Richard Murphy – Does the Green New Deal need modern monetary theory?

You know we are making progress towards a Green New Deal when alternative finance concepts can be discussed. The “if” is receding, being replaced by the “how”, hopefully soon to be replaced with the “when”. Regardless, the Green New Deal will require a broad vision, not a dogmatic one. Richard Murphy has still again stolen a march on everyone.

Richard Murphy is Professor of Practice in International Political Economy, City University of London. He campaigns on issues of tax avoidance and tax evasion, as well as blogging at Tax Research UK

Cross-posted from Tax Research UK

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It would appear that in the eyes of left and right the biggest problem to implementing the Green New Deal is the link made between it and modern monetary theory.

Paul Mason has done it on the left.

Numerous people have done it on the right. I have picked one at almost random, from here, but this will also do.

So, apparently, saving the planet is now to be prevented by the fact that in a fiat money system a government can create new credit money at will, and prevent it having an inflationary impact by taxing it back out of existence, which is all modern monetary theory really says. I think that’s absurd, largely because that’s exactly what happens day in, and day out in the modern economy. But then, you might say I would say that, because according to Jonathan Portes I am the major exponent of modern monetary theory in the UK.

But let’s be clear, the Green New Deal was created before I’d heard of MMT. And let me also be abundantly clear that others in the Green New Deal group do not share my interest in MMT. I think it fair to say that Ann Pettifor and Geoff Tily are not at all persuaded, for example.

So, in that case, the issue needs to be tackled head-on. And the issue is whether or not the Green New Deal is dependent on modern monetary theory. I can answer straight away: it is not. To suggest that it might be is false.

I can say that for three reasons. I think I have a fair grounding in both is the first reason. I think that I understand the alternatives is the second one. And third, we have to do the Green New Deal come what may, and I’m damned if an argument on which may money and tax flow around the economy is going to stop something so important.

What then does the Green New Deal say. I’d summarise it like this: the Green New Deal is a programme to:

– Manage the rapid transition of the UK to become a sustainable economy
– Invest in the new businesses, technologies and skills that will be needed to achieve this goal;
– Invest in the new infrastructure that will be required to manage a sustainable economy, including new power generation and supply networks, transformed transport systems and buildings that have low or no carbon footprint
– Create long term, well-paid employment to deliver this programme in, quite literally, every constituency in the UK
– Reform the UK’s finances to make this possible. This will require change to banking, financial markets, our tax system, the ways we save and the role of government in making this work
– To build a fairer society where we can all coalesce around these goals which we all must share if we are to survive in the long term

I do not deny for a moment deny that this is economically radical. The government will lead a rapid transition of the economy because markets cannot do that. In the process they will direct the use of resources through their power to spend. They will target full employment. The aim is that the employment must be spread right across the country as a result. It so happens that the Green New Deal is ideal suited to deliver that. And in the process a national infrastructure bank will be created to fund much of this investment. It will be capitalised by the government but the evidence is that a gearing ratio of around 8:1 or 9:1 is optimal so £50bn or so of government money could underpin £500bn of spend. But it may take up to a decade to spend that. So the actual spend, and so borrowing, will be around £50bn a year. And so the question is whether or not we can afford to invest such a sum a year to transform our economy.

We’re talking 2.5% or so of GDP – our national income. Which is neither here, nor there.

We are in that context talking much less than the overall difference in the level of annual investment in the UK and that in many other economies. If they can afford higher levels of investment, so can we.

In government spending terms, and presuming the capital injection was spread over a decade, we’re talking about less than 1% of total government spending a year. If the figure had to be raised in tax less than 1p on income tax would do it, to save the planet.

But let’s ignore paying for this with tax right now. Because, as I will note below, in tax terms the Green New Deal should more than pay for itself. Let’s talk about other funding mechanisms instead. Take pensions, for example.

