This Radical Plan to Fund the Green New Deal Just Might Work

A network of public banks could underwrite the new New Deal in the same way President Franklin Roosevelt financed the original.

This is part one of a two-part essay. Part two can be found here.

With what 聽鈥済alloping momentum,鈥� the 鈥淕reen New Deal鈥� promoted by newly elected U.S. Rep. Alexandria Ocasio-Cortez (D-NY) appears to be forging a political pathway for solving all of the ills of society and the planet in one fell swoop. It would give a House Select Committee 鈥渁 mandate that connects the dots between energy, transportation, housing and聽construction, as聽well as health care, living wages, a jobs guarantee鈥� and more. But to ,聽it is just political theater, since 鈥渆veryone knows鈥� a program of that scope cannot be funded without a massive redistribution of wealth and slashing of other programs (notably the military), which is not politically feasible.

Perhaps, but Ocasio-Cortez and the 22 representatives joining her in calling for a Select Committee are also proposing a novel way to fund the program, one which could actually work. The resolution says , 鈥渦sing a combination of the Federal Reserve, a new public bank or system of regional and specialized public banks, public venture funds and such other vehicles or structures that the select committee deems appropriate, to ensure that interest and other investment returns generated from public investments made in connection with the plan will be returned to the treasury, reduce taxpayer burden and allow for more investment.鈥�

A network of public banks could fund the Green New Deal in the same way President Franklin Roosevelt funded the original New Deal. At a time when the banks were bankrupt, he used the publicly owned Reconstruction Finance Corporation as a public infrastructure bank. The Federal Reserve could also fund any program Congress wanted, if mandated to do it. Congress wrote the Federal Reserve Act and can amend it. Or the Treasury itself could do it, without the need even to change any laws. The Constitution authorizes Congress to 鈥渃oin money鈥� and 鈥渞egulate the value thereof,鈥� and that power has been delegated to the Treasury. It could , put them in its bank account, and start writing checks against them. What stops legislators from exercising those constitutional powers is simply that 鈥渆veryone knows鈥� Zimbabwe-style hyperinflation will result. But will it? Compelling historical precedent shows that this need not be the case.

Michael Hudson, professor of economics at the University of Missouri, Kansas City, has studied the hyperinflation question extensively. He writes聽that . Rather, 鈥淓very hyperinflation in history has been caused by foreign debt service collapsing the exchange rate. The problem almost always has resulted from wartime foreign currency strains, not domestic spending.鈥�

As long as workers and materials are available and the money is added in a way that reaches consumers, adding money will create the demand necessary to prompt producers to create more supply. Supply and demand will rise together and prices will remain stable. The reverse is also true. If demand (money) is not increased, supply and GDP will not go up. New demand needs to precede new supply.

The public bank option: The precedent of Roosevelt鈥檚 New Deal

Infrastructure projects of the sort proposed in the Green New Deal are 鈥渟elf-funding,鈥� generating resources and fees that can repay the loans. For these loans, advancing funds through a network of publicly owned banks will not require taxpayer money and can actually generate a profit for the government. That was how the original New Deal rebuilt the country in the 1930s, when the economy was desperately short of money.

The publicly owned 聽was a remarkable publicly owned credit machine that allowed the government to finance the New Deal and World War II without turning to Congress or the taxpayers for appropriations. First instituted in 1932 by President Herbert Hoover, the RFC was not called an infrastructure bank and was not even a bank, but it served the same basic functions. It was continually enlarged and 聽to meet the crisis of the times, until it became America鈥檚 largest corporation and the world鈥檚 largest financial organization. Its semi-independent status let it work quickly, allowing New Deal agencies to be financed as the need arose.

The RFC Act of 1932 provided the RFC with capital stock of $500 million and the authority to extend credit up to $1.5 billion (subsequently increased several times). The initial capital came from a stock sale to the U.S. Treasury. With those resources, from 1932 to 1957 . A small part of this came from its initial capitalization. The rest was borrowed, chiefly from the government itself. Bonds were sold to the Treasury, some of which were then sold to the public; but most were held by the Treasury. The RFC ended up borrowing a total of $51.3 billion from the Treasury and $3.1 billion from the public.

Thus the Treasury was the lender, not the borrower, in this arrangement. As the self-funding loans were repaid, so were the bonds that were sold to the Treasury, leaving the RFC with a net profit. The RFC was the lender for thousands of infrastructure and small business projects that revitalized the economy, and these loans produced a 聽on the RFC鈥檚鈥渘ormal鈥� lending functions (omitting such things as extraordinary grants for wartime). The RFC financed roads, bridges, dams, post offices, universities, electrical power, mortgages, farms, and much more; and it funded all this while generating income for the government.

The central bank option: How Japan is funding Abenomics with quantitative easing

The Federal Reserve is another funding option before the Green New Deal. The Fed showed what it can do with 鈥渜uantitative easing鈥� when it created the funds to buy 聽and $1.77 trillion in mortgage-backed securities, all without inflating consumer prices. The Fed could use the same tool to buy bonds earmarked for a Green New Deal; and since it returns its profits to the Treasury after deducting its costs, the bonds would be nearly interest-free. If they were rolled over from year to year, the government would in effect be issuing new money.

