The Covid-19 pandemic has triggered a global recession. What should a pandemic recovery plan look like, and where should public spending be allocated to for a true recovery? An anti-austerity Green New Deal is expected to overcome a twin crises of inequality/poverty and climate change.
2020 will be remembered as the year when the pandemic ravaged the world and completely redefined what is normal. We now face a critical juncture.
To prevent the spread of the virus, many countries have implemented lockdowns and restrictions and asked their citizens to exercise restraint. This naturally led to major reductions in economic activity, which in turn triggered a global coronavirus recession. Governments responded by implementing radical economic measures to combat the crisis. This consisted of two components: the largest public spending programmes in history coupled with cuts to consumption and other taxes. The United States (US) has already implemented measures worth 3 trillion USD under the Trump administration and added another 1.9 trillion USD stimulus package in March 2021 under President Joe Biden. In Europe, many countries have temporarily reduced their value-added taxes. The Japanese government implemented a one-time cash relief of 100,000 JPY per citizen.
What was most surprising was how the World Bank and the International Monetary Fund (IMF) showed their support for these large-scale public spending policies. World Bank chief economist Carmen Reinhart recommended that ‘countries should borrow heavily during the pandemic’, while IMF managing director Kristalina Georgieva urged IMF members to ‘continue support for workers and businesses until a durable exit from the health crisis [is achieved].’ Given that Reinhart – co-author of This Time is Different: Eight Centuries of Financial Folly – has famously championed austerity, and given that the IMF has a track record of imposing public spending cuts, tax increases and other austerity measures on national governments in exchange for relief, their change of heart is all the more striking.
For decades, national governments, the World Bank and the IMF have stayed true to the spirit of neoliberalism and promoted public spending cuts. Faced with the present crisis, however, these actors abruptly changed course and returned to a Keynesian fiscal expansionism. Even if temporary, such a change is bound to have huge implications for the world economy. To lift their national economies out of the coronavirus recession, governments will have no choice but to put aside their neoliberal habits, re-examine the role of government and the public sector, and start spending.
Two important questions arise: What should a pandemic recovery plan look like, and where should public spending be allocated to? Rather than simply returning to a pre-pandemic status quo, a true recovery should help us overcome the twin crises of inequality/poverty and climate change. A Green New Deal founded on anti-austerity principles (anti-austerity GND) is the correct strategy for achieving that goal. The present essay, which is based on an academic journal contribution published back in May 2020, will explore the details and necessity of an anti-austerity GND.
Overcoming the Twin Crises of Inequality/Poverty and Climate Change: A Strategy
Climate change has been a key factor behind the exacerbation of typhoons, droughts, wildfires, heavy rains and other natural disasters as well as the rise of military conflicts and refugee crises, and its effects have been particularly devastating for those who are economically disadvantaged. The Intergovernmental Panel on Climate Change (IPCC) estimates that the world needs to reduce its CO2 emission levels by 45% by 2030 compared to 2010 and achieve carbon neutrality by 2050 in order to keep global warming below 1.5℃.
In this context, Swedish teenager Greta Thunberg began her school strikes on Fridays, demanding that the climate crisis be averted and climate justice be achieved. Her actions struck a chord with young people from all around the world and grew into a global movement known as Fridays For Future. An estimated 7.6 million people around the globe have joined the Climate March on September 2019. Thunberg’s famous United Nations (UN) speech, delivered in New York on 23 September 2019, was widely reported by the media worldwide and became something of a sensation. In her speech, Thunberg stated: ‘We are in the beginning of a mass extinction, and all you can talk about is money and fairy tales of eternal economic growth. How dare you.’ Thunberg’s activism and the Global Climate March played a pivotal role in marking the urgency of the climate crisis and the need for a solution. On the other hand, the apocalyptic tone in which it emphasises the seriousness of the climate crisis and the way it downplays economic factors have made the movement socially divisive, as some critics have pointed out.
