Speech

For Release on Delivery Sunday, June 6, 1971 3:00 p.m. E.D.T. ECONOMIC IMPACT OF POLLUTION ABATEMENT Remarks By Andrew F. Brimmer Member Board of Governors of the Federal Reserve System At the 1971 Commencement Exercises of the University of Miami Coral Gables, Florida June 6, 1971 Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis ECONOMIC IMPACT OF POLLUTION ABATEMENT By Andrew F. Brimmer* One is not surprised to note that the problems of checking pollution and improving our environment are among the most popular topics for commencement speakers this year. In fact, if the issue were not such a vital one, I might be inclined to apologize for raising the subject again. However, we are confronted with a stark and unpleasant reality: many of our lakes and rivers (and even the oceans themselves) are polluted. Much of our air is contaminated -- to the point of creating a serious threat to the health of some of our citizens in specifi c areas. In a variety of ways, our overall environment has suffered considerable deterioration. On an occasion such as this, there is little to be gained by an attempt to assign blame for the circumstances in which we find ourselves. To a considerable extent, all of us — as citizens of a country with the most sophisticated technology in the world as well as possessing some of the earthfs richest natural resources -- are guilty * Member, Board of Governors of the Federal Reserve System. I am grateful to several members of the Board's staff for assistance in the preparation of these remarks. Mrs. Susan Burch helped with the analysis of the outlook for private spending and the assessment of Federal policy for pollution control. Mr. David Wyss was responsible for the computer simulations to assess the effects of increased investment in equipment to control pollution. Miss Harriett Harper also helped with the paper in the final stages of preparation. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis -2- of allowing our environment to be abused. On the other hand, we know a great deal about the main sources of pollution, and we have a fairly good idea of the requirements that must be met -- if we are to cope successfully with the problem. We know that certain industries, partly because of the inherent nature of the production processes which they employ and partly because of hesitancy in recognizing their responsibilities, have posed serious dangers to the environment: - A sizable share of the air pollution can be traced to electric power plants, to coke ovens in steel mills, and to smelters of nonferrous ores. - Paper mills pollute streams, and chemical plants produce waste that is discarded in lakes and oceans. - Faulty oil wells and accidents in petroleum trans- portation pollute ocean waterways and damage beaches. - In agriculture, drainage from feed lots spoil streams, and pesticides harm some beneficial plants, fish, birds, and people. - In transportation, airplanes, buses, trucks, trains, and other modes of transport also add to the pollution of the atmosphere. But industry is not alone. Governments also contribute in significant ways to the deterioration of our environment: - Municipal incinerators rank high as a source of air pollution. - Garbage, dumps scar the landscape, foul the air, and provide havens for rats and other vermin. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis -3- Arid above all, individual citizens collectively are probably the most important factor in air and water pollution in the United States: - The private automobile is obviously the chief source in the household sector. - Some furnaces and the burning of leaves and grass are also major contributors. - Drainage of septic tanks contaminate the sub- soil and foul our lakes, streams and rivers. - Discarded solid waste disfigures our streets and highways and turns much of the countryside into a junk-heap. So, we must accept the fact that the task of pollution abatement is both large and urgent. This conclusion seems self-evident -- even after we discount (as we should) many of the overly dramatic claims of some of the more shrill environmentalists, some of whom do not distinguish between the wise and conservative development and use of our natural resources and the wanton squandering of our heritage. But we must also accept the fact that -- left to themselves -- some of the principal polluters (businesses, governments, and private individuals) would not correct the situation on their own responsibility. Yet, the extent of the pollution problem varies greatly from industry to industry and even among firms within the same industry. Because of differing geographical and climatic conditions, one area with essentially the same industrial structure possessed by another may be relatively free of air or water pollution while the other staggers in smog or swirls in effluvium. So, what is needed is a national policy Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis -4- on pollution control -- a policy with firm national standards, but one that also gives due weight to the diversity of experience and circum- stances among industries and localities. I realize, of course, that we do not need to begin from scratch in this effort. Laws and regulations on the books, at the Federal, State and local level, have already created much of the necessary framework for such a policy. And in a number of industries, business firms have gone a long way in adapting and upgrading their facilities in an effort to meet the more rigorous standards. Moreover, existing anti-pollution laws are being tightened, and new measures are being adopted. In implementing these more stringent requirements for pollution abatement, the public sector (at all levels) does have a vital role. In fact, the Federal Government has projected a sizable expansion in the volume of budget resources to be devoted to pollution control in the next few years. Nevertheless, in the current fiscal year (ending on the last day of this month), outlays for these programs may amount to only $1.2 