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

With what Naomi Klein calls “galloping momentum,” the “Green New Deal” promoted by newly-elected 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 “a mandate that connects the dots between energy, transportation, housing, as well as healthcare, living wages, a jobs guarantee” and more. But to critics even on the left it is just political theater, since “everyone knows” 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 funding will primarily come from the federal government, “using 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, in order 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.”  

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 “coin money” and “regulate the value thereof,” and that power has been delegated to the Treasury. It could mint a few trillion dollar platinum coins, put them in its bank account, and start writing checks against them. What stops legislators from exercising those constitutional powers is simply that “everyone knows” 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 that those disasters were not due to government money-printing to stimulate the economy. Rather, “Every 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.”

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’s New Deal

Infrastructure projects of the sort proposed in the Green New Deal are “self-funding,” 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 at a time when the economy was desperately short of money.

The publicly-owned Reconstruction Finance Corporation (RFC) was a remarkable publicly-owned cedit 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 modified by President Roosevelt to meet the crisis of the times, until it became America’s largest corporation and the world’s 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 US Treasury. With those resources, from 1932 to 1957 the RFC loaned or invested more than $40 billion. 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 total net income of $690,017,232 on the RFC’s “normal” 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 “quantitative easing” when it created the funds to buy $2.46 trillion in federal debt and $1.77 trillion in mortgage-backed securities, all without inflating consumer prices. The Fed could use the same tool to buy bonds ear-marked 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. “Abenomics,” the economic agenda of Japan’s Prime Minister Shinzo Abe, combines central bank quantitative easing with fiscal stimulus (large-scale increases in government spending). Since Abe came into power in 2012, 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 universal healthcare insurance system is maintained for all citizens. Nominal GDP is up 11 percent 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 according to the Financial Times 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.

Abenomics has been declared a success even by the once-critical International Monetary Fund. After Prime Minister Shinzo Abe crushed his opponents in October 2017, Noah Smith wrote in Bloomberg, “Japan’s long-ruling Liberal Democratic Party has figured out a novel and interesting way to stay in power – govern pragmatically, focus on the economy and give people what they want.” He said everyone who wanted a job had one; small and midsized businesses were doing well; and the BOJ’s 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. Forty percent of Japanese workers 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’s debt combined with fiscal stimulus by the government (spending on “what the people want”) has not inflated Japanese prices, the alleged concern preventing other countries from doing it.

Abe’s 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 (¥80tn) per year. According to fund manager Eric Lonergan in a February 2017 article:

The Bank of Japan is in the process of owning most of the outstanding government debt of Japan (it currently owns around 40%). 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’t have a mortgage.

If the Federal Reserve followed suit and bought 40 percent of the US 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’s 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 “quantitative tightening,” raising interest rates and reducing the money supply by selling its bonds into the market in anticipation of “full employment” driving up prices. “Full employment” is considered to be 4.7 percent unemployment, taking into account the “natural rate of unemployment” 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 “accommodative” monetary policy. In fact, the economy is not near either true full employment 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 10 percent below the 2006 forecast of the Congressional Budget Office, and it shows no signs of returning to the predicted level.

In 2017, US 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 another $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 created by banks 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 first posted on Truthdig.com. Ellen Brown is an attorney, founder of the Public Banking Institute, and author of twelve books including Web of Debt and The Public Bank Solution. A 13th book titled Banking on the People: Democratizing Finance in the Digital Age is due out early next year. She also co-hosts a radio program on PRN.FM called “It’s Our Money.” Her 300+ blog articles are posted at EllenBrown.com.

18 Responses

  1. […] Ellen Brown Web of Debt […]

  2. Reblogged this on The Most Revolutionary Act and commented:
    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.

    • Yes, and the money ultimately came from bonds purchased by the public to fund the RFC. We need legislation to authorize the Treasury to create money as needed.

  3. Ellen – you realize you are espousing precisely what monetary reformers such as AMI, Alliance For Just Money, Positive money, International Movement for Monetary Reform have been promoting all along – the need for legislation to allow the government to create money.

    • Yes, “Ellen – you realize you are espousing precisely what monetary reformers such as AMI, Alliance For Just Money, Positive money, International Movement for Monetary Reform have been promoting all along – the need for legislation to allow the government to create money.”

