The Economy Vs. The Environment:
Is There A Conflict?

By Dennis Church

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 Income

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 Growth?

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 impact.

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 services.

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 more.

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 both.

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