As recently as a year or two ago, the consensus among economists and much of the political sphere was that the only policy required to deal with climate change was some form of carbon tax. With an appropriate carbon price in place, decarbonization could be guided by market incentives, without the need for more active government involvement. An open letter signed by a long list of the best and the brightest in economics—including 27 Nobelists and four former Fed chairs—explicitly presented a carbon tax as obviating the need for any more intrusive climate policy. Among Obama-era policymakers, you might hear that the question was whether a carbon tax was 100 percent of the solution or only 80 percent. Even on the left, much of the debate was about whether permits were a better form of carbon pricing than a tax, and on whether per-capita rebates would offset the negative distributional impact of a carbon price.
Since it entered the national conversation in mid-2018, the Green New Deal has dramatically shifted the terms of debate. Whatever the specifics, the term describes a response to the climate crisis that foregrounds public investment and a deliberate reconstruction of the economy. It starts from the premise that market signals may be effective at guiding tradeoffs at the margins, when it’s a question of making small adjustments between well-defined alternatives. But they’re inadequate for large-scale shifts that must take place across many sectors of the economy simultaneously; where it’s not a question of a little more of this and a little less of that, but of redirecting production into entirely new channels. Like industrialization in developing countries or mobilization for major wars, rapid decarbonization will require active direction by the state. Helped by ferocious resistance to proposed gas-tax increases in France and elsewhere, this new vision of decarbonization is increasingly displacing the carbon tax.
The Green New Deal implies instead a major expansion in the public sector. While specific proposals vary, most imply annual spending on the order of at least several percent of GDP on decarbonization (not counting universal health care and other broader programs that are sometimes included). Most of the climate proposals released by the Democratic candidates call for new federal spending of 2 percent of GDP; the most ambitious, proposed by Senator Bernie Sanders, calls for nearly twice this—$16 trillion in new public investment over 15 years. This is spending on the scale of mobilization for a major war—if not World War II, then at least Vietnam or Korea.
A natural question in response to a proposal on this scale is: How do we pay for it? The argument of this piece is that, posed correctly, this question is not an objection to the Green New Deal approach to climate change. In today’s economic environment of persistent weak demand, where useful investments are much scarcer than saving, the scale of increased spending required by a public-investment led approach to climate change is an argument in favor of that approach. In short: The price tag of the Green New Deal should be seen not as a bug, but a feature.
The starting point for thinking about the question of paying for a Green New Deal, or any other expansion of public spending, is to recognize that it’s really two distinct questions. One is about financing—what flow of dollars coming in to the government will balance the flow of additional dollars going out? Second is the question of real resources—how much labor, capital, and raw materials have to be withdrawn from other uses? What other useful activities will have to be curtailed to allow this new activity to take place? These questions are often treated as equivalent, but conceptually the issues involved are quite different.
In daily life, we don’t have to worry about the different meanings of “paying for” something. For a family, a small business, or a local government, the financing question is the only one that matters. As long as you can get the dollars you need, you don’t have to worry about whether there will be enough of whatever you want to buy, or whether getting what you want will mean someone else isn’t able to get what they want. Nor do you have to worry about what effect the additional dollars you’re putting into circulation will have on the larger economy.
For the federal government, however, both sets of concerns matter. Like any other economic unit, the government is subject to a financing constraint, in the sense that dollars going out must equal dollars coming in. But unlike most other units, it also has to worry about whether the economy has the capacity to produce the additional goods it wants to buy, on top of everything already being produced. When the country mobilized for World War II, for example, the limit on how many planes the federal government could buy was how fast factories could be built or converted to make them, not finding the dollars to pay for them. For the United States, this second question is the one that puts tighter limits on public spending.
In current conditions, both real and financial arguments point to the conclusion that paying for a Green New Deal is not a problem.
On the financing side, the simplest answer to the question of “How will we pay for it?” is: Congress will authorize the spending, and the appropriate agency will spend the money. Despite the fictions of pay-as-you-go, this is just how the federal budget works. It’s impossible to match up revenues and expenditures exactly even in the short term, let alone over a decade as current pay-as-you-go rules require. And, anyway, money is fungible; it’s the federal budget as a whole, and not any individual item, that needs to be financed. But public investment on the scale of the Green New Deal will raise total spending enough that it’s worth asking what mix of higher debt, tax increases, and reduced spending in other areas will counterbalance the new outlays.
There are certainly forms of public spending it would be better to have less of, starting with the military. And there are taxes it would be socially beneficial to raise, even apart from revenue needs—taxes on the highest incomes and wealth are an important tool to rein in inequality, and taxes also have a role in discouraging socially harmful activity, like the speculation that would be targeted by a financial transaction tax. To the extent that the cost of a Green New Deal strengthened the case for these kinds of budget adjustments, the scale—and the urgency—of GND spending would be politically useful. But it’s likely that much if not all of the additional spending would end up financed by increased public debt. So on the financing side, the pay-for-it question largely comes down to the feasibility or desirability of significantly increasing federal borrowing.
