Experts Discredit Small Business Studies
In July 2009, consultants Sanjay Varshney and Dennis Tootelian released a report evaluating the costs of AB 32. The report, “Costs of AB 32 on California Small Businesses,” was commissioned by the California Small Business Roundtable, a group of 40 California business owners. The report concluded that AB 32 will impose high costs on businesses. The authors estimated that the total cost of AB 32 will be $49,691 per small business in California, and the annual cost per household will be $3,857. In September 2009, another Varshney and Tootelian (VT) report, “Cost of State Regulations on California Small Businesses,” was released. This report, commissioned by the State of California, was the result of a 2006 law requiring an assessment of the impacts of state regulations on small businesses. The study found that the total cost of regulation to the State of California is $493 billion, which is almost a third of the State’s gross product. In addition, the study claimed that the cost of regulation results in an employment loss of 3.8 million jobs, one tenth of the State’s population. Following the release of each study, economists and business advocates have roundly rejected the authors’ methodologies and conclusions.
“Both of the two studies… have major problems involving both data, methodology, and analysis. As a result of these shortcomings, we believe that their principal findings are unreliable.” “Our review of [the VT study on the cost of AB 32] indicates that it contains a number of serious shortcomings that render its estimates of the economic effects of AB 32’s proposed implementation through the [Scoping Plan] highly unreliable.” “Our review of [the VT study on the cost of state regulations] indicates that it contains a number of serious shortcomings that render its estimates of the annual economic costs of state regulations essentially useless.” MAC TAYLOR, LEGISLATIVE ANALYST, LEGISLATIVE ANALYST’S OFFICE i “…these consultants’ cost estimates are fatally flawed and vastly over-state the expected costs of AB 32.” “The [VT] report does not include ANY of the potential savings from implementing AB 32.” “…the VT study ignores the salient fact that any expenditures that California households make to comply with new AB 32 regulation will create new opportunities for California businesses… VT ignores this fact and appears to implicitly assume that each household takes $3,857 each and throws this amount into the Pacific Ocean but this defies the basic logic of how a free market operates.” DR. MATTHEW E. KAHN, PROFESSOR OF ECONOMICS & PUBLIC POLICY, UCLA ii
“The report’s findings are derived from a deeply flawed analysis that disregards even the most basic principles of sound economic research. None of the report’s findings hold up under scrutiny and, as such, they should not be cited or used to inform policy debates. The only useful purpose this report serves is as an important reminder that just because a study appears on the surface to have the elements of economic research does not mean that it actually follows sound methodology and results in reasonable findings.” (over) CALIFORNIA BUDGET PROJECT iii
“Examination of the Varshney/Tootelian analysis leads to the conclusions that their estimates are highly biased. PRESIDENT & FOUNDER. they should be viewed merely as daydreams of disaster. FRANK ACKERMAN. entirely unreal. assumes California – the land of innovation – will never innovate. Disturbingly. and are likely to be too large by a factor of at least 10.” SCOTT HAUGE. CHRIS BUSCH. STANFORD UNIVERSITY iv
“While it is critical that the interests of California’s small businesses are prioritized as the state moves to reduce our dependence on fossil fuels and promote a clean energy future.” CHRISTOPHER THORNBERG AND JON HAVEMAN. For example.imply that California could increase its economic output by reducing the quality of its labor force and increasing the cost of doing business in the state. JAMES SWEENEY. this result is based on one of the worst examples of schlock science we’ve ever seen.” DR.” DR.” DR. the results for two of the other measures . The losses they project would be serious economic impacts – if they were real. This seems absurd. ECONOMIST. SMALL BUSINESS CALIFORNIAv
“Both studies are unsound and unreliable economic analysis. PROFESSOR OF MANAGEMENT SCIENCE AND ENGINEERING AND DIRECTOR OF THE PRECOURT ENERGY EFFICIENCY CENTER. STOCKHOLM ENVIRONMENTAL INSTITUTE & TUFTS UNIVERSITY vi
“The results of Varshney and Tootelian are inconsistent with [other economic analyses of AB 32]as well as with the bulk of the economic literature. BEACON ECONOMICS viii
. are based on poor logic and unsound economic analysis. and arrives at unfounded conclusions that undermine its credibility. however.” “The illogical results are abundantly clear elsewhere in the report. flawed studies such as that released by [California Small Business Roundtable]. The study completely ignores the well-known economic benefits of energy efficiency. FOUNDING PRINCIPALS. which suggests that the overall macroeconomic effects of climate policy will be relatively modest. CENTER FOR RESOURCE SOLUTIONS vii
“A new study… estimates that the burden on California’s economy resulting from state regulations amounts to a shocking $500 billion – nearly one-third of the state’s output.the cost of doing business and the quality of the labor force . They are. do not help to protect our interests.
