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Paying for the Green New Deal

Summary:
George Selgin was interviewed on the BBC today and did an excellent job of explaining the unrealistic assumptions being made by proponents of the Green New Deal (GND). I encourage readers to listen to the interview (which also includes two other pundits.) Here I’d like to put in my two cents worth, as proponents of this policy often muddle the issues with all sorts of distractions. First I’ll discuss paying for the GND in a financial sense and then in an opportunity cost sense. In a financial sense, people often talk about paying for government spending with taxes, borrowing or money creation. They might as well talk about taxes, taxes, or taxes. After all, government debt is merely pushing taxes into the future, and money creation (seignorage) is a tax on money

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George Selgin was interviewed on the BBC today and did an excellent job of explaining the unrealistic assumptions being made by proponents of the Green New Deal (GND). I encourage readers to listen to the interview (which also includes two other pundits.)

Here I’d like to put in my two cents worth, as proponents of this policy often muddle the issues with all sorts of distractions. First I’ll discuss paying for the GND in a financial sense and then in an opportunity cost sense.

In a financial sense, people often talk about paying for government spending with taxes, borrowing or money creation. They might as well talk about taxes, taxes, or taxes. After all, government debt is merely pushing taxes into the future, and money creation (seignorage) is a tax on money holders.

So let’s call seignorage “unconventional taxes” and all other taxes “conventional taxes”. In that case it’s a choice between current conventional taxes, future conventional taxes, and current and/or future unconventional taxes.

As a practical matter we can rule out unconventional taxes as a major source of funds for the GND. In the US we have a 2% inflation target, which doesn’t allow for much seignorage. Even if you doubled it to 4%—probably the highest sustainable rate that is politically feasible these days—the sums would still be far too small to make a difference, far below 1% of GDP.

This simplifies things. When you hear these debates and someone starts talking about the Fed monetizing the debt to pay for something big, you can just cover your ears and ignore everything being said until they get back to reality. That’s not to say the Fed cannot buy up lots of debt with interest bearing reserves. But interest bearing reserves are just another form of government debt, and don’t actually pay for anything. You only get significant seignorage from printing $100 bills—seignorage from the rest of high-powered money is trivial

So almost all of any major new program will be paid for with conventional taxes. A responsible government sets conventional tax rates at a level that minimizes deadweight losses over time. Since we already have a big deficit, and bad demographics will push spending even higher in the future, a responsible government will pay for any new spending program with higher current taxes (to minimize deadweight losses.) That’s not to say an irresponsible government (i.e. Trump) might not decide to pay for it with future taxes. But one way or another, new spending will be paid for with higher conventional taxes.

So what about the opportunity cost of extra spending? Might that be lower than expected due to slack in the economy? Might new spending boost economic growth and pay for itself? Unlikely, for three reasons. First, we are probably very close to the natural rate of output. Thus new spending on government programs will displace private spending (C+I).

Second, even if the economy still has slack, it’s very unlikely that it will still have slack two years from today, which is the soonest that the GND would be implemented. It’s already a decade since the Great Recession and wages and prices have probably adjusted by now. If a little bit of adjustment remains, then it’s likely to occur over the next two years.

And even if I’m wrong on both counts, there would still be very little multiplier effect, as the Fed also believes there is very little slack in the economy. They will offset any fiscal boost with tighter money, preventing any significant stimulative effect. (That’s true even if Moore and Cain are added to the FOMC—they are only 2 votes out of 12. And given their history, will they vote to bail out a bunch of socialists in 2021?)

Bottom line: Forget all the MMT hocus-pocus. Any major new spending program will be paid for with conventional taxes, preferably right now. And the opportunity cost will be lower private spending. That’s not to say that all proposals for new government spending are unjustified. But in the case of global warming we don’t need more spending; we need more carbon taxes. K.I.S.S.


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Scott Sumner
Scott B. Sumner is Research Fellow at the Independent Institute, the Director of the Program on Monetary Policy at the Mercatus Center at George Mason University and an economist who teaches at Bentley University in Waltham, Massachusetts. His economics blog, The Money Illusion, popularized the idea of nominal GDP targeting, which says that the Fed should target nominal GDP—i.e., real GDP growth plus the rate of inflation—to better "induce the correct level of business investment".

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