Not Your Grandma’s (Green) New Deal

Image courtesy of Jonathan Ernst at Reuters.

The Green New Deal has recently seen an explosion in searches online. Alexandria Ocasio-Cortez has been championing the policy ever since her election to Congress, injecting the conversation about a GND into the mainstream political debate.

What is the Green New Deal? In AOC’s recently proposed GND resolution, it’s described as a policy vehicle to turn the American economy into 100% clean and renewable energy in ten years, while providing a job for every American that needs one.

Let’s take a journey into the economic history books to the New Deal to see where this term originated from, and examine its economic feasibility.

During the 1930’s, the Great Depression hit the United States and unemployment soared to over 20%. The United States economy tanked, and millions of people became unemployed. Across the pond, a man by the name of John Maynard Keynes (remember him from Macro 101?) had recently written a book entitled The Means To Prosperity, and sent a copy of it to Franklin D. Roosevelt. In it, he criticized British austerity policies at the time, and suggested large budget deficits (government debt spending) instead in times of economic downturn.

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(Pictured: John Maynard Keynes, the father of Keynesian economics which had a profound impact on modern macroeconomics.)

Before we dive deep into the economic concepts at play here, it’s important to make sure to emphasize why Keynes’s ideas were so revolutionary. He was one of, if not the first mainstream economist to advocate for deficit spending in times of crisis.

To contextualize this, when the Great Depression hit, millions of people lost their jobs. This caused the government to lose tax revenue, causing  it to have less money to pay for the budget. With less money in the treasury, the government is less able to fund programs like the building infrastructure. Isn’t this situation similar to a household, where if less money is coming in, then the family can afford less? So just like the family, the government should tighten its belt too, right?

Wrong. Keynes argued that in times of recession, what is lacking is aggregate demand (total demand for goods and services). This means that, generally speaking, a large percentage of the population have lower wages, so they won’t spend as much money as they did before in the economy. If consumers spend less money in the economy, then businesses will sell less goods and hire less people, and so on.

The prevailing sentiment at the time was to reduce government spending during economic downturns to save money, and let the free market resolve any differences between supply and demand. This is what is referred to as ‘austerity’. The theory behind this is that since people are buying less goods, businesses will have to lower their prices. Eventually, with lower prices, people will be able to afford buying goods again. As people start to buy goods, businesses will begin to raise revenue again, start to hire more people, and the government will then start to collect more taxes. The forces of supply and demand will re-equilibrate and the economy will be in good shape in no time.

The problem with this hypothesis, is that in practice, this adjustment process often takes a long time. Just look at some countries in the Eurozone, like Greece, who were forced to let the market alleviate the 2008 crisis, and whose citizens have been left to pick up the pieces economically.

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(By Brian McFadden, via The New York Times)

As Keynes famously said, “In the long run, we’re all dead”. Keynes did not believe that millions of people were simply out of work due to mismatches between traditional supply and demand. Instead, he knew that the government was crucial in the process of restoring demand back into the economy.

In 1936 Keynes wrote his most famous work, On The General Theory of Employment, Interest, and Money. The principals that he outlined within are taught in practically every macro economics class across the country. The basic thesis in the book is to not wait in times of recession for the economy to find its way back to equilibrium, but to jump start it with government deficit spending. Additionally he argued against supply side economics, which said that if the conditions in the economy were there to allow businesses to grow and become more profitable, then they would start to hire again and continue to bring all the people who were previously unemployed back into the workforce.

Keynes believed that the ultimate driver of the economy was the consumer. At the end of the day, the consumer spends their money in the economy, which then leads businesses to hire and spend money on investments, etc. He argued that the goal of the federal government should be to use fiscal policy (government spending) and monetary policy (controlling the money supply and interest rate) to achieve full employment. If everyone who wants a job has a job, then that means consumers are buying goods, businesses are hiring, and the government is collecting taxes.