billion. And, despite a relatively large increase projected for next yearfs budget, outlays for pollution abatement in the year ahead s t i ll may not exceed $2 billion. Moreover, as we look further into the decade, it is becoming increasingly clear that the resources of the Federal Government will be almost fully committed -- despite the outlook for renewed economic expansion — through 1975. This prospect seems to be virtually assured because of the further maturing of programs already in force Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis -5- and because of the expected impact of new initiatives whose adoption appears to be well underway. State and local governments also will be hard-pressed to raise the revenue necessary to finance an expanding demand for public services. Consequently, the major role in the campaign to control pollution must rest with the private sector. But, within the private sector, the efforts of households to expand consumption and the efforts of business firms to expand investment will make heavy claims on our limited resources. Under these circumstances, we must face squarely an inescapable fact: there is a fundamental conflict between our efforts to maximize the growth of our gross national product (GNP) as traditionally defined and our efforts to devote a substantial share of our real resources to pollution control. While activities to check pollution and to improve our environment will undoubtedly take many forms, above all they will require a significant increase in the level of investment in pollution abatement equipment. This will mean a drastic change in the pattern of investment spending in both the private and public sectors. Historically, the vast proportion of the new investment in private industry has been made to increase production capacity, and only a modest share has been devoted to suppressing the pollutants generated as a by-product of industrial activity. To get a firm grip on the pollution problem will require a considerable reordering of investment priorities: a much larger share of new investment will have to be Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis -6- devoted to making production processes themselves far cleaner and to repairing the environmental damages suffered in the past. And here we encounter the toughest choice of alls the rate of growth of real output in the United States — as in any other advanced industrial society — depends heavily on the pace of invest- ment in plant and equipment to expand productive capacity. With much more of our net investment being channeled into pollution abatement, the rate of expansion of the American economy as a whole will probably slow down perceptibly. So, with our population continuing to grow, we would be faced with the likelihood of a slower growth in real per capita income -- and in our standard of living as traditionally defined. Some of us, of course, would accept such an outcome as a reasonable price to pay to halt the deterioration of our environment. Others would decry it as an unwarranted penalty to be paid primarily by those segments of society least able to bear it -- under-developed regions of the country, the poor and disadvantaged, hard-pressed urban communities — all of which may benefit considerably from a high level of sustained economic growth. And, finally, still other observers would hope and search for a viable means of reconciling these conflicting goals. That these goals are in conflict is shown clearly in the results of a systematic analysis of the effects of pollution abatement efforts whic h I undertook with the assistance of the Board's staff and the computer-based econometric model which we have had in operation for the last few years. These results are not altogether comforting: Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis -7- while pollution abatement activities would undoubtedly create many new jobs, the adverse impact of reduced or disrupted output in some sectors would partly off-set these gains. There would also be an adverse impact one of the most disturbing adverse effects is the impetus to inflation that the pollution abatement efforts would produce. While some of the resulting increased costs and higher prices can be viewed as reflecting higher quality of output, there undoubtedly would be a further strengthening of inflationary pressures in the American e c onomy. a whole can answer. Public Policy and Pollution Control As I indicated above, the public sector is relying largely on the private sector for implementation of a large measure of private secto r with the stick of judicial procedures and the carrot of a modest amount of grant assistance. So far, the emphasis of the Federal programs is mainly on water pollution. About 80 per cent of Federal obligations•are currently in this area, with the largest share of funds reflected in grants and loans for construction of municipal Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis -8- waste treatment facilities. Air pollution control, in second place, lags far behind with about 11 per cent of the obligated funds. Small sums are planned for activities relating to the pollution of land, for example, from mine drainage, nutrients, pesticides, and other sub- stances. Most of these funds will be for research. Altogether, outlays for these programs in fiscal 1971 are estimated at approximately $1.2 billion. In fiscal 1972, outlays for pollution control and abatement activities are expected to rise by a large percentage amount (71 per cent) but in absolute terms only by $838 million. Budget authority for these programs so far has been considerably greater than outlays. To some extent, these low expen- diture figures reflect difficulties in starting up programs, and perhaps there have been difficulties in the original drafting of some of the expenditure provisions. But, whatever the explanation, budget authority for pollution control in 1972 will increase rather significantly — from an estimated $1.8 billion in fiscal 1971 to $3.1 in fiscal 1972. On the other hand, these