Transforming an economic system that threatens earth’s life support systems.

This is an excerpt from a Green New Deal Report published today, 20th September, 2019 - the day children and their supporters around the world demanded urgent action on the climate emergency. The Green New Deal Report is co-authored by PRIME’s director, Ann Pettifor, and accompanies the publication of Bill tabled in parliament by Caroline Lucas MP (Green Party) and Clive Lewis MP (Labour Party).

Momentum is growing worldwide for a comprehensive Green New Deal that will transform our economy, society, and almost every aspect of life in Britain: from the way we produce and consume energy, grow the food we eat, travel, work, and cool and heat our homes.

An economic system that has driven us to disaster.

For more than fifty years the global economy has endured frequent and recurring financial crises, debt inflations and deflations, economic slumps and booms, volatility and instability. While economic activity has expanded it has increasingly become commodified, privatised and marketised. This economic expansion (often defined as ‘growth’ by economists) has been driven by easy (deregulated) and costly credit; credit that is created effortlessly but demands high rates of return (interest) and is highly extractive. Deregulated credit that has been used to expand production and consumption on a global scale. This expansion has led to intensified exploitation of both people and of the Earth’s finite resources.

Since the 1960s, the interests of private wealth, represented by Wall Street and the city of London, have, by corrupting democratic political processes and enforcing financial deregulation and increased globalisation, effectively usurped the role of democratic governments in managing both the international economy, but also domestic economies. As Alan Greenspan, once governor of the US federal reserve noted, the world is now governed by markets – or more precisely, by private individuals active in global capital markets. “national security aside, it hardly makes any difference who will be the next President”, he once said.7 The globalised economy is now effectively governed by a small group of speculators in the private finance sector. They decide whether capital should flow in or out (with sudden stops and starts) from an economy; what the value of a nation’s currency should be; what rates of interest should prevail – and which governments should be supported or attacked and destabilised.

As a result, our economies are now effectively governed by private, not public authority; the direction set by Wall Street and the city of London and not managed by elected, democratic governments. This has led – as the deregulated international system did in the 1920s and 30s – to political insurgencies across the world, as restless populations demand protection from the ruthless exploitation of market forces. Economies are stricken with deprivation, unemployment and under-employment, low wages coupled with obscenely high levels of wealth and levels of inequality, severe political tensions, trade wars and the rise of right-wing extremism and authoritarianism in all the major economies – in the global north and the global south. Again, as in the 1930s, there is everywhere fear of more wars – fought now with remote, sophisticated, and hugely destructive weapons.

Worse, human economic activity has reached such a scale that it has led to the degradation of the earth’s, and humanity’s complex life support systems: the atmosphere, oceans, land surface and diverse life forms. As the journalist George Monbiot argues, if just one of those life support systems were to fail – soils, aquifers, rainfall, ice, the pattern of winds and currents, biological diversity – life on earth could come to an end.

But things need not be this way. Our international financial system and our domestic economies can be managed and made sustainable. They need not be left to the destructive market forces unleashed by financialised capitalism. Governments, communities and individuals can all play their part in protecting and sustaining a liveable planet. But to do so we must once more regulate and manage the forces unleashed by the neoliberal ideology of Friedrich Hayek, Milton Friedman and their followers.

Changing the boundaries of the possible

Tackling earth systems breakdown requires the kind of urgent action that governments would take in a time of war. It needs us to expand our horizons, and our sense of what is possible – what Greta Thunberg calls ‘cathedral thinking’.8 The Green New Deal is cathedral thinking that will not just address the climate crisis, it will treat the crisis as an opportunity to end the injustice of inequality and economic insecurity, by creating millions of jobs and a more stable and just economy.

To implement the Green New Deal – to transform the economy away from dependence on fossil fuels – the government will, for example, have to manage the transition away from oil and other fossil fuels, to prevent further global heating. Owners and shareholders of fossil fuel companies will demand compensation, and those affected by any loss of employment will have to be protected. The task will be complex, but other countries have shown what is possible. Following a decision in 2012, Germany has permanently shut down eight of its 17 reactors and pledged to close the rest by the end of 2022. As one of the world’s biggest consumers of coal, Germany has also agreed to shut down all 84 of its coal-fired power plants over the next 19 years, to meet its international commitments to ending climate breakdown.9 to finance that transition the German government plans to spend 40 Billion euros to mitigate the impact on coal regions.10 In 2018, the Spanish government announced that it would close its remaining coal mines within a year, after an agreement was reached with unions for a 221-million-euro investment package for the mining regions combining early retirement for some miners, environmental restoration work in pit communities, and re-skilling schemes for green industries.11

Transforming the economic system

If Britain is to undertake a similar transformation, the government will need to mobilise large sums to spend on that single, major task of ending our dependence on fossil fuels like oil as part of the wider transformation proposed in the Green New Deal. But given the way in which our current financial system is structured, decisions about the availability and mobilisation of finance will not be under the purview of the state; but will largely be in the hands of private capital market investors. Their interests are primarily to protect their own wealth and interests and that of other investors – the 1%. They have no mandate to defend and protect the public interest. The public interest, the security of the nation can only be defended by elected governments.