Not too many years ago, the suggestion of raising the federal deficit by several points of GDP—$1 trillion or more—would have been far beyond the pale. But the macroeconomic conversation has shifted dramatically in the past few years. While many elected officials—especially in Europe, but also in the United States—still hold to the conventional wisdom that higher government deficits are always a bad thing, the arguments for that position that seemed clear-cut in the 1990s are much less convincing nowadays. Today, not only the heterodox fringe of the economics profession but many of the most prominent mainstream economists, as well as much of the financial press, takes the view that higher public debt is essentially costless or even positively desirable.
At last year’s American Economic Association meetings, AEA president and former International Monetary Fund Chief Economist Olivier Blanchard presented a widely discussed paper arguing that in a world of low interest rates, the costs of high government debt are much lower than many economists had previously believed. “Put bluntly,” he says, “public borrowing may have no fiscal cost.” Similar arguments have been made by prominent mainstream economists like former Treasury Secretary Lawrence Summers and former Council of Economic Advisers (CEA) chair Jason Furman. A well-known paper from a decade ago, which argued that high debt-GDP ratios could have catastrophic effects on economic growth, is now one of the most thoroughly debunked pieces of economics in recent history. Even Kenneth Rogoff, one of the paper’s co-authors, recently repudiated its conclusions in a column titled, “Never Mind the Debt.”
A major reason for this change in opinion is the decline in interest rates on government debt—a long-term trend that has accelerated since 2007, even as the debt itself has grown. Fifteen years ago, the great majority of economists would have said that doubling the federal debt as a share of GDP (as happened between 2007 and 2013) must lead to a spike in interest rates, probably accompanied with rising inflation and a collapse in the value of the dollar. In 2005, people like Brad Setser and Nouriel Roubini were predicting a sharp fall in the dollar and a rapid increase in interest rates if the United States did not bring down its deficit within the next two years. When the deficit was not brought down but grew sharply—the dollar instead just got stronger and interest rates fell. In the United States, interest rates have dropped below 2 percent on 30-year bonds and 1.5 percent on 10-year bonds—the lowest rate since the Republic was founded. In Japan, the debt-GDP ratio has risen to 250 percent, with no uptick in interest rates. Similar patterns can be found throughout the advanced world; in 2019, the stock of government debt around the world with negative interest rates approached $17 trillion, a third of all investment-grade bonds. This coexistence of historically high government debt and historically low interest rates is one of the central macroeconomic facts of our time.
Low interest rates fundamentally change the calculations around government debt. When interest rates are high—in particular, when they are greater than growth rates—debt can snowball, with persistent deficits raising the debt ratio to infinity. To keep the debt-GDP ratio stable, deficits in one year must be offset with surpluses in a later year—and the longer you wait, the bigger the required surpluses get. But when interest rates are lower than growth rates, none of this is true—even if deficits continue forever, the debt ratio will stabilize somewhere. And after a period of temporarily higher deficits, the debt ratio will return to its old level on its own, with no need for surpluses. These facts are uncontroversial, but the implication that government deficits are much safer than previously thought is only beginning to be taken on board.
Today’s low interest rates have a more subtle implication, one that is also important for the question of financing the Green New Deal: They suggest there’s no relationship between government debt and interest rates in the first place. Economic textbooks suggest that government debt draws on a fixed supply of savings—if the government borrows more, there’s savings for the private sector. The fact that government borrowing has not, in fact, led to higher interest rates, supports an alternative view, going back to Keynes, which sees interest as the price of liquidity rather than saving. In this view, if government debt is sufficiently safe and liquid—sufficiently money-like—more government debt may in fact lower interest rates rather than raising them. What’s more, government debt plays a critical role for the financial system as a source of liquidity—safe assets that can be reliably sold on short notice. If the government fails to provide safe, liquid assets in the quantity the financial system requires, banks may be forced to create their own substitutes. But as we learned during the housing bubble—when mortgage-backed securities were briefly supposed to be as safe as Treasury debt—no private asset can offer the same security. When we come to see government debt as a uniquely safe asset for the banking system—a common perspective in the world of finance but one that economists have only recently begun to take seriously—we may realize that, even from a narrow financial perspective, the risks of too little government debt may be more serious than the risks of too much.
But of course, we don’t want to take only a narrow financial perspective. We also have to think about the real economy. And here again, when we close the textbooks and look at the real economies around us, we may well decide that the high cost of the Green New Deal is not a problem but a solution.