budget obligations are spread over a number of years in the future, and the amounts are relatively small. As of this date, the Administration's program for fiscal 1972 has not been passed, and there are at least two major alternative programs being considered by Congress. However, there is a significant departure from previous policy in the Administration's new proposal for water treatment plants. From 40 to 60 per cent of the cost of waste disposal is apparently directly traceable to industrial users, Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis -9- and new proposals would require communities receiving waste treatment grants to recover from industrial users that portion of project costs that is allocable to the treatment of the specific company's waste. In other words, there would be a user charge associated with waste treatment, and industries would have a direct incentive to economize in their use of water. This clearly differs from past policies which relied on enforcement of water standards through judicial procedures, which could result in long delays and often were limited to a few conspicuous violators. For the last 1-1/2 decades, the central theme of Federal Government policy in this area has been that most pollution control must be effected by industry. In 1956, Congress amended the Federal Water Pollution Control Act and initiated Federal efforts to establish water quality standards and to enforce them. Federal involvement grew slowly, but the 1965 Water Quality Act provided Federal supervision in the establishment of water quality standards on all interstate water ways. As legislation now stands, Federal water pollution control is based on the required development by each State of water quality standards for each interstate lake, stream, or coastal area within its jurisdiction. Provision is made for Federal and State negotiations on the problem and judicial enforcement of the agreed upon standards against pollutors. To meet these standards, industry has already invested large sums of capital. The present structure of legislation and the apparent shortage of available government funds suggests, how- ever, that the bulk of the effort will have to continue to be made with- out financial assistance from governments. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis -10- Recent and Prospective Pattern of Business Investment These new investment requirements will follow a heavy volume of investment activity by American industry. In the 1960fs, the growth in real private business investment outlays was particularly rapid, averaging about 6.5 per cent annually — well above the 2.7 per cent annual expansion during the 1950's. In 1970, real plant and equipment expenditures declined — partly because of the general economic slowdown and partly because of the lagged effects of monetary restraint in 1969. During the next few years, we expect outlays to expand again at a fairly rapid pace, if long-term capital markets remain favorable and if investment and depreciation allowances are made more liberal. In addition, if the investment tax credit were to be re-enacted, it too would provide inducement to expand durable equipment investment. More generally, however, part of the unusually large volume of investment in recent years is undoubtedly attributable to inflation- ary psychology. The rapid rise in the prices of plant and equipment (especially in construction costs) caused business to push ahead with new programs even when the need for these facilities was not immediately urgent to meet current demand. As price increases moderate, this source of stimulus to investment should fade somewhat, but it will pro- bably be quite some time before businessmen completely forget present inflationary conditions and the pressure of rapidly rising unit costs. Moreover, strong consumer demand (especially for durables with their Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis -11- greater capital investment requirements), the expected demand from the public sector (particularly from urban transportation systems), and requirements for changes in the production process to keep up with accelerating technological advances will undoubtedly generate large capital requirements. Consequently, additional investment to curtail pollution of the environment will add importantly to already large capital outlays by private business. One recent survey estimates that investment in pollution-control activities by American companies this year will rise by 46 per cent over last year, to a total of $3.6 billion — or 4.4 per cent of total capital investment in the 26 industries surveyed compared to 3.1 per cent last year. To meet legal standards set up as of last January, it is estimated that, from the end of last year through the mid-19701 s, it will take a aumulative total of more than $18 billion -- and it is possible that standards will be stiffened further in the years ahead. Seven industries will probably have to spend more than $1 billion apiece, with electric utilities being hardest hit with an estimated cleanup bill of $3.2 billion. Electric utilities plan to spend $679 million this year, compared with only $127 million in 1966. Alternative Approaches in Assessing Pollution Abatement Costs The above outlays are obviously large, and they should make a significant impact on industry's capacity to cope with pollution. How- ever, an economist would want to pose a number of specific questions in Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis -12- order to make a fairly good assessment of the probable costs of the investment necessary to meet the more stringent pollution standards. I addressed such a list of questions to representatives in two industries (steel and electric power generation), and they were hopeful of res- ponding in time to permit an analysis of the replies in connection with these remarks. Unfortunately, the answers were not available. In the absence of such data, I decided to try a different approach to obtain an assessment of the implications of channeling a greater proportion of private investment to control pollution. For this purpose, I relied on the Federal Reserve Board's staff and the modern, computer-based econometric model which the staff has had in operation during the last few years^ Essentially, I wanted to know what would be the general economic impact -- both direct and indirect -- of devoting a larger share of business investment in plant and equipment to pollution abatement. To answer this question, it was first necessar y to have an indication of the contours of investment and the level and composition of GNP in the absence of special efforts to change the configuration Of investment spending. Using the Board's econometric model, a "base projection" of real GNP a*id its principal 2/ components in 1975 — was prepared.