Friday, 6 December 2019

Richard Murphy and Colin Hines’s way of funding the Green New Deal.

Murphy & Hines have just published their ideas on this subject in a work entitled “Funding the Green New Deal”.

I’m all for the GND, but Murphy & Hines’s (M&H) way of funding it leaves a bit to be desired. Basically they claim that funds can be nicked from other types of investment: in particular they advocate changing the rules for ISAs and pension funds so that a proportion of the savings currently going to the latter two are diverted to bonds to fund the GND, and certainly that’s possible.

Problem though, is that would starve the banks, firms etc which rely on ISAs and pension funds for money for investment, which would push up interest rates. And that in turn would benefit creditors / the rich while hitting borrowers, e.g. those with mortgages.

That wouldn’t be the end of the world given that in the 1990s UK mortgagors were paying nearly three times the rate of interest they pay nowadays, and strange to relate, the sky did not fall in in the 1990s. But M&H ought to be more open  about that interest raising effect.

The above “rate of interest raising” effect does not actually have anything specifically to do with ISAs or pension funds or any of the many other possible ways of diverting funds to the GND. To illustrate, if government just offered bonds to fund the GND at whatever rate attracted lenders in sufficient quantities, the inevitable effect would be a rise in interest rates and attract funds away from other types of investment.

Put another way, if government decides to borrow and spend an extra £Xbn a year, and assuming the economy is already at capacity (which it more or less is in the case of the UK in 2019), that extra spending is not permissible unless some form of spending cut is implemented so as to balance the extra spending. That cut can be brought about by a rise in interest rates or a rise in tax, for example.

And frankly it does not make a huge difference which one is chosen: if the interest rate rise option is chosen, then in effect it’s mortgagors and other borrowers who are induced to spend less. And mortgagors are pretty much the same collection of individuals as taxpayers, though clearly not exactly the same collection of individuals.

And finally, if the distribution of after tax income is what government thinks is optimum before implementing the GND, then funding the GND via borrowing will disturb that optimum set up (e.g. because mortgagors are worse off). Thus government will have to adjust tax on so called “unearned income” (on the rich) and subsidies for mortgages (if there are any) etc etc. 

Be simpler fund the GND via tax, and in a way to maintains what government thinks is the optimum distribution of after tax income, don’t you think?

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