t e c l a i m s which must be honored t h r o u g h the a l l o c a t i o n o f a g r e a t e r share o f our r e a l resources. So^ I am l e f t i n the m i d d l e . I see a b a s i c c o n f l i c t among competing g o a l s , and a s h o r t - f a l l i n the means t o s a t i s f y them a l l . And we cannot a f f o r d the i l l u s i o n o f b e l i e v i n g t h a t we can: despite our obvious a f f l u e n c e as a n a t i o n , we do n o t have the c a p a c i t y t o produce enough so t h a t households can maximize t h e i r consumption (while m i n i m i z i n g t a x e s ) ; so t h a t an adequate volume o f housing can be b u i l t ; so t h a t businesses can expand t h e i r p r o d u c t i o n f a c i l i t i e s a t a maximum r a t e (and a l s o make the i n v e s t m e n t needed t o abate p o l l u t i o n ) ; t h a t governments can meet the i n c r e a s i n g demand f o r p u b l i c ( w h i l e t a x revenues l a g b e h i n d s p e n d i n g ) . so services I n s t e a d , I see t h e need f o r a l l o f us t o e x e r c i s e t h e c r i t i c a l judgment and make the h a r d c h o i c e s which seek a reasonable balance between our hopes and p o s s i b i l i t i e s . I n s h o r t , some t h i n g s must be l e f t undone; some g o a l s must remain beyond our grasp - - a t l e a s t f o r the time b e i n g . And some common aims must be pursued - - d e s p i t e the c o s t and p a i n t o some o f us -18- individually. Put a n o t h e r way - - perhaps an o l d f a s h i o n e d way - - t h e r e a r e s t i l l many s a c r i f i c e s ahead. W i t h r e s p e c t t o p o l l u t i o n abatement a l o n e , t h e i s s u e can be stated succinctly: i n the n e x t f o u r o r f i v e y e a r s , i t w i l l t a k e about 10 p e r c e n t o f our n e t i n c r e a s e i n the n a t i o n ' s r e a l o u t p u t $16 b i l l i o n i n r e a l t e r m s , based on 1958 d o l l a r s ) i n v e s t m e n t necessary t o check p o l l u t i o n . (or roughly t o finance the A t t h e same t i m e , capital however, i t m i g h t a l s o p l a c e a s u b s t a n t i a l drag on the c o n t i n u e d improvement the m a t e r i a l c o n d i t i o n s of our lives. How many o f us a r e w i l l i n g t o pay t h i s price? in P r i n c i p a l Claims on R e a l Gross N a t i o n a l P r o d u c t , and A l t e r n a t i v e P r o j e c t i o n s t o 1975 (Amounts i n B i l l i o n s o f 1958 D o l l a r s ) 1970 ( A c t u a l ) Per cent Amount o f T o t a l Sector Gross N a t i o n a l Product 1975 : Base Proi<e c t i o n i / Per c e n t Amount o f T o t a l 1970 1975: New Equipment P r o j e c t i o n ^ / Variance Per cent from Base Amount o f T o t a l P r o j e c t i o n 1975: Amount Upgrading Per c e n t of T o t a l Projection^ V a r i a n c e from Base New Equip. Projection Projection 724.1 100.0 892.6 100.0 918.0 100.0 25.4 887.2 100.0 - 5.4 -30.8 477.1 65.9 593.8 66.5 595.6 64.9 1.8 588.2 66.3 - 5.6 - Producers 1 D u r a b l e Equipment Producers 1 S t r u c t u r e s 56.1 23.1 7.7 3.2 63.6 25.7 7.1 2.9 69.5 26.2 7.6 2.9 5.9 0.5 70.6 25.3 8.0 2.9 - 7.0 0.4 - Residential Construction Consumer D u r a b l e s 20.6 82.0 2.8 11.3 24.7 106.6 2.8 11.9 23.7 110.2 2.6 12.0 1.0 3.6 24.3 105.3 2.7 11.9 - 0.3 1.3 - Personal Consumption Memorandum: Treasury B i l l Rate (Per P r i c e s (GNP D e f l a t o r ) Unemployment R a t e cent) 6.37 134.9 4.8 6.20 159.9 3.8 7.40I 162.9 2.7 1/ The "base p r o j e c t i o n " i s d e r i v e d from a s i m u l a t i o n o f the n a t i o n a l economy by u s i n g t h e F e d e r a l R e s e r v e B o a r d ' s econometric model. A key assumption was t h a t r e s o u r c e s were f u l l y u t i l i z e d w i t h unemployment i n the neighborhood o f 4 per c e n t i n 1975. 2 / I n t h i s p r o j e c t i o n , i t i s assumed t h a t p o l l u t i o n c o n t r o l equipment i s on a l l new e q u i p m e n t , a d d i n g 5 per cent to c o s t . required 3/ T h i s p r o j e c t i o n assumed t h a t i n a d d i t i o n to a d d i n g p o l l u t i o n c o n t r o l d e v i c e s t o new e q u i p m e n t , o l d equipment w i l l be r e n o v a t e d f o r p o l l u t i o n abatement a t a c o s t o f $3 b i l l i o n a y e a r f r o m 1 9 7 1 - 1 9 7 5 . - 1.20 3.0 - 1.1 6.50l 163.0 3.8 0.30 3.1 0.0 - 7.4 1.1 9 n U.6 4.9 0.90 0.1 1.1
@FedFRASER