— The results (in constant 1958 dollars) are shown in the attached table. J./The model was developed with the technical assistance of economists at the Massachusetts Institute of Technology and the University of Pennsylvania. 2/Key assumptions underlying the exercise were that tax rates were unchanged and that resources were fully utilized, with unemployment in the neighborhood of 4 per cent in 1975. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis -13- According to these estimates, real GNP might rise from $724 billion in 1970 to $893 billion in 1975. Producers' durables equipment (the most likely place where outlays for pollution abatement would be registered) might be in the neighborhood of $63.6 billion, representing about 7.1 per cent of GNP, compared with $56.1 billion and 7.7 per cent of GNP in 1970. Expenditures on producers' structures (mainly plant and other nonresidential structures) would approximate $25.7 billion, slightly more than in 1970, and equivalent to 2.9 per cent of total output. Residential construction expenditures might amount to $24.7 billion compared with $20.6, claiming the same share of total output (2.8 per cent) in both 1970 and 1975. This pattern of private investment and the overall structure of GNP associated with it should be kept in mind: without a conscious effort to modify the flow of investment, we might expect to see a slightly smaller proportion of our real resources devoted to capital accumulation ( in the private sector, and the increase in investment in plant and equipment would aceount for about 6 per cent of the rise in real output between 1970 and 1975. The next step was to determine the effects of raising the level of investment to cope with pollution. It was assumed initially that pollution control devices are added to new equipment purchases but that old equipment is not altered. Greater investment in pollution Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis -14- control equipment would increase the amount of capital required per 3/ unit of output— -- because no increase in production capacity would be associated with a more expensive -- but less polluting -- production process. The result of this second exercise is labeled "new equipment projection" in the table. In this projection, real GNP might rise to $918 billion in 1975 with investment in producers1 durable equipment at $69.5 billion, accounting for 7.6 per cent of total output.—/ Personal consumption expenditures would be held to proportionally less than in 1970, 64.9 per cent of GNP compared to 65.9. Producer^ structures and residential constructio n also would be held to proportionally smaller shares of total output than in 1970 as more investment is shifted to new pollution abatement equipment. The unemployment rate, however, would drop substantially below the 4 per cent level, and the pressure on prices and interest rates would be increased significantly. The final step in the exercise was to estimate the effect of raising the level of investment to cope with pollution in both new equipment and the cost of upgrading equipment already in place. It 3/Economists refer to the capital required per unit of output as the'fcapital-output ratio". It was assumed that the pollution control devices add 5 per cent to the cost of a unit of producers1 durable equipment. 4/A ten-year simulation indicates that real GNP in the "new equipment" projection will drop below the level for the "base pro- jection" in about seven years, compared with 3-1/2 years for the projection discussed below. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis -15- was assumed that rehabilitation of the old stock of producers1 durable equipment would cost $3 billion a year from 1971 through 1975.—^ The resulting projected GNP (labeled "upgrading" in the attached table) was $887 billion, nearly $5.5 billion less than the base pro- jection (without special anti-pollution efforts) and $31 billion less than the projection for investment in new equipment provided with pollution control devices. As expected, producers1 durable equipment, at $70.6 billion in 1975, claimed an even greater share of total GNP (8 per cent) than with either of the other projections, while plant held the same relative share. The increase in investment accounted for 10 per cent of the increase in GNP from 1970 to 1975. In addition, although they accounted for a slightly greater proportion of the total (66.3 per cent), personal consumption expenditures were lower than in the other projections, amounting to $588 billion in 1975. Outlays for residential construction and consumer durables were held to lower levels than in the base projection. The unemployment rate held at the same level as that of the base projection when no modifications were planned for pollution abatement, and interest rates rose only slightly. The most disturbing aspect of this exercise is the projected effect on prices. Prices as measured by the GNP deflator began to rise more rapidly with the additional investment in pollution control. This, of course, raises the whole question of national accounting vs. a fuller J5/This assumption appears consistent with results of the industry survey cited on page 11. