By Marshall Auerback, a market analyst and commentator. Produced by Economy for All, a project of the Independent Media Institute
Extreme weather variations and increasingly dire scientific reports have spurred surprisingly robust policy proposals for a Green New Deal.
Rather admirably, the resolution sponsored by Sen. Ed Markey (D-MA) and Rep. Alexandria Ocasio-Cortez (D-NY) marks a significant break from the usual “small ball” incrementalist approach to politics adopted in D.C., reflecting the increasingly prevailing view that the next decade or two is make-or-break for planet Earth.
The sheer scale of the ambitious proposal—net-zero greenhouse gas emissions, clean air and water, married to traditional bread-and-butter progressive issues, such as a job guarantee and universal health care—have led to two predictable lines of attack: The first is that the program represents full-on socialism: a grab bag of the left’s favorite policies, “with everything from universal health care to a job guarantee draped under the mantle of environmentalism,” as a recent New York Times opinion piece explains. The second issue is how we are going to pay for it, given that the proposed Green New Deal resolution envisages costs that will run into the trillions to undertake this whole restructuring of the U.S. economy.
Shorn of ideological rhetoric, the answer to the second question is actually quite simple. We “pay” for these specific proposals much as we do with any government initiative: Congress appropriates the funds, and the government literally spends the money into existence. The key point here is that when a government issues a currency that is not backed by any metal or pegged to another currency (i.e., the currency is created via government order, or “fiat,” hence the term, “fiat currency”), then there is no reason why it should be constrained in its ability to finance its spending by issuing currency in the way it was, say, under a gold standard (in which the supply of gold held by each nation literally controlled its capacity to spend). By extension, taxes don’t actually “fund” the government, so much as they constrain overall expenditures in the economy. In essence, government spending adds new money to the economy, whereas the imposition of taxes takes some of that money out again. The constant addition and subtraction of these spending and taxing activities is how “fiscal policy” actually works (and the sequencing is actually the opposite of what is traditionally taught in most economics textbooks). Likewise, as the monopoly issuer of the currency, the U.S. government (via the Federal Reserve) establishes the rates at which we borrow (not “the market”). It therefore follows that a sovereign currency-issuing government, unlike a private company, does not have market-based costs of capital that set the opportunity cost of their activities. This is important to remember when you hear politicians outlining how certain policy goals are somehow “constrained” by borrowing costs (or a particular discount rate).
This is also why private sector concepts such as “internal rates of return” (IRR) or “return on equity” (ROE) are only relevant in macroeconomic policy terms, to the extent that the appropriated capital is used as productively as possible to mitigate possible inflationary pressures, as opposed to whether this spending ultimately generates a profit or loss for the government. To put it another way, even if the government’s “balance sheet” is adversely affected by poorly conceived and executed policy choices, these mistakes have no bearing on whether the United States, as the currency issuer, has the “fiscal capacity” to meet any future crisis (in contrast to a private firm, which can’t afford to misuse its finite capital resources, lest cumulative losses drive it out of business). As such, costs and benefits must be measured largely in social terms, rather than financial terms, even as we acknowledge that the damage to GDP from the negative effects of climate change can be substantial.
Note that although there is no financial constraint on the ability of a sovereign nation to deficit spend, this does notmean that there are no real resource constraints on government spending; this is the real concern that should guide policy, not financial constraints. If government spending pushes the economy beyond full capacity, inflation will result. A government can create all of the currency it likes, but there are finite supplies of natural resources, labor, and other productive assets that form the backbone of an economy. Put another way, money is not scarce, but real resources can be. So if government spending does not add to the economy’s productive capacity, then excessive expenditures will almost certainly become inflationary, and that does represent a legitimate constraint. That is why the main focus of the Green New Deal should be on how the money is spent, rather than how the program is to be funded.
So in assessing how appropriated funds under a Green New Deal are spent, the decarbonization of the U.S. economy must be constructed with a view toward other broad social goals, which is why the Markey/Ocasio-Cortez resolution incorporates so many additional features that at first glance do not deal solely with environmental issues (a complaint recently made by Speaker Nancy Pelosi). A job guarantee, for example, must be a germane consideration in contemplating a substantial reduction and ultimately a full-on elimination of the fossil fuels industry. This not only means the hundreds of thousands of workers actually involved in the extraction, production, and distribution of oil, gas, coal, etc., but also the administrative and support jobs connected to these industries, and the communities adversely impacted by the resultant job losses.
