How do we pay for a Green New Deal? - Ann Pettifor

This essay first appeared in the IPPR and WWF publication Putting People at the Heart of the Green Transition.

To avoid a climate and earth systems breakdown, a Green New Deal Chancellor must mobilize large sums from both the public and private sectors to finance the transformation of the British economy away from its dependence on fossil fuels.

Can those sums be afforded? Yes. An economy blessed with a sound monetary system can never suffer a shortage of finance. The “breathtaking” (to quote Mervyn King) £1,000 billion bailout of the banking system in 2009 is evidence of the resilience of monetary institutions.

To be successful in raising finance while at the same time ensuring the stability of the public finances, monetary and fiscal institutions must work in tandem, with neither one dominant. Under today’s system of ‘monetary radicalism and fiscal conservatism’ monetary and fiscal policy work against each other. Belatedly, and after more than a decade of economic failure, mainstream economists now recognise the damage monetary dominance has wrought on the global economy. Those like Blackrock that espouse ‘Green QE’, i.e. the central bank’s direct financing of economic activity, are simply upholding the neoliberal dogma of ‘monetary dominance’.

With monetary and fiscal policy mutually supportive, we can assume there will be two sources of finance: credit (or loan-finance) and savings. Credit is created at a high level by the Bank of England, mainly in support of the banking and wider financial system. However, the bulk of credit is created at a ‘micro’ level by commercial banks when customers apply for loans. During World War II, commercial banks provided government with low-cost loans, defined as ‘Treasury Deposit Receipts’. There is no reason they could not do so again.

Deposits and savings exist as a consequence of credit creation. Similarly, and contrary to popular belief, taxation is not a source of finance but a consequence of public and private spending on new projects – and, in particular, employment. The Green New Deal economy will be labour-intensive, with labour effectively substituting for carbon. High levels of employment will generate the tax revenues needed by government to balance the books. That’s why Bernie Sanders is right to argue that his plan for a Green New Deal that will create 20 million jobs “will pay for itself within 15 years.”

"High levels of employment will generate the tax revenues needed by government to balance the books"

Loan-finance can be raised by the Treasury or a national investment bank issuing bonds. The Bank of England’s role will be to support government bond issuance, so that the yield on government bonds remains low, to ensure sustainability of repayment. To keep rates low on the full spectrum of lending (short- and long-term loans, safe and risky loans, and relative to inflation) the Treasury could work with the Debt Management Office to issue bonds that meet the full range of investor demand for assets that can a) be converted quickly into cash; b) provide long-term future security; and c) generate capital gains and satisfy the speculative motive. By this means the government can manage and keep interest rates low across the economy’s spectrum of borrowing.

The great risk a Green New Deal Chancellor will face is this: can finance be safely and affordably mobilized and invested in both public and private activity without reprisals from actors in globalized capital markets?

"Bernie Sanders is right to argue that his plan for a Green New Deal that will create 20 million jobs will pay for itself within 15 years."

It is not unlike the risk faced by the architect of the New Deal in 1933. As outlined in my new book, The Case for the Green New Deal, Roosevelt’s very first act as president – on the night of his 1933 inauguration – was to dismantle the globalized and deflationary financial system (the gold standard) that had inflicted austerity on the US economy. From there on, it was the health of the US economy, not bars of gold, which served to value the exchange rate. That act led to the transformation of the international financial system and ensured that a government – not Wall Street – was in the economic driving seat. Thereafter a democratically elected government – not private bankers – called the shots when it came to managing cross-border capital mobility, the exchange rate and fiscal policy.

These are the tried and tested ways in which finance was raised to tackle and end the US’s catastrophic economic failure of the 1930s – and also its ecological crisis, the Dust Bowl. The same policies could be used again now in a Green New Deal to help prevent the catastrophic failure of the Earth’s life support systems.

Ann is director of the Policy Research in Macroeconomics network. She is a member of the group originally publishing the Green New Deal in 2008.

This essay first appeared in the IPPR and WWF publication Putting People at the Heart of the Green Transition.