Industry’s problems lie with inadequate productivity gains and profits caused by mismanagement of the economy. Pollution control costs would not contribute to inflation if the U.S. matched Germany’s or Japan’s productivity growth over the past ten years. The fact is all business costs that grew faster than 1.7% annually contributed to inflation Tobias Anthony Research - Cottrell Washington, D.C.20006 The inflationary problem has little to do with environmental costs. It is the direct result of mismanagement of the economy to the detriment of the very industries which produce the wealth that must pay for social objectiveswhatever they are. The overall U S . current economic policy, if pursued further, poses dire consequences for OUT society, economy and position in world markets. On April 20 last year, The Washington Post printed a startling headline: “Postal workers, teamsters and environmental regulations are the first three targets chosen by .Robert Strauss for the opening salvo of his campaign to show the Carter Administration is serious about cutting down inflation.” Most readers were caught by surprise. Was this the same Administration that made environmental goals a key part of its platform, approved the most stringent clean air and water legislation in history, and staffed more than a dozen key posts in the Administration with environmentalists? While Ambassador Strauss retreated somewhat from this position, nevertheless, a top level review committee (Regulatory Advisory Review Board) was established under Charles Schultze, the Administration’s chief economist, to critique regulations that
might be considered inflationary. T o underscore the significance of this new thrust, EPA Administrator, Douglas Costle, issued guidelines aimed at reviewing current and new regulations for their economic impact. But, no, this was not another example of equivocation; just another example of politics in motion. This new thrust is causing much confusion among economists. The reason being inflation has little to do with pollution control costs but much to do with federal deficits, excessive money supply and mismanagement of
the economy. But Mr. Strauss was saying what industry wanted to hear even though it was a phony issue. The real issue is not inflation vs. environmental regulation, but industries’ complaint that pollution control costs are excessive, with little benefit derived to industry. These complaints reached Mr. Strauss during meetings with steel company executives over trigger-price policy. H e responded as he did to cozy up to steel and other troubled industries who are looking for relief any way they can get it. Nevertheless, is there substance to the complaints? What, then, is at the root of the complaints? That’s a different, much more complicated story, which has to do with industries’ inability to generate profits to invest in pollution control equipment, plus productive facilities, plus all the other investments for safety, noise, and crime control; also paying for unrelenting increases in taxes and interest costs plus energy, raw material costs, higher wages and the rest, in excess of industries’ ability to reflect profits immediately in cost of production. Industries’ complaints over pollution control investments have been pronounced because these costs are highly visible, They are complaining about all the other regulated costs as well, because when they try to pass along costs in price increases, they are jawboned or they get caught in a recession. Why increase prices? Well, productivity is so low. the costs cannot be offset.
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0013-936X/79/0913-0400$01 .OO/O @ 1979 American Chemical Society
How did American industry, once the most respected in the world, get caught up in such a bedeviled environment?
The real issue The problem is rooted in longstanding conflicts over social goals. I like the term quality-of-life goalsenvironmental quality being only one of them. These conflicts exist because goals a r e not easily quantified. Consequently.,there is no consensus over what these goals should be, how much should be spent to achieve them, and how long it should take. And the reason the US., unlike Europe, has not done that is because of lack of cooperation among industry, the government, and the public. The quarreling parties have not agreed on what constitutes the social objective called environmental quality nor any of the other QOL objectives. Can we restore the environment to its pristine state? How safe can we be? What level of crime is tolerable? Sorry, no quantification exists. Then how much of the economy should be diverted toward the vague qualitative targets we do have? Well, there was a time when our economy, our technology and our will could accomplish anything. . . and unlike European attitudes, our American ego would except no limits to what we could do. There was a time when the government could lead us toward achieving any national goal. This wasn’t a whim derived from some socialistic doctrine, but a conclusion resulting from three real successes: winning a war, achieving a high standard of living and landing a man on the moon. Let us take the time to trace the development of this successful leadership. The American Dream Ever since the founding of this country it was believed that quality of life was synonymous with a high standard of living. In particular, the Depression years left us with the impression that a good job, a home, a car and money in our pockets were all that were needed to achieve the good life. It wasn’t called quality of life in those days; it was called the “American Dream.” Immediately after World W a r I1 this dream seemed possible. Government, industry and the public succeeded in winning a seemingly impossible victory. Then came the task of converting our industry from wartime to peacetime production. Industry excelled in mass production, technology and producing exotic materials. The U S . could i.ap its wartime re-
sources, utilize its unparalleled technology and generate products that would dominate world markets. By contrast, Europe and Japan would have to rebuild their war-torn industry before they could compete with the
us.