To manage the financial system to ensure sufficient finance is available to design and maintain a steady state economy that delivers well-being for all within ecological limits, it will be necessary for governments to do what they would do in case of war. Bring offshore capital onshore: both to manage capital flows and ensure their stability; but also, to manage the exchange rate and interest rates as applied in the domestic economy. Above all, managing capital flows will help a government ensure taxes are not evaded by big mobile corporations.

The primary purpose of bringing offshore capital back onshore is to empower democratic governments, and ensure that they, and not markets, are in “the driving seat” when it comes to major economic policy decisions. With those economic levers managed by the state it will be much easier for governments to raise and spend the finance needed to maintain the life support systems upon which we all depend for our existence.

We know this from the experience of the original New Deal. President Roosevelt’s first action as a newly inaugurated President was to suspend the gold standard – a globalised monetary system governed by private authority: effectively, wall street. Under the gold standard the United States government lost the ability to manage the exchange rate – the value of the dollar as well as other economic levers. After years of austerity under President Hoover, on the night of his inauguration in 1933, Roosevelt first ordered wall street banks and later, American citizens, to hand over gold in their possession to the us treasury. From there on the value of the currency was not going to be measured relative to bars of gold, but rather to the health of the us economy. This radical and courageous decision began the dismantling of the gold standard, which ended an era in which the international financial system had been governed by private authority. Once Roosevelt’s administration moved into “the driving seat” it became possible to manage the exchange rate of the dollar, but also to raise the finance and undertake the government spending needed to end the massive unemployment crisis in the United States and to address its ecological crisis: the dust bowl. Given the scale of threats posed by earth systems breakdown, our government will have to act with even greater resolution.

In the United States, the 2020 presidential candidate, Bernie Sanders has pledged to tackle the climate crisis and committed to investing about $16 trillion over fifteen years12 in renewable energy, ending unemployment, supporting family farms and restoring justice for frontline communities. This is a modest amount relative to the size of the us economy which has an annual GDP (income) of about $20 trillion. John McDonnell MP has vowed spend more relative to the size of the UK economy. Labour plans establish a ten-year £250 billion transformation fund to support the transition

to green energy. In other words, the plan is to finance and spend just over one per cent of UK GBP (£25 billion) in public investment. This will be complemented by a network of regional development banks that will channel a further £250 billion of private sector savings into the transformation fund.13 This is a crucial step in the right direction, although some organisations believe we could go even further. A range of organisations including Greenpeace, Islamic Relief, CAFOD and the Women’s Institute have called for government spending of at least two per cent of British GDP (at least £42 billion per annum) every year for the next three years.14

Because there is so little time and the transformation needed is so urgent, we are more ambitious. We propose to transform for example our energy, transport and land use systems over the next ten years by investing up to five per cent of Britain’s annual GDP – or £100 billion annually. The key point here is not the financing, but the spending of that finance. The shortage of ‘shovel ready’ projects casts doubt on whether those large sums could be spent immediately. So, we propose that the spending is tapered over several years, with £50 billion spent in year one,

£75 billion in year two, rising to £100 billion a year invested for the remaining eight years. This balances the readiness of projects with the fact that in terms of the earth’s life support systems, and because of the threat posed to our survival by the cumulative impact of emissions, what matters most is what we do in the near future.

As the emergent challenges of actually delivering rapid transition on this timeframe become clear it is possible that an even higher level of funding could be needed

– or if, as could well happen, several positive and self-reinforcing dynamics are created by the process of change, lower sums would be needed. The most important point is that there is no excuse, economic or political, not to invest in a Green New Deal. Resources can be made available the results of which will be a better, more dynamic, employment rich and low carbon UK economy. Not to invest in a Green New Deal would be, in fact, to inflict great economic, environmental and social self-harm on the nation.

Financing the Green New Deal

Broadly speaking, there are two sources of finance. The first is credit and the second is savings.

As we all know from the use of our credit cards, savings do not finance the spending on our card. There don’t need to be any funds in our bank account before we use a credit card to spend. Instead credit is a promise to pay, and payment for the use of credit is made later when income arrives in a bank account. Savings by contrast are the surplus generated as a consequence of investment or employment when that activity generates income. Savings, unlike credit, do not predate spending, investment or employment. They are a consequence of economic activity.

