Excuse the politics but 't'is the season:
Donald Trump has promised to roll back regulations and unleash an energy revolution in America — but economists have their doubts about the plan.
The Republican presidential candidate says he will boost America's economic output, create millions of new jobs, and put coal miners back to work. But the windfalls Trump touts originate from a report commissioned by a nonprofit with ties to the energy industry and whose findings rely on a forecasting model that often overstates the benefits of increased drilling, according to economists who have researched the U.S. shale oil and gas revolution. ...
While outlining his economic blueprint last month, Trump said that lifting restrictions on oil and gas would increase GDP by more than $127 billion, add about 500,000 jobs, and increase wages by $30 billion each year over over the next seven years. Those figures come from the Institute for Energy Research, a nonprofit that advocates for a free-market approach to energy. It typically casts fossil fuels as the most economic form of energy generation, promotes research that says green energy jobs are unsustainable, and claims there is an "enormous volume of sensationalized, simplistic and often plain wrong information" on climate change. ...
The IER study does not actually attribute the gains to a lifting of restrictions, as Trump indicated, but to opening all federal lands to oil, gas, and coal leasing. It is currently barred or temporarily blocked in some parts of the U.S. lower 48, the outer continental shelf, the Gulf of Mexico, and the Arctic National Wildlife Refuge. ...
The IER report uses a method of forecasting called the input-output model, which is frequently used by consultants and government agencies to make projections about the effects of economic activity.
But a number of economists say that model is not well-suited to predicting how more drilling will produce windfalls in other sectors, and academics are skeptical of the method because the results, or outputs, rely so heavily on the assumptions, or inputs.
Thomas Kinnaman, chair of the Economics Department at Bucknell University, who reviewed the IER report for CNBC ... said the technical assumptions used throughout the study are not "egregious," but he noted that the paper makes no attempt to weigh the environmental and social costs of opening federal lands against the benefits.
Joseph R. Mason, the author of the IER study and professor of banking at Louisiana State University, acknowledged that input-output models are not published in academic journals "because economics has moved on" from the method developed by Nobel Prize-winner Wassily Leontief nearly 100 years ago. But he said it is still a useful tool, and one that is widely utilized by the government.
Peter Maniloff, assistant professor of economics at the Colorado School of Mines, said the IER study is based on a questionable assumption.
"The IER report assumes that policy restrictions are the major factor holding back coal, oil, and gas production," but it has more to do with straightforward economics, he said. "Domestic oil drilling on available land has dropped by three-quarters since 2014 due to low prices."
U.S. drillers have slashed capital spending and laid off tens of thousands of workers to survive an oil price collapse brought on by massive oversupply. A chief contributor was surging U.S. production over the last decade as wildcatters harnessed the power of horizontal drilling and hydraulic fracturing, a method of releasing oil and gas from shale rock by pummeling it with water, minerals, and chemicals.
More drilling would delay re-balance and an ultimate price recovery, keeping the pressure on beaten-down American producers. Mason counters that oil prices are expected to eventually recover, and it makes sense to lease federal lands ahead of that rebound.
The IER report makes similar assumptions about coal production that discount the effects of regular economic factors, according to Maniloff. ...
But IER Director of Communications Chris Warren said one cannot ignore the effect of government forces on energy. Congressional research shows oil and gas production on federal lands has lagged output on state and private property, he noted. Indeed, oil and gas drillers often complain that it takes too long to get approval to drill on federal lands and too few auctions for leases have been held.
Further, the Environmental Protection Agency's Mercury and Air Toxics Standard and its carbon dioxide regulations have put pressure on coal miners, Warren said. The U.S. Energy Information Administration does ascribe part of the effect of coal-fired power plant retirements to the Mercury and Air Toxics Standards rules, but concurs with Maniloff that the chief culprit in reduced coal consumption is that it can't compete with cheap and abundant natural gas. ...
Of the hypothetical $127 billion in increased economic output that IER ties to scrapping restrictions, the group attributes more than half of the supposed gains, or $68 billion, to "spillover" effects into other industries. IER says, for example, that increased drilling in offshore fields "might lead to more automobile purchases that would increase economic activity in Michigan." Similarly, most of the 552,000 jobs hypothetically gained would not be directly related to the oil and gas sector. IER believes 75 percent of the employment gains would be in high-wage, high-skill employment like health care, education, professional fields and the arts.
Maniloff's research into the economic effects of increased drilling show a substantial boost in employment and wages in the boomtowns where drilling takes place, and finds that most statistically significant labor gains outside the energy industry are in the construction and retail sectors. ...
Mason, the IER study author, acknowledged to CNBC that he did not attempt to quantify the environmental costs of more drilling and mining, but he noted that he also left out a potential economic benefit: Oil, gas, and coal production inevitably leads to environmental damage, which requires the services of remediation companies.
"I know it's a perverse argument, but it is there," he said of the economic benefits that can come from environmental damage. "As economists, we're caught ... This is not about what should be, but about what is."
This article includes many of the things we try to say often:
- Economic impact studies shouldn't be conducted at the national level -- it ignores all of the substitutions that will make impacts smaller.
- Don't count jobs created/lost by government policies -- unless you also count those jobs lost/created by the same government policies.
- The benefit-cost analysis of an environmental regulation should include environmental benefits -- i.e., people will die early and we ought to acknowledge that.
- The broken window fallacy is a perverse argument -- don't be perverse.