Statement from Dr. Sanjay Varshney and Dr. Dennis Tootelian Regarding Recent LAO Analysis of AB 32 Study and the Study of the California Cost of Regulations

SACRAMENTO, Calif.--()--A recent analysis from California’s Legislative Analyst’s Office (LAO) questioned the methodology of a study on the costs of AB 32 implementation that Dr. Sanjay Varshney and Dr. Dennis Tootelian conducted on behalf of the California Small Business Roundtable. We are pleased that our study has garnered so much attention and comments because the issue of economic impacts is vitally important to California. We also note that the LAO has reached similar conclusions as we have about the California Air Resources Board’s (CARB) economic impact analysis.

We stand by the findings of our research, and emphasize that the costs of AB 32 are materializing quickly as utilities announce sky-high rate increases, and still the economic benefits of AB 32 are yet to be seen. In this way, the facts are supportive of our research predictions. The methodology that was employed in our report was beneficial in accounting for the variables; our approach was practical and relevant to the current economic reality. Furthermore, our report on the cost of regulations for small business was based on the 2005 federal study by Mark Crain which uses ordinal rankings and relies on other studies – a common approach in academic research.

Several aspects of the AB 32 controversy are becoming increasingly clear:

1)  

The research conclusions about the positive impacts of AB 32 that were relied upon for passage of the legislation have now been rejected by many sources. Instead, the conclusions in our report regarding near-term job losses have been confirmed by the Legislative Analyst’s Office. In fairness, the Analyst disputes the degree of job loss and also highlights our reluctance to measure future benefits. However, the benefits that were predicted by the Climate Action Team have so far proved untrue and highly speculative. (http://www.climatechange.ca.gov/climate_action_team/reports/2006report/2006-04-03_FINAL_CAT_REPORT.PDF).

 
2) Our reluctance to incorporate speculative benefits into our AB 32 analysis also has foundation in the fact that early studies of previous state policy changes have greatly overestimated benefits. The best example of this problem occurred when the state restructured the electric industry, with the promise of job and economic growth - in contrast the result of the policy change was large price spikes and negative economic impacts. Given this history and the vulnerability of the state’s economy, we felt a responsibility to pay very close attention to the potential costs and could not develop a credible and reliable analysis of speculative benefits. Moreover, we stand by our conclusions and believe that many of the technology gains assumed in the early policy reports are still years away from development.
 
3) The burden of proving whose economic model is correct does not rest with a private entity such as the California Small Business Roundtable. Our role for the CSBR was to analyze the proposed CARB scoping plan and determine whether risks exist for taxpayers, especially the small business community that is most vulnerable. It is the government’s role to review the studies and determine the best policy for implementation. Still, CARB has not produced its own revised economic analysis that examines the AB 32 impacts to small business. Nor have the critics produced a study that provides more convincing or exhaustive analysis.
 
4) Varshney and Tootelian have been criticized before for their research findings, only to be vindicated by the facts. For example the Sacramento Business Review – a product of Sacramento State – predicted a 10% unemployment rate for Sacramento last year. Critics took issue with the economic projections and instead projected an unemployment rate of no more than 8%. Sacramento region was at 12.3% unemployment at the close of last year and is currently at 13.1% based on January 2010 numbers. As the states and the country scramble to seek economic growth, California continues to experience one of the highest unemployment rates, job losses, and sinking real estate markets. All these simply serve to reinforce the potential job losses pointed out by the Varshney and Tootelian studies.
 
5)

The process has become so political that resources are being used to refute our model rather than to develop an alternate analysis that will guide the development of a program that will address the job loss and economic impact problems that many reports have identified.

In this context of conflicting research findings and academic finger pointing, AB 32’s proponents have begun to attack Varshney and Tootelian’s research, rather than embrace an opportunity to have a dialogue about how best to assess the economic impacts of the program.

Since methodology is at the center of this debate, let us take this opportunity to discuss Varshney and Tootelian’s approaches in their two reports under discussion.

  • Regarding the analysis of AB 32 impacts: In our three scenario approach to computing the costs related AB 32, we declared upfront that we are not attempting to capture the benefits. We did this because we recognized – as the LAO recently did – that the benefits are elusive and uncertain. Critics have been unable to produce any studies or reliable data that confirms that AB 32 will create jobs in specific sectors, especially those areas where jobs will be lost. While the costs are already increasing for consumers, most notably in the electricity sector, there is no information that confirms present or future job growth. Critics have been unable to produce any comprehensive study using a superior methodology with results that are unquestionable – period.
  • Regarding the analysis of cost of regulations: Rather than suggesting that regression methodology should not be used at all, our critics should recognize that the methodology comes with inherent issues of multicollinearity that can result in sign reversal. However, this methodology is useful and is no different than the federal study that Varshney and Tootelian modeled that also used ordinal rankings.

Rather than question the logic behind the AB 32 or cost of regulations studies or attack their reliability, critics should talk to small businesses about the current economic challenges confronting California. Small business owners and the Legislative Analysts’ Office all agree that AB 32 will cost Californians their jobs, the question is really about the degree and how many will be lost.

In a vacuum of information where CARB has not yet produced its own credible in depth analysis of AB 32’s impacts on small business, the Varshney and Tootelian report began to shed light on how this regulatory program will shape the small business economy. We encourage other researchers as well as CARB to continue to examine these impacts so that there grows a body of research to inform the public and the state’s decision-makers. We encourage the academic critics to produce their own research with a different methodology if they choose, and to engage productively in analyzing the issues that impact Main Street and the average family that is just trying to make ends meet.

Contacts

Varshney & Associates
Sanjay Varshney, 916-971-4096
sbvarshney@yahoo.com

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Contacts

Varshney & Associates
Sanjay Varshney, 916-971-4096
sbvarshney@yahoo.com