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Investment is a Win-Win for the Global Economy and Climate Change

2/2/2011 10:12:06 AM

Tags: Joseph Stiglitz, John Maynard Keynes, economy, global warming, climate change, investment, environment, New Deal 2.0, Jon Rynn


This article was originally published at New Deal 2.0 


Recently Joseph Stiglitz, the Nobel-prize-winning economist and Senior Fellow and Chief Economist at the Roosevelt Institute, gave a very interesting speech in South Africa concerning climate change and the global economy. He argued that by implementing policies that help to reverse global warming, we can also reverse the global economic downturn. Although he also pointed out many barriers to doing so, he outlined some interesting policy proposals.

For me, the most interesting part of his speech concerned the use of a Keynesian approach, not just for a single country, as is usually done, but for the entire world economy. Keynes pointed out that when the private sector is unable to generate enough demand in the economy, that is, it is unable generate enough spending from consumption and investment, then the government must step in to kickstart spending. Thus in recessions and depressions many now acknowledge that at some point it may be necessary for the government to spend more than it takes in to get the economy moving again. (See numerous articles from Marshall Auerback on this basic idea.)

There are a couple of fine points to what Keynes was saying, however, that are either often glossed over or challenged. First, he asserted that when demand is low, saving can get in the way of recovery. So — and this is the part that is ignored — since the rich save more than the poor, their excess income gets in the way of recovery. The horrendous implication, from the rich person’s point of view, is that they should be taxed more. The less direct way to put this, which is the way it is discussed even in much of the progressive media, is that an “unequal distribution of wealth” leads to negative economic outcomes. The important statistic for the US is that while in 1970 the top 1% of households pulled in about 10% of total income, now they receive close to 25%. Not good, from a purely Keynesian perspective.

So what does this have to do with climate change? Since he was speaking in South Africa, it was easy for him to point out that the world distribution of wealth is very unequal. Because of this inequality, it will be much harder for developing countries to create less carbon-intensive economies through large-scale investment than for developed countries. In addition, the poorer countries consume more and the richer countries save more. So an obvious policy approach is to tax financial transactions, which moves money from something that (to be charitable) involves savings into consumption and investment by developing countries. The richer countries could also simply give grants to the poorer countries. Stiglitz claimed that about $200 billion per year would be required to help developing countries make the transition to a less carbon-intensive future, which could be financed from a financial tax.

The second implication of Keynes’ ideas is that the economy needs more investment when it is in a downturn. We certainly need a good deal of investment to create less carbon-intensive economies, and it so happens that, according to Keynes, investment, particularly in factories, is the best way to pull economies out of slumps. While he famously suggested that digging holes and filling them up again would also do the trick, he clearly preferred doing something useful with investments on the grounds that investment is generally good for a society and that it is a surer way to speed recovery than consumption.

Stiglitz argued that what we have now is an inadequate level of global aggregate demand, which is to say, there isn’t enough consumption and investment for the entire global economy to pull out of the recession. Thus, he stressed, reversing climate change is an opportunity for the economy, not a drag. We need investment for the good of the climate and we need investment for the good of the economy — therefore what we have is a win-win situation.

But how do we encourage investment? Stiglitz’s answer is to put a price on the emission of carbon, thus stimulating investment into less carbon-intensive technologies. He thinks that eventually carbon will be priced at 80 dollars per ton, which means that it will probably be cheaper to build a wind farm than to build a coal plant. In fact, it might become more economically rational, with a price on carbon, to shut down an existing coal plant and build a new wind farm to replace it. And new wind farms mean new investment, which means increasing global aggregate demand, which means pulling out of the global recession.

Of course, there are roadblocks in the way of this process. For one thing, there is the power of the greatest emitters of carbon, the oil and coal industries, among others. Then there is the expense that a price on carbon would mean for poorer countries — thus the need for the richer part of the world to subsidize the poorer part. Even rich countries, of course, would not take easily to a price for carbon, as we saw in last year’s defeat of lukewarm cap-and-trade legislation. Stiglitz argues that for an international treaty to be effective, it needs to have enforceable sanctions, such as hitting the offending nation’s exports with a price increase. But as the managing editor of South Africa’s largest newspaper argued in a generally favorable response to Stiglitz’s lecture, trade sanctions would mean that developing countries would be hurt, thus requiring some more subsidies in order to equalize the playing field.

In all, I think Stiglitz laid out the foundation of a very workable global economic strategy. I would propose another element: encouraging direct investment and construction of infrastructure on the part of governments. While Stiglitz mentioned the idea of regulation and praised mass transit as an adjunct to the general policy of pricing carbon, it was not a focus of his approach. But here is another possibility for a win-win — if developed countries sold or gave factories to the developing countries to create the wind turbines, electric rail and cars, and solar plants that would allow them to reduce carbon emissions, it would give the developed countries a huge boost economically and the developing countries the capability to become much wealthier in a sustainable way. Think of it as a global Marshall Plan or Works Progress Administration. The developed countries could promise, say, one trillion dollars per year in machinery to the developing countries, which would be a strategic, targeted, Keynesian method for pulling the entire world economy out of its slump. And it would go far to meet what Stiglitz called the greatest challenge we have ever faced: the threat of global climate change.

Jon Rynn is the author of Manufacturing Green Prosperity: The power to rebuild the American middle class, available from Praeger Press. He holds a Ph.D. in political science from the City University of New York.  

Source: New Deal 2.0 

Image by NASA via wwworks at Creative Commons. 

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