Since the beginning of his presidential campaign, President Donald Trump made his strong anti-regulatory stance known. In his first months in office, Trump has scaled back rules in all industries, from financial to energy to firearms. Yet, the economic hypothesis of Michael Porter ’69 is challenging Trump’s actions, especially those related to environmental regulations.
The Porter Hypothesis was published in a 1995 paper in the Journal of Economic Perspectives, according to the Harvard Business School. The hypothesis posits that tighter environmental regulations actually benefit industries by creating competition and incentivizing innovation, two effects that are well-evidenced by regulations in various industries throughout history. “In this paper, we will argue that properly designed environmental standards can trigger innovation that may partially or more than fully offset the costs of complying with them,” the hypothesis states. “Such ‘innovation offsets,’ as we call them, can not only lower the net cost of meeting environmental regulations, but can even lead to absolute advantages over firms in foreign countries not subject to similar regulations.”
Porter’s hypothesis ran counter to the popular belief at the time that more stringent environmental regulations would result in higher costs to companies and fewer jobs for domestic workers. Ronald Reagan’s intention of easing automobile manufacturing regulations in the 1980s was to counter these effects, and Trump’s intention in the current day is to do the same. Historical applications of Porter’s hypothesis, however, suggest that easing regulations is not the right strategy, according to The New York Times.
The New York Times pointed to the 1970s as an example of the positive benefits of regulations, as tighter fuel economy standards for automobiles helped make American cars smaller and more fuel efficient. This helped domestic manufacturers compete with the large influx of imported European and Japanese cars.
Woodrow Wilson School professor and Princeton Environmental Institute faculty member Lyndon Estes also disagrees with the beliefs that tighter environmental regulations decrease the number of jobs available to workers.
“This is something that concerns me and which I have thought about, given the frequent claims made by politicians (almost exclusively from the GOP) about ‘job-killing’ environmental regulations, and I have yet to hear them provide any evidence to support this claim,” Estes noted in an email. “Regulations may result in job losses in a particular sector, but these tend to be offset by gains in other sectors.”
Estes cited the progression of the coal industry in recent years as an example of this trade-off in jobs between various sectors. Trump’s plan to revitalize America’s coal industry is to repeal regulations like the Clean Power Plan in an attempt to bring back jobs to the coal industry. According to Estes, however, the coal industry is in decline not because of regulations, but because natural gas is a cheaper alternative, and any jobs lost by the coal industry will be gained back by the solar and wind energy industries.
“Jobs, however, are just one part of the equation that needs to be fully considered when examining the costs and benefits of environmental regulations, which above all else strive to minimize the very real (but often hard to precisely quantify) costs to human health and key environmental services,” Estes added. “Critics of such regulation fail to consider such costs, and thus do not acknowledge the larger share of benefits provided by environmental regulation.”
The Porter hypothesis is especially relevant for Trump’s intended treatment of the budding electric car industry. According to US News, Trump held a meeting in late January with several top American business executives such as Under Armour CEO Kevin Plank and Tesla CEO Elon Musk to make it clear that he would cut corporate regulations by “75 percent — maybe more” to protect domestic companies.
Ironically, the Porter hypothesis states that companies like Elon Musk’s Tesla are the very ones that benefit from heavier regulations. Existing regulations, such as California’s Zero Emission Vehicle program, help electric car manufacturers by allowing them to sell “credits” to other makers for selling more than a minimum standard of electric cars. Regulations like these allow electric car companies to survive in an automobile industry and national infrastructure dominated by more profitable gas-powered cars.
The exact effects of Trump’s plans to scale back regulations remain to be seen. Popular resistance to his environmental policies, however, is already increasing.
“It is unbelievable that, immediately after experiencing the second-hottest February on record, the Trump administration decides to repeatedly ignore the will of the entire scientific community,” Conservation Society president Noah Mihan ’19 said. “Trump’s repeal of these regulations is simply a gift to the fossil fuel industry...Trump is digging humanity’s grave, one signature at a time.”
Porter did not respond to requests for comment.
Porter concentrated in mechanical and aerospace engineering, played for the varsity golf team, and was elected to Phi Beta Kappa during his time in college. After graduating with high honors in 1969, Porter received an M.B.A. from Harvard Business School in 1971 and a Ph.D. in business economics from Harvard University in 1973. Porter is now an eminent American economist and professor at Harvard Business School.
This article has been corrected to better reflect Porter's academic ranking at his graduation.