In September 2007, as credit was “crunched” and the financial crisis began to unfold, a group of economists and environmentalists, including the future Green party MP Caroline Lucas, met regularly in my small London flat. Supping on comfort food and wine, we argued furiously while drafting a plan we hoped would transform the economy and protect the ecosystem. We called it the Green New Deal. Little did we know that the ideas we seeded then would be adopted by a shooting star of the Democratic party, Alexandria Ocasio-Cortez, as part of her bid for a New York congressional seat in 2018.
Fast forward to 2019 and the Green New Deal is now at the centre of the 2020 US presidential campaign. Bernie Sanders last week declared the climate crisis a national emergency and launched his version of the deal – a $16.3 trillion plan that includes massive investment in renewable energy, green infrastructure for climate resilience and money for research.
Sanders is vague about his financing plans. He suggests that cuts in military spending could generate cash, but also proposes a rise in tax for big corporations. These are welcome proposals, but our group has one quibble. Big transformational projects are not financed from taxation. Kennedy’s moonshot wasn’t, nor is Britain’s HS2 rail project. Suggesting that the deal can be paid for through tax (even from big corporations) will rightly raise suspicions. Ordinary taxpayers will assume – as they did during the US debate about inheritance tax (reframed by the right as “death taxes”) – that the burden of such a carbon levy will fall instead on their shoulders.
So where should the money come from? There are fundamentally only two sources of financing. The first is borrowing (credit). This is achieved by applying for a loan, or issuing a bond. The second is existing savings.
To raise the money for a green deal, governments would have to draw on their equivalent of a giant credit card, but would also be able to take advantage of investment by savers. Thankfully, the creation of millions of jobs will generate the income and tax revenues needed to repay any borrowing. As Sanders argues, the whole thing will pay for itself.
First, the borrowing: credit issued by a commercial bank, as we all know from spending on our credit cards, does not draw on our existing deposits or savings. Instead it is a promise to pay in the future. OECD governments (backed by millions of taxpayers) are the most trusted borrowers, which is why their promises (bonds) are in such demand. Savings, by contrast, already exist – in bank deposits and savings accounts.
When a government borrows, as it has for financing HS2, that leads to investment and the creation of paid jobs in public and private sectors, and to private sector profits. Both employment income and profits generate tax revenues. Tax revenues are, therefore, a consequence of spending or investment – and can be used to pay back the borrowing. They need not be used directly to finance that investment.
During the second world war commercial banks provided credit to the government in the form of Treasury deposit receipts. They could do so again. But the government also has its own bank, the Bank of England, which issues credit, too (currently known as quantitative easing, or QE), and could use this to purchase government bonds.
To appeal to savers, the government could issue bonds to be repaid over different time periods – short, medium or long-term. These would attract pension funds and insurance companies, but also different kinds of individual savers. They would be able to invest their money in transforming the economy away from fossil fuels, while receiving a regular income in the form of interest. For this to happen, governments would have to be “in the driving seat” when it comes to issuing bonds. Currently they’re more passive – relying almost entirely on demand from private capital markets.
As you can see, this system of financing is entirely doable. However, to succeed, our plan demands a decisive rupture from the neoliberal consensus of pairing expansionary monetary policy (QE) with contractionary fiscal policy (austerity).
The original Green New Deal group continues to meet, to argue, to indulge in good food and wine, and to plot the defeat of that consensus. Later this week, Caroline Lucas, together with Clive Lewis MP, will launch a bill embracing key principles of the plan. From small beginnings, a great change could soon be on its way.