Paying for the Green New Deal
George Selgin was interviewed on the BBC today and did an excellent job of explaining the unrealistic assumptions being made by proponents of the Green New Deal (GND). I encourage readers to listen to the interview (which also includes two other pundits.)
Here I’d like to put in my two cents worth, as proponents of this policy often muddle the issues with all sorts of distractions. First I’ll discuss paying for the GND in a financial sense and then in an opportunity cost sense.
In a financial sense, people often talk about paying for government spending with taxes, borrowing or money creation. They might as well talk about taxes, taxes, or taxes. After all, government debt is merely pushing taxes into the future, and money creation (seignorage) is a tax on money holders.
So let’s call seignorage “unconventional taxes” and all other taxes “conventional taxes”. In that case it’s a choice between current conventional taxes, future conventional taxes, and current and/or future unconventional taxes.
As a practical matter we can rule out unconventional taxes as a major source of funds for the GND. In the US we have a 2% inflation target, which doesn’t allow for much seignorage. Even if you doubled it to 4%—probably the highest sustainable rate that is politically feasible these days—the sums would still be far too small to make a difference, far below 1% of GDP.
This simplifies things. When you hear these debates and someone starts talking about the Fed monetizing the debt to pay for something big, you can just cover your ears and ignore everything being said until they get back to reality. That’s not to say the Fed cannot buy up lots of debt with interest bearing reserves. But interest bearing reserves are just another form of government debt, and don’t actually pay for anything. You only get significant seignorage from printing $100 bills—seignorage from the rest of high-powered money is trivial
So almost all of any major new program will be paid for with conventional taxes. A responsible government sets conventional tax rates at a level that minimizes deadweight losses over time. Since we already have a big deficit, and bad demographics will push spending even higher in the future, a responsible government will pay for any new spending program with higher current taxes (to minimize deadweight losses.) That’s not to say an irresponsible government (i.e. Trump) might not decide to pay for it with future taxes. But one way or another, new spending will be paid for with higher conventional taxes.
So what about the opportunity cost of extra spending? Might that be lower than expected due to slack in the economy? Might new spending boost economic growth and pay for itself? Unlikely, for three reasons. First, we are probably very close to the natural rate of output. Thus new spending on government programs will displace private spending (C+I).
Second, even if the economy still has slack, it’s very unlikely that it will still have slack two years from today, which is the soonest that the GND would be implemented. It’s already a decade since the Great Recession and wages and prices have probably adjusted by now. If a little bit of adjustment remains, then it’s likely to occur over the next two years.
And even if I’m wrong on both counts, there would still be very little multiplier effect, as the Fed also believes there is very little slack in the economy. They will offset any fiscal boost with tighter money, preventing any significant stimulative effect. (That’s true even if Moore and Cain are added to the FOMC—they are only 2 votes out of 12. And given their history, will they vote to bail out a bunch of socialists in 2021?)
Bottom line: Forget all the MMT hocus-pocus. Any major new spending program will be paid for with conventional taxes, preferably right now. And the opportunity cost will be lower private spending. That’s not to say that all proposals for new government spending are unjustified. But in the case of global warming we don’t need more spending; we need more carbon taxes. K.I.S.S.
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6. April 2019 at 19:24
Scott,
You are certainly right, but let us not forget that most politicians and some pundits don’t want to express negative consequences, they want to disguise the negative consequences as much as possible. The obfuscation is intentional.
I remember an interview with a close Obama adviser some years after Obamacare. The journalist asked the adviser why Obamacare was so incredibly complicated. Why not a simple, transparent, and effective construction in which certain people are taxed more so that other people get cheaper health insurance?
To my surprise, the adviser admitted that obfuscation und deception was the whole point of the complexity of Obamacare. It seems to me that 80-90% of politics is about disguising who has to pay the bills, and when.
7. April 2019 at 03:50
President Donald Trump recently said the US has spent $7 trillion dollars in the Mideast since 9/11 and the money has been wasted. No one really seems to contest Donald Trump’s assertion.
Perhaps Trump can be criticized for speaking euphemistically, others would say the money was spent counterproductively,
As there were no war taxes implemented after 9/11, one can posit that all of this $7 trillion was either borrowed or printed.
But now we see great umbrage taken at the thought that the Green New Deal might be financed with money that is either borrowed or printed.
From what I have seen of the Green New Deal it is likely a boondoggle, but I do not see how it could be any worse than us expeditions to the Mideast.
As for money-financed fiscal programs, I am not sure of Scott Sumner’s assertion that they are only a tax through inflation. If there is unexploited slack in an economy, then arguably the additional money printing just creates additional economic output.
It is also interesting to ponder a world in which money-financed fiscal programs prevent deflation and bring prices to stability or very mild inflation. Where is the inflation tax in this situation?
