The indefatigable Ellen Brown had an article under the above title on TruthDig yesterday. With her permission I reproduce it here:
As alarm bells sound over the advancing destruction of the environment, a variety of Green New Deal proposals have appeared in the U.S. and Europe, along with some interesting academic debates about how to fund them. Monetary policy, normally relegated to obscure academic tomes and bureaucratic meetings behind closed doors, has suddenly taken center stage.
The 14-page proposal for a Green New Deal submitted to the U.S. House of Representatives by Rep. Alexandria Ocasio-Cortez, D-N.Y., does not actually mention Modern Monetary Theory (MMT), but that is the approach currently capturing the attention of the media–and taking most of the heat. The concept is good: Abundance can be ours without worrying about taxes or debt, at least until we hit full productive capacity. But, as with most theories, the devil is in the details.
MMT advocates say the government does not need to collect taxes before it spends. It actually creates new money in the process of spending it; and there is plenty of room in the economy for public spending before demand outstrips supply, driving up prices.
Critics, however, insist this is not true. The government is not allowed to spend before it has the money in its account, and the money must come from tax revenues or bond sales.
The counterargument, made by American Monetary Institute (AMI) researchers, among others, is that the central bank is not the monopoly supplier of dollars. The vast majority of the dollars circulating in the United States are created, not by the government, but by private banks when they make loans. The Fed accommodates this process by supplying central bank currency (bank reserves) as needed, and this bank-created money can be taxed or borrowed by the Treasury before a single dollar is spent by Congress. The AMI researchers contend, “All bank reserves are originally created by the Fed for banks. Government expenditure merely transfers (previous) bank reserves back to banks.” As the Federal Reserve Bank of St. Louis puts it, “federal deficits do not require that the Federal Reserve purchase more government securities; therefore, federal deficits, per se, need not lead to increases in bank reserves or the money supply.”
What federal deficits do increase is the federal debt; and while the debt itself can be rolled over from year to year (as it virtually always is), the exponentially growing interest tab is one of those mandatory budget items that taxpayers must pay. Predictions are that in the next decade, interest alone could add $1 trillion to the annual bill, an unsustainable tax burden.
To fund a project as massive as the Green New Deal, we need a mechanism that involves neither raising taxes nor adding to the federal debt; and such a mechanism is proposed in the U.S. Green New Deal itself–a network of public banks. While little discussed in the U.S. media, that alternative is being debated in Europe, where Green New Deal proposals have been on the table since 2008. European economists have had more time to think these initiatives through, and they are less hampered by labels like “socialist” and “capitalist,” which have long been integrated into their multi-party systems.
A Decade of Gestation in Europe
The first Green New Deal proposal was published in 2008 by the New Economics Foundation on behalf of the Green New Deal Group in the U.K. The latest debate is between proponents of the Democracy in Europe Movement 2025 (DiEM25), led by former Greek finance minister Yanis Varoufakis, and French economist Thomas Piketty, author of the best-selling “Capital in the 21st Century.” Piketty recommends funding a European Green New Deal by raising taxes, while Varoufakis favors a system of public green banks.
Varoufakis explains that Europe needs a new source of investment money that does not involve higher taxes or government deficits. For this purpose, DiEM25 proposes “an investment-led recovery, or New Deal, program … to be financed via public bonds issued by Europe's public investment banks (e.g., the new investment vehicle foreshadowed in countries like Britain, the European Investment Bank and the European Investment Fund in the European Union, etc.).”
To ensure that these bonds do not lose their value, the central banks would stand ready to buy them above a certain yield. “In summary, DiEM25 is proposing a re-calibrated real-green investment version of Quantitative Easing that utilizes the central bank.”
Public development banks already have a successful track record in Europe, and their debts are not considered government debts. They are financed not through taxes but by the borrowers when they repay the loans. Like other banks, development banks are money-making institutions that not only don't cost the government money but actually generate a profit for it. DiEM25 collaborator Stuart Holland observes:
While Piketty is concerned to highlight differences between his proposals and those for a Green New Deal, the real difference between them is that his–however well-intentioned–are a wish list for a new treaty, a new institution and taxation of wealth and income. A Green New Deal needs neither treaty revisions nor new institutions and would generate both income and direct and indirect taxation from a recovery of employment. It is grounded in the precedent of the success of the bond-funded, Roosevelt New Deal which, from 1933 to 1941, reduced unemployment from over a fifth to less than a tenth, with an average annual fiscal deficit of only 3 percent.