What was controversial at the time was that Keynes argued that governments should deficit spend (aka borrow money and accrue debt) to jump start the economy. In the 1930’s, FDR spent massive amounts of federal money to put people back to work. The workforce was mobilized to build bridges, damns,  roads, and provided low interest loans to farmers. People who were previously unemployed could walk up and get a job if they desired. After the New Deal was instituted, GDP grew by an average of 10% over the next three years! If that rate was sustained for 7 years, the whole economy would have doubled.

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(Pictured: Annual changes in GDP during the Great Depression. Via The Balance.)

The philosophy behind Keynes’ economics was simple. The government and the Fed’s primary goal should be to achieve full employment and protect the middle class. A healthy middle class provides the economy with a broad consumer base. When money is constantly being spent in the economy, it grows faster (the concept of velocity of money). New Deal policies were implemented with this philosophy in mind. Job programs put people back to work, and put money into their pockets. Federal programs like Social Security provided seniors with money during retirement to prevent poverty in old age. The FDIC ensured the middle class’ assets in times of a banking crisis. These policies were created not simply because they were the moral thing to do, but because they were smart economic policies that sought to codify a healthy consumer base.

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(Pictured: Annual changes in GDP per capita during the Great Depression)

Additionally, this type of deficit spending increased the efficiency of our economy by overseeing the construction of new infrastructure like dams and bridges. These infrastructure programs had their own multiplier effect- with new infrastructure, businesses are able to transport goods more efficiently, meaning they can retain more profits and hire even more employees.

Many people argue that WWII ended the Great Depression, not the New Deal. Looking at the previous graphs, we can see that growth rates were astronomical (besides 1938) throughout the 1930’s. To say that New Deal policies did not elicit growth is factually incorrect.

It is true that growth rates continued to explode during WWII, hitting nearly 19% in 1942. These data points just help Keynes’ theories though! What did the government do in WWII? It deficit spent out the wazoo. The War Economy was one giant stimulus program. The government did things like build the largest industrial plant in the world within months (in Ypsilanti Michigan), it put millions of people to work in factories producing war materials and supplies, and controlled large parts of US industries. You would think government taking over industry and and acquiring record levels of debt would sink the economy right? But, as mentioned before, the growth rate in 1942 was nearly 19%. The economy and the average income of an American would double in a little less than 4 years at this growth rate.

And now this takes me to the Green New Deal. In case you haven’t noticed, the world is fucking burning. The IPCC recently released a report stating the world has until 2030 to drastically reduced our carbon footprint to stay under 1.5 degrees Celsius. Doing so would require global coordination the world has never seen before.

Estimates show that the US economy could lose anywhere from 2-10% of its economy every year due to climate related issues by the year 2100. If we take the middle and say that climate change will cost 5% in of our GDP each year, that would amount to around $1 trillion (in 2019 dollars) every year if we do nothing.

There have been few studies on the cost of a GND, but some people estimate it would cost around that same amount, around two trillion dollars a year. However a lot of that cost is upfront- a GND would require us to build a lot of new infrastructure, which would be there for a long time afterwards. If we rebuilt our aging electricity grid into a smart grid with modern technology, we could increase its efficiency and save both families and businesses valuable money on their monthly energy bills. Even with high upfront costs, these investments as a part of a GND would be much cheaper than the cost of 5% GDP to our economy from climate change every year for the rest of time (unless we figure out how to sequester carbon out of the atmosphere on an industrial scale).

Some may point out that most of the world’s carbon emissions come from outside of the US today. The US has produced the greatest amount of carbon emissions historically, however, and if we want to actually prevent climate change, having the world’s most powerful country be the leader on climate mitigation is essential.

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(Pictured: Historical context of emissions from industrialized nations.)

Even if this is all in vain in the long run in terms of climate costs, the GND would unequivocally increase the GDP of our economy. As I explained before, infrastructure spending and providing jobs to millions of people that need it is an excellent way to promote demand. Imagine the amount of people it would need to take to build a bullet train from NY to DC. It would involve hundreds of thousands of people. Any one that wants a job could use their existing skills to be placed somewhere to work, or be trained to do so. No matter where you live, the people in your community who are living paycheck to paycheck could get a good paying job. Wind turbines could be installed in the Great Plains and on off of our coastlines, while our deserts could be converted into giant solar farms.

