(Co-authored with Sue Holmberg and Mark Paul, and cross-posted from Forbes. This is a teaser for a project the three of us are working on at the Roosevelt Institute on the economics of the Green New Deal.)
Almost overnight, the idea of a Green New Deal has won over environmental activists and many lawmakers. An all-out national mobilization to decarbonize the economy has a natural appeal to those who see climate change as an immediate, existential threat. But others have doubts. Why can’t markets guide the transition from carbon? Do we really need an expansion of the public sector on the scale of the New Deal or World War II? Can we afford it?
As economists, we think the answer is Yes.
To many economists, the obvious alternative to a Green New Deal is a carbon tax. Make the tax high enough, and businesses and consumers will figure the best ways to reduce emissions. A group of eminent economists from both parties, including Nobel Laureates and former Federal Reserve chairman, recently endorsed this approach to climate change. They argue that markets, rather than regulation or public spending, are best at spurring investments in clean energy.
Carbon pricing definitely has a role to play, but market approaches have limits. Markets are effective at allocating resources when the required adjustments are small and the outcomes clear and immediate. Yet, there’s a reason that during World War II, the government built aircraft factories and allocated scarce materials like steel and rubber through the War Production Board. Closer to home, there’s a reason that large businesses have professional managers to plan their operations, and don’t rely on internal markets.
The limits of leaving large-scale planning to markets should be even clearer today, especially after the experience of the housing bubble and crash, which demonstrated a colossal failure of financial markets to direct investment to productive uses. We shouldn’t count on the same financial system that so mismanaged the housing market to guide the shift away from fossil fuels on its own.
Instead, the government needs to mobilize our collective productive capacities through a mix of tools: directly through public investments and credit policy; through regulations that enforce key climate goals, in the same way that harmful chemicals are banned and not just taxed; and through taxes and subsidies that ensure that what consumers and businesses pay for goods and services reflects their true social cost.
What about the fact that the Green New Deal bill includes seemingly unrelated issues, like health coverage and a jobs guarantee? Is there a danger of weighing down a climate program with perhaps worthy but unrelated social goals? If we were talking about small-bore regulatory changes, this criticism might have merit. But we may be looking at five or ten percent of GDP, sustained over many years. Action on this scale is going to have major effects on labor markets and income distribution, one way or another. The question is only whether these impacts come haphazardly, or openly and deliberately.
A Green New Deal that didn’t address social justice would risk reinforcing existing inequities of education, geography, race and gender, as certain workers and regions found their labor in much greater demand and others much less. The fact that the authors of the bill have addressed these impacts directly does not mean they are getting distracted or being disingenuous. It means they are taking the project seriously. As recent events in France demonstrate, environmental policy that ignores existing inequities invites a ferocious backlash.
Perhaps the most common question about the Green New Deal approach is “How do we pay for it?” That is, where will the money come from for new public spending? And where will the real resources come from, for both public and private investment in decarbonization?
Supporters of the Green New Deal, like most Americans, also favor higher taxes on very high incomes and wealth. But these will not cover all the increased public spending. So, yes, the government will borrow more, but this shouldn’t worry us.
In recent years, there has been a remarkable shift among economists on the dangers of high public debt. The big runup in U.S. debt over the past decade has not been accompanied by any of the disasters that we used to fear—runaway inflation, sky-high interest rates. Neither has rising debt in Japan, which has now reached 250 percent of GDP with no obvious ill effects.
In a world of low interest rates, which seem to be here for the foreseeable future, there is no danger of a runaway debt spiral. The idea that low interest rates make deficits less worrisome has been forcefully argued by people like former IMF chief economist Olivier Blanchard and former Treasury Secretary Lawrence Summers and Council of Economic Advisors Chair Jason Furman. Even if the government runs deficits year after year, the debt will eventually stabilize.
On the productivity side, there is good reason to think that our economy is still operating well below full capacity. Real GDP today is more than 10 percent below the level predicted a decade ago, and at least some of this gap reflects lingering weak demand following the Great Recession. Despite the low headline unemployment rate, the fraction of working-age adults in the labor market is substantially lower than it was a decade ago — let alone than in the late 1990s, or in many other rich countries. Meanwhile, flat productivity suggests that many of the Americans who have jobs are underemployed. A truly strong labor market would bring discouraged workers back into the labor force, shift currently employed workers into more high-yielding work, and boost wage growth – something that still hasn’t happened despite today’s supposedly tight labor markets.
We won’t know for sure how much space there is exactly until we reach the limits, but there’s every reason to push them – if a deficit-funded Green New Deal causes the economy to run hot for a while, that’s a benefit, not a cost. Faster wage growth will help workers regain the ground they have lost in the last 50 years. And if the Fed has to raise rates to step on the brakes, that gives them more room to cut them again in the next recession.
There is no silver bullet to address climate change, but history shows us that market approaches alone are not enough – public investment and other, more direct government action are necessary to provide an effective, robust response. The costs of a Green New Deal are affordable, but the costs of inaction are literally beyond calculation.
As economists, we see a Green New Deal as eminently reasonable. As human beings, we see it as a necessity.