Roosevelt's New Deal was largely funded through the Reconstruction Finance Corporation (RFC), a public financial institution set up earlier by President Hoover. Its funding source was the sale of bonds, but proceeds from the loans repaid the bonds, leaving the RFC with a net profit. The RFC financed roads, bridges, dams, post offices, universities, electrical power, mortgages, farms and much more; and it funded all this while generating income for the government.
A System of Public Banks and “Green QE”
The U.S. Green New Deal envisions funding with “a combination of the Federal Reserve [and] a new public bank or system of regional and specialized public banks,” which could include banks owned locally by cities and states. As Sylvia Chi, chair of the legislative committee of the California Public Banking Alliance, explains:
The Green New Deal relies on a network of public banks – like a decentralized version of the RFC – as part of the plan to help finance the contemplated public investments. This approach has worked in Germany, where public banks have been integral in financing renewable energy installations and energy efficiency retrofits.
Local or regional public banks, Chi says, could help pay for the Green New Deal by making “low-interest loans for building and upgrading infrastructure, deploying clean energy resources, transforming our food and transportation systems to be more sustainable and accessible, and other projects. The federal government can help by, for example, capitalizing public banks, setting environmental or social responsibility standards for loan programs, or tying tax incentives to participating in public bank loans.”
U.K. professor Richard Murphy adds another role for the central bank–as the issuer of new money in the form of “Green Infrastructure Quantitative Easing.” Murphy, who was a member of the original 2008 U.K. Green New Deal Group, explains:
All QE works by the [central bank] buying debt issued by the government or other bodies using money that it, quite literally, creates out of thin air. … [T]his money creation process is … what happens every time a bank makes a loan. All that is unusual is that we are suggesting that the funds created by the [central bank] using this process be used to buy back debt that is due by the government in one of its many forms, meaning that it is effectively canceled.
The invariable objection to that solution is that it would act as an inflationary force driving up prices, but as argued in an earlier articleof mine, this need not be the case. There is a chronic gap between debt and the money available to repay it that needs to be filled with new money every year to avoid a “balance sheet recession.” As U.K. professor Mary Mellor formulates the problem in her book “Debt or Democracy” (2016):
A major contradiction of tying money supply to debt is that the creators of the money always want more money back than they have issued. Debt-based money must be continually repaid with interest. As money is continually being repaid, new debt must be being generated if the money supply is to be maintained. … This builds a growth dynamic into the money supply that would frustrate the aims of those who seek to achieve a more socially and ecologically sustainable economy.
In addition to interest, says Mellor, there is the problem that bankers and other rich people generally do not return their profits to local economies. Unlike public banks, which must use their profits for local needs, the wealthy mostly hoard their money, invest it in the speculative markets, hide it in offshore tax havens or send it abroad.
To avoid the cyclical booms and busts that have routinely devastated the U.S. economy, this missing money needs to be replaced; and if the new money is used to pay down debt, it will be extinguished along with the debt, leaving the overall money supply and the inflation rate unchanged. If too much money is added to the economy, it can always be taxed back; but as MMTers note, we are a long way from the full productive capacity that would “overheat” the economy today.
Murphy writes of his Green QE proposal:
The QE program that was put in place between 2009 and 2012 had just one central purpose, which was to refinance the City of London and its banks. … What we are suggesting is a smaller programme … to kickstart the UK economy by investing in all those things that we would wish our children to inherit whilst creating the opportunities for everyone in every city, town, village and hamlet in the UK to undertake meaningful and appropriately paid work.
A network of public banks, including a central bank operated as a public utility, could similarly fund a U.S. Green New Deal–without raising taxes, driving up the federal debt or inflating prices.
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I’m afraid that article got too complicated for me. The beauty of MMT for me is its simplicity in describing how money works in the economy. I could use other words but I won’t.
It strikes me that there is still a conceptual problem in America in that the private banks see those dollars as belonging to them when in fact the dollar as a denomination and sovereign currency actually belongs to the State as it is the State who essentially created the dollar and it is the State who has every right to use the currency as it sees fit for the good of the US people.
This negation as to who actually is the issuer of the denomination is the fiscal equivalent of saying that mankind walked around with dinosaurs in my view.
Otherwise this is a very handy read, thank you.
