Originally published on ellenbrown.com
As alarm bells sound over the advancing destruction of the
environment, a variety of Green New Deal proposals have appeared in the
US and Europe, along with some interesting academic debates about how to
fund them. Monetary policy, normally relegated to obscure academic
tomes and bureaucratic meetings behind closed doors, has suddenly taken
center stage.
The 14 page proposal
for a Green New Deal submitted to the US House of Representatives by
Congresswoman Alexandria Ocasio Cortez does not actually mention Modern
Monetary Theory, but that is th it’s e approach currently capturing the
attention of the media – and taking most of the heat. The concept is
good: abundance can be ours without worrying about taxes or debt, at
least until we hit full productive capacity. But the devil is in the
details….
MMT advocates say the government does not need to collect taxes before it spends. It actually creates new money
in the process of spending it; and there is plenty of room in the
economy for public spending before demand outstrips supply, driving up
prices.
Critics, however, say this is not true.
The government is not allowed to spend before it has the money in its
account, and the money must come from tax revenues or bond sales.
In a 2013 treatise called “Modern Monetary Theory 101: A Reply to Critics,”
MMT academics actually concede this point. But they write that “these
constraints do not change the end result,” and here the argument gets a
bit technical. Their reasoning is that “The Fed is the monopoly supplier
of CB currency [central bank reserves], Treasury spends by using CB
currency, and since the Treasury obtained CB currency by taxing and
issuing treasuries, CB currency must be injected before taxes and bond
offerings can occur.”
The counterargument, made by American Monetary Institute researchers among others, is that the central bank is not
the monopoly supplier of dollars. The vast majority of the dollars
circulating in the United States are created, not by the government, but
by private banks when they make loans.
The Fed accommodates this process by supplying central bank currency
(bank reserves) as needed; and this bank-created money can be taxed or
borrowed by the Treasury before a single dollar is spent by Congress.
The AMI researchers contend, “All bank reserves are originally created
by the Fed for banks. Government expenditure merely transfers (previous)
bank reserves back to banks.” As the Federal Reserve Bank of St. Louis puts it,
“federal deficits do not require that the Federal Reserve purchase more
government securities; therefore, federal deficits, per se, need not
lead to increases in bank reserves or the money supply.”
What federal deficits do increase is the federal debt; and while the
debt itself can be rolled over from year to year (as it virtually
always is), the exponentially growing interest tab is one of those
mandatory budget items that taxpayers must pay. Predictions are that in
the next decade, interest alone could add $1 trillion to the annual
bill, an unsustainable tax burden.
To fund a project as massive as the Green New Deal, we need a
mechanism that involves neither raising taxes nor adding to the federal
debt; and such a mechanism is actually proposed in the US Green New Deal
– a network of public banks. While little discussed in the US media,
that alternative is being debated in Europe, where Green New Deal
proposals have been on the table since 2008. European economists have
had more time to think these initiatives through, and they are less
hampered by labels like “socialist” and “capitalist,” which have long
been integrated into their multiparty systems.
A Decade of Gestation in Europe
The first Green New Deal proposal was published in 2008 by the New Economics Foundation on behalf of the Green New Deal Group in the UK. The latest debate
is between proponents of the Democracy in Europe Movement 2025
(DiEM25), led by former Greek finance minister Yanis Varoufakis, and
French economist Thomas Piketty, author of the best-selling Capital in the 21st Century. Piketty recommends funding a European Green New Deal by raising taxes, while Varoufakis favors a system of public green banks.
Varoufakis explains
that Europe needs a new source of investment money that does not
involve higher taxes or government deficits. DiEM25 proposes for this
purpose “an investment-led recovery, or New Deal, program … to be
financed via public bonds issued by Europe’s public investment banks
(e.g. the new investment vehicle foreshadowed in countries like Britain,
the European Investment Bank and the European Investment Fund in the
European Union, etc.).” To ensure that these bonds do not lose their
value, the central banks would stand ready to buy them above a certain
yield. “In summary, DiEM25 is proposing a re-calibrated real-green
investment version of Quantitative Easing that utilises the central
bank.
Public development banks already have a successful track record in
Europe, and their debts are not considered debts of the government. They
are financed not through taxes but by the borrowers when they repay the
loans. Like other banks, development banks are moneymaking institutions
that not only don’t cost the government money but actually generate a
profit for it. DiEM25 collaborator Stuart Holland observes:
While Piketty is concerned to highlight differences between his
proposals and those for a Green New Deal, the real difference between
them is that his—however well-intentioned—are a wish list for a new
treaty, a new institution and taxation of wealth and income. A Green New
Deal needs neither treaty revisions nor new institutions and would
generate both income and direct and indirect taxation from a recovery of
employment. It is grounded in the precedent of the success of the
bond-funded, Roosevelt New Deal which, from 1933 to 1941, reduced
unemployment from over a fifth to less than a tenth, with an average
annual fiscal deficit of only 3 per cent.