In addition to climate change, we are also facing another crisis, that of growing inequality and poverty due to austerity policies. Neoliberal austerity policies and structural adjustment programmes have led to the demise of the middle class and worsened inequality and poverty. As a result, economies have stagnated, unemployment and precarity have worsened and anxieties around childcare and old age have deepened. Mass anxiety has led to the rise of xenophobic extreme right-wing forces.
What strategy can we rely on to overcome these two crises? Anti-austerity GND proposals, many of which have been recommended since 2018, constitute a solution. An anti-austerity GND is a set of policies which demand not only a structural transformation of our economy but also a huge paradigm shift. Based on ambitious targets for emissions reduction, renewable energy adoption and energy conservation, and based on an anti-austerity economic theory, the GND aims to mobilise massive public investment, going beyond the limits of tax revenue and fiscal discipline. In doing so, the GND becomes a radical and comprehensive strategy to enact a just transition to a low-carbon economy as well as to address inequalities between developed and developing nations, inequalities related to income, wealth, race and gender, and other injustices.
What is an Anti-Austerity Economic Model?
An anti-austerity economic theory is essentially a contemporary form of Keynesianism as defined in opposition to the neoclassical macroeconomics underpinning the pro-austerity budget hawks. This school of thought has been gaining prominence against the backdrop of long-term economic stagnation, and the coronavirus crisis has brought the theory under the limelight. Anti-austerity New Keynesianism, Modern Monetary Theory (MMT) and public money theory all agree on the following points.
- A government with the power to create money (i.e. a sovereign government) cannot become insolvent.
- Taxation is a way to control inflation by diminishing the purchasing power in the market; there is no intrinsic reason for balancing the budget.
- Until full employment is reached, creating money to fund government spending does not cause inflation.
- Excess savings in the private sector go hand in hand with government deficits.
- The central bank is de facto an arm of the government; the two should therefore be treated as a ‘consolidated government’.
From a policy perspective, an anti-austerity economic theory supports the growth of social services such as universal healthcare, free public education and the expansion of social security. The theory also supports the idea of increasing public spending in order to stimulate the economy and create new jobs and income. Furthermore, all currents of anti-austerity economics agree on tackling inequality by imposing higher taxes on large corporations and the rich. The theory rejects the absolutisation of public debt repayment and a balanced budget as misguided neoliberal creeds, while moves such as ‘monetary financing’ – public spending based on money created by the central bank – and ‘quantitative easing’ (QE) – bond purchases made by the central bank – are not seen as taboo but are rather encouraged.
Recently, the United States and the European Union (EU) have witnessed the rise of anti-immigrant, pro-EU-withdrawal political forces as well as the emergence of new leftist parties rallying with traditional left-wing and progressive parties around an anti-austerity economic theory. Many of the latter are championing an anti-austerity GND.
Anti-Austerity Elements of a Green New Deal
The phrase ‘Green New Deal’ derives from US President Franklin D. Roosevelt’s New Deal, whose aim was to combat the Great Depression in 1929. GNDs to date may be roughly categorised into two waves based on time period, social context, relevant actors and the underlying economic theories. Both waves have been strongly influenced by the Green Party who played a leading role in the promotion of environmental and economic policies over the decades.
The first wave came between 2008 and 2009, whose most noteworthy example is US President Barack Obama’s proposal. The second wave consists of a slew of proposals released after 2018, epitomised by the plan put forth by US Representative Alexandria Ocasio-Cortez (AOC) among others. Individual politicians of note who have championed an anti-austerity GND include US Democratic representative AOC, former US presidential hopeful Bernie Sanders, former UK Labour Party leader Jeremy Corbyn and DiEM25 leader Yanis Varoufakis. Noteworthy scholars on this topic include, Mariana Mazzucato (author of The Entrepreneurial State), Ann Pettifor (adviser to the UK Labour Party), Robert Pollin, Stephanie Kelton (MMT theorist) and Pavlina Tcherneva.
US representative AOC has clearly stated that her GND will be funded by large-scale deficit spending, a statement which caused much controversy. AOC’s position reflects the view that a sovereign government cannot become insolvent.
