The Greatest Self-imposed Constraint in the History of Humanity
We need to rethink money supply to address climate change.
Houston, we have a problem. It seems our planet is heating up, and we are either unwilling or unable to pay for the changes that need to happen to address this climate change. The consensus in the scientific community is that we are approaching a point of no return where any effort to reverse or mitigate climate change will be ineffective. This exact point in time is unknown, but conservative estimates suggest that within three decades we will have crossed the threshold. There have been ongoing discussions in the political and academic arenas about carbon taxes. It is clear that carbon taxes would be an effective mechanism for curbing carbon emissions. However, even 350.org’s Bill McKibben has publicly recognized the need for additional measures, most recently in a featured article on Yale Environment 360. It is starting to become apparent that the money supply may be the single greatest self-imposed constraint in the history of humanity. Below are the eight questions we should be asking right now.
1. What is the cost of addressing climate change? This is an easy question to answer assuming you know the method being used to address climate change. If we want to start by converting to 100% clean energy, we can calculate how much money it would take to do so. We simply multiply the number of units of dirty energy by the cost to convert them to clean energy, and this would give us the total cost of the transition. For example, if we have 15 Terawatts of energy infrastructure that we want to convert to clean energy infrastructure at an average cost of $1.5 per watt or $1,500 per kilowatt, it would cost $22.5 trillion. That might seem like a lot of money, because that is a lot of money.
Global investment in renewable energy is currently around $300 billion per year. And, it will likely increase to around $500 billion per year over the next three years. Therefore, in order to convert to 100% clean energy by 2035, we need to more than double the pace of investment in renewable energy.
15 TW x $1,500/kW = $22.5 trillion
$22.5 trillion/20 years = $1.125 trillion per year
If we wanted to make this conversion within the next 10 years, we would have to quadruple the rate of investment in renewable energy to over $2 trillion per year.
$22.5 trillion/10 years = $2.25 trillion per year
To put that in perspective, the United States federal budget is around $3.8 trillion per year. And, the estimate that was just calculated assumed no growth in energy demand and a low cost of conversion to clean energy. Also, that estimate doesn’t cover all greenhouse gas emissions, only the emissions from energy use. Agriculture is also a significant source of greenhouse gases. This means we will likely need to invest even more.
2. Do we have enough money to make such massive investments to address climate change?
There are two possible answers to this question. The first possible answer is “Yes, we do have enough money.” This means that we just need to start investing faster, and if we do, we will get to 100% clean energy in time. The second possible answer is “No, we do not have enough money.” This means that there is no possible way we could invest the needed amount of money in time. It is also important to note that there is a difference between inability and unwillingness to invest. And, both could justify a money supply increase.
If climate change was the only thing we cared about, and we were willing to abandon investments in other things, then it is conceivable that we could afford to make the appropriate investments over the next ten to twenty years. However, since we care about things like poverty, national security, healthcare, education, and transportation, it is highly unlikely that we will be able to bolster the appropriate amount of investment to address climate change given our time constraint of two to three decades.
We need to increase the amount of money we have to work with.
3. How much money should exist? On one end of the spectrum of choices, we have zero dollars. Zero dollars is the amount of money that would exist in a barter economy where goods and services are exchanged for other goods and services. On the other end of the spectrum, we have an ever-growing infinite amount of money that continues to increase as a result of endless economic expansion. On this end of the spectrum, we worry about things like price stability, hyperinflation, and currency devaluation. Somewhere in the middle of the spectrum, we have a sweet spot. At this sweet spot, the amount of money remains constant (or fluctuates very slightly) and satisfies all of the needs of the population. At this sweet spot, any major increase or decrease in the money supply causes unnecessary volatility in society. We should strive to operate around the sweet spot.
It is also very important to note that monetary economics has never included any notion of climate change. The Federal Reserve has only recently been considered a potential player in the climate change arena. If money is the tool that allows us to incentivize, negotiate, and incite action, then we have to consider how much money we need to be directed to solving this massive problem. Whether we decide to mitigate or adapt, it is clear that more money needs to exist to solve the riddle of climate change.
4. How much money currently exists in the world? According to the CIA World Factbook, the current global money supply is about $93.7 trillion. That is data from 192 countries. The largest money supply is China at roughly $21 trillion, and the second largest is the United States with roughly $12 trillion.
5. How do we know if increasing the money supply is necessary?
There are a couple indicators that we might be operating with an insufficient amount of money. One indicator is the epidemic of national debt. There are only five countries in the world that have zero debt. While debt is not inherently a bad thing, it does represent a significant shortfall in the amount of money necessary to maintain things like infrastructure, healthcare, education and security. The United States spends about $230 billion on servicing the national debt. Imagine if instead of servicing debt, that money was being used to mitigate climate change and shift to a more sustainable future.
There are also indicators of insufficient money supply at the local level. There are at least $200 billion in local tax referendums being voted on in November 2016. And, most of these are to help fill funding gaps for education and infrastructure. Perhaps the most telling tax referendum being voted on in November is the Fairfax County Meals Tax Referendum. Fairfax County is consistently ranked in the top three wealthiest counties in the country. And yet, Fairfax County Public Schools have had significant funding challenges since 2008. Americans have a long history of being averse to taxes, and yet elected officials are still making the case that more money is needed.