Presently in Japan, the central bank is conducting epic quantitative easing programs as the national government runs deficits. Michael Woodford says that this concurrent use of QE and federal deficit is in fact a helicopter drop, aka money-financed fiscal programs.
But Japan is running inflation now under 1%. This is not a theory, this is the reality.
So, are we so confident to say that money-financed fiscal programs are just an inflation tax?
7. April 2019 at 04:55
I’m surprised the tax smoothing argument never really came up in the whole austerity Vs deficit debates in 2012 etc (maybe my memory is wrong here).
Even in my final year undergraduate macro classes tax smoothing didn’t come up in the fiscal policy section, I bumped into it while reading Romer’s Advanced Macro.
7. April 2019 at 07:24
Ben, You said:
“President Donald Trump recently said”
I stopped reading right there. Why would I want to continue?
7. April 2019 at 08:36
Valid on all counts, Sumner. Though I seriously doubt the American people would dare accept carbon taxes for the sake of emissions reduction.
7. April 2019 at 10:06
Very good post, Scott. This is the right tack. MMTers will feel like you haven’t engaged, but that’s a mug’s game and getting MMT goo all over yourself doesn’t help anyone.
7. April 2019 at 15:56
“Ben, You said:
“President Donald Trump recently said”
I stopped reading right there. Why would I want to continue?”—Scott Sumner
Have you never heard of the expression, “Out of the mouth of fools?”
Anyway, I do not see how money-financed fiscal programs, if all they do is prevent deflation, can be characterized as an inflation tax?
What if the new norm in Western developed nations is a tendency towards deflation, unless money-financed fiscal programs are implemented? See Japan, see Europe.
8. April 2019 at 00:06
For a blog titled ‘The Money Illusion’, all of the posts I have read since discovering this site have been extremely conventional thinking. The notion of ‘paying’ and ‘taxes’ are very tiny lenses from which to try and measure Human Action. The scope of inputs that drive human action dwarf the monetary dimension. Imagine a mother caring for her child, men volunteering to repair a local church, or cult members working 12 hours a day without pay. There’s no reason to think any policy that can be imagined cannot also be implemented, monetary policy be damned. Any ‘debt’ at the national level is an abstraction: imagine a bloodless coup or regime change in the USA that wipes away federal debts and obligations without damaging a single building, machine, farm, or the neurons inside the creative and professional classes — the last of which now accounts for the vast majority of capital in all developed nations. The Will to Power is the only objective currency.
8. April 2019 at 01:35
While I have long supported several elements of MMT, I agree with Scott that seigniorage is not going to fund much of the GND.
8. April 2019 at 07:25
I don’t understand why some economists call for more carbon taxes when it is widely accepted that the levels proposed don’t come close to having an impact on climate change.
8. April 2019 at 08:04
The seignorage question is interesting.
What’s the maximum amount of possible seignorage? This would probably correspond to a scenario where the Fed offered no interest on reserves, and invested its assets in a diversified portfolio (similarly to Switzerland). A 5% yield could bring in, perhaps, $200B per year, given a $4T balance sheet (although a $4T balance sheet may lead to large inflation if no interest on reserves are paid).
$200B/year is a substantial amount of money, but not nearly enough to fund the GND.
8. April 2019 at 08:12
Elan, It goes without saying that default is an option, but that’s simply a tax on debt holders. Not sure what point you are making here.
Todd, If the tax is set at the optimal level, then it will reduce climate change by the appropriate amount. If that’s small (which I doubt) then so be it.
LK, You are describing speculation, not seignorage. In any case, there won’t be any funds to invest in equities, as it will be put into the GND.
8. April 2019 at 09:10
“LK, You are describing speculation, not seignorage.”
Does this imply that the Swiss National Bank and the Bank of Japan remittances are based on speculation, rather than seignorage, since they invest their assets in diversified portfolios?
9. April 2019 at 04:15
Scott,
A carbon tax would need to be global and estimates for any reduction in temperature by 2100 indicate the starting tax would need to be $150 per ton now and ramp up to over $3,000 in 80 years. Nobody is willing to consider $150 a ton for 2020.
9. April 2019 at 10:38
Tood Kreider
“A carbon tax would need to be global and estimates for any reduction in temperature by 2100 indicate the starting tax would need to be $150 per ton now and ramp up to over $3,000 in 80 years. Nobody is willing to consider $150 a ton for 2020.”
This study puts the welfare-maximizing carbon tax at $25 now, ramping up to $200 in 100 years.
https://iopscience.iop.org/article/10.1088/1748-9326/aa6e8a/pdf
9. April 2019 at 10:49
LK, A part of their return is due to speculation.
Todd, I question those numbers. See LK’s comment.
9. April 2019 at 12:58
Scott and LK,
That paper is using the Paris Agreement’s target but that also doesn’t lower the temperature by more than 0.1 degree in 2100. It is why Berkeley physicist Richard Mueller has stated he is opposed to the agreement.