Summary. Ann Pettifor claims that government can borrow tens if not hundreds of billions to fund the GND, and that money can be repaid fairly quickly from the additional tax revenues flowing from the extra jobs created. The flaw in that argument is that unemployment is currently near record lows in both the US and UK, thus it just isn't possible to raise numbers employed to any great extent. I.e. while spending vast amounts on the GND is certainly possible, that can only be done by cutting expenditure elsewhere.
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Ann Pettifor has just written a book, “The Case for the Green New Deal”. I’m all for doing something about man made climate change. Unfortunately her ideas on the economics of the Green New Deal (GND), in particular how to fund it, leave something to be desired, to put it politely.
The sub-heading of a Guardian article by her entitled “The beauty of the Green New Deal is that it would pay for itself” says “Governments around the world do not need to raise taxes in order to transform their economies and avert climate disaster.”
Indeed, the article describes the various ways in which the GND, and much else it seems, can be funded simply by borrowing. And one of the main sources of borrowing, if not the the main source, is apparently the Bank of England: that is, all we need do is have government go running to the BoE and ask for tens of billions, with government giving the BoE bits of paper called “bonds” (effectively IOUs).
Then, as if by magic, government can apparently spend tens if not hundreds of billions on loads of lovely GND stuff: wind farms, solar panels, better home insulation and all the rest of it.
Now I suspect most readers will have spotted the snag here, or at least they’ll be muttering that old phrase “if it sounds too good to be true, it probably is”.
One snag is that it’s government that owns the BoE! That is, the BoE is simply part of the government machine. Thus the above mentioned bits of paper (bonds) which government gives the BoE are an irrelevant administrative detail: they are of no economic consequence. Indeed, government does not need to go running to its central bank to come by money: in the First World War, the UK Treasury actually did some money printing.
Put another way, the large pile of bonds which the BoE (and other central banks) now hold as a result of QE are little more than a charade: they could all perfectly well be scrumpled up and thrown on a fire, as many people have pointed out, including me in a letter in the Financial Times.
Or put it yet another way, the “government borrows from central bank and spends billions” carry on boils down to, or nets out to “government as a whole (including the CB) prints billions and spends it”.
In contrast, the important economic effect of the above “borrow and spend” exercise, is (prepare to be amazed) . . . the actual spending!! That is, firms up and down the country would find themselves buried under a pile of new orders for wind farms and other stuff: orders which they couldn’t possibly fulfil, given the astronomic sums that need to be spent on the GND. The result would be hyperinflation.
The only exception, or partial exception to the latter hyperinflation problem would come where the economy had a large amount of spare capacity. In that case, firms would welcome the new orders and would use them to take on members of the dole queue.
Unfortunately unemployment is currently at near record lows (both in the US and UK), thus the economy has little or no spare capacity.
Of course it can always be argued that a bit more output can be squeezed out the economy by better training and similar. But if the amount of training and education is currently sub-optimal, then it ought to be increased anyway: that is, the latter training point has nothing specifically to do with the GND. Plus, given the number of graduates that end up working at MacDonalds, it is debatable as to whether the amount of education is currently inadequate.
Borrowing from pension funds etc.
Apart from borrowing from the BoE, Pettifor claims pension funds and insurance companies would be attracted by the GND bonds. She also mentions commercial banks.
No doubt the latter three types of institution would be attracted, but trouble is that they’re already lending what they regard as the optimum amount at current rates of interest. Put another way, to induce them to lend more interest rates would need to rise. But that would push up interest rates in general, which would hit every mortgagor in the country: in effect, every mortgagor would pay what amounts to more tax - exactly what Pettifor claims is not needed to fund the GND.
What else can borrowing pay for?
In her article, Ann Pettifor makes much of the fact that the loans needed to fund the GND can be paid back fairly quickly because GND spending raises numbers employed, which in turn raises tax revenues.
Well if that’s the case, then there must be loads of other projects costing tens of billions which can be similarly funded: indeed she herself claims in her article that Kennedy’s Moon shot and the £30bn UK HS2 rail project are or were funded via borrowing.
But why stop there? Since any public spending funded via borrowing can apparently be paid back fairly quickly via the tax revenues coming from the extra jobs created, why don’t we just abolish all taxation and pay for everything via borrowing!! Instant riches for every household in the country!
If you haven’t started to smell a rat by now, then your sense of smell must be severely defective.
The flaw in her argument is that when government spends more money there shouldn't be and normally isn't any great increase in numbers employed. To illustrate, if an extra few billion are spent on the HS2 rail project, clearly that project creates jobs. But if as a result, total numbers employed for the country as a whole rise, then it logically follows that total numbers employed before the project got going must have been less than was possible!
Of course governments often don’t make a good job of keeping employment at the maximum level possible. But they do try! So normally when governments decide to spend a few billion extra, they assume (sometimes rightly and sometimes not) that spending in other sectors of the economy will have to decline by a similar amount. So they raise taxes on alcohol, tobacco or whatever to pay the latter extra spending.
Moreover, given the fact that unemployment is currently near record lows, it looks like the assumption that total numbers employed cannot be raised just at the moment in the US or UK is approximately right, if not “spot on” right.
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