  4. Many thanks, Ellen. Was the RFC money created out of thin air, as it were, or did it come from a bond issue, from money lent by the public?

    • Money came from bond purchases from the public to fund the initial outlay from the Treasury. No government thin-air money creation here (except that the public money to purchase the bonds was obtained from thin-air money created by commercial banks).

  5. …A ‘Mortgage’ equals….money out of thin air….

    • Mortgage is Old French for–wait for it–“DEAD PLEDGE”. A very fitting name indeed.

  6. Excellent idea overall, and I second the motion. Alternatively, we could simply admit the truth about Monetary Sovereignty, debunk the Big Lie that federal taxes actually pay for federal spending, and fund the Green New Deal, as well as literally all other federal government via Overt Congressional Funding. In other words, just print the money ad hoc via Congressional authorization, full stop. No pretense or need to worry about borrowing or tax revenue at all, nor would the FERAL Reserve even need to be involved at all. But of course that would make too much sense. (See Rodger Malcolm Mitchell’s Ten Steps to Prosperity.) In the meantime, the trillion-dollar coin idea would be a good workaround, as would something like Dennis Kucinich’s NEED Act.


  7. This video comments on Cortez’ plan you might want to see.

  8. While I will concede that Ellen Brown frequently espouses public credit issuance versus the three millenium old private shylocking racket that has burdened humanity with unpayable debt, war, and endless absurd excuses for its malpractice, she does not stick to her storyline there and begins to conflate the concept of public money with the concept of not creating inflation while issuing ever increasing amounts of credit. These are two completely unrelated topics and should not have been conflated in one article.

    Please, Ellen, just tell your former associates on the Street that we do not want to play patty cake with any private central banks anymore. Their sorry era of human ant farming is over. Soon someone will eradicate the private banks by law and copycats will appear out of the former stagesets of every debased nation eager to grab peace from the jaws of endless wars, along with a piece of the action, estimated to nearly make everyone in a commonwealth public credit scheme rich, were the tables turned.

    Perhaps people who really want to be free can now turn to the only structural remedy, sovereign money in lieu of Federal Reserve Notes, that will ever solve the sucking of wealth right out of humanity’s pockets. For amazingly, the simple return of compounded profit from a commonwealth ex nihilo fractional reserve banking facility, redirected by law to the public as creditor, instead of deleted from them as debt, is not even the greatest boon available to people everywhere; the boon of true sovereignty matters more. To control where issued money is spent and by whom is the greatest benefit as it alone confers freedom, a concept few today can imagine as it no longer actually exists in any private global debt scheme. Ask Greenspan what he meant by his claim that the Federal Reserve answers to no one in the US corporation dependent upon it. Debt slaves can beg; private issuance has full discretion in starting wars and ruining the middle class. Never forget the old saying, who pays the piper, calls the tune.

    Soon when the meme of public credit gains favor in the ruined national economies, taken down by controlled demolition, it will be hard for the whores frontrunning the Fed to come up with reasons why the public should be caught in their vise any longer. And then the regime we have slaved under since coinage and ironmongering, will be over for all time.

    You want structural change? Simply legally mandate sovereign money. Only a pen stroke now can derail what is otherwise going to soon become very, very dark for all of us. Who thinks the coming storm will spare them is not paying attention. It is time to act as captains of our destiny to end the era of privatized national credit, if you can even call it credit when it is actually debt.

    • Hear, hear!

  9. The people commenting here are really only debating the efficacy of QE and not even touching upon human freedom to determine the fate of their own nations. They simply, like you, do not understand money, but their rulers certainly do.

  10. We should take this approach to pay off our existing debt to offshore holders. As slow as required to prevent inflation. We should not take this approach to try to create a socialist Utopia. In any event, lets finally get the Fed out of profiting from the public debt – turn that job back to the Treasury per the Constitution. Morph the Fed and our existing banking system to one that’s limited to serving the commercial economy. Plenty of profit available for them without sucking the taxpayers.

  11. What is a socialist utopia?

    • a myth !

    • It must be something like a capitalist utopia. Methinks a mixed economy WITHOUT the capitalist pigs (especially the banks) running the show for themselves is the correct solution.

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