How to Do Regulatory Stimulus

A Ford C-MAX hybrid vehicle goes through assembly at the Michigan Assembly Plant Nov. 8, 2012, in Wayne, Mich.
A Ford C-MAX hybrid vehicle goes through assembly at the Michigan Assembly Plant Nov. 8, 2012, in Wayne, Mich.

Photo by Bill Pugliano/Getty Images

In yesterday’s climate speech, Obama took out a fair amount of time to explain the long history of industry crying wolf about the economy-killing impact of environment regulations, and I was glad he did it. But that speaks largely to the short-term issue. A different question is how does regulatory policy intersect with the conditions of a depressed economy with low and stable inflation and near-zero short-term interest rates. And the answer is—it depends.

The basic issue is that with idle resources in the economy, you want to do things that bolster the marginal product of new capital investments or the marginal value of new durable goods purchases. Whether stricter or laxer rules serve that purpose depends on what the rules apply to.

So to take an example, if you increase fuel-efficiency standards for all new cars starting tomorrow while leaving existing cars alone, you exacerbate a recession. The price of new cars will go up, but holding onto your old gas-guzzler will get cheaper (since other people will be driving more fuel-efficient cars) so you end up slowing the pace at which people upgrade vehicles. By contrast, if you say that the dirtiest X percent of cars currently on the road will be illegal 10 months from now, then you increase the pace at which the nation’s vehicle fleet turns over and boost short-term growth. In other words, regulations that tend to make the existing stock of equipment go obsolete faster can boost growth, but regulations that tend to make new equipment more expensive will tend to retard it.

In terms of power plant regulations, what you’d ideally want to do is force existing coal-fired plants to either close or invest in some kind of upgraded infrastructure while simultaneously making it easier to build gas or renewable plants.

The problem with stimulative regulation is that the kinds of regulations that stimulate—the ones that force otherwise useful equipment to be scrapped—are the kinds that are politically toughest to impose. It’s easier, politically, to grandfather existing equipment and simply put the squeeze on new stuff. That said, in terms of pro-growth green measures, there’s plenty you could do to de-regulate, starting with land use rules on land that’s already been developed. Turning detached houses in expensive suburbs into apartment buildings and townhouses, and turning apartments and townhouses in expensive cities into bigger apartments is much greener than turning open land into new detached houses. But it tends to be broadly illegal in large swaths of the country. Deregulating on that kind of density while stepping up rules on pollution from existing power plants and vehicles can do a lot to create jobs.