The cost of tax reliefs alone on pension fund contributions now amounts to at least £38.6 billion a year. Now, admittedly, this is spread across income tax and corporation tax, and this makes estimating the gross contributions paid from the tax relief given a little difficult, but presuming that some are lower income tax rates, and sum are at higher rates, and allowing for the fact that corporation tax biases this towards the lower level, to assume an overall tax relief rate of 30% is probably too high. This, then implies that £130bn a year is contributed to UK pension funds. Suppose that in exchange for this relief it was required that 25% of all new pension funds contributions now be invested in projects linked to the Green New Deal. This need not mean the National Investment Bank and its bonds, although it might. It could be linked to equity or bonds issued by companies undertaking projects directly related to the Green New Deal. But, either way, that would release £32bn for Green New Deal investment. I can see no reason why this cannot be done, and cannot see how it would breach state aid rules if written carefully.

Then consider ISA accounts. Here the data is readily available: the government publishes it. There is around £600 billion saved in ISAs right now. Almost half of that is in cash. The rest is almost entirely in shares. About £70 billion a year is saved this way. Now suppose that in exchange for your tax-free return the government required that 25% of all ISA deposits were put in Green New Deal linked funds. That could be a deposit account run by the National Investment Bank. It could, again, be investment in companies taking part in the Green New Deal. I stress, I am not saying all funds must be deposited this way; only some. And the National Investment Bank should be required to pay a competitive rate. That would bring a further £15bn or more a year into the Green New Deal.

And this is before the fact that there would be an appetite for National Investment Bank bonds is even considered, and of this I have not a shadow of a doubt.

In other words, funding £50 billion looks rather tame as an objective.

And remember when noting this that much of the GND spend will be on labour in the UK, which will all be subject to tax, with consequent and significant multiplier effects in both the economy and the tax yield. In other words, in tax terms the Green New Deal will more than pay its way because if I was to suggest that one third of the Green New Deal could be funded by additional taxes paid as a result of the new employment created I am understating my case.

In that case simple, and I think necessary, tax reforms could provide much of the required funding for the Green New Deal.

And I believe the bond market would be queuing up to buy National Investment Bank bonds, as investors do in many other countries.

The Green New Deal can, then, be conventionally funded.

So where’s the link with MMT? There’s only one possible one in this scenario. I think now, but I stress that not all in the Green New Deal Group agree, that in the event of a downturn the government could instruct the Bank of England to buy National Investment Bank bonds if the supply of money to this Bank would otherwise dry up. Actually, that drying up of funds is unlikely: in downturns people save in the safest place possible and GND related funds will be amongst the best on that score and so the need for Green (or People’s) Quantitative Easing (QE) might never arise at all. But I think it’s an option worth having in the mix. I stress, not all agree, and that’s fine with me, and this is a personal and not a Green New Deal Group blog.

What I should note is that those committed to MMT could replace much of what I suggest with MMT logic. But then I have to ask, why do that? Why not intervene to prevent the state subsidised distortions we now have in the savings market and to redirect the funds to a socially essential activity?

And why not recognise that people might very well be happy to save in the way I suggest?

And why deny the existence of the bond market?

Why too ignore the vital role that tax can play in sociuety? This is not a job destroyer as some in MMT like to claim. It is a powerful force for effecting social change. As I argue it has six purposes, only the first two of which can be said to be MMT related:

– Reclaiming money the government has spent into the economy
– Ratifying the value of money
– Redistributing income and wealth
– Repricing market failure
– Reorganising the economy
– Raising representation in a democracy

The rest are about the delivery if enlightened social policy – and they require that tax be paid to work.

So by all means recognise that MMT might be a backstop to the Green New Deal. And that therefore the availability of credit money is not a constraint on the Green New Deal happening, because it is not since the government can always overcome it, and I would argue that it must do so when required.

But let’s not make MMT a constraint on the Green New Deal, let alone a supposed condition for it happening. It is not. As I have shown, there is money for this task that could be easily redirected to it with a twist to existing tax rules. Let’s not let dogma get in the way. The Green New Deal requires action now, MMT or not. And I think that in order of priority the Green New Deal is many, many times more important than any economic theory. So shall we drop the argument, now?

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