The United States is facing four interconnected crises: the COVID-19 pandemic, a looming economic recession, extreme inequality and a climate emergency.
Congress will be forced to pass multiple stimulus bills to stave off these converging crises. But politicians, policy makers and everyday people are facing a unique challenge. What kind of stimulus will best protect people’s well-being and future economic recovery? And where will the stimulus money come from?
This debate is not new. In the first 10 Democratic presidential debates moderators asked candidates the “how will you pay for it” question a total of 21 times. This question was primarily directed at candidates who proposed big public policies that aimed to radically restructure the economy.
One of those policies was the Green New Deal. In our recently published paper “The Green New Deal in the United States: What it is and how to pay for it,” we investigated whether Senator Bernie Sanders’ $16.3 trillion plan would have a fighting chance, if implemented, of making the U.S. carbon-neutral while keeping the economy strong.
We examined these questions from a purely pragmatic perspective. We put aside questions of the rights and wrongs of burning issues like reduced inequality, a living wage, indigenous rights and gender equity. This narrowed our investigations down to two central questions: how can the Green New Deal be paid for without damaging the economy; and how would it be politically possible to sustain such a radical approach through the 15 years of its implementation?
While former Vice President Joe Biden is now the presumptive democratic nominee, the underlying debates around the key components of the Green New Deal remain. Sanders’ Green New Deal is worth evaluating, as he developed Representative Alexandria Ocasio-Cortez and Senator Ed Markey’s Green New Deal resolution into the most ambitious, full-fledged and financially detailed plan. Moreover, the Green New Deal will not just be one single piece of legislation, but rather a roadmap for a broad spectrum of policies, programs and legislation to be introduced by various U.S. representatives and senators over the coming months and years. Therefore, it represents a great starting point for analysis.
So, what did our study find?
First, the economy. Sanders’ Green New Deal was budgeted at $16.3 trillion over 15 years, or just under $1.1 trillion per year. That’s equivalent to about 5.4 percent of GDP annually, or 27 percent of total federal expenditure in 2018, and bigger than the entire Social Security budget (excluding healthcare) of just under $1 trillion.
To clarify, not all the $16.3 trillion would have been additional spending. Sanders contended that much would be offset by ending fossil fuel subsidies, reducing military spending on oil shipping protection, the selling of energy by new government-owned utilities and a saving on welfare payments enabled by the 20 million new jobs to be created.
But could the U.S. economy stand, say, extra spending of around $1 trillion a year to decarbonize?
A mistake many commentators make is to ask, often despairingly, “Where will the money come from?” In fact, ever since President Nixon took the U.S. off the last remnant of the gold standard in 1971, U.S. dollars have been “fiat” money—money created out of nothing. The U.S. regularly creates money out of nothing when it pays its dues, and it dissolves it back into nothing when it collects your taxes. And that’s where the current COVID-19 stimulus got the money from—the Federal Reserve was instructed by Congress to keystroke “digital dollars” into existence.
Like other monetarily sovereign countries such as New Zealand, Britain and Australia, the U.S. can create as much money as it likes and can never run out.
The real question, as sensible economists like Randall Wray, Stephanie Kelton and Thomas Palley recognize, is: “Will this spending be inflationary?” If a Green New Deal requires injecting cash equal to 5–6 percent of GDP into the economy each year, won’t that be more money chasing the same stock of goods and services, thereby pushing prices up?
Sanders’ Green New Deal had two built-in ways to avoid this outcome. One was to put more goods and services into the economy—things like solar panels, wind turbines and anything else his job-guarantee employees made—so there would be more goods and services for that extra money to chase.
The second is to pull money back out of the economy by increasing taxes and selling green bonds. This has been tried before, and it worked. It was John Maynard Keynes’ solution to financing the U.S. and British Second World War efforts. In 1943–45, U.S. federal expenditure went as high as 45 percent of GDP, but inflation averaged only 5 percent because money was clawed back through war bonds and a high marginal tax rate.
Federal expenditure was 20 percent of GDP in 2018, and the Sanders Green New Deal would raise it to 25.7 percent. We calculate that marginal tax rates on high incomes would need to be raised to offset this, but probably not as high as the levels Americans tolerated in the 1950s and 1960s.
This is where the second pragmatic tool comes in: keeping the people on board. The Green New Deal avoids French President Macron’s mistake of reducing taxes on the rich while increasing petrol tax, which penalized low-paid workers and sent them to the streets in protest. Instead it very deftly rewards the low-paid and marginalized in tandem with its transition from fossil to renewable energy. It embeds climate solutions within an anti-inequality agenda. This includes creating high-paying union jobs for workers laid off from fossil fuel industries, insulating houses, providing adequate family and medical leave, and work for women in new green industries. With COVID-19–induced unemployment rising at the fastest rate since at least the 2008 crash, such policies are now more urgent than ever before.
Increasing marginal tax rates on the highest incomes will have a further pragmatic effect. High incomes are associated with enormously high carbon footprints, and recent research shows that carbon emissions drop as inequality reduces. The superwealthy often use their excess wealth to obstruct legislative and regulatory restrictions on emissions standards and climate policy. Weakening this stranglehold is a smart way to keep a clean energy future alive.
A more economically equal society would therefore give both practical and political support to the year-by-year implementation of a Green New Deal, and recent polls show significant support for a wealth tax and progressive tax regime, across party lines.
A Green New Deal offers a timely framework for future fiscal stimulus. Our research suggests there is fiscal space. What’s needed now is the political will.