Funding the Green New Deal: the evocation of Keynes

Riccardo Mastini

The Green New Deal started making headlines in early 2019 when newly elected congresswoman Alexandria Ocasio-Cortez submitted to the United States House of Representatives a non-binding resolution laying out the main elements of a 10-year economic mobilization plan that would phase out fossil fuel use and overhaul the nation’s infrastructure to fight the climate emergency. AOC has recently received considerable press coverage also for another policy proposal: a 70% marginal tax rate for incomes above $10 million.

Given the overlap between these two pieces of news, many people were induced to believe that the tax hike on the super rich would be used to pay for the Green New Deal. But subsequently AOC made clear that she thinks that the plan should be financed through deficit spending. The confusion around the issue of funding raised some eyebrows among economists supporting Modern Monetary Theory (MMT). Indeed Stephanie Kelton, Professor of Public Policy and Economics at Stony Brook University and Economic Advisor to Bernie Sanders’ 2016 presidential campaign, retweeted David Roberts saying that “Green New Deal advocates need to decide if they want to propose ideas to “pay for it” or if they want to argue that “paying for it” is an incoherent notion”.

The point is that for MMT talking about finding public funds to pay for a government program is almost a blasphemy, because it would be in contradiction with the core belief that a monetarily sovereign government could finance itself simply by pressing — metaphorically, of course — a computer key (hence the nickname that many give to MMT of ‘keystroke economics’). Taxes and inflation thus become two arguments that exclude each other: in principle, MMT argues that the former are not important as a source of financing (so much so that the fight against tax evasion is not at the top of their priorities). However, they become important when printing money risks causing inflation.

As clearly laid out in the report How to Pay for the Green New Deal published by the Levy Economics Institute of Bard College, the government uses the monetary system to mobilize real resources and to move some of them to the pursuit of the public purpose. Affordability is never an important question for a monetarily sovereign government and the relevant question concerns resource availability and suitability. Thus if a government can identify technologically feasible projects that would achieve climate goals and if it can identify the resources to devote to these projects, then the financing of the programs will never be an issue.

The authors of the report based their prescriptions on a heterodox interpretation of Keynes’ teachings contained in the book How to Pay for the War offered to the Chancellor of the Exchequer on the eve of WWII. They maintain that Keynes’ approach is simple: total the resources available to prosecute the war while meeting the consumption needs of the population. If the available resources fall short of what is needed, the solution cannot be found in the finances. Government can always spend more to shift resources to the war effort; if consumption spending is not reduced, the result is inflation that generates a combination of ‘voluntary’ saving and excess profits as real consumption falls. To prevent this undesirable outcome, government must reduce consumption demand by some combination of voluntary saving, taxes, deferred compensation, rationing, and wage and price controls. Hence the goal of taxation is not to provide government with the financial means to “pay for” the war effort but rather to relieve pressure on scarce resources that can lead to inflation.

The authors make it very clear that financial affordability is not a question for a monetarily sovereign government when they write: “We do not need to go hat-in-hand to rich folks to get them to pay for it. We do not have to beggar our grandkids to pay for it. We do not have to borrow from China to pay for it. We do not have to get the Fed to “print money” to pay for it. All we need to do is to remove the self-imposed constraints, the myths, and the misplaced morality; then budget for it, approve the budget, and spend. No new spending process is required. Follow the normal procedures that the Fed and Treasury have developed. That is how you pay for it.”

On the other side of the Atlantic, there is also considerable interest in the idea of a Green New Deal. Recently DiEM25, a pan-European political movement, in collaboration with several think tanks has launched the campaign “Green New Deal for Europe”. It consists of a similar package of eco-social policies to its American counterpart, but when it comes to financing they prefer to walk the well-worn path of issuing bonds to pay for the program. DiEM25 campaigners argue that the sums needed for a Green New Deal in the EU could be raised without increasing taxes, by having the European Investment Bank issue green bonds and sell them to private investors. Such bonds would basically be IOUs issued by governments, and the proceeds would be restricted to sustainable investments. The programme would effectively be a reversal of QE: instead of injecting money into the financial system, it would withdraw it.

Yanis Varoufakis, DiEM25 founder and former Greek Finance Minister, maintains that the European Investment Bank should issue green bonds while the European Central Bank stands by, ready to purchase as many of them as necessary in the secondary markets. These green bonds would undoubtedly sell like hot cakes in a market desperate for a safe asset. So the excess liquidity that keeps interest rates negative — crushing German pension funds — would be soaked up with the result that the Green New Deal gets fully funded. The funding goal should be set at 5% of the GDP of the EU.

In spite of all the discussions about the issue of funding for the Green New Deal, one thing is clear: progressives all over the world must push back conservatives’ scaremongering on the tune of “we can’t afford the Green New Deal”. When the US was attacked during the Second World War no one asked if the country could afford to fight. It was an existential matter. The climate emergency is the moral equivalent of war and we can’t afford not to fight it.

Riccardo Mastini

Riccardo Mastini is a PhD candidate in Ecological Economics and Political Ecology in the Institute of Environmental Science and Technology at the Autonomous University of Barcelona. He is also a member of the academic collective Research & Degrowth, of the Wellbeing Economy Alliance, and of the Center for the Advancement of the Steady State Economy. You can follow him on Twitter and Facebook and visit his website.

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