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Abstract
The cost of the Green New Deal is usually estimated in financial terms, adding the projected costs of the various programs which leads to the conclusion that large tax hikes would be needed to pay for it. In this paper, we apply the methodology developed by J. M. Keynes in How to Pay for the War to offer a better approach for evaluating the affordability of the GND. We argue that the cost of the GND must be measured in terms of real resources, not financial costs. Affordability cannot be determined by adding up the financial costs and weighing them against prospective tax increases. What is required instead is a careful accounting of the resources the GND will require, weighing those against resources it will release plus what is already in excess supply. Only then can we determine whether a reduction of aggregate demand is needed, and consequently, whether we need counter-inflationary measures, such as tax hikes. While we acknowledge the major uncertainties involved in estimating real resource costs, we argue that our approach to affordability is much more relevant than the mainstream one.
Notes
1 We do not assess the technological feasibility of the part of the GND that is focused on reversing climate change as we have no expertise in this area. We will assume that the science and technology exist and focus on resource availability instead.
2 We recognize that bottlenecks can generate price pressures for some resources while other resources are in excess supply. Where demand is directed matters. Further, industry structure and strength of labor organizations can contribute to price pressures even if resources are plentiful. Our point is that given these considerations, pressures on prices are not affected by the way spending on resources is financed—whether the spending is by government or private purchasers, or out of income or financed by credit.
3 Keynes noted that he intends no insult in his reference to “profiteering”—the extra spending must either go to profits or taxes, given that the supply of consumer goods is fixed (Keynes Citation1940, 64).
4 What he describes is something like individual retirement accounts allowing early withdrawals for emergencies (loss of job, illness, support of dependents) that would amount to approximately 20 percent of wages, with the deferred rate progressive, such that lower-income workers receive a higher deferred payment in the future relative to wages. To reduce the burden on lower incomes, he would provide a progressive family allowance. He suggests it would work like the social insurance system. Below, we will recommend a proposal that would tie the deferred compensation to Social Security.
5 While Keynes (Citation1940, 51) argued that “some measure of rationing and price control should play a part” in controlling inflation, he believed that these methods should be secondary to taxes and deferred compensation. He cautioned that rationing impinges on consumer choice and inevitably has differential impacts across individuals, while price controls can create shortages. Further, he thought of rationing as a “pseudo-remedy” as it would “simply divert demand from the rationed to the unrationed article” (Toye Citation1999, 260). On the other hand, according to Skidelsky ([Citation1986] 2001, 67), Keynes “did not see demand management as a useful adjunct to planning, price fixing, rationing, bureaucratic controls and so on, but as an alternative to them, in war as in peace”. In spite of Keynes’s skepticism, rationing did, of course, play a role moving resources out of consumption and to the war effort. We will not discuss rationing further as we do not believe it needs to play a role in implementing a Green New Deal.
6 “The adoption of my plan would require the approval of the Labour Party. But they will never be asked to approve inflation. It will just happen.” John Maynard Keynes, The Times, 28 November 1939, p. 7.
9 Authors’ calculations based on the Bureau of Economic Analysis NIPA Table 1.1.1. Percent Change From Preceding Period in Real Gross Domestic Product (last revised on: June 25, 2020)
10 Board of Governors of the Federal Reserve System (US), Industrial Production Index [INDPRO], retrieved from FRED, Federal Reserve Bank of St. Louis; https://fred.stlouisfed.org/series/INDPRO, July 12, 2020.
11 We are not going to address in detail the deep recession brought on by the COVID crisis, but we expect recovery is going to be very slow. This is all the more reason to quickly phase in the Green New Deal—not simply because the economy needs “stimulus,” but because with resources idled, the “opportunity costs” of implementing the GND have dropped considerably. As we write, there is too much uncertainty to estimate the slack that will be created over the next months and perhaps years, but it has become more clear that there is little reason to worry about inflation as we phase in a comprehensive GND.
12 Dean Baker (Citation2019) makes a similar argument.
13 Senator Sanders proposes to pay for Medicare For All by imposing a “a 4 percent income-based premium paid by employees, exempting the first $29,000 in income for a family of four” in addition to a host of other measures (see https://berniesanders.com/issues/how-does-bernie-pay-his-major-plans/). We emphasize that we do not agree with such framing. The functional purpose of the higher tax is not to “pay for” government spending but rather to release real resources.