Roosevelt’s New Deal was largely funded through the Reconstruction
Finance Corporation (RFC), a public financial institution set up earlier
by President Hoover. Its funding source was the sale of bonds, but
proceeds from the loans repaid the bonds, leaving the RFC with a net profit.
The RFC financed roads, bridges, dams, post offices, universities,
electrical power, mortgages, farms, and much more; and it funded all
this while generating income for the government.
A System of Public Banks and “Green QE”
The US Green New Deal envisions funding with “a combination of the Federal Reserve [and] a new public bank or system of regional and specialized public banks,”
which could include banks owned locally by cities and states. As Sylvia
Chi, chair of the legislative committee of the California Public
Banking Alliance, explains on Medium.com:
The Green New Deal relies on a network of public
banks — like a decentralized version of the RFC — as part of the plan to
help finance the contemplated public investments. This approach has
worked in Germany, where public banks have been integral in financing
renewable energy installations and energy efficiency retrofits.
Local or regional public banks, says Chi, could help pay for the
Green New Deal by making “low-interest loans for building and upgrading
infrastructure, deploying clean energy resources, transforming our food
and transportation systems to be more sustainable and accessible, and
other projects. The federal government can help by, for example,
capitalizing public banks, setting environmental or social
responsibility standards for loan programs, or tying tax incentives to
participating in public bank loans.”
UK professor Richard Murphy adds another role for the central bank – as the issuer of new money in the form of “Green Infrastructure Quantitative Easing.” Murphy, who was a member of the original 2008 UK Green New Deal Group, explains:
All QE works by the [central bank] buying debt issued by
the government or other bodies using money that it, quite literally,
creates out of thin air. … [T]his money creation process is … what
happens every time a bank makes a loan. All that is unusual is that we
are suggesting that the funds created by the [central bank] using this
process be used to buy back debt that is due by the government in one of
its many forms, meaning that it is effectively canceled.
The invariable objection to that solution is that it would act as an
inflationary force driving up prices, but as argued in my earlier
article here, this need not be the case. There is a chronic gap between debt and the money available to repay it that actually needs to be filled with new money every year to avoid a “balance sheet recession.” As UK Prof. Mary Mellor formulates the problem in Debt or Democracy (2016), page 42:
A major contradiction of tying money supply to debt is
that the creators of the money always want more money back than they
have issued. Debt-based money must be continually repaid with interest.
As money is continually being repaid, new debt must be being generated
if the money supply is to be maintained.… This builds a growth dynamic
into the money supply that would frustrate the aims of those who seek to
achieve a more socially and ecologically sustainable economy.
In addition to interest, says Mellor, there is the problem that
bankers and other rich people generally do not return their profits to
local economies. Unlike public banks, which must use their profits for
local needs, the wealthy hoard their money, invest it in the speculative
markets, hide it in offshore tax havens, or send it abroad.
To avoid the cyclical booms and busts that have routinely devastated
the US economy, this missing money needs to be replaced; and if the new
money is used to pay down debt, it will be extinguished along with the
debt, leaving the overall money supply and the inflation rate unchanged.
If too much money is added to the economy, it can always be taxed back;
but as MMTers note, we are a long way from the full productive capacity
that would “overheat” the economy today.
Murphy writes of his Green QE proposal:
The QE program that was put in place between 2009 and
2012 had just one central purpose, which was to refinance the City of
London and its banks.… What we are suggesting is a smaller programme …
to kickstart the UK economy by investing in all those things that we
would wish our children to inherit whilst creating the opportunities for
everyone in every city, town, village and hamlet in the UK to undertake
meaningful and appropriately paid work.
A network of public banks including a central bank operated as a
public utility could similarly fund a US Green New Deal – without
raising taxes, driving up the federal debt, or inflating prices.
_______
This article was first published under a different title on Truthdig.com. Ellen Brown is an attorney, founder of the Public Banking Institute, and author of twelve books including Web of Debt and The Public Bank Solution. A 13th book
titled Banking on the People: Democratizing Finance in the Digital
Age is due out soon. She also co-hosts a radio program on PRN.FM called “It’s Our Money.” Her 300+ blog articles are posted at EllenBrown.com.
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