Sanders, on the other hand, proposes that the government make direct large-scale investments of 16.3 trillion USD in order to achieve the goals of his GND. Sanders’ GND is a highly progressive programme which aims to achieve many ambitious goals within a decade. Since a huge amount of public investment is needed to kickstart the Sanders GND, it is reasonable to say that the main source of funding needs to be something other than tax revenue.
In the UK, the GIR, which is the GND proposal of the Labour Party led by Corbyn, states that 250 billion GBP will be dedicated to renewable and low-carbon energy and transport, biodiversity and environmental restoration, while also providing 250 billion GBP in loans for enterprise, infrastructure and innovation over 10 years. According to the GIR, these goals will ‘require a full mobilisation of national resources, both public and private’, a position which seems to encourage both public and private investments at scale.
In the case of DiEM25 led by Varoufakis, at least 5% of European GDP will be invested in the GND. Sources of funding include massive private bank savings generated by QE programmes as well as Eurobonds (green bonds) issued by the European Investment Bank (EIB) whose value is guaranteed by the European Central Bank (ECB)’s readiness to buy.
To summarise, anti-austerity GNDs advocated by new leftist parties and traditional left-wing and progressive parties in Europe and the US are based on an anti-austerity economic theory, supporting large-scale public investments in energy transformation and public infrastructure projects, economic and employment stimuli and social security programmes. Moreover, the anti-austerity GND approach does not rely on taxation as its main source of funding. Progressive income taxes play a role in resource redistribution, while carbon taxes and energy taxes are seen to function as a tax on ‘bads’ for curbing GHG emissions and energy consumption. As for funding, one suggestion is to mobilise private funds by issuing green investment bonds. While difficult for EU member states, deficit spending based on monetary financing may be considered an option for sovereign governments such as those of the UK and the US.
Challenges Facing an Anti-Austerity Green New Deal
The first challenge concerns taking a stand on nuclear power. Both first- and second-wave GNDs have never explicitly opposed nuclear power. Indeed, some have even promoted it. While many anti-austerity GNDs seem to implicitly take a no-nukes position by aiming for a 100% renewable energy system, they do not explicitly oppose nuclear power, possibly because of a desire to stay on ‘good terms’ with the nuclear power sector (and its unions).
Secondly, extant GNDs tend to downplay the introduction of a carbon tax which is, after all, potentially a highly effective way to reduce carbon emissions. A notable exception is the DiEM25 proposal which calls for the introduction of a carbon fee and dividend. Because carbon taxes tend to be politically difficult to implement and regressive, anti-austerity GNDs tend to avoid them in order to properly reduce inequality and poverty while also combating climate change.
Thirdly, anti-austerity GNDs tend to have extremely ambitious goals. Many of these proposals aim for a 100% renewable energy rate and a drastic or total reduction of GHG emissions by 2030.
The fourth challenge is to see to what extent an anti-austerity economic theory will find acceptance. While austerity policies have brought stagnation and scarcity to many countries, anti-austerity has been advocated by many prominent economists, combining rich theoretical resources with strong empirical promises. Nonetheless, due to its clear opposition against the dominant austerity outlook of politicians, bureaucrats, media persons and economists around the globe, anti-austerity needs to be continually disseminated in an intellectually energetic and rigorous manner before it is properly understood by a wider audience.
An Historical Turning Point
In November 2020, Joe Biden defeated Donald Trump in the US presidential elections. Biden has endorsed nearly every tenet of the anti-austerity GND (except the term itself) of Sanders, his former Democratic rival. This means that a Biden administration might become the first government in the world to actually implement a GND. Nonetheless, there is no royal road to success. Neoliberalism, the spirit of the age, may rear its ugly head once more in an attempt to block large-scale public spending proposals for combating climate change and implementing environmental policies. To overcome this obstacle for good, we need to shake off the deficit myth.
Human history shows that climate change events, such as the Little Ice Age, and pandemics, such as the plague, have pushed civilizations to adapt and develop. We should own up to the fact that we are living in an historic moment of change. We should dare to imagine that another world is possible.