February 05, 2021
MarketWatch
Against the universal, natural tendency to put off future needs for the sake of current ones, I want to dwell on the disposition of U.S. public investment. I insist on using investment in the economist’s sense: spending that provides benefits in the future.
Liberal advocates tend to describe absolutely everything as investment, perhaps to evince a hardheaded, businesslike attitude. I doubt anyone is convinced.
“ The time remaining to prevent disastrous climate change is running out. But the Green New Deal has a political problem: Most folks have more immediate concerns. Rather than a Green New Deal, we want a New Deal that is green. ”
To be sure, the bulk of federal spending is for consumption; and consumption—food, clothing, and shelter—is life and death. I’ve written myself for the Center for Economic and Policy Research about >the immediate priority of injecting purchasing power into the economy by providing more cash assistance to households and to state and local governments.
The political problem
When it comes to investment, something other than cash is needed. All the rage today is around the Green New Deal (GND), and for good reasons. The time remaining to prevent disastrous climate change is running out. But the GND has a political problem, the same one alluded to above. Most folks have more immediate concerns. My conservative in-laws in Florida acknowledge that in the future the state might be half underwater, but hey, that’s 50 years away.
The political shortcoming of focusing on a green campaign with a diminished addendum—there’s something in it for you skeptics too—is best remedied with a different rubric. Rather than a Green New Deal, we want a New Deal that is green.
Public investment would be just one component of such a deal. The foundation would be a high employment economy, universal health insurance coverage, and an adequate safety net for those unable to work. Being ‘green’ would not constrain these objectives. To bring about a GND, assuring economic security must be the first priority.
“ We are supposed to be horrified by hefty price tags, but blind to the costs of inaction. This is know-nothingism, regrettably not a new feature in American political life. ”
President Barack Obama’s chief economist Jason Furman writes that the gross domestic product is currently 5% below trend. This could be understood as an output gap, and it’s huge. There are a lot of different types of jobs the government could create with expansionary fiscal policy, but to stay on mission, they should be green jobs. The current hole in which the economy finds itself is also an opportune time to launch new, permanent spending programs.
Most infrastructure is local
When it comes to the public capital stock (roads, bridges, rail systems, public buildings), the bulk of it is under the purview of state and local governments. Upgrading existing fixed capital is more a job for the states, which are in no financial shape to jump-start new investment programs. Federal grants will be required.
“ Aficionados of the stock market understand that in a properly diversified portfolio, there will be some clunkers and some stars. ”
A lot of retrofitting could be launched relatively quickly in keeping with “shovel-ready” concerns. Painting roofs white, adding charging stations for electric vehicles, instituting dedicated lanes for zero-emission buses, weatherization of residences, all would be a boon in the current economic downturn.
A policy commentator with a sense of humor once remarked that the federal government is like a huge insurance company with an army. Defense aside, it is mostly in the business of mailing checks—to defense contractors, Social Security beneficiaries, and medical-care providers.
For the feds, the GND will entail new public enterprises. These organizations should not be constrained by requirements to cover their costs with user fees. The customer for reduced carbon emissions is the world’s population. Nobody is going to pay an enterprise for their own share of reduced emissions.
Investing in basic R&D
When it comes to public enterprises, the failure of Solyndra comes to mind, and if it doesn’t, somebody is sure to bring it up. Aficionados of the stock market understand that in a properly diversified portfolio, there will be some clunkers and some stars. The risk-reward tradeoff in the case of green investment is between emission reduction and spending. If you don’t have some failures, you’re not trying hard enough.
The federal government need to establish a diversified portfolio of projects, with an emphasis on what the private sector does least—disinterested, basic research and development placed in the public domain.
Besides basic science, what investments does a GND demand? One field is emission-free power generation. Solar panels are getting cheaper all the time, to the point where the power generated could become too cheap to meter. Federal leverage could accelerate their proliferation. The other GND investment priority is the major capital project of a “smart grid” that rationalizes and economizes on the use of electricity.
The ‘care economy’
The most-neglected investment priority is what has been called the “care economy.” Nobody is getting any younger. A variety of groups will require the assistance of trained personnel to perform the basic activities of daily living. In most cases, they will lack the financial means to purchase such services. The U.S. needs to expand facilities for long-term care of the indigent elderly, for child care, for the homeless, and the disabled. Many immigrants arrive here as victims of human and labor trafficking. They will need decent transitional housing and social services, not infernal cages.
We can afford a GND. Its critics are given to deploying potted cost-benefit analyses. We are supposed to be horrified by hefty price tags, but blind to the costs of inaction. This is know-nothingism, regrettably not a new feature in American political life.
When it comes to investment financing, the state of interest rates, which goes to the cost of capital, is a key factor. The rate of return for a profitable investment needs to exceed the cost of servicing the debt that would finance it. As John Quiggin points out, with real interest rates near zero, this calculation changes dramatically. We have arrived at the nirvana of John Maynard Keynes’s “euthanasia of the rentier.”
Another source of finance is cuts in the arguably obsolete U.S. defense budget, bloated for the sake of fighting massive land wars whose likelihoods defy the imagination.
And finally, there is the potential for deficit spending. The extraordinary output gap cited above indicates the massive free lunch awaiting the Biden administration in the coming year. A 5% shortfall in GDP enables a projected federal budget increase of $1 trillion, easy, escaping the need for any new taxes. The deficit-timid could be reminded that in 2020, the increase exceeded $3 trillion.
If we ever really left the era of big government, the current economic crisis and the incipient climate crisis bring us roughly back to confront it.
