Readers of Stirring the Pot know that I am deeply concerned about the issues of global climate change and inequality in the United States. Climate change, or the larger issue of global change, is an existential threat to modern human civilization. Inequality strikes at the very heart of the American ideal of “liberty and justice for all.” So at first glance I should enthusiastically embrace the Green New Deal, a proposal by Democrats to address these twin issues. The foundational statement of this idea is House Resolution 109 – Recognizing the duty of the Federal Government to Create a Green New Deal.
The Green New Deal proposal suffers from the same shortcomings as the right-wing tax cuts of both the Bush and Trump administrations. They all ignore the first law of economics, there is no such thing as a free lunch. Politicians of all stripes like the idea of magic beans, policies that will do good with no costs because they will “pay for themselves.” So the Republican tax cuts of the last twenty years tacitly embraced the discredited idea of a Laffer curve, the notion that income tax cuts will pay for themselves because they will stimulate business and raise incomes enough so that taxes collected will actually increase even though tax rates declined. The economy just does not work that way. The result of these tax cuts has been increasing inequality, increasing government deficits, and a shifting of the costs of current consumption to future generations. A Ponzi scheme.
The Green New Deal offers a similar something for nothing scheme, predicated on the idea that we can spend our way out of the twin dilemmas of climate change and inequality with little or no concern of how to pay for that spending. The approach of spending our way out of these problems has been justified by reference to Modern Monetary Theory, the left-wing corollary to the Laffer Curve. This idea is predicated on the notion that nations that issue their own currency cannot run out of money. Hence government spending is simply the means of putting currency into the economy. This too ignores the first law of economics – there is no free lunch.
Indeed, this approach belies the basic critique of modern economics offered by the discipline of ecological economics. The great economist Herman Daley once observed that the problem with many economists is that they are at once both too materialistic (thinking that wellbeing comes only from consumption) and not materialistic enough (forgetting that human economies are fundamentally about the matter and energy that we take from nature to meet our wants and needs). Modern Monetary Theory suffers from both of these ills. Thus the underlying assumptions of the Green New Deal as an approach to solving our most pressing problems are flawed. The problem with the Green New Deal is not the red herring of “socialism” that the Republicans are claiming it to be. The problem is that the deal is flawed in just the same way that Republican fiscal policy is flawed, it promises something for nothing.
I am fully in agreement with the description of the problems the Green New Deal is designed to address, problems which are not only ignored by the current Administration, but also denied. Our collective survival demands solutions to global change, including climate change, and inequality. These solutions will not come at no cost; we will need to make difficult decisions. Most importantly we need to recognize that all of us must make some changes in how we live; our individual behaviors collectively yield the emissions of gases that lead to global change. Changes in those individual behaviors will only happen if we individually face the costs of what we do, an approach that the Green New Deal avoids in an attempt to make solutions seem painless. It promises that free lunch.
Broad consensus among economists is that the most effective way to address climate change is to make the sources of climate change, greenhouse gases, more expensive to emit. This sends signals throughout the economy, both to consumers and producers, telling them to find a way to use less energy and to use energy more efficiently. A tax on carbon emissions (no exceptions) is an efficient way to encourage alternative energy technologies and signal consumers what costs they are imposing on others in their energy consumption.
The problem is how to do this tax fairly, particularly since low income households spend a higher proportion of their income on energy than higher income households. (The latter actually spend more in absolute terms because they consume more goods and services.) There are lots of ways to do a carbon tax and actually reduce income inequality as well. Just one approach is to take the tax revenues from a carbon tax and reduce the payroll tax (FICA) paid by both workers and employers to fund the Social Security Trust Fund. By eliminating the FICA tax on first dollars earned instead of reducing the tax rate, it would make this system more progressive; eliminating the ceiling on earnings subject to FICA taxation (currently $132,900) would make the system even more progressive and the Social Security System more sustainable.
A tax on “bads” (climate change causing gases) to reduce taxes on “goods” (work) would do more than a host of government expenditure programs in the Green New Deal, many of which would be subject to rent seeking behavior.
Climate change mitigation and greater fairness, all without resorting to the false promise of a free lunch for all, that would be a Good Deal.