The UK economy remains in crisis. It is still in recession. Any recovery, when it comes, will be fragile. The capacity for a foreseeable disaster to become a nightmare depression still exists.
Two things could precipitate the crisis that creates depression. The first would be any serious attempt to cut government spending at this moment. If this were to happen the fall in demand would leave unemployment spiraling, government debt escalating and deflation a significant probability. When that combination occurs the chance of getting out of depression is limited.
The second crisis that could cause depression would be international failure to cooperate on tackling this issue. Attempts to restrict trade at this moment, to impose tariffs or to simply rely on the action of others to stimulate the economy could all create the inertia that tips the balance downwards.
Both possibilities exist: because of the threat of a Conservative government dedicated to slashing public services irrespective of the social and economic consequences for the people of the UK, and elsewhere, the risk of the former outweighs the latter by some way right now.
The Green New Deal seeks to tackle these issues, but does something that few other strategies offer: that is an integrated short and long term view of the way in which the economy should develop.
There is no doubt what needs to happen in the short term. In classic Keynesian fashion the government should, during the current period of serious unemployment and under-employment (the latter being disguised inactivity within self employment and absence from the job-seeking register) spend more to create the demand within the economy that is the only way of getting us out of recession.
Two things follow from this observation. Firstly, spending pays for itself. As I have shown, this can almost be true in terms of taxation alone. But there is, of course, much more to it than that. The result of keeping a person in work is that their spending helps keep other people in work. The more people kept in work the less the demand on government to fund unemployment and other benefits and the more cash is receives in taxation to reduce debt. The evidence is unambiguous: in situations where there is less than full employment increased government spending both reduces debt and creates little or no risk of inflation as there is excess capacity in the economy to absorb any price pressure.
Second, this policy works best, by far, if appropriate spending is chosen for the money injected into the economy. Subsidising consumption makes no sense at all. Firstly, quite a lot of that consumption spending will immediately flow overseas. Whilst any recovery package must be international, for reasons noted above, it is clearly beneficial for the process of democratic accountability if the impact is kept as close to home as possible. Second, keeping the impact as far as possible within the UK both ensures that revenues will be collected as a result of the stimulus that reimburses government for the spend and the impact on the value of sterling will be restricted, which is an important part of the economic equation.
For all these reasons we suggest that the spending of money into the economy that is essential if we are to restore demand to a point where full employment is created (which we think a basic requirement of economic management in a democratic society) should be spent on three things.
The first is on carbon saving. There is an extraordinary amount of ‘low hanging fruit’ where relatively small amounts of spending can deliver high carbon saving, and in turn save on future energy bills which provide the means for paying back the investment and which also protect the future value of sterling exchange rates by reducing future requirements for foreign exchange to pay for energy imports. The spend in question is on simple things: loft insulation, cavity wall insulation, double glazing and new boilers. All these create new jobs, almost no planning lead time is involved and the payback is the highest available in carbon reduction. Releasing a ‘carbon army’ of people to do this work could stimulate our economy better than anything else available in the short term.
Second, we promote mass roll out of programmes such as smart metering and local energy generation which encourage the turning of ‘every building into a power station’. This is possible and desirable.
Third, in the longer term spending on permanently greening the economy is needed. We must invest in new energy technology, new generating capacity, efficient local energy grids, combined heat and power schemes, wind, solar, wave and other energy systems and more besides. This takes time. But given that few think that there is any upside in prospect in our economy right now and that the best we can hope for is long term stable unemployment we not only can but must think about the long term.
And staggeringly, this will cost us nothing. Keeping people in work will provide the payback on government spending – it always has and it always will when there is significant unemployment – and the investment pay back yields on all these types of investment are short: they are all economically viable and yet create long term benefit for us all.
And if we get back to full employment? Then we need an entirely new type of saving – in locally raised carbon indexed bonds to fund the long term investment and carbon reduction our economy needs – and to provide the long term investment returns our pensions require.
That’s the beauty of the Green New Deal: returns now and in the future in terms of employment, saving, carbon and a better quality of life all of which makes complete economic sense.