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What Happens When Economists Skip Econ 101

Posted By David Kreutzer, Ph.D. On February 10, 2011 @ 12:00 pm In Energy | Comments Disabled

Job seekers line up for jobs at Citi Field in Queens in New York [1]

Suppose the government forces a company to take all the money it would have paid person A and use it to hire person B instead. How many jobs have been created? If you said, “One direct job, one indirect job, and a number of uncounted induced jobs,” call the University of Massachusetts, because you qualify to do economic analysis at their Political Economy Research Institute [2] (PERI).

The trick to the perverse PERI analysis is to ignore the cost of taking the money from person A and from the people who support person A (for instance, people who supply materials and people who deliver the materials and products). This is a long-recognized economic error called the “broken windows fallacy,” and it requires a belief in free lunches.

On Wednesday, Environmental Protection Agency (EPA) head Lisa Jackson quoted this study to support her assertions the EPA regulations are net job creators. Under this logic, all regulations that have compliance costs create jobs.

The PERI study claims that EPA regulations will add nearly 1.5 million jobs over the next five years (Note: They have completely confused a job and a job-year, which multiplies the errors in their results.) However, because these regulations increase energy costs, they cut consumers’ income while raising manufacturers’ costs of production [3]. The net effect is both job and income losses. [4]

In a great irony, under PERI logic, regulations without compliance costs would not create jobs; only regulations with compliance costs generate employment increases, because it is the expenditure on compliance that creates the jobs they count. More amazingly, under PERI logic, the greater the cost of complying, the greater the job increases.

To recap: The PERI logic projects more job creation when regulations are more onerous. If Jackson’s endorsement of this line of thinking is reflective of the Obama Administration’s thinking, America’s very sluggish employment rebound [5] is not surprising.


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URL to article: http://blog.heritage.org/2011/02/10/what-happens-when-economists-skip-econ-101/

URLs in this post:

[1] Image: http://www.foundry.org/wp-content/uploads/unemployment100224.jpg

[2] Political Economy Research Institute: http://www.peri.umass.edu/fileadmin/pdf/other_publication_types/green_economics/CERES_PERI_Feb11.pdf

[3] they cut consumers’ income while raising manufacturers’ costs of production: http://www.heritage.org/Research/Reports/2010/05/A-Renewable-Electricity-Standard-What-It-Will-Really-Cost-Americans

[4] The net effect is both job and income losses.: http://www.heritage.org/Research/Reports/2010/01/What-Boxer-Kerry-Will-Cost-the-Economy

[5] very sluggish employment rebound: http://www.heritage.org/Research/Reports/2011/02/Heritage-Employment-Report-January-Report-Shows-Some-Thawing

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