A Magic Money Tree for the Climate Crisis
The climate crisis has begun, posing an immense threat to both life and prosperity. Raging fires, unprecedented storms, deadly heat, rising sea levels all threaten the livelihoods and lives of billions of people. In the past fifteen years alone, the total cost of weather disasters was $1 trillion in the US alone, with disasters only getting more destructive and expensive. Globally, a weather disaster forces an individual out of their home every 2 seconds.
The US is one of the largest CO2 emitters per capita, as seen in Figure 1, and thus large mitigation efforts are needed to prevent total climate degradation. More notably, though, the US may be one of the only nations in the world capable of addressing climate change with the scale it requires: as certain as environmentalists are about the existence of climate change, economists and politicians are certain about the astronomical short-term price tag associated with addressing it. The private sector and markets continuously fail to address it, proven by the current worsening of the problem, rathering than better. The US deficit is already over $28 trillion, with GDP at a lesser $23 trillion. How can the US afford a green transition, especially when the markets have already proven the externality of climate change must be addressed through public spending?
According to neoclassical economics, the US has no real hope of spending the trillions of dollars this project would take, at least not without dire consequences including astronomical inflation. However, over decades of economic data, these models have proven to consistently fail. Perhaps these neoclassical assumptions are not as restricting as initially thought.
Modern Monetary Theory
In a neoclassical approach to economic policy, governments should base their spending on their revenue (taxes times the number of taxpayers). Spending any more will create a deficit, and spending any less will result in a surplus. The government functions like a household, restricted by the amount of income they have. Like a household, a government can go into debt, and the US has done this to an extreme. So extreme, in fact, that our power as a nation is threatened by continuing this trend.
Modern Monetary Theory (MMT), contrastingly, contends that this deficit is the reason for American financial power. The US dollar is the currency of the global economy. Trillions in treasury billions are sitting in foreign reserves and circulating the globe. Even in times of financial crisis when the value of the dollar goes down, the demand for it goes up. The international economy is constructed in a way that the dollar is always in demand. The advantage of being a currency issuer is that the US gets to set the interest rate on all of those treasuries. Interest rates are determined by the Federal Reserve, not the invisible hand. There is no true budgetary limit to how much the US government can spend, because dollars will always be in demand across the world. Therefore, it is illogical to worry about a country living beyond its means when it prints those means and there is constant demand for them. The US’s success is dependent on its national deficit, not threatened by it. MMT sees the public deficit as a private sector surplus. Suddenly, that $28 trillion figure seems a whole lot less scary.
It is then necessary to address the inflation neoclassical economics promises with excessive spending. As seen in Figure 2, inflation has fallen, even as the deficit has skyrocketed. This suggests that if there is a speed limit on the economy, as the neoclassic model suggests, the US is far from hitting it. This is because the standard model doesn’t take into account the global political economy around currencies. The US dollar is the most demanded currency in the world and will remain so due to the mechanisms of international trade. Inflation occurs when there’s an excess of money in the economy, but if there is practically an infinite demand for our money, the US dollar will not reach a surplus. On an inflationary basis, there is plenty of room to spend.
In an MMT world, no real need ever costs too much because the economy works for the people’s needs. As absurd as it may sound, that is how the American government is operating currently. Trillions of dollars that were funneled into the War on Terror didn’t come from America's paychecks through tax raises. The government created the money it needed, with no real inflationary consequences on the economy. The US is in a unique position to have this power, as the issuer of the world’s most important and demanded currency.
Funding the Green Transition is truly a political issue, as opposed to an economic one. If the money is there to fix the issue, how can economists convince people that it’s worth believing in and supporting? This needs to be the ultimate focus of politicians and green climate activists. Different options exist, such as a federal jobs guarantee to support displaced workers from non-green industries. Tax cuts can be utilized as incentives as a way to placate conservative voters. There’s a myriad of ways to get this policy through, but it will take the greatest minds working on these issues to achieve it, as well as an open mind from every American voter to rethink all they’ve been taught about the economy. Different options will appeal to different voters with differing efficiencies. Two key policies are explored here.
