How Environmental Regulations Hurt the Economy in One Graph

With the Obama administration's new climate regulations on the table of big government and aiming to further reduce basic freedoms for those not only in the United States, but also in all the other nations that will undoubtedly follow the lead, Peter Gleick has presented a figure over at the Huffington Post showing real GDP of the USA since 1929.

The attempted message from Gleick's figure is clear: despite bringing a number of major environmental laws into force since 1970, the US economy has continued to grow in inflation normalized terms.

Of course it has, but that isn't the figure that tells the real story. The total size of the pie (i.e., GDP), and how fast it is growing, is of little interest to me. I'm interested in my slice of the pie -- which is better represented by per capita GDP, and how fast it is growing after we account for inflation (a.k.a., real per capita GDP).

When we look at real per capita GDP since 1929, the potential negative impacts by various environmental laws become clear. The following graph shows the logarithm of American real per capita GDP over this timeframe. If an economy is growing at a constant percentage rate over time (e.g., 3 percent per year on average), a plot of the logarithm of GDP (or per capita GDP) over time will be a straight line. Increasing rates of growth will be seen by an upward curvature on the plot (concave up), and declining growth rates will exhibit a downward curvature (concave down).

The red line shows the actual real per capita GDP profile. The black dashed line shows the declining growth rate since 1970 and extrapolated to 2050. The blue dashed line is the 1929-1970 growth rate, which -- despite large variability during the 1930s and 1940s -- had no significant trend over these four decades.

In other words, the per capita US economy grew at a constant rate up to about 1970, after which it began to go into a sharp growth rate decline. What began in the early 1970s? The environmental laws shown came into force, new ones were added, and regulations and enforcement for all of this legislation cumulatively increased over time.

Correlation isn't causation, but coincidentally the per capita American economy began its death spiral during this period.

The black line shows the economy the US has. The blue line shows the economy the US should have. Had per capita GDP continued increasing at the average rate seen between 1929 and 1970, current real per capita GDP in chained 2009 dollars would have been $94,000 in 2013, rather than its actual value of just under $50,000. In other words, Americans are currently about half as wealthy as they should be. By 2050, the US could be four-times less wealthy as they should be -- and this shortfall will only continue widening exponentially over time unless the economic course is corrected.

Carbon pricing is in a whole different universe when it comes to likely negative impacts on the economy. Energy costs underlie all sub-sectors of the economy, and their additivity is synergistic. While the Clear Air, Clean Water, and Endangered Species Acts -- as well as the Montreal Protocol -- may have had significant negative impacts on economic growth, the costs of curtailing greenhouse gas emissions could be even more harmful than the collective effects of all prior environmental laws up to this point. Add to that the high uncertainty as to what -- if any -- impacts anthropogenic GHGs are having on our climate and the economic risks are just too high to accept.

With the Obama administration's new climate regulations on the table of big government and aiming to further reduce basic freedoms for those not only in the United States, but also in all the other nations that will undoubtedly follow the lead, Peter Gleick has presented a figure over at the Huffington Post showing real GDP of the USA since 1929.

The attempted message from Gleick's figure is clear: despite bringing a number of major environmental laws into force since 1970, the US economy has continued to grow in inflation normalized terms.

Of course it has, but that isn't the figure that tells the real story. The total size of the pie (i.e., GDP), and how fast it is growing, is of little interest to me. I'm interested in my slice of the pie -- which is better represented by per capita GDP, and how fast it is growing after we account for inflation (a.k.a., real per capita GDP).

When we look at real per capita GDP since 1929, the potential negative impacts by various environmental laws become clear. The following graph shows the logarithm of American real per capita GDP over this timeframe. If an economy is growing at a constant percentage rate over time (e.g., 3 percent per year on average), a plot of the logarithm of GDP (or per capita GDP) over time will be a straight line. Increasing rates of growth will be seen by an upward curvature on the plot (concave up), and declining growth rates will exhibit a downward curvature (concave down).

The red line shows the actual real per capita GDP profile. The black dashed line shows the declining growth rate since 1970 and extrapolated to 2050. The blue dashed line is the 1929-1970 growth rate, which -- despite large variability during the 1930s and 1940s -- had no significant trend over these four decades.

In other words, the per capita US economy grew at a constant rate up to about 1970, after which it began to go into a sharp growth rate decline. What began in the early 1970s? The environmental laws shown came into force, new ones were added, and regulations and enforcement for all of this legislation cumulatively increased over time.

Correlation isn't causation, but coincidentally the per capita American economy began its death spiral during this period.

The black line shows the economy the US has. The blue line shows the economy the US should have. Had per capita GDP continued increasing at the average rate seen between 1929 and 1970, current real per capita GDP in chained 2009 dollars would have been $94,000 in 2013, rather than its actual value of just under $50,000. In other words, Americans are currently about half as wealthy as they should be. By 2050, the US could be four-times less wealthy as they should be -- and this shortfall will only continue widening exponentially over time unless the economic course is corrected.

Carbon pricing is in a whole different universe when it comes to likely negative impacts on the economy. Energy costs underlie all sub-sectors of the economy, and their additivity is synergistic. While the Clear Air, Clean Water, and Endangered Species Acts -- as well as the Montreal Protocol -- may have had significant negative impacts on economic growth, the costs of curtailing greenhouse gas emissions could be even more harmful than the collective effects of all prior environmental laws up to this point. Add to that the high uncertainty as to what -- if any -- impacts anthropogenic GHGs are having on our climate and the economic risks are just too high to accept.