To give some idea of the scale of potential jobs at risk here, a recent U.S. Energy and Employment report from 2017 estimates that there are “about 2.3 million jobs in Transmission, Distribution, and Storage, with approximately 982,000 working in retail trade (gasoline stations and fuel dealers) and another 830,000 working across utilities and construction.” It is virtually impossible to contemplate the implementation of a Green New Deal if it is not accompanied holistically by policies that address the potential job disruption. We don’t want to have this debate framed yet again within the sterile paradigm of “jobs vs. environment,” which is a political non-starter.
The Canadian Labor Congress, among others, has enumerated a number of possible jobs to which the displaced workers could transition. These jobs would include “the retrofitting of buildings for energy conservation, the retraining of workers to become energy auditors, developing renewable energy sources, promoting sustainable transport systems, supporting community-based sustainable industries, community revitalization projects, moving towards a complete waste recycling program, and creating a publicly owned infrastructure that will manage in the public good.”
There’s no question that a properly revived manufacturing sector would also lead to a revived working and middle class, because as the economist Seymour Melman explained, high-skill manufacturing leads to a process of economic growth that gives workers more power, economically and within the firm—even with mechanization and automation. To be sure, historically, manufacturing has often been associated with “dirty” industries. According to Jon Rynn, a fellow at the CUNY Institute of Urban Systems, emissions from manufacturing account for about 28 percent of greenhouse gas emissions. Once the electrical system is renewable, however, a substantial amount of these emissions is eliminated, because almost all industrial machinery uses electricity. So if the electricity is clean, manufacturing can expand without worsening the climate problem. Needless to say, this will require significant investments in energy efficiency alongside rapid decarbonization of power sources for as much of the economy as possible.
The broader question of inequality must also be tackled. We live in a world where things are interdependent. Hence, the whole concept of a just transition to an environmentally sustainable economy can only be adequately addressed when it is wrapped in a broader set of policies designed to help most Americans, which raises distributional questions that are part of the broader problem of today’s highly unequal economy. As the economists Emmanuel Saez and Gabriel Zucman have documented, tax data in the United States illustrates that top 0.1 percent now hold 22 percent of the total wealth in the United States—the same amount as the bottom 90 percent. This takes us back to levels of economic distribution that existed more than 100 years ago, when we barely had cars, unions were virtually non-existent, and social welfare provision was minuscule. Simply believing that creating a whole bunch of “clean tech” jobs in and of itself will resolve this problem is disingenuous, which is why the Markey/Ocasio-Cortez resolution specifically addresses the broader issue of economic inequality.
Failure to address the inequality question exacerbates the inflationary problem, because when increasing amounts of GDP are directed toward those with the highest savings propensities (i.e., the 1 percent), it means that the economy doesn’t grow as efficiently. This matters when we are addressing a genuine national emergency, such as climate change (as opposed to the faux “national emergency” related to Trump’s southern border wall).
The scale of the spending shouldn’t scare people. At $2 trillion a year, that’s around 10 percent of a $20 trillion economy. Put another way, the American government has spent greater sums in its Afghanistan and Iraq wars with no lasting productive benefit accruing to the U.S. economy (to say nothing of the social costs and global environmental degradation). By way of comparison, as Jon Rynn writes, “the Federal government paid for most of the machinery used to create the military equipment during World War II, and the corporations bought the factories for pennies on the dollar after the war ended.” To put it another way, the federal government did not “record a profit” on the sale of these assets, but the “return” came in the form of much of the industrial machinery that was the basis for the shared prosperity of the post-WWII boom, a period of unparalleled “sharedprosperity” (emphasis added) for the United States.
We have to make choices, but the idea that we can’t make the right choices based on funding concerns is ridiculous. However, the policy goal embodied in the Green New Deal must be part of a broader policy framework, much as Franklin Delano Roosevelt ultimately conceived of his Economic Bill of Rights (which featured a government-funded health care provision) as an extension of the original New Deal. After all, the Green New Deal is as much about enhancing “human capital”—that is, increasing the wealth-generating capability of people—as it is about “physical capital,” the machinery and systems that are physical in nature. Speaking about one without the other is as misconceived as speaking about a tree outside the context of the forest in which it grows. Remember that, the next time someone dismisses the Green New Deal as a grab bag of policies designed to ensure a communist-style capture of the commanding heights of the economy.