MMT Applied: Option One
The budget deficit is calculated by subtracting government spending from taxes. So long as spending is greater than taxes, a deficit exists. If Congress were to cut taxes to incentivize a green transition, the deficit would grow. Tax cuts have long been used as an incentive to achieve desired behavior, from charitable donations to job creation, and green behaviors can be similarly supported. For example, if a company is able to transition to 100% clean energy, they could write those expenses off or receive a standard 1% cut on their income taxes. The advantage of a system like this is that it will generate strong Republican support, which generally does not back green policy. While this policy may only directly target the private sector, it in no way prohibits the government to fund a green transition for the public sector in addendum. Furthermore, the private sector is responsible for the vast majority of pollution. “100 active fossil fuel producers including ExxonMobil, Shell, BHP Billiton, and Gazprom are linked to 71% of industrial greenhouse gas emissions since 1988” (New Report Shows Just 100 Companies Are Source of over 70% of Emissions - CDP). Furthermore, less than 10% of all energy use in the United States is personal residential, meaning that the vast majority of demand for climate-destroying energy is coming from corporations (Who Is Responsible for Climate Change?). Introducing economic incentives to these firms to adapt their practices or shift their market scope will tackle the problem at its core while appeasing a constituency that would usually oppose legislation with this goal.
However, this proposed plan poses the risk of losing Democratic support, which is building a strong platform on more aggressive corporate taxation. The more important risk of this policy, however, is the realisticness of its application. Even if Congress were to be able to pass this legislation, it will not make a real difference for the biggest polluters. The top 60 US firms have zero or negative real effective tax rates and the top 50 firms are responsible for 75% of untaxed offshore profits (Zucman). Energy producers in particular hoard the vast majority of their profits. Therefore, tax cuts will fail to incentivize changed behavior. Even if taxes were cut down to zero, it would still be more expensive to move profits to the US when you include the cost of the transition. Having no incentive to follow through on the program, corporations will simply make no changes to their production, or find loopholes in the tax system to further exploit and pay even fewer taxes without the production of any new social goods.
MMT Applied: Option Two
Alternatively, Congress could increase government spending to support both public and private sectors’ transition. This money can be used to directly fund public sector transitions and support any potential job loss as the market adjusts, but it can also be used to subsidize desired behavior from private organizations. Additionally, it can help influence consumer behavior to further the pull of the market towards a green economy. This is because there are multiple ways of going about a subsidy.
- The government could subsidize the final cost of green goods such that consumers will have to pay a lower price, but producers do not lose any revenue.
- The government could subsidize production costs and give companies an up-front amount of money to spend on certain green activities, such as conversion to clean energy, renewal of real estate and capital to be environmentally friendly, improving production systems to reduce waste, investing in better waste management, etc.
The advantage of this program is that it would make hard legislative requirements more feasible and effective, but not necessary. This project can be done in iterations. First, the government could provide a federal jobs guarantee and do so by funding a public sector green transition. This is a strong stance MMT takes and provides additional political feasibility. Those in pollution-heavy industries such as coal would be more likely to support this policy if it came along with a promise for better work for them. From there the government can subsidize private corporations to go green as well. Finally, if such action proves to be inadequate, they can take a harder regulatory stance against major polluters, while still supporting the individuals who work the jobs at those organizations.
A program like this obviously creates jobs but additionally gives the economy an overall boost. Because any economic loss is offset by the subsidy, this will further increase the country’s GDP. It also provides a more clear path for shifting the public sector into sustainable practices. That being said, increasing government spending often faces Republican backlash. Even Democrats who do not believe MMT may be off-put by the high cost of this plan. This policy would be an incredibly costly one. MMT suggests that if a speed limit is hit, it will be known due to inflation. There’s a slight possibility of this inflation if enough money is spent. Additionally, many of the progressives may see this move as a betrayal of their platform. Therefore, there must be an emphasis on supporting labor and equity throughout all phases of this transition, but especially in the private sector subsidization.
Recommendation
The most effective usage of MMT’s findings would be option two, an expansion of government spending to subsidize a private sector green transition, as well as additional spending in the public sector to support any fall out from the private sector transition. While tax cuts as an economic incentive may garner a wider base of political support, the ultimate outcome will not be as desired. The largest polluters will not be impacted by these legislative changes and thus will have no incentives to go green. The government must make the green transition be less costly, perhaps even profitable for them. MMT allows for this in a way that the traditional economic model does not. Rather than balancing the budget, MMT encourages governments to balance the economy. Currently, our economy is broken, from both an environmental standpoint, as well as an equity one. Utilizing this critical juncture as an opportunity to repair both is crucial to the continuation of the United States as a global superpower.
Sources
Modern Monetary Theory explained by Stephanie Kelton
The Cost of Inaction on the Climate Crisis
Climate change is displacing 20 million people each year, Oxfam study shows
The Climate Crisis in 2021: 5 Key Facts to Know
Ever heard of modern monetary theory?
Stephanie Kelton, The Deficit Myth: Modern Monetary Theory and the Birth of the People’s Economy (New York: Public Affairs 2020)
Gabriel Zucman, The Hidden Wealth of Nations (Chicago: University of Chicago Press 2015)
Photo: Image via Newsweek