Warning bells might be going off if you are concerned about the deficit. Even if we remove all subsidies from the fossil fuel industries and tax the rich with a wealth tax, finding around a trillion dollars will be difficult politically. The key word is difficult, because it is not impossible. There are two ways to look at the funding methods. One method is to be concerned about the deficit and simply raise revenue via taxes. The second is to use Modern Monetary Theory, and simply print the money that is needed to fill the gap that could not be raised through taxes for political reasons.

First, for the sake of argument, let’s agree that printing money (MMT) is a bad thing since it will cause inflation. So the only way to raise money for a GND would be through taxes. Many people will say this is sooooo costly, there is literally no way we can pay for it. If they were arguing that politically, it would be impossible to raise the money since no one likes their taxes to increase, then sure there’s an argument there. But if someone argues that there is physically no way to pay for it then they are woefully uninformed.

Currently, the US economy was roughly $20 trillion. As a percentage of our GDP, the US’s tax receipts are around 26% of our GDP. If you look at other highly developed rich nations such as Norway, France, Germany, Japan, and the UK you will see they collect a lot higher percentage of their GDP in taxes. Norway collects 54.8%, Japan collects 36%, and Germany collects 44.5% of its economy through taxes. If the US simply collected 5% more in taxes as a percentage of our GDP, it would raise an additional $1 trillion. So if we really wanted to raise the revenue without adding to the deficit, we could. The government has full capability to raise taxes if politicians voted to do so.

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(Pictured: The percent of countries’ GDP that is collected through taxes.)

The second option would be to use Modern Monetary Theory to deficit spend and add money to the deficit. The theory of MMT states that a government that prints its own currency cannot go bankrupt, because it can print money whenever it needs to stimulate demand in the economy. Since the US government controls the US dollar, it can always sell treasury notes to raise revenue and pay off its debt. Plus, the largest creditor of the US debt is the American public, so when we pay off our debt, the interest payments actually go back into the economy.

MMT doesn’t say that debt doesn’t matter at all. MMT economists emphasize that governments should tax to pay for spending, and to make up the difference with deficit spending. Paying interest on our debt takes up a percentage of our national budget, which is not necessarily the most efficient use of this money. Deficit spending becomes dangerous when the economy is past productive capacity, and “When too much money is chasing too few goods” (Stephanie Kelton, Professor of Economics), which is when inflation occurs.

In our economy right now, the US economy is not at productive capacity, inflation is at record lows, and there is a lack of aggregate demand. MMT urges that the government deficit spends to fill in this capacity gap. Like I stated before, the infrastructure packages of a GND would boost the economy, so deficit spending could be paid off through higher tax revenue in the future thanks to higher growth. Inflation won’t occur if the economy’s productive capacity is not met.

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Outside of the economic stimulus benefits, Alexandria Ocasio-Cortez also emphasizes that a GND could be used as a vehicle to address economic and racial disparities, something that the New Deal failed to do. Wealth inequality is the highest it has been since the Roaring Twenties, with the 400 richest Americans owning more wealth than the poorest 150 million. Communities of color are undeniably hurt the most by environmental racism, and a GND could help to correct this historical injustice. Cities like Detroit that are financially struggling could be quickly mobilized to become green cities. The GND can provide good paying government jobs with generous benefits to the millions of poor and working class people in this country that desperately need a raise.

It’s time we return to the economic roots of FDR’s New Deal, and again use government policies as pillars to uphold the middle class. The GND would not only be the moral thing to do for future generations, but it will economically benefit our country by providing work for millions of people and stimulating our economy. With the construction of state-of-the-art infrastructure, built by millions of people back in the workforce with good paying jobs, our economy would no doubt grow at higher rates than it is right now.

To quote Ed Markey, the Senate’s sponsor of the recent AOC’s GND resolution, “Our energy future will not be found in the dark of a mine, but in the light of the sun.”

Godspeed.

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