However, difficulties surfaced immediately. It was taking longer for markets to develop and the transition to a peacetime economy was more difficult than first imagined. By comparison, from 1950- 1960 France’s real G N P grew at a 4.8% annual rate; West Germany’s posted a n 8.5% increase; and Japan ,matched Germany’s performance. Our real G N P growth increased 8% from 1950-51, but then a recession in 1953-1954 forced the rate down to 3.8% until 1956, when it fell again to 2%, where it stayed from 1956-1961. Clearly, we were losing ground in achieving our dream. If we were to establish a hold on world markets, and improve our SOL, we had to marshall support from industry and the public, behind the federal government, to once more accomplish a national purpose.
Land a man on the Moon Russia’s success i n launching Sputnik in 1957, coupled with the election of President Kennedy, provided the spark. Our wartime-developed technology would be used to outrace the Russians and score a lunar landing first. The magnificence of such a prospect was enough to win the backing of the public, provide focus for our industry, and once again prove that government could accomplish another incredible task. The lunar program unleashed a
massive research and development effort never seen before in history. It would produce new chemicals, electronics, navigation, satellites and metals undreamed of a decade before. The transfer of technology to industry would establish this nation as the most industrially-advanced in the world. European scientists would emigrate to American industry and universities at such an alarming rate as to create friction with England. The economic results were dramatic. Whether the lunar landing can be given all the credit for the fabulous sixties is a moot point. Undoubtedly, it provided the stimulus. During the years 1960- 1965, real G N P moved up to a growth rate of 4.7% a year. Moreover, incomes soared-reaching most of the public. We finally achieved that high standard of living that would fulfill our American dream.
Is that all there is? Peggy Lee introduced that song several years ago and it describes most Americans’ reactions to our great achievement. Something went wrong. Where was the quality of life? In pushing for a high standard of living, the quality of our environment regressed: cities deteriorated, quality of education peaked and crime rose. Impact on the environment was the earliest to be recognized. In the drive to expand industry and technology to produce more goods and services, considerably more waste was generated than was noticed in the early sixties. This waste affected our aesthetics, limited fishing and swimming options, made air around cities noxious, and cluttered parks. Annoyance grew into disturbance; disturbance grew into anger. The public was not willing to give up these amenities for they were assumed to be part of the American dream. The Government’s next mission Victory in war, the moon landing and achievement of affluence; now quality-of-life goals. All it would take, again, would be marshalling all forces under the federal government’s leadership. This was the first instance of fallacious reasoning. This mission was different. First of all, the objectives of this mission were different. Winning a war and a manned landing are definitive objectives. For example, we always knew where the moon would be when we landed. Accomplishing a lunar objective was complicated, but even that would prove easier by comparison. All the options were technical in nature once the commitment of $25 billion Volume 13, Number 4, April 1979
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was made. Massive infusions of money would allow us to screen the many modal options until the right combination was formed. Then, extensive and elaborate test programs allowed for a good deal of redundancy to assure successful performance. Quality-of-life objectives are at best nebulous; for example, what is environmental quality? How much environmental quality are we talking about? Furthermore, achieving a QOL objective would be extremely difficult since it was never clear the technology would be sufficient to meet the objective. Since objectives were not quantified on some fixed consensus basis, they changed repeatedly, providing a constantly moving target. Huge expenditures have been made, but life doesn’t seem to get much better. Next, federal leadership was inadequate, due primarily to the absence of scientific study needed to fix a set of objectives. Instead, crash programs such as CHESS, aimed at defining the threat of air pollutants such as sulfur dioxide to health and safety were instituted. But these programs did not define what level of environmental quality is feasible or desirable. Rather, the presumption exists that the environment must be nearly pollution free no matter what the cost. Next, there was no marshalling of industry behind the mission objectives such as they were. In fact, industry became the target rather than a contributor, the chief reason a brand-new industry emerged to supply the control technology. Industry lined up on one side, confronted by the government and environmentalists, both purporting to represent the public. This confrontation inevitably led to establishment of arbitrary objectives or standards which turned out to be simplistic. Lastly, economic conditions were different. A good deal of capital would be diverted away from production of standard-of-living goods to qualityof-life services in areas of crime prevention and safety. Although it is not clear how much capital has been diverted, it took place during a time of exceptional incursion by the Federal government in the credit markets, thereby driving up interest rates and exacerbating industry’s costs still further. Consequently, another type of fallacious reasoning took hold. Confrontation led to delays in meeting Q O L objectives, so these objectives were force-fit. Legislation became punitive and regulations confounded sound decisionmaking with most of the burden falling on industrial processes. I n 402
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fact, the heaviest burden fell on the industries who also produce the tangible wealth needed to pay for Q O L objectives. This mission was doomed to failure in meeting expectations because we failed to define objectives to achieve a necessary consensus for establishing and carrying out those objectives, and to understand the limits of our economy to meet S O L and Q O L expectations. It was inevitable that over the time it took to land a man on the moon, approximately eight years, we would arrive at the point when our Q O L mission, particularly environmental quality, would fall short of its target.
