Representative Alexandria Ocasio-Cortez and Senator Ed Markey’s proposed Green New Deal is getting a lot of attention these days. Democratic Presidential hopefuls Cory Booker, Kirsten Gillibrand, Kamala Harris, and Elizabeth Warren are all supporters, as is Senator Bernie Sanders. Former Greek Minister of Finance and Economist Yanis Varoufakis has been aggressively promoting his own vision of a Green New Deal for Europe. Many of the policy proposals and programs are similar and so are the proposed methods of funding:
The great advantage of our Green New Deal is that we are taking a leaf out of US President Franklin Roosevelt’s original New Deal in the 1930s: our idea is to create €500bn every year in the green transition across Europe, without a euro in new taxes.
Here’s how it would work: the European Investment Bank (EIB) issues bonds of that value with the European Central Bank standing by, ready to purchase as many of them as necessary in the secondary markets. The EIB bonds will undoubtedly sell like hot cakes in a market desperate for a safe asset. Thus, the excess liquidity that keeps interest rates negative, crushing German pension funds, is soaked up and the Green New Deal is fully funded.
Representative Ocasio-Cortez’s office offered a similar rational for debt financing:
How will you pay for it?
The same way we paid for the New Deal, the 2008 bank bailout and extended quantitative easing programs. The same way we paid for World War II and all our current wars. The Federal Reserve can extend credit to power these projects and investments and new public banks can be created to extend credit. There is also space for the government to take an equity stake in projects to get a return on investment. At the end of the day, this is an investment in our economy that should grow our wealth as a nation, so the question isn’t how will we pay for it, but what will we do with our new shared prosperity.
If it sounds too good to be true it probably is. There is a long and well established literature on the sort of negative economic effects such an inflationary policy entails but there is an important moral dimension as well. Long ago the German economist Wilhelm Röpke argued that the market economy can only be sustained within a moral social order:
Its place is in a society where certain elementary things are respected and are coloring the whole life of the community: individual responsibility; respect of certain indisputable norms; the individual’s honest and serious struggle to get ahead and develop his faculties; independence anchored in property; responsible planning of one’s own life and that of one’s family; thriftiness; enterprise; assuming well-calculated risks; the sense of workmanship; the right relation to nature and the community; the sense of continuity and tradition; the courage to brave the uncertainties of life on one’s own account; the sense of the natural order of things.
The cavalier attitude toward debt, exhibited by both Green New Deals, helps to erode the moral order necessary for a market economy. French Economist Thomas Piketty, who shares many of the policy preferences of the Green New Dealers, in a recent critique of the Green New Deal put it this way,
[O]ur proposals are based on taxes because a major part of the expenditure which we propose is public expenditure: financing research in new technologies by universities and sharing the cost of migration among member countries are beyond the sphere of private firms. This is one of the fundamental differences between our proposals: we propose to give Europe the means to provide public goods to its citizens—including the campaign against global warming, but not uniquely.
Even Piketty, no fan of free markets, believes one should pay for what one gets. Paying for things is always politically unpopular, but as Röpke tells us, “Muddling through from day to day and from one expedient to another, to boast that “money does not matter”–that is, indeed, the opposite of an honest, disciplined, and orderly concept and plan of life.” Our social policy should strive to be what we are at our best, not our worst.