Another indicator of insufficient money supply is a noticeable increase in political polarization. The more we see stalemate situations particularly in the context of budget debates, the more likely it is that we are operating with an insufficient amount of money. When negotiations stop happening, we should consider what the potential implications of more money might be.
Some might argue that governments would have more to operate with if they reduce waste, fraud, and abuse, or if they tax more, or if they simply provide fewer services. These are valid arguments, but there are limits and counter arguments to each. Perhaps the best way to determine if increasing the money supply is necessary is to do extensive sensitivity analyses that show the effect of money supply on public finance and clean energy investment. New Zealand economist Bill Phillips built a hydro-mechanical computer in the 1940’s called the MONIAC. The machine was used to demonstrate and predict the flow of money through an economy. A modern version of the MONIAC could map and predict the flow of money to clean energy investments and also determine if more money is necessary. Also, the modern version would likely not be a hydro-mechanical computer. Instead it would be a sophisticated computer program that could be adjusted for sensitivity analysis by any policy maker.
6. If we increase the money supply, will inflation increase? No. In fact, it is more likely that if we don’t adequately address climate change, there will be major increases in price volatility and market failures. There are legitimate concerns that a mismanaged money supply increase will cause speculative stock market players to drive stock prices up. However, those concerns can be easily addressed by a slow money supply increase and strong government regulation of Wall Street. Some will also suggest that the quantity theory of money guarantees that there will be an increase in inflation. This merits some discussion.
The quantity theory of money suggests that for every increase in the money supply, there will be a proportional increase in prices. In other words, if you double the money supply, then prices will double. However, there are several forces that drive prices up and down, and there are other levers governments can use to manipulate price levels, including reserve requirements, interest rates, regulations, subsidies, and purchasing power. The goal of the Federal Reserve is to keep the inflation rate low.
The latest round of quantitative easing (QE3) began in September 2012 at a rate of $40 billion per month and ended in 2014 at a rate of $85 billion per month. To put that in perspective, the Bill and Melinda Gates Foundation has an endowment of $40 billion. Since the beginning of QE3 in September 2012, inflation in the United States has decreased, and over that time period it never came close to exceeding 3%. If the money supply were to double overnight and that increase were to be blanketed over the entire economy, then it is likely that the quantity theory of money would apply. However, if the Federal Reserve conducts relatively small injections into specific areas of the economy, like clean energy infrastructure, then it is very unlikely that there will be any increase in inflation.
7. How should we create and inject money into the economy so that we effectively address climate change?
This is the fun question, which begs for a creative answer (preferably from an elected official). In the last round of quantitative easing, the Federal Reserve used its 23 Primary Dealers. These are the companies that the Federal Reserve has deemed to be worthy conduits of monetary policy. All 23 are big banks or associated with big banks. The problem with conducting monetary policy with big banks is that it is difficult to ensure mission alignment and commitment. While big banks are uniquely capable of handling large quantities of money, there are other more altruistic players that could handle money supply injections for the purposes of addressing climate change.
Local and state governments, as well as, large philanthropic endowments and charities are more ideal candidates for facilitating the use of money to address climate change. It is conceivable that the Federal Reserve could develop a similar list of Primary Dealers for the purposes of this exercise. Congress would likely determine the mechanism that facilitates the transaction and eventual disbursement of funds. The important part is that it is targeted. While the Federal Reserve could simply increase the money supply, the money would take longer to have the desired effect if it wasn’t tagged for a specific purpose upon entry into the economy.
Regardless of the mechanism, the money supply increase should be slow and start as soon as possible. A slow increase would mitigate any risk of speculative inflation.
8. What are we waiting for? There are very few people that have the power and influence to make money supply increases happen. There are seven members of the Board of Governors of the Federal Reserve. The President has the power of influence. The Congress has the power to direct the Federal Reserve. Rich and famous people have the ability to get in the ear of those few powerful people. But, most citizens cannot directly influence national money supply decisions beyond simply writing to their elected representatives.
There is a piece of legislation that might facilitate this conversation in Congress. The Humphrey-Hawkins Act was designed to curb inflation and unemployment. It also mandated that the Federal Reserve connect monetary policy with the economic policy of the sitting President. Today, that would mean that the monetary policy would have to connect with an economic policy that acknowledges and addresses the real threat of climate change. Unfortunately, the Humphrey-Hawkins Act expired in the early 2000’s, and The Federal Reserve has decided that it will no longer set target ranges for money supply growth.
There are legislative champions in Congress advocating for the reinstitution and modernization of the Glass-Steagall Act. There should also be legislative champions in Congress advocating for the reinstitution and modernization of the Humphrey-Hawkins Act. We need to think about what it is going to take to truly address climate change. The money supply is something that can be changed. The amount of time we have left is something out of our control.
Even though very few of us are influential policy makers, we all play a role in the transition to a sustainable future. We, as individuals, have the ability to use less. We have the ability to make small investments in energy efficiency and renewable energy. And, we can influence the organizations we are a part of to do the same. We can also talk to our elected officials about addressing climate change. Someone once said, “It is the greatest of all mistakes to do nothing, because you can only do a little.” Do what you can. And, we will get there.