This is not just theory. Japan is actually doing it, without creating even the modest 2 percent inflation the government is aiming for. 鈥淎benomics,鈥� the economic agenda of Japan鈥檚 Prime Minister Shinzo Abe, combines central bank quantitative easing with fiscal stimulus (large-scale increases in government spending). , Japan has seen steady economic growth, and its unemployment rate has fallen by nearly half; yet inflation remains very low, at 0.7 percent. Social Security-related expenses accounted for 55 percent of general expenditure in the 2018 federal budget, and a 聽is maintained for all citizens. 聽since the end of the first quarter of 2013, a much better record than during the prior two decades of Japanese stagnation; and the Nikkei stock market is at levels not seen since the early 1990s, driven by improved company earnings. Growth remains below targeted levels, but 聽in May 2018, this is because fiscal stimulus has actually been too small. While spending with the left hand, the government has been taking the money back with the right, increasing the sales tax from 5 percent to 8 percent.

聽even by the once-critical International Monetary Fund. After Prime Minister Shinzo Abe crushed his opponents in October 2017, Noah Smith , 鈥淛apan鈥檚 long-ruling Liberal Democratic Party has figured out a novel and interesting way to stay in power鈥攇overn pragmatically, focus on the economy and give people what they want.鈥� He said everyone who wanted a job had one; small and midsize businesses were doing well; and the BOJ鈥檚 unprecedented program of monetary easing had provided easy credit for corporate restructuring without generating inflation. Abe had also vowed to make both preschool and college free.

Not that all is idyllic in Japan. 聽lack secure full-time employment and adequate pensions. But the point underscored here is that large-scale digital money-printing by the central bank to buy back the government鈥檚 debt combined with fiscal stimulus by the government (spending on 鈥渨hat the people want鈥�) has not inflated Japanese prices, the alleged concern preventing other countries from doing it.

Abe鈥檚 novel economic program has achieved more than just stimulating growth. By selling its debt to its own central bank, which returns the interest to the government, the Japanese government has in effect been canceling its debt; and until recently, it was doing this at the rate of a whopping $720 billion (楼80tn) per year. According to fund manager :

The Bank of Japan is in the process of owning most of the outstanding government debt of Japan (it currently owns around 40 percent). BOJ holdings are part of the consolidated government balance sheet. So its holdings are in fact the accounting equivalent of a debt cancellation. If I buy back my own mortgage, I don鈥檛 have a mortgage.

If the Federal Reserve followed suit and bought 40 percent of the U.S. national debt, it would be holding $8 trillion in federal securities, three times its current holdings from its quantitative easing programs. Yet liquidating a full 40 percent of Japan鈥檚 government debt has not triggered price inflation.

Filling the gap between wages, debt, and GDP

Rather than stepping up its bond-buying, the Federal Reserve is now bent on 鈥渜uantitative tightening,鈥� raising interest rates and reducing the money supply by selling its bonds into the market in anticipation of 鈥渇ull employment鈥� driving up prices. 鈥淔ull employment鈥� is considered to be 4.7 percent unemployment, taking into account the 鈥渘atural rate of unemployment鈥� of people between jobs or voluntarily out of work. But the economy has now hit that level and prices are not in the danger zone, despite nearly 10 years of 鈥渁ccommodative鈥� monetary policy. In fact, the economy is 聽or full productive capacity, with gross domestic product remaining well below both the long-run trend and the level predicted by forecasters a decade ago. In 2016, real per capita GDP was 聽of the Congressional Budget Office, and it shows no signs of returning to the predicted level.

In 2017, U.S. gross domestic product was $19.4 trillion. Assuming that sum is 10 percent below full productive capacity, the money circulating in the economy needs to be increased by an added $2 trillion to create the demand to bring it up to full capacity. That means $2 trillion could be injected into the economy every year without creating price inflation. New supply would just be generated to meet the new demand, bringing GDP to full capacity while keeping prices stable.

This annual injection of new money not only can be done without creating price inflation; it actually needs to be done to reverse the massive debt bubble now threatening to propel the economy into another Great Recession. Moreover, the money can be added in such a way that the net effect will not be to increase the money supply. Virtually our entire money supply is 聽as loans, and any money used to pay down those loans will be extinguished along with the debt. Other money will be extinguished when it returns to the government in the form of taxes. The mechanics of that process, and what could be done with another $2 trillion injected directly into the economy yearly, will be explored in Part 2 of this article.

This article was originally published on . It has been published here with permission.

Ellen Brown is an attorney, chair of the Public Banking Institute, and author of thirteen books including Web of Debt, The Public Bank Solution, and Banking on the People: Democratizing Money in the Digital Age. She also co-hosts a radio program on聽PRN.FM聽called 鈥淚t鈥檚 Our Money.鈥� Her 300+ blog articles are posted at聽EllenBrown.com.

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