When a government uses credit to spend, the consequence of that investment is (or should be) the creation of employment and the generation of profits for a range of enterprises. Employment generates income, investment generates profits. Both income and profits generate government tax revenues. In other words, tax revenues are a consequence of spending or investment. They do not directly finance that investment. Instead governments use income from taxation to help pay back the borrowing that financed the investment. That is why the creation of good, skilled and well-paid jobs are so important to ‘balancing the books’ and managing the public finances.

There are two major sources of credit. The first is the commercial banking system. The second is the central bank, the Bank of England in the UK. The commercial banking system provides credit at a ‘micro’ level – i.e. For individuals and firms in normal times, although in these exceptional times, this credit is increasingly provided by the central bank, too. The central bank provides credit at a ‘macro’ level for big institutions like banks, pension funds and insurance companies, but also indirectly, for government.

To raise the finance for the Green New Deal the government would have to access credit, but also savings. We know from the experience of the second world war that commercial banks provided credit to the government in the form of treasury deposit receipts. They could do so again to help finance the Green New Deal. But the government also has access to Bank of England credit (currently known as QE) when the central bank deliberately purchases government bonds (promises to pay) as it has done since the great financial crisis of 2007–08. (the Bank of England has purchased about £435 Billion of government bonds at very low rates of interest.15 These purchases helped finance the government’s borrowing and at the same time lowered rates of interest for all borrowers.)

The second source of finance for government is the nation’s savings. Those individuals and institutions (like pension funds) that hold savings are keen to invest safely and for several reasons. First, to ensure the savings are available for future spending on, for example, pension payments. But savers may also want to draw down their funds immediately, as cash. Third, savers may wish to make a quick profit from their savings, and therefore to invest them in risky, speculative investments that pay higher rates.

The government could issue bonds that would meet all these requirements – short- term for cash, long-term for security, and bonds for investment in riskier activities hat issue higher rates of interest. By this means government can help channel our savings into the urgent need to transform our economy away from fossil fuels – while at the same time providing future income (interest) to savers.

Managing the flow: co-ordination between the Bank of England, the treasury and the debt management office

Government can fund the Green New Deal, both directly and by encouraging private investment, but if we are to raise the finance needed, then we will need to transform the way in which the British financial system operates. Under recent governments, monetary policy (policy for managing the banking system, interest rates and inflation) and fiscal policy (policy for managing taxation and tax revenues) have diverged. They are conducted in opposition to each other. Monetary policy is expansionary and helps those that benefit from the Bank of England’s QE, mainly the rich. Fiscal policy, which benefits the great majority that use public services, is by contrast, contractionary.

The decision to manage the system by setting monetary and fiscal policy in opposition to each other is ideological. The result is predictable: the rich have got richer since the crisis and the rest of us, the ’99%’, have had to endure falls in both real wages and the social wage, and declining living standards. Under the Green New Deal this situation will be transformed. Monetary and fiscal policy will work in tandem to finance and stabilise the economic system, as well as the ecosystem. This will require changes to the Bank of England’s mandate, and it will require greater coordination between the treasury, the debt management office (which issues government bonds) and the Bank of England.

There will also have to be greater regulation of the banking system and support for the creation of local, community banks. Our pensions funds – in other words, the nation’s savings, will be deployed in sustainable investment that will secure the future we will need to be able to guarantee, if we are to be able to draw down our pensions.

We know from the experience of Roosevelt’s New Deal and from the Bretton Woods era, but also from our own history, that such a transformation of the economy is entirely possible. And thanks to the sound monetary system developed in Britain over the centuries, backed by our public institutions (the system of law and contract, the regulatory, accounting and taxation systems) we know that investment in the Green New Deal will pay for itself. As the economist John Maynard Keynes argued, what we can do, we can afford. There are limits of course, to what we can do. But within those limits we can afford what we can do. At a time of climate crisis, that must also mean that what we need to do, we can afford.

Mobilising our pensions and savings: National and Regional Investment Banks

Further funding for the Green New Deal, including funding provided through our pension funds and savings, could be channelled into a newly created national investment bank, designed to funnel investment into the transformation of our physical and social infrastructure as well as technological research and development for the Green New Deal while rebalancing the economy away from London and the south east. The banks would be funded through a combination of green pension mechanisms, green ISAs and green bonds. A complementary network of regional investment banks could make sure that resources are available for the transformation of our cities and regions.

Other measures could be used to encourage pension funds into the Green New Deal. Each year the government provides around £50 billion as an annual subsidy to pension saving through the income tax, corporation tax and national insurance systems.16 This could be used to leverage additional investment for the Green New Deal, by adding conditions to the tax relief provided by government. One way would be to require that in exchange for those pension tax reliefs 25 per cent of all new pension contributions must be invested in funds, bonds and other investments that in turn fund the Green New Deal. These could be issued by government, local authorities or the national investment bank. Companies could also issue shares and bonds to be approved for this use. This could raise at least £20 billion a year for the Green New Deal, based on the estimated level of current contributions.17