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What fundamental economic and political change is needed for an effective response to climate change?

Words by Maurice Höfgen, Pluralism in Maastricht

According to the IPCC report by the UN Intergovernmental Panel on Climate Change we – and by “we” I mean us as human society – have only 12 years left to prevent global warming from crossing the limit of +1.5C. The consequences of failing to achieve this are disastrous – extreme heat, floods, droughts, loss of biodiversity, poverty, starvation, extinction. Leading scientists have been warning us for long enough – now it’s time to act!

Since the economic policy we have been relying on thus far has brought us the mess we are in right now, we need to change our economic thinking in the first place. As Einstein has put it wisely: “We cannot solve our problems with the same thinking we used when we created them.”. The urgency of the issue at hand calls for bold, unprecedented and progressive solutions!

To tackle climate change, we need a comprehensive and ambitious reform package. Ultimately, we need to shift resources from where they harm the environment to where they don’t or even benefit – speaking of negative emissions – the environment. Undeniably, the most challenging part of the transition is shifting people from one profession to another. The research on human decision making is pretty clear on that: if we want people to change, we need to make them better off. Thus, the reform package needs to incorporate an ecological transition and a socio-economic improvement for the majority of the people. Both can be perfectly combined in a Green New Deal!

In order to achieve an ecological transition and a socio-economic improvement for the many, a Green New Deal needs to incorporate a job guarantee for everyone able and willing to work, provision of high-quality health care, education and training, affordable housing, transition to renewable and zero-emission energy sources, provision of a clean and affordable transportation system, repairing and upgrading infrastructure, fostering growth in clean and sustainable business sectors as well as a transition to sustainable agriculture. Whatever is technologically feasible in all those areas, we need to implement as soon as possible. On top, massive research is required to expand our technological frontiers. Clearly, to realize such an extensive and bold reform package, we need to mobilize many of our available productive resources, such as labor and technology. How do we mobilize those?

Money! Money is such a smart human invention to move resources and solve allocation issues, but obviously we’ve forgotten how to properly use it. Undoubtedly, unless we start rethinking how modern fiat money and our monetary system work, we won’t get anywhere in the context of tackling climate change. Given the seriousness of the issue, we can no longer afford our politicians to stop at the “how do we pay for it?”-question, not implementing adequate policies. As much as the financial affordability question was of no concern in war times, it shouldn’t be one in our fight against climate change. While scientists are proposing smart technical solutions, economists and politicians need to catch up and make up their mind about how the monetary system works and how we can use the power of the monetary system in order to achieve the socio-economic-ecological outcome we desire.

Regarding financial affordability and our current monetary arrangements, we need to differentiate between the users and the issuers of currency. Both operate under a completely different logic. The users of the currency – such as local governments, corporations and households – have to finance their spending by either income, asset sales or borrowing, which is ultimately limited by their creditworthiness. Consequently, currency users face financial constraints. Our personal experience as being a currency user, however, does not generate any useful, applicable knowledge for how the issuer of the currency operates. Unfortunately, the majority of economists, journalists and politicians constantly invoke the household-analogy framing that prevents us from unveiling the power of the monetary system and finding progressive policy solutions.

The currency issuer, mostly the national federal government, from inception, has to spend the currency into existence first, before it can be used by non-government entities to pay taxes or purchase bonds. As a matter of logic, it follows that neither taxes nor bond sales finance government spending for a sovereign currency issuing government. As monopoly issuer of the currency, the government faces no purely financial constraints and hence is able to employ all productive resources that are for sale in its own currency – including all idle labor. The only constraints that the currency issuer faces are availability of real resources and inflationary pressure, which might occurs when total spending exceeds the productive capacity of the economy. To put it with Keynes’ words: “Anything we can actually do, we can afford.”.

To be clear, that does not lead to the inference that taxes do not play any significant fiscal role. Firstly, taxes create a demand for the currency. Secondly, taxes are a means to drain purchasing power from the non-government sector, which could be helpful to mitigate inflationary pressures and free up real resources to be commanded by the public sector – something that was definitely required in war times and might be required to tackle climate change too. On top, taxes are a means to address inequality. The higher the wealth of a person, the higher its absolute consumption, the higher its command of real resources and the higher its environmental impact. In this light, addressing inequality can not only be grounded in social justice but also in environmental considerations. Lastly, taxes (dis)incentivise certain behaviors, e.g. related to the environmental impact of certain products and services.