The New Green Deal proposes to Manage our economy and our ecology for our mutual, the people’s, benefit.
All Capitalists revere Management. We want our economy and ecology managed and thus preserved, not looted.
The key phrase is “will of the people.” The People are Sovereign, not the Money.
There is politics and economy. They are inseparable, not separable. People who think that economics is non-political, are capitalists. People who think that politics isn’t related to economics, are socialists. One fails at “proper goals” the other fails at “proper means”. This is the original sin, separating Cain and Abel.
good comment DV
There’s a reason that the field was originally called “political economy” …
A succinct and lucid presentation of what must be done. Deserves to be shared widely. Thank you, Marshall!
Maybe some historical perspective can be useful here when talking about the cost and size of the effort needed for the Green Deal.
December 1941 – The White House
Secretary of State: Mr. President. We have confirmation. The Japanese have crippled the Pacific Fleet and are taking over the Philippines. Germany and Italy have also declared war on us along with their allies through the Tripartite Pact.
President Roosevelt: So what do we need to do to beat them?
Secretary of War: We need an armed forces of about 15 million people. We need to build whole fleets of carriers, battleships, cruisers, destroyers and support vessels. The Army Air Corps will need fleets of bombers with fleets of fighters to defend them along with thousands of transport planes. We have to build up an army of millions of men to invade Europe and fight the Axis armies along with the Japanese Imperial Army in the Pacific.
Secretary of Commerce: We have to transform the whole economy into a war economy. Get millions of unemployed trained to work in war factories, cease consumer production and turn it into war production. We also have to build thousands of factories, ports, railways – in short everything to supply all these armies and fleets.
President Roosevelt: So are we agreed then? We can’t afford it! Contact Berlin and Tokyo and ask the for terms.
Bravo! Excellent analogy.
Excellent point. WWII for us was ten times the enterprise the New Deal was. The entire federal budget in 1939 was $9 billion. In 1944, it was over $100 billion. The New Deal was subject to constant whining about how we were going to pay for it. Nobody worried about paying for WWII.
Absolutely correct. Which means the political challenge involves one of two things (or both):
1. Convincing the general public and a significant fraction of the business community that climate change merits a level of national mobilization akin to Hitler, the Japanese, and WW2, in the knowledge that this mobilization, unlike WW2, would diametrically challenge the economic interests of a (different) significant fraction of current business.
2. Convincing the working class and a significant fraction of the middle/technical/administrative class to align against the (likely united) business class to achieve that level of mobilization, which could well require significant nationalization of the economy (i.e. socialism).
An additional challenge is the national/international problem, which is convincing people this is the right thing to do even if the Chinese (and others) don’t go along.
Countering the deficit argument is one problem but a small one in the grand challenge.
There is something about exponential growth we do not understand. Minsky said prosperity leads to ponzi. We have recently seen that one antidote, austerity, also leads to ponzi-inequality. We are obviously missing something. So the balance of it all is the important thing. We have symbolized that balance in accounting for money, balancing the books. As if money itself were the subject. But we neglected social needs and the environment like locusts. In a sense it was exponential neglect. That must be a negative ponzi which we simply refuse to see. We need to understand that the economy can get very big without wobbling into inequality. Or environmental destruction. And we also need to understand that it isn’t about money. And we would be fools to ignore overpopulation.
With climate change, we are well past the time to argue about details or costs. There is enough information available to take action right now and to know that pretty much anything we do is better than the default of flying over the edge into a civilizational and ecological collapse, because that is exactly what current projections say is going to happen – and much sooner than many people think.
I hate to use the grossly overused WWII analogy, but when war started, they didn’t spend a few years arguing about how much to spend and whether they should buy B-17’s or Shermans. They built them all – when something failed on the battlefield they built something different. And they did it all in half a decade.
You are correct except the vast majority of the American people don’t understand the existential crisis we face. It’s imperative that the advocates for a GND find the resources right now for a public awareness campaign at a comparable scale to the actual GND or it will never get adopted at the scale necessary to address climate break down effectively.
And I don’t see anything like that happening yet.