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis -16- set of social accounts. In a very important sense, when we add to the cost of electricity, for example, by insisting upon putting a cost on the use of natural resources such as water and air, we are adding to social costs. Since our traditional measures of cost cannot easily be adjusted for environmental savings, the standard price indexes will continue to register increases. In summary, the increase in producers1 durable investment for pollution control was purchased at the cost of slight reductions in expenditures for plant and residential housing, and sizable drops in personal consumption and total GNP. Concluding Observations: Before closing these remarks, I want to emphasize again that I personally share the concern being expressed increasingly (especially by young people) over the quality of our environment. Fortunately, the handful of critics (and it is good that there are so few) who try to minimize the seriousness of the pollution problem have not been able to divert attention from the genuine threat that confronts us. Hopefully, from now on, we will insist that consideration of environmental consequences be placed high on the agenda of any resource development projects -- whether public or private. We can no longer defend a scheme simply because it will expand the supply of energy, increase the availability of building material, reduce transportation costs, or in other ways add to the material welfare of our citizens. The costs to the environment must also be added in the calculus of decisions. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis -17- On the other hand, I certainly would not stand with that small band of intolerant men and women (ami here also it is good that there are so few) who would so elevate environmental concerns that we would be virtually precluded from using our economic and natural resources to improve the lot of the poor and disadvantaged, to spur the growth of depressed regions, or to ease the plight of our cities. In all of these areas, toa, we are still faced with a long agenda of unfinished tasks. They also have large and legitimate claims which must be honored through the allocation of a greater share of our real resources. So^ I am left in the middle. I see a basic conflict among competing goals, and a short-fall in the means to satisfy them all. And we cannot afford the illusion of believing that we can: despite our obvious affluence as a nation, we do not have the capacity to produce enough so that households can maximize their consumption (while minimizing taxes); so that an adequate volume of housing can be built; so that businesses can expand their production facilities at a maximum rate (and also make the investment needed to abate pollution); so that governments can meet the increasing demand for public services (while tax revenues lag behind spending). Instead, I see the need for all of us to exercise the critical judgment and make the hard choices which seek a reasonable balance between our hopes and possibilities. In short, some things must be left undone; some goals must remain beyond our grasp -- at least for the time being. And some common aims must be pursued -- despite the cost and pain to some of us Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis -18- individually. Put another way -- perhaps an old fashioned way -- there are still many sacrifices ahead. With respect to pollution abatement alone, the issue can be stated succinctly: in the next four or five years, it will take about 10 per cent of our net increase in the nation's real output (or roughly $16 billion in real terms, based on 1958 dollars) to finance the capital investment necessary to check pollution. At the same time, however, it might also place a substantial drag on the continued improvement in the material conditions of our lives. How many of us are willing to pay this price? Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis Principal Claims on Real Gross National Product, 1970 and Alternative Projections to 1975 (Amounts in Billions of 1958 Dollars) 1975: New 1975 : Base Equipment Projection^/ 1975: Upgrading Projection^ 1970 (Actual) Proi< ectioni/ Variance Variance from Per cent Per cent Per cent from Base Per cent Base New Equip. Sector Amount of Total Amount of Total Amount of Total Projection Amount of Total Projection Projection Gross National Product 724.1 100.0 892.6 100.0 918.0 100.0 25.4 887.2 100.0 - 5.4 -30.8 Personal Consumption 477.1 65.9 593.8 66.5 595.6 64.9 1.8 588.2 66.3 - 5.6 - 7.4 Producers1 Durable Equipment 56.1 7.7 63.6 7.1 69.5 7.6 5.9 70.6 8.0 7.0 1.1 Producers1 Structures 23.1 3.2 25.7 2.9 26.2 2.9 0.5 25.3 2.9 - 0.4 - n 9 Residential Construction 20.6 2.8 24.7 2.8 23.7 2.6 - 1.0 24.3 2.7 - 0.3 U.6 Consumer Durables 82.0 11.3 106.6 11.9 110.2 12.0 3.6 105.3 11.9 - 1.3 - 4.9 Memorandum: Treasury Bill Rate (Per cent) 6.37 6.20 7.40 I 1.20 6.50 l 0.30 - 0.90 Prices (GNP Deflator) 134.9 159.9 162.9 3.0 163.0 3.1 - 0.1 Unemployment Rate 4.8 3.8 2.7 - 1.1 3.8 0.0 1.1 1/ The "base projection" is derived from a simulation of the national economy by using the Federal Reserve Board's econometric model. A key assumption was that resources were fully utilized with unemployment in the neighborhood of 4 per cent in 1975. 2/ In this projection, it is assumed that pollution control equipment is required on all new equipment, adding 5 per cent to cost. 3/ This projection assumed that in addition to adding pollution control devices to new equipment, old equipment will be renovated for pollution abatement at a cost of $3 billion a year from 1971-1975. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Andrew F. Brimmer (1971, June 5). Speech. Speeches, Federal Reserve. https://whenthefedspeaks.com/doc/speech_19710606_brimmer

@misc{wtfs_speech_19710606_brimmer,
  author = {Andrew F. Brimmer},
  title = {Speech},
  year = {1971},
  month = {Jun},
  howpublished = {Speeches, Federal Reserve},
  url = {https://whenthefedspeaks.com/doc/speech_19710606_brimmer},
  note = {Retrieved via When the Fed Speaks corpus}
}