Dissecting the failure Skipping over the mission objectives for environmental quality, for little else can be added, brings us to the point of failure to establish a consensus, particularly between environmentalists and industry. Environmentalists were first to react to the obvious degradation of our environment. Activists, centered in California, where a marked dichotomy existed between industrial con-
centrations of oil refineries and aerospace companies and pristine forests, were the first to the attack. Fresh from suc.cessful battles over civil rights and the Vietnam War, biased against industry and largely unschooled in industrial economics, these activists readily assumed an anti-industry stance. But they missed the point that industry, particularly heavy polluters, were responsible for the wealth production so necessary to meeting environmentalist’s goals. Industry, on the other hand, had
been investing in pollution control but at too slow a pace to suit activists. Recognizing that associated costs had to be included in costs of production, industrialists faced the problem of maintaining balance sheets and P / L statements to satisfy demands for investment in wealth-producing facilities, for earnings and growth required by investors, and for R & D . As they viewed it, the cost of restoring the environment at the rate demanded by activists was incompatible with the cost of running their businesses. Furthermore it seemed there would be no end to rising pollution control and other social costs. I think it worthwhile to discuss industry’s attitude toward investing in pollution control. Understanding this attitude is paramount to establishing a consensus with industry. There are three categories of interest over the effects of pollution: impact on plant impact on community impact on the nation and world. Provided objectives or standards are reasonable and investments for control can be absorbed, businessmen have little problem with the first. When required, industries will look for ways to substitute processes which favor cost of production, or benefit employee morale and safety. The Commerce Department reports fully 20% of all pollution control expenditures by manufacturing go for process substitution, a little known fact. As for the second point, take the case of the effect of pollution on a community or city. For more than 30 years, utilities bought electrostatic precipitators to keep fly ash off neighbors’ roofs. Industry contributed to the clean-up of Pittsburgh, through cooperation with city government and the public; albeit it took time so that costs could be absorbed. Also, businessmen know only too well that smog alerts in Los Angeles cost millions of dollars in shut-downs of shops and plants. Local governments are usually successful in solving these problems over time when it is clearly apparent that associated costs of clean-up are acceptable either because they are distributed over time or they are shared equitably. The third point, however, is the big problem area. It is not usually clear that industry’s pollutants affect the rest of the nation or the globe; or that costs will be shared by all parties. Since the benefits to industry or the public are not certain (the costs of clean-up are certain, and large, however), industry becomes recalcitrant. Again, it is uncertainty over quantifiable ob-
Why industry complains about regulatory costs: an explanation Observation: In column 4, current dollars of all corporations is expressed in terms of unit dollars. By way of analogy, if the US. produced only widgets, then column four represents the price of one widget. In 1967 this widget cost 83 cents and during the first quarter of 1978 its cost was $1.48. Observation: Columns 5- 11 represent the components of price including after-tax profits. Conclusion: All components doubled in value except interest cost which tripled and after-tax profits which did not grow at all. Not only did profits not grow but opportunity for savings declined in the intervening years as profits dipped below 7 cents between 1967 and 1977. In contrast, indirect and corporate taxes rose relentlessly. Rationale: Profits and capital consumption allowance (depreciation)represent the source of internal funds for investment. Adding them together (columns 5, 11) they amounted to 14.4 cents in 1967 and 22.6 cents in 1977 but not a fast enough growth rate to keep up with growth in costs. Industry had to go to outside money sources to finance costs and investments which accounts for the rapid rise in interest costs. Who did they have to compete with in credit markets?The federal government bidding up interest rates to pay for exceptional budget deficits.