While most of the governments are sovereign currency issuers – most prominently the US, UK, Canada, China or Japan -, the individual member states of the eurozone and the CFA franc zone as well as countries operating under unilateral fixed exchange rate regimes are exceptions from the rule. If countries face institutional constraints hindering them from taking adequate action, those constraints need to be solved – e.g. by implementing a euro treasury to make the case for the eurozone or dismantling the pegs and monetary unions. Ultimately, the only reason for the monetary system to exist is to facilitate the movement of resources in a sophisticated way. If the current institutional arrangements are unable to facilitate that, the arrangements need to be changed. If there is a political will, there is always a way. Financial affordability, however, is nothing that my generation accepts as a valid argument for not taking adequate action on climate change! Actually, the only thing we cannot afford is not taking bold action soon enough.

Governments need to make the Green New Deal a political priority. Eventually, they might need to consider hiring people out of the private sector into the public sector – which also happened during war times. The urgency of the issue doesn’t allow us to have smart minds doing zero-sum jobs – or bullshit jobs as David Graeber has famously put it – that don’t add to the public purpose, such as facilitating speculation on derivate markets, corporate marketing, blown-up tax offices or inefficient insurances to name but a few examples. Clearly, we need to bring people into their most productive use serving the purpose of tackling climate change. Necessarily, this also entails ending the existence of involuntary unemployment by implementing a job guarantee.

The job guarantee involves the government making an unconditional job offer to anyone who is willing to work at a socially acceptable minimum wage. If the private sector is unable to create sufficient job opportunities, then the public sector has to stand ready to provide those. This creates a buffer stock of purposeful, paid jobs that expands (declines) when private sector activity declines (expands). Next to the societal benefits, the job guarantee works as an automatic stabilizer, price and wage anchor as well as a macroeconomic tool for aggregated demand management thereby stabilizing the economy at a state of full employment. Clearly, the job guarantee increases economic stability as it acts as an automatic (countercyclical) stabilizer and a superior buffer stock approach to increase price stability – compared to the current approach of having a reserve army of unemployed in order to discipline wage demands. Additionally, the job guarantee program is an effective and sustainable tool for aggregated demand management. While a demand expansion led by the private sector increases private indebtedness and thereby financial fragility, a government led expansion enhances financial stability by providing safe assets and income to the private sector – remember the point that currency issuers and currency users operate under a completely different logic, hence, face different constraints. The job guarantee is federally funded, i.e. by the monopoly issuer of the currency, but locally administered. The job guarantee scheme basically includes all types of jobs that tend to be underproduced by the private sector, e.g. community or environmental care. Essentially, the bottom line of the job guarantee approach is: there is no reason for a monetarily sovereign nation to have involuntary unemployment thus suffering from its macroeconomic and societal costs, no matter how unproductive or poor the non-human resources in that country are. The wage paid for jobs under the job guarantee scheme essentially becomes the effective national minimum wage. Similarly, the working conditions and job benefits become the lower bound of national working conditions. The job guarantee scheme effectively attacks the societal costs of unemployment, such as: poverty, social isolation, crime, regional deterioration, health issues, family breakdowns, school dropouts, loss of human capital and social, political and economic instability. Simultaneously, the job guarantee program fosters the societal benefits of full employment: poverty alleviation, community building, social networking, and intergenerational stability amongst others. Next to that, the job guarantee offers on-the-job training as well as skill development and addresses inequality since it hires off the bottom of the income distribution by offering a fixed wage and benefits package to anyone willing and able to work. In this light, the Green New Deal with its incorporation of a job guarantee qualifies as the bold, unprecedented, progressive solution desperately needed!

The economy is not an end in itself! Rather, the economy is a means to serve our demands as human society with respect to the environmental boundaries. It’s time to envision the economy as such and to utilize the economy and our productive resources in a way that keeps planet earth – our very basis of existence – inhabitable for us and future generations. While scientists work on technical solutions, economists and politicians have to catch up by gaining a proper understanding of the monetary system. Whatever is technically possible, is financially affordable. The main barriers to solving the climate issue and bringing our economy on a sustainable path are no longer technological nor financial, but ideological, political and – for some cases (as the Eurozone) – institutional. Let’s face it!

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