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Economics and the Green New Deal

Denis Pombriant
Jun 15, 2019 · 9 min read

A successful Green New Deal won’t look like its namesake, the Depression era, Franklin D. Roosevelt coined, New Deal. The original new deal was a program tailor made to the specifications of British economist John Maynard Keynes who advocated government spending during a recession effectively making the government the buyer of last resort. Keynes’ formulation holds that putting money into the hands of the working and middle classes would stimulate a depressed economy by giving people the means to buy things. New Dealers liked to call this “pump priming.”

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Economist John Maynard Keynes was quite influential.

Giving money to working- and middle-class people supplements slack demand because these people spend all, or nearly all, of their income on living expenses while wealthier people don’t have to spend so much of their resources, keeping some in reserve. Thus, the thinking is that giving tax cuts to wealthy people is not as economically stimulative as providing unemployment insurance to those less well off.

Pump priming in action

After the economic collapse triggered by the mortgage crisis in 2007–08, Western Democracies performed a natural experiment. It wasn’t controlled the way a scientist would set up an experiment in a lab, but the practical effects were similar because two large economies decided to take very different strategies in the face of recession. The US applied a Keynesian stimulus, spending nearly one trillion dollars to keep the economy from going into recession. It bought things like infrastructure projects and while the effort was later judged too small, it blunted the worst effects of the downturn. In contrast, European Union used austerity and the US economy had a shallower slump and recovered well ahead of the EU.

According to the US National Bureau of Economic Research (the official scorekeeper of U.S. recessions) the recession began in December 2007 and ended in June 2009, a period of eighteen months. While the recession affected most countries, it affected them disproportionately. According to the St. Louis Federal Reserve Bank, GDP growth fell in North America by 2.90 percent from 2008 to 2009 but in Western Europe it dropped 10.18 percent producing a much more severe shock. Eastern Europe was particularly hard hit and its GDP dropped 20.80 percent in the same time frame.

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GDP growth during the Great Recession.

Prior to Roosevelt, the Hoover administration promoted austerity policies that it felt would rectify the economy but in fact only made things worse. As Keynes stated in 1937, “The boom, not the slump, is the right time for austerity at the Treasury.”

Managing a capitalist economy in good economic times is not rocket science. It involves the austerity that Keynes spoke of translated as removing government stimuli and letting the free market run.

This brings us to the need for a model of the Green New Deal that fits the times. How does a program modeled on stimulus spending apply to times of sufficiency? Would additional stimulus in an economy operating at near capacity cause inflation which would eventually result in economic calamity?

Yet, the idea that government might need to play a role in a movement as fundamental as remodeling the global economy, as the Green New Dealers have suggested, makes sense. Moving the economy from a foundation based on fossil fuels and consumption to one working on renewable energy and a more communitarian outlook is a heavy lift. At the same time though, few tax payers would want to see government paying for things that the private sector is capable of paying for. We can clearly see the beginning and end points of the switch, but the middle transition-state is blurred.

What’s the right Green economic model?

The notion that government should take a highly stimulative role in changing the economy as the Green New Dealers envision needs to be examined. Ultimately, the model for the transition anticipated in good economic times may look much more like the 1990s than the 1930s. For this we need to look at how the Clinton Administration encouraged the dot-com boom.

1990s timeline

The top marginal tax rate for high-income people in 1980 was 70 percent which Ronald Reagan reduced through two tax cuts (1981 and 1986) to a low of 28 percent for top earners; he also raised the bottom tax bracket from 11 percent to 15 percent. This resulted in huge budget deficits that became unsustainable and the Clinton administration raised the top rate to 39.6 percent in 1993. That’s important for this story because it struck fear into the hearts of people whose top rates went from 28 percent to 39.6 percent. Was the 1993 increase the only or last tax increase or might they be looking at a return to the 70 percent extreme?

Whether the tax increases signed by Clinton stimulated what happened next is difficult to say. There is a sensible hypothesis that, faced with having money taken by either higher taxes or a failed investment, most rich people will opt for the investment. The thinking goes that while losses to the tax man are guaranteed, losses from investments in new technology companies are only probable. Who knows? An investment might turn into a spectacular success which would then provide the taxpayer with a very happy problem.

As it turns out, the dot-com boom of the late 1990s turned into a bonanza for investors that took the bet and invested rather than pay. Moreover, government would rather see the investments and all of the associated economic activity, such as generating private sector jobs, over simply collecting taxes because the stimulus provided often outweighs the revenues from direct taxation. It’s called the multiplier effect.

As the graphic below shows, increases in venture capital investment began to grow significantly in the late 1990s, just as the tax increase began to bite. Whether the tax increase had anything to do with the increases in investments in VC funds is difficult to say but there seems to be a good correlation. The dot-com boom represents a long economic upswing and the fallout from the Internet era and it is still being felt today.

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VC investments spiked around the dot-com boom, helping expand it.

The Dot-com Boom’s after effects

The bolus of cash supplied through venture capital enabled private industry to invest in the technologies, products, companies, and infrastructure the dot-com boom needed. One example will suffice.