Economic indicators 4
Period
1967 1968 1969 1970 1971 1972 1973 1974 1975 1976 1977 1977: I II 111 IV 1978: I
Gross domestic product of nonfinancial corporate business (S bll.) Current 1972
452.9 498.4 541.8 560.6 602.5 671.0 752.0 808.8 874.1 988.5 1103.2 1048.5 1093.3 1124.6 1146.3 1161.6
545.8 581.6 607.3 600.6 619.3 671.0 720.4 695.0 680.0 730.0 769.3 750.2 766.9 776.7 783.6 783.6
Total cost and profit
0.830 0.857 0.892 0.933 0.973 1.ooo 1.044 1.164 1.285 1.354 1.434 1.398 1.426 1.448 1.463 1.482
5
6
7
8
9
10
11
Current-dollar cost and profit per unlt of output (dollars) Capital Corporate profits with consumv. IndlCominvent. valuation and allow. with rect pensacapital consump. adjust. capital tlon of Profits Profits budconsump. empI oy Net ness tax after interest adjust. ees Total Iiabllily lax taxes
-
0.072 0.074 0.079 0.088 0.094 0.093 0.095 0.116 0.142 0.146 0.150 0.149 0.149 0.151 0.152 0.155
0.084 0.089 0.094 0.103 0.110 0.110 0.112 0.123 0.136 0.136 0.140 0.140 0.139 0.140 0.142 0.145
0.535 0.553 0.589 0.628 0.645 0.661 0.699 0.796 0.848 0.891 0.952 0.932 0.946 0.955 0.973 1.008
0.016 0.017 0.022 0.028 0.029 0.028 0.032 0.043 0.045 0.042 0.044 0.043 0.043 0.044 0.045 0.046
0.123 0.124 0.109 0.086 0.095 0.107 0.105 0.086 0.113 0.139 0.148 0.134 0.148 0.158 0.151 0.129
0.051 0.058 0.055 0.045 0.048 0.050 0.055 0.061 0.060 0.073 0.077 0.075 0.078 0:076 0.077 0.071
0.072 0.066 0.055 0.041 0.046 0.057 0.050 0.024 0.053 0.066 0.071 0.059 0.070 0.082 0.074 0.057
12
Outputfh of all employWS
(1972 5 )
6.873 7.105 7.139 7.132 7.374 7.595 7.788 7.489 7.721 7.962 8.057 7.991 8.025 8.113 8.103 8.053
Compensationfh of all employees
(0 3.676 3.929 4.198 4.478 4.757 5.024 5.446 5.958 6.550 7.093 7.667 7.451 7.590 7.746 7.881 8.117
Source: Council of Economic Adviser’s monthly report.
Observation: To finance operations industry had to incur substantial debt and did so. By 1976, industry’s debt was 110% of GNP-a figure reached only during the Depressionyears. Since then the percentage declined and industry has been reluctant to incur long-term debt that accounts, in part, for its reluctance to invest in facilities and R&D. Observation: Column 12 deals with productivity or output per hour of employee. Calculating the growth rate for this column the national productivity rate is 1.7 %. Note that this poor performance started long before pollution control was a factor. Bottom line. Yes, industry howls over pollution control costs. But, the complaint is really again the government’s intervention in the overall economy. Industry would not complain as much if productivity rates matched Germany’s or Japan’s 6-8 % range if taxes did not erode cash flow if interest costs could be moderate.
jectives that leads to confrontation and lack of consensus. One word on the “polluter-shouldpay” principle. The polluter doesn’t pay. The consumer does. Costs of investment are either passed on in price increases or offset by productivity gains-not necessarily offered by the pollution control equipment. Industry howls when neither can be accomplished over the life of the investment. Finally, failure was caused by a third factor. That is, failure to define the impact of QOL expectations on the economy. Because of insufficient study
of this relationship, it was never identified whether the economy could support the cumulative costs of achieving those expectations. Rather it was assumed the wealthiest nation in history could absorb these costs. Evidence exists which indicates industry has done poorly over the past decade covering the period of major emphasis on QOL objectives. This is the same industry that provides the wealth needed to pay for achieving those objectives. Wealth is defined in economists’ terms; it is comprised of the tangible assets each of us owns in contrast with income.