Onwards!
Upwards!
Email Address Supplied says:
“It strikes me that there is still a conceptual problem in America…”
Yes agreed. More than one, I think, having ‘talked’ to Americans recently (by the wonders of the interweb). And who money belongs to is one of the biggies. Who land belongs to and who America belongs to is all tied up with it. To be fair, the Americans took their political philosophy with them from their European roots, they didn’t invent this.
It would be nice to be able to ignore that and let them get on with sorting-out their own problems, but the US influence on the rest of the World particularly where money is involved makes it very much our business too. And despite Trump’s campaign rhetoric the US continues to deal with the motes in the eyes of other nations whilst ignoring the beam in it’s own eye.
My initial reaction to Ellen Browns piece above is the realisation that without it having been recognised as such, the entire banking system, which is effectively a natural monopoly, was handed over to private sector control. Efforts in the past to regulate that relationship have tended to result in dead presidents.
The fervid antipathy to anything which might hint at creeping ‘Socialism’ or involve collective control by government rules out rational discussion. Government is now so corrupted in the US that only the political right who appreciate its role as their cash cow are supportive, and even they rail against ‘big government’ constantly; naturally they do, government constrains the extent to which they can pillage freely.
This mindset has increased traction in the UK. Four decades of it has distorted the political landscape of Britain as grotesquely as it has distorted the US.
I wonder if there is any rational justification at all for private sector banking when money supply is in effect a natural government monopoly. (?)
Andy
Yes – I concur with your thoughts exactly.
And as for Peter May – he is right about the U.S. Central bank – but this is the point I am making – American attitudes to money / who should be in charge of money (macro policy even) – are creeping over here – have crept over here.
But it is a queer situation in the US. That a utility so fundamental to the nations ‘wealth health’ is managed/distributed by private bankers. The same bozo’s who told Bill Clinton that the state could not afford his welfare plans but quite happily let the US overspend on military investment year after year and got the Government to give Wall Street £800 billion dollars, no strings attached!!
I’d go as far as saying that the system in the US is pure evil.
Inflation in Venezuela is 10 million % per annum..that is the first thing people will think of when you “create money out of thin air” for any project or concern that takes your fancy.
No they won’t
Because you just then ask them ‘why has the pound in your pocket got any value?’
To which the only available answer is ‘Becuse our the promise printed on it’
All money is ‘created/ printed’
And all is a government promise
Backed by the power to tax
So we have a choice between hysteria and explanation
Why are you choosing hysteria?
terry says:
“Inflation in Venezuela is 10 million % per annum..that is the first thing people will think of when you “create money out of thin air” for any project or concern that takes your fancy.”
You have a point…lots of people WILL think that. But then lots of people will be entirely ignoring the facts of the situation and listening to neoliberal propaganda, which is deliberately intended to produce such a hysterical and unreasoned response.
The UK is not in the same position as Venezuela. Post Brexit we might be if our best hope of economic survival is to accept a US takeover of our remaining national assets, masquerading as a good rescue deal.
The situation in Venezuela is the direct result of US sanctions and political interventions. Standard US foreign policy since Cuba……. and oft repeated. Currently also being applied to Iran and to N.Korea for reasons of political domination. What is happening in Venezuela is a US manufactured coup. And to our shame we (the UK) are supporting what should be regarded as illegal interference in a sovereign nations affairs with the intention of forcing a regime change.
It was illegal when we did this to Iraq and it’s still illegal, but the US is above international law; a big and dangerous wild child.
Post-Brexit the US will have in it’s grasp the last part of the British Empire: England itself. Game set and match.
These guys play a long game.
“The government is not allowed to spend before it has the money in its account, and the money must come from tax revenues or bond sales.”
Allowed by who? If this is a correct statement of the legal position in the USA then it is a self-imposed constraint. As with any state, the Federal Government will be operating using Treasury accounts held at the Federal Reserve. Those accounts, as for any state with its own currency, come with unlimited zero interest overdraft facilities. The Chair of the Fed is never going to ring the President and inform him he has until 4pm to pay in cash or the cheques will bounce. Selling Bonds to finance all or part of the deficit is again a policy choice. There is no particular need to tie up a Green New Deal in some complicated financing arrangement. In Europe you have to get it past German paranoia, but I like the simple approach that the European Investment Bank sells bonds to the ECB and then uses the funds to finance the New Deal projects. This requires nothing new to be set up and could happen tomorrow.