Also all the other crises mentioned were handled by expending more energy in terms of hydrocarbons.
For example, ever more hydrocarbons were consumed to lift the USA out of the Great Depression, fight WWII, and build the post war economy.
In the current order, I view that people around the world look at dollars as representing claims on resources, be they human labor, oil, cement, rare metals or food and other commodities.
In my opinion, to honor these dollar claims even more energy will be produced, not just in the USA, with only the small renewable energy portion not adding to the CO2 level.
The policy makers around the world KNOW what can be used to slow the incremental CO2 addition to the earth’s atmosphere as the the Financial Crisis of 2007+ caused a decline in economic activity.
There was a slowing in CO2 being added to the atmosphere.
But not growing the economy is unthinkable.
Climate change is an existential crisis, in large part because the go-to play in the human playbook for handling crises, expending ever more energy, should seemingly make the problem even worse.
This is a definite attempt to make the public awake and aware:
“We hope you join us for the Ende Gelände tour, either in person or online in the webinars being organized by Rising Tide . More importantly, we hope you join a freewheeling, scheming, free-form direct action disruptive movement at the points of resistance or at home where you live. One action, one camp, one long-term occupation in our vast country is insufficient. We look forward to your creativity, strategy and willingness to do the hard work to build a disruptive movement.
For a list of EG tour stops and how to follow the tour, you can sign up here:”
I have a stash of old Life magazines from the late 30’s early 40’s, and in one of them it had photos of American tanks in action, and one of the crew had to stand up in the turret and instruct the driver which way to proceed by tapping him on the left, center or right of his back. This was in 1938.
We went from being a laughingstock compared to what Adolf & co. had going on, to putting out essentially the VW Bug of tanks, in the guise of the Sherman.
We now need to mass-produce less mass.
That’s a good goal. I was thinking about The Incredible Shrinking Man. Wound up living in an empty matchbox on the basement window sill. Until he was eaten by a spider.
Using the grossly overused WWII analogy — we didn’t boost our calvary and looking back to WWI we don’t need GEN Haig’s help. I quibble with your assertion: “With climate change, we are well past the time to argue about details or costs.” I agree as far as costs but the devil is in the details. You cannot make changes to the Grid — cost be damned — and then try something else if what you try doesn’t work … unless you make changes at a small scale to try them out first. I don’t get the feeling that the Green New Deal is inclined to move incrementally or with due caution. It impresses me as a bandwagon, climb-on-board the train is leaving, kind of resolution. We need cut-and-try as applied by the FDR New Deal. Solutions live in the details and we must try MANY ‘solutions’. But I just don’t get that feeling from the Green New Deal. I agree most strongly with your assertion of urgency. I worry that Green New Deal is too ‘slogan’ and will make waste of urgency.
Another point of emphasis should be showing how better environmental policy helps people’s health in the here and now.
Add more : “saving lives now so that it can be done in the future.”
I would say it somehow differently regarding the lines of attack:
1) ideological- I will not enter the ideological discussion. I just would add that zero emissions, a difficult goal, can only be achieved the way progressives propose. The “business as usual” way almost certainly wont work.
2) idiotic: how to pay for it. Just as usual. As it has been done in the last centuries.
An aside on how much electricity would be needed to de-carbonize industry I ran across the other day:
” In deep decarbonization, Final demand by industry could reach almost the same level as the current EU economy-wide final demand for electricity. It could also represent 50% (3,000 out of 6,000 TWh) of final EU electricity consumption in 2050 (under a -95% scenario).”
How do we know when resources are constrained?
Price, as the author notes, and calls it inflation.
Why does price work? Because somewhere there is an open auction of deposits against loans, and the auction bidders are a representative sample of resource users.
The correct order is:
Make money work first, spending by government and private sector second.
You seem to assume we have competitive markets for resources.
Repeating myself, but the simplest answer to the affordability of the gND is: “We will pay for it the way we have paid for 17 years of futile overseas war.”
He wrote: “I recently put somebody very smart on the necessary research (SEC K’s, press releases regarding private equity to private producers, etc.) to determine what total upstream shale oil debt actually is. We found it to be between $285-$300B, both public and private.”
We found a way to issue 1/3 of trillion in debt to frackers that are losing $3.9B a year and burning natural gas that they can’t sell. This would be a good place to start as well.