Prosperity is not characterized by the dollars we own, which constantly lose their value, but by the value of tangible goods in constant dollars: structures, equipment including consumer durables, land and inventions. These are essentially the output of our heaviest polluting industries-mining, manufacturing, agriculture and construction. When abundant natural resources were cheap, preeminence in highly productive machinery added exceptional value to these resources, converting them into goods of high demand. In turn, industry enjoyed high Volume 13, Number 4, April 1979
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profits, which were ploughed back in the form of investments in R & D , modern machinery and training to improve labor skills. In the period from 1967 to 1975, data in the Statistical Abstract-1977, shows that tangible assets grew modestly. O n a per capita basis, tangible assets in 1967 were worth $10 833 (in 1958 dollars). By 1975 this figure grew to only $12 978 for a growth rate of 2%/year. By contrast the national income on a per capita basis grew from $3300 to $5700 in current dollars for a growth rate of 6% per year, thereby giving the impression we were getting richer three times faster than we actually were. The perception that dollar holdings are synonymous with wealth is fallacious. Imagine for a moment that all currency disappeared. Who would be the wealthy people? Those with the largest holdings of tangible assets. Yet I suspect our expectations were fueled by the 6% growth rate and not by the 2% rate. That being the case, industry has not been performing well over the same time frame. A look a t industrial production indexes shows that overall, production in real terms on a cumulative basis has not risen commensurate with G N P , and industry has not expanded a t comparable historical rates. Let us take the case of manufacturing industries: Table 1 shows the average annual expansion over the past 20 years. This is also reflected in static employment rates in manufacturing, which have remained flat at an average employment of 20 million workers. Quantify the mission Sound fiscal policy set aside, the U S . has to get back to the job of quantifying our QOL objectives if we are to retain our standard of living. Looking beyond environmental quality at such factors as proper schooling, good housing, and safety, the U S . has
the capability within its grasp to quantify these objectives. Of course, this is a long-term proposition. But having accomplished this, we would be able to crank benefits into our economic models and relate them to economic costs. Then, the public would be in position to choose among QOL and SOL objectives. This is not a pipe dream. Work has already started in this direction by the Congressional Office of Technology Assessment for such a study. In addition, a first step has been taken by the Commerce Department. Recently, it published a volume called Social Indicators-1976. A statement in the introduction sets the theme for the volume. “Many aspects of our lives, particularly their qualitative features, are not adequately reflected in the available statistics-a critical examination of the report should provide a factual basis for independent assessment of our current social conditions and the directions in which we appear to be evolving as a society.” The report is comprised of a compendium of statistics broken down into 1 1 categories that include Health and Nutrition; Culture Leisure and Use of Time, Work and Housing-to name a few. Many of these statistics either exist in econometric models or can be inserted. This step is insufficient in itself. Optimum values for these categories must be established in order to arrive at quantitative objectives. This may not be as difficult as it first seems. Periodically, surveys are conducted of cities considered to be the best places to live, The survey is qualitative in nature but so is the perception of happiness, “the good life” and yes, even quality of life. And no one will argue that happiness is a worthwhile criterion for our objective. Therefore, one can take a first cut at quantifying our mission objectives. All that is left to do is measure the values
of social indicators in those cities, thereby equating quantitative measures with qualitative goals. Of course, comparing those measures with economic data for those cities could provide a first-cut econometric model. Even though modeling is suspect today, moderated economic conditions could enable it to function better. Furthermore, quantifying QOL objectives could provide us with a measure against which to judge government performance. One could equate spending by agencies (for example, H U D , H E W , EPA) with achievement in terms of meeting social indicator values. Their effectiveness could be evaluated by setting M B O targets (management by objectives). These targets would relate to success or failure in attaining optimum social indicator values in education, health, housing qualities, and the like. Imagine! W e could determine, finally, whether our tax dollar would be contributing to a better life, and judge agency performance against something like a bottom line.
Looking ahead The Administration’s intention to include EPA in its regulatory review program is not a move to roll back environmental gains, but simply an extension of its plan to reform the bureaucracy. It is a band-aid attempt to show industry and labor that the government intends to fight inflation. But EPA Administrator Costle put it wisely when he said we cannot presume pollution control costs are inflationary if we do not equate them with benefits. My recommendation would do that. It would go farther by introducing the view in day-to-day decisionmaking that we are now in an era where there are limits to what we can achieve with the resources we have.
TABLE 1
Average annual industrial expansion over past 20 years 1954-1964
All manufacturing Textiles Paper PetroIe um Chemicals Nonferrous metals Auto Nonelectrical machinery Electrical machinery Source: McGraw-Hill
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4.2 %
3.1 5.6 3.8 7.8 4.0 4.4 3.9 7.6
1984-1969
6.6 %
6.6 5.8 2.9 11.8 6.1 2.2 6.4 8.5
1969-1975
2.4%’ 2.7 3.9 3.9 4.5 3.0 3.3 4.4 2.2
Tobias Anthony is director of business
development and Washington affairs f o r Research-Cottrell, His career as a business decelopment executive in private and federal markets spans 30 years. Listed in Who’s Who in Finance and Industry, 1977-78, he has lectured and authored numerous papers on economics, environment and energy; he has also lectured at many unicersities and conferences.