Think much of the American conceptual problem is because, although the chair of the Fed is appointed by the President, the Fed itself is still owned by a consortium of private banks. At least the UK had the foresight to nationalise the Bank of England.
Though if the Tories are in power much longer they’ll probably sell it off. Post Brexit, after all, we’ll ‘need the money’:)
I confess that’s a privatisation I had not considered…..
Quis custodiet custodies ? The question is, as with ‘Target 2’, in the Eurozone, where is the lender of last resort if these ‘public investment banks fail’ (as assuredly they will, as money is pumped into projects which go nowhere and achieve little) ? You got it: officially or unofficially it can only be- tada – the Central Bank. QE was a mechanism to replace secondary bank credit formation. It therefore did not increase money supply so much as replenish what was lost/unavailable in the ‘Credit Crunch’. Inasmuch as it may have increased the supply of money, we have seen not goods inflation, nor wage-price inflation, but asset inflation. If a Central Bank is backing the creation of new credit, how is it any different from Keynesian counter-cyclical investment ? How is such credit creation outside conventional money supply, with all the implications for inflation if not very carefully managed ? I stand to be persuaded this is not the Emeperor’s new clothes.
No one disputes it is Keynesian stimulus
And it is money creation when the private sector will not create it
What’s the constraint? Three. 1) MMT recognises we cannot go beyond full employment 2) MMT recognises environmental constraints. 3) MMT realises tax is an inflation control mechanism
That’s why it will work when new-Keynesianism delivers boom and bust
Thank you for the clarification. My remaining concern – fear actually – would be that the whole initiative would be killed by the dead hand of the State. If there is one thing I do not buy it is Mazzucato’s ‘entrepreneurial state’ thesis. Perhaps I am wrong. I wish it were so.
That is perhaps the best explanation of the modern economy there is
Would it be true to say there’s a 4th constraint = Nothing to buy?
That’s nit quite true
Prices can rise
State crowding in indeed pushes up the prices of assets, labour, raw materials etc etc..it is inflationary..so we balance the expenditure by taxing and taking money out of the individuals pocket..whats there not to like?
What evidence do you have of state crowding out?
Evidence please
Not dogma
John D “is a constraint there is nothing to buy” .. RM “not true can push prices up” by buying from the private sector. You’ve said it yourself!!!
Venezuela nationalising the oil industry (and fukcing everything up thereafter).
If an economy has mass unemployment then state intervention is needed. If an economy is approaching full capacity then crowding out is inevitable. One sign of an economy approaching capacity is low unemployment.
https://www.tandfonline.com/doi/abs/10.1080/17487870.2013.866897
A piece on China which concludes there can be crowding in or crowding out depending on the sector.
Since when did we have full employment?
Do you think we have masses of skilled labour down the job centre? No we don’t. You will probably claim that the low unemployment figures just announced will be a function of the gig economy and people forced to go self employed..well many don’t agree.
Those who want to work in full time secure employment would not agree
Ben says:
“Venezuela nationalising the oil industry (and fukcing everything up thereafter).”
Q. And why should one of Venezuela’s principle natural resource assets NOT be nationalised ?
A. Because the US doesn’t like it.
So the everything else that’s ‘fukced’ up thereafter is the result of US sanctions and political interference in a foreign sovereign state with the intention of installing their own puppet leader.
Roll-on Brexit eh Ben ? Then the US can roll us over too.
This doesn’t account for the amount of deflation exported by China and surplus countries. If these slow then demand for government bonds shall fall undermining a plank of the plan.
In any case while discussion of MMT is going on China’s Belt and road has already struck landfall in Italy and the spending tap is being switched on (much to the dislike of the EU)…
You may not have noticed that Green QE means that demand for government bonds is in no way a plank of the plan
The plan can progress without any bonds being issues
That was the whole point of Green QE
As you infer the bond markets won’t act as a constraint but the currency markets will.
No they won’t
They really like full employment
“No they won’t they really like full employment”..says the ace currency strategist. Like you can just reach full employment as easy as turning up the volume on the TV..and without any consequences like annoying the neighbours.
Well currency markets HATE THE FEAR of inflation. They hate it even more if interest rates are at zero or nearly zero which is what you advocate..
So – y6ou want us to live in fear of something that will not happen?
Really?
Why?