Excellent article. The federal government, unlike state and local governments, is Monetarily Sovereign.
Yes, great post! The need to tackle wealth/income inequality together w/ reducing carbon is the first critical message of GND.
In a way, carbon reductions in the US are technically easier since we are starting from nearly the highest per capita use level.
Tiny detail re: industrial carbon/enrrgy/heat use – don’t forget raw materials and industrial/ag chemicals. The stuff going into the molding machine or metal forming machine can easily have as much work done on it before as after what we think of as the manufacturing operation.
Good post, but…
… someone should tell Auerbach that leading with and highlighting your opponents critique undermines your argument badly, and starts the reading experience by activating the mental frames your opponents want to activate. In other words, your piece is doing the opponents’ work for them and subsequently putting your own arguments on the defensive right out of the gate.
This argumentation style is quite common, perhaps drilled into us in high school paper writing and debate practice. But we need to abandon it out in the real world. Effective argumentation must start by presenting the compelling vision you want to bring about, creating and strengthening your desired mental frame in the reader’s mind. If a mention of opponents’ critiques must be mentioned at all (why?), it should be done in passing late in the piece once your own frame has been established.
Auerback is an analyst, not an advocate. And this site is in the business of encouraging critical thinking, not pom pom waving. And more specifically, the sort of exhortation you want works only with people who are already receptive. Honestly, if I were doubtful about an issue, a big emotional pitch would turn me off completely. Auerback’s focus is to try to persuade people who haven’t made up their minds and have been given scary-talk, and he’s addressing how to debunk that.
A more general issue: don’t demand that we do something that we do not and have never promised we’d do. A classic article by management expert Michael Schrage argues that most businesses need to fire 15-20% of their customers because they make demands or have expectations that the business never said it would meet. Those customers are a drain on the business by insisting their self-imagined demands be met (they take up undue amounts of time and demoralize staff). Schrage argues the enterprise would be better off taking the time it devotes to the impossible task of trying to placate customers who will never be happy to instead finding new customers who want what the business provides.
There are plenty of places on the Web where you can find the sort of article you are seeking.
Hardly of any grave consequence, but…
While this is indeed an excellent article, (the kind that makes one wish they could write that well), it raises the question of being up front about MMT as the framework for it’s very clear explanation of why we don’t need to worry about how to pay for the GND. It does a an elegantly compact job of using MMT concepts, but in doing so with no mention of MMT, it risks putting itself up as a target for criticism; the implication being that since the author didn’t mention it, there must be something to hide about MMT.
Aside from that, it might also have been more compelling to touch on the alternative than a discussion about how the GND would contribute to our capitalist economy (which in it’s ever expansionary contradiction with real and finite resources is part of the problem); that is, to touch upon what was perfectly described in the title of the recent NC article, How Much Will It Cost to Address Climate Change? Pennies Compared to the Alternative
I’m reading Naomi Klein’s This Changes Everything: Capitalism vs the Climate. Recommend it.
Details … details … BUT the devil is in the details! For each problem we MUST give the devil his due. We CAN afford a Green New Deal. BUT what is the Green New Deal? After ‘Motherhood’ is blessed … what is the Green New Deal?!!!!!????? The answer DOES matter!
I think it is an excellent goal but we must not forget tha the oil and extractive industries also are the feeders for non fuel products such as plastic, paint, and a wide range of widely used products. The GND needs to figure out replacements/substitutes for these types of things too.
I’m concerned that a significant portion of the income that is generated from the gnd may end up going to pay off the private debt hangover of the USA population especially student debt and mortgages thereby reducing its positive economic impact. Any opinions on this?
The broad approach of the GND is inspired, but I agree with others’ comments in recent posts that details/approaches matter. In that regard, Yves recently commented on different types of carbon pricing, noting the differences between cap-and-trade (what I prefer to call pollution trading) and carbon taxes. Having been intimately involved in battles surrounding the creation of California’s cap-and-trade program, and having written on the topic (The War on California, 2017), I believe that cap-and-trade threatens GND as a poison pill policy. Yet, it is a policy being front-loaded by a number of interests including moderate Dems/ Reps and oil majors as a part of any GND. Examining the particular approaches is essential to clarifying what is already unfolding in DC and elsewhere: very different formulations of GNDs serving very different purposes.