A second fundamental macroeconomic fact of our times, along with, and linked to, low interest rates despite high public debt, is persistent stagnation in almost all the advanced countries. This shows up in many ways—as slow growth, low inflation, weak wage growth, underemployment, and sluggish investment even when profits are high. This is clearest in Europe, where real GDP in a number of countries is lower than it was a decade ago. But even in the United States, despite measured unemployment near record lows, the fraction of working-age adults who have jobs is a full point lower than it was in the mid-2000s, and two points lower than in the late 1990s. Slow wage growth similarly suggests continuing labor-market slack; if there really were not enough workers to fill available jobs, employers would be competing for them and the wage share of national income would rise. So far this has not taken place. U.S. GDP, while increasing, has never returned to the growth rates of the pre-2007 period, let alone made up the shortfall of the recession; relative to the growth rates of 1947-2007, U.S. output today is more than 10 points below trend. All these symptoms point to the same underlying cause: a level of aggregate demand, or spending, that is too low to fully mobilize the economy’s productive potential.
Until recently, most economists would have rejected the idea that a demand shortfall could last for a decade or more. The economy was supposed to have powerful self-stabilizing mechanisms that should quickly bring the flow of money back into line with the real resources available. And if the economy failed to self-adjust for some reason, the central bank’s control over the interest rate was a powerful tool that could quickly right it. Today, it is clear that neither of these assumptions hold up. As in the 1930s, the economy may remain indefinitely below any meaningful definition of full employment. And in a deep slump, conventional monetary policy has little ability to raise spending—a problem dramatized by, but hardly unique to, the zero lower bound on interest rates.
Under these circumstances, it’s natural to turn to fiscal policy. Ramping up government spending is a much more direct way to raise demand in the economy than trying to shift the price of financial assets in the hopes that, eventually, more favorable borrowing conditions will lead families and businesses to borrow and spend more. Jason Furman made a strong case toward the end of his tenure that fiscal policy should play a larger role in demand stabilization going forward. As he put it, “the tide of expert opinion is shifting . . . to almost the opposite view” of the pre-2007 skepticism about discretionary fiscal policy as the main tool for fighting recessions. Most policy-oriented macroeconomists would probably agree.
Unfortunately, here we encounter another way that the real economy departs from textbook stories. Economists have long worried about elected governments suffering from a bias in favor of deficits—if voters reward spending and punish tax increases, elected governments will be tempted to run bigger deficits than is macroeconomically justified. Great effort has been devoted to finding mechanisms to overcome this supposed bias toward profligacy. Among other things, it’s a big part of the argument for why macroeconomic policy should be left to independent central banks. But the experience of the past decade suggests that this conventional wisdom is wrong. Whether it’s the Obama Administration’s “pivot” to deficit reduction in 2010, when the unemployment rate was still close to 10 percent, or Angela Merkel in Germany boasting of the “black zeros” of balanced budgets while Europe slid into depression, governments today don’t seem to suffer from deficit bias so much as austerity bias. Even when there is overwhelming evidence that the economy is suffering from a lack of demand and deficits are clearly appropriate, elected officials are unwilling or unable to run them.
The problem is that the economy requires a big jolt of additional spending, but nothing on the required scale can get past the various veto points in the political system. What’s needed is something to spend money on that is more urgent than routine macroeconomic management. Keynesian stimulus has the reputation, unfair as it may be, of digging holes in the ground and filling them back up. For a stimulus on the scale required to gain the support of policymakers and the public, the spending has to be for something.
The great thing about the Green New Deal, from this point of view, is that it gives us so many useful things to spend money on. Most obviously the transition away from carbon will require a massive expansion of renewable energy production—like the original New Deal’s Tennessee Valley authority, but on a national scale. To overcome the problem of intermittency, we will need massive investment in new energy storage technologies, and in vast expansion of transmission capacity. (The wind is always blowing somewhere.) We will need to retrofit homes and office buildings—perhaps the lowest-hanging fruit in decarbonization, and one that can pay for itself within a few years, but that is hard for widely-dispersed homeowners and landlords to carry out on their own. We will need a massive investment in public transit, high-speed rail, and a charging network for electric vehicles, along with research into the harder problem of decarbonizing aviation. We will need investment in our public utilities, including district heating and cooling systems, which can be much more efficient but are almost impossible for private owners to carry out on the required scale. In addition to the direct investment, rapid economic restructuring of the economy can disrupt various ways that people meet their own needs, creating further demands on the public sector. During World War II, for example, the mass entry of women into the labor force was facilitated by the first large-scale provision of public child care. The transitions and dislocations of decarbonization will call for similar expansions of caring labor.
All of this spending is essential to deal with climate change. But just as important from an economic perspective, it will pump needed dollars into our stagnant economy, boosting demand and raising wages. Just as World War II mobilization pulled the United States and other advanced countries out of the Depression, rapid decarbonization could pull us out of today’s secular stagnation. And, as in World War II, the massive demand for labor from a true high-pressure economy might do more to equalize incomes than any more direct program of redistribution.
When we put the Green New Deal in macroeconomic context, the question of paying for it looks very different. The question is no longer, does it cost too much for the government to pay for? The question becomes, does it cost enough to meet the economy’s needs?