The Internet took off in the 1990s creating significant demand for computer servers and networking infrastructure to transport data. The computer hardware companies of the era could deliver the servers but someone else needed to provide the long-distance fiber optic network that the disruptive innovation of the Internet required. That job fell to numerous telecommunication companies that buried as much fiber-optic cable as they could to connect cities, towns and coastlines. They deployed so much fiber-optic cable that a new word entered the lexicon of the time: “dark fiber.”

Fiber-optic cable is made of pristine glass that transmits laser light as an information carrier, a technology that’s better than standard copper wire transmitting electric signals that the telephone system had relied on since its inception. Dark fiber initially carried no signals because it was intentionally installed for future demand. It seemed wasteful at the time, but it was the most economic approach compared to digging more trenches and laying more cable later.

This was all done with private funding. Venture capital sponsored the startups and more conventional financing through the public markets enabled established telecommunication providers to run cable. The result was the infrastructure that enabled the Internet boom. We can directly trace numerous advances in business and culture to these actions such as better cable TV, reliable video conferencing and many other kinds of communication but especially cloud computing which is the dominant form of consumer and enterprise computing today. A few years after the dot-com bust, social media came into being in part because there was cheap and reliable communication at first between desktop users and soon after through the wireless Internet which used fiber optic cable in the background.

GND and lessons for today

All of this suggests some important points,

1. The free enterprise system can raise large sums of money to make big projects happen. Free enterprise creates jobs and new industries that take advantage of technological disruptive innovations. Government doesn’t need to finance everything.

2. Government can play a role at the margins by setting standards and enforcing regulations. For instance, today’s technologies use a variety of radio spectra enabling computers to communicate and those standards are set by organizations like the Federal Communications Commission or FCC, a New Deal agency.

The Green New Deal need not be a carbon copy of the New Deal of the 1930s. The objectives of the GND such as creating good-paying jobs for working- and middle-class workers can be satisfied simply by focusing private investment. But how do we do that?

If the 1990s example is a model, we need to consider modifying the taxation system to incentivize high earning and high net-worth individuals and corporations to invest their capital in the green industries of the future. Green energy provisioning will be a huge set of industries in the years ahead and those who invest in them will be richly rewarded especially as the fossil fuel paradigm begins to collapse. The same is likely with industries that manage water resources so that crops can get sufficient irrigation and floods don’t wipe out a growing season.

And of course, the auto industry

There were more than 270 million cars on US roads in 2017 and that number is rising. Every one of them will need to be replaced with cars that use electricity instead of fossil fuels. Last year the US produced more than 17 million cars and light trucks while the global total exceeded 70 million. At current rates simple math says that it will take 16 years to replace every American car. But many cars may not last that long depending on their use, so the future of auto manufacturing seems secure.

Additionally, more green energy, more people living in cities, and the decrepit state of mass transportation in the US suggests a big opportunity for construction companies and manufacturers of light rail vehicles. There’s also significant opportunity for industry formation and jobs creation in building out a renewable energy infrastructure.

Of course, this is just scratching the surface. The first part of an economic wave (called a K-wave) associated with a disruptive technical innovation, such as this, lasts upwards of 30 years suggesting a bright future for middle- and working-class people who are under appreciated in the current economy.

Omnibus legislation

During the New Deal the government initiated a large number of agencies to help specific areas of the economy, which became known as the “Alphabet Soup.” The Civilian Conservation Corps (CCC) employed upwards of 2 million men at its peak planting trees, building wilderness roads, and upgrading national parks. The TVA or Tennessee Valley Authority brought electricity and flood control to the valley of the Tennessee River, and the WPA or Works Progress Administration provided jobs to the unemployed in a variety of occupations.

The point is that the New Deal was an umbrella term for a host of smaller efforts. Roosevelt strongly believed in “Bold, persistent experimentation,” through these programs. He was under no illusions that every initiative would be wildly successful and by having many smaller efforts it was a relatively simple thing to admit a failed experiment and redeploy resources.

That attitude is so far missing from the Green New Deal and it is attracting negative energy from conservatives and others concerned that the GND will become a socialist boondoggle. Green New Dealers will help their cause significantly by clarifying their approach, something they’ve been slow to do.

Summing up

The Green New Deal needs two things to be successful. A way to pay for its bold plans and a focus on the essentials of fixing the energy paradigm while removing carbon from the environment. (This article does not focus on carbon, but others do.) To get political for a moment, one political party focuses on tax cuts that don’t often benefit the nation as a whole and it’s doubtful that any meaningful legislation that would stimulate investment directed at sustainability would pass in the current political environment.

The issue now is to put forward a set of proposals that deal with the core problems and not to give the impression that the Green New Dealers are seeking a government funded stimulus. This isn’t the time for a stimulus, and it could too easily be dismissed as bad economic policy. The play right now is to set forth a vision of the future described above, to support sound economics, and to vote.

Dialogue & Discourse

News and ideas worthy of discourse.

Denis Pombriant

Written by

Researcher, author of multiple books including “The Age of Sustainability” about solutions for climate change. Technology, business, economics.

Dialogue & Discourse

News and ideas worthy of discourse. Fundamentally informative and intelligently analytical.

Denis Pombriant

Written by

Researcher, author of multiple books including “The Age of Sustainability” about solutions for climate change. Technology, business, economics.

Dialogue & Discourse

News and ideas worthy of discourse. Fundamentally informative and intelligently analytical.

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