. 2010. DAVID NEUMARK. Accessible at http://www. ENVIRONMENTAL DEFENSE FUND ix
“I am not disputing that regulations impose some costs. October 12.org/2010/02/23/garbage-in-garbage-out/ iv James Sweeney.pdf viii Christopher Thornberg and Jon Haveman. “Figuring out the true cost of complying with California regulations. DR.pdf ii Matthew Kahn.” The Sacramento Bee. “New Anti-AB 32 Report Ignores Benefits to Small Business. 2010.” July 2009.“The ‘Cost of AB 32 on California Small Businesses’ study is a complete and overtly biased analysis of the costs of implementing [AB 32].0.” February 16.” Los Angeles Times.gov/globalwarming/pdf/Ackerman_review.arb.assembly. x
Letter from Mac Taylor. 2009. Accessible at http://www. 2010.html ix James Fine. Using only the compliance cost estimate for AB 32 Scoping Plan measures. Accessible at http://democrats.com/opinion/story/2246790. September 21. PUBLIC POLICY INSTITUTE OF CALIF. www. x Cyndia Zwahlen.” DR. 2010. Legislative Analyst. to Assemblymember Kevin De León.latimes. Accessible at http://www. ECONOMIST. 2009. 2009.” December 2009. 2009. UC IRVINE. “Cost of AB 32 on California Small Businesses—Summary Report and Findings (Varsheny & Associates): Critical Review Provided to the Small Business Roundtable. “Review of Varshney/Tootelian Report “Cost of AB 32 on California Small Businesses – Summary Report of Findings. SENIOR FELLOW. March 9. Assumes No Innovation.pdf iii “Memo: Cost of Regulations Report is Deeply Flawed and Conclusions Should Not Be Used.stanford. February 22.ca.gov/members/a45/pdf/LAO%20Analysis%20of%20Varshney.ca. but none of the estimated economic benefits. But policy debate is not furthered by grossly exaggerated numbers that have no basis in reality.” UCLA & NBER.pdf vii Chris Busch.org/pub_pdfs/Climate%20Policy%20and%20Economic%20Growth%20in%20California. vi Frank Ackerman. 2009.724317. Accessible at http://www. “A Review of Cost of AB 32 on California Small Businesses—Summary Report of Findings by Varshney & Associates. Accessible at http://ag.pdf v Small Business California. And we should be asking which regulations are worth the costs they impose. PROFESSOR OF ECONOMICS.ca-greenbizalliance. Accessible at http://californiabudgetbites. October 13. JAMES FINE. “Viewpoints: State rules stymie economy? Don’t trust professors’ study. the study methods diverge from well-established practices in cost-benefit analyses. “Daydreams of Disaster: An evaluation of the Varshney-Tootelian critiques of AB 32 and other regulations. such as savings from avoided fuel or electricity use. Accessible at http://peec.gov/cc/scopingplan/economicssp/matthew_kahn.story
California Business Alliance for a Green Economy. They surely do.sacbee. March 24.resourcesolutions.com/business/la-fi-smallbiz13-2009oct13.” California Budget Project.edu/docs/policy/research/Sweeney%20Review%20of%20Varshney.” Stockholm Environment Institute. and consequently produce outlier conclusions that should not be considered reliable or even generally indicative of the net economic effects of fighting global warming in California. “Climate Policy and Economic Growth in California: A Comparative Analysis of Different Economic Impact Projections.ca.” July 14.