Democrats are starting to take green investment seriously. To move these plans anywhere near a Green New Deal—and avoid ceding power to Wall Street—will require a political mobilization from the bottom up.Mark Paul and Daniel Aldana Cohen ▪ September 21, 2020 – Dissent Magazine
Public investment in green energy has moved to the mainstream of the Democratic Party, with even the moderate Joe Biden promising $2 trillion in spending this summer. But $2 trillion isn’t enough; it wouldn’t come close to covering the cost of the policies called for by the House Select Committee on the Climate Crisis in June. So if Biden wins, how would he actually deliver the levels of investment needed to rapidly decarbonize and tackle inequalities of race and class? To build toward anything like a Green New Deal (GND), we’re going to need a strategy to deliver the massive investments essential to transforming communities across the country.
Policy thinkers and organizers are mulling a number of new institutions, from narrow federal green bank proposals to more ambitious assemblages. Everyone is looking for ways to bring in additional private investment, ramp up public investment, or both. Behind the charts and jargon are massive questions of economic and political power. Who will foot the bill for the needed investment: public agencies that are at least modestly accountable to democratic publics and grassroots mobilization, or private companies lured into green investment by the potential for profit and power? And if—most likely—it’s going to be a mix of public and private, on which terms will the sectors cooperate?
It’s not just Biden’s advisers who will decide how much gets spent and where—it’s also a question of bottom-up political mobilization. We still have the chance to consolidate progressive forces around economic policy frameworks that will both deliver decarbonization and attack inequality at speed and scale. Many people are dying of COVID-19, and Black and brown people at disproportionately high rates; the western sky is on fire while southern and eastern shorelines are inundated by hurricanes; unemployment has risen to levels unseen in generations. This is not time to leave the economy to a handful of economists and bankers. If ever there were a time to advance bold, clear proposals to solve giant problems with hugely ambitious policies, this is our moment.
Yet progressives have to acknowledge the realities of the mixed U.S. economy. Decarbonization will require both public and private investments—but the exact mix is up for grabs. A century ago, John Maynard Keynes was convinced that for advanced economies to support full employment, the “comprehensive socialization of investment” was required. Today, we could start by greatly expanding the public sector’s role in engaging with, and directing, private capital, as was done during the Second World War. To do so, we can live with big deficits. In fact, we’d be better for it.
The alternative, which is creeping into seemingly progressive proposals, is to keep public spending in check while using partnerships that leverage private money for (ostensibly) public benefit. In this scenario, the public would have to ensure that the private investors made a profit on all their investments—potentially distorting progressive policy objectives well beyond recognition.
The metaphor of “leveraging” private dollars may sound sensible. It seems a tempting strategy to avoid increased public spending (and taxing the rich), and hence protracted political fights. But public-private partnerships in the United States, at the federal and urban levels, as well as in the United Kingdom under Tony Blair, have a troubled history. Time and again private investors were exceedingly talented in ensuring their returns, typically at the cost of the public sector in general and working-class and racialized communities in particular. Does anyone really believe that bankers and frontline environmental-justice organizers will be able to agree on investments that will both offer serious repair and stable private-sector returns in communities ravaged by pollution and government neglect?
The latest proposal to use private investment to pursue public good comes from Cornell law professor Saule T. Omarova, who has outlined a plan for a National Investment Authority (NIA). Omarova’s plan builds on earlier work on the topic, done in partnership with her colleague at Cornell, Robert Hockett. Omarova’s proposal is getting a lot of attention from the left, and receiving fairly positive reviews. It promises an “economy-wide shift to clean energy and sustainable growth.” Omarova tells us that the NIA “will operate as a permanent ‘capital bank’” for the GND through new “public-private cooperation in the arena of infrastructure finance.”
Omarova’s proposal tries to answer the “how will you pay it?” question that has haunted climate activists for years. It also aims to create an investment vehicle to solve coordination problems in the economy. As Omarova notes, there are many important productive investments that should be made but that haven’t happened because our neoliberal governance structures aren’t set up to drive investment into socially beneficial decarbonization. On the public side, we have a poor setup of regional bond markets, state and city balanced-budget requirements, and inadequate federal funding. On the private side, markets are rampant with failures resulting from asymmetric information, high transaction costs, and other pitfalls.
The NIA would address the financing of investments in both the public and private spheres through the creation of two government-owned corporations. The first would be a national infrastructure bank (NIB), which “will focus on traditional credit financing.” This would help rationalize green bonds and other green public finance flows. We agree on the need for this kind of investment bank.
The second would be a national capital management corporation, or “Nicky Mac,” which is essentially a public option for private equity. Nicky Mac would use public dollars as a kind of “venture capital” to kickstart valuable and innovative projects. Recall that the federal government has given Tesla billions in public subsidies but gets no return for that investment. Under Omarova’s proposal, the public sector would hold equity in the firms it jumpstarts. That excellent idea recalls some of the recent writing on economic innovation from Mariana Mazzucato. (Although we must also support providing public-funded green tech at low or no cost to low-income countries, an idea for which public polling finds majority support.)
The proposal also provides a kind of public investment option for private investors. Here, Omarova is trying to do two big things at once: First, tap the private sector for billions in GND investments, like major infrastructure projects, through the deployment of “advanced financial engineering methods to reward private investors for their participation in financing these long-term publicly beneficial projects”; and second, find a productive outlet for the enormous sums of private money looking for somewhere to go by channeling private savings into green public investments.
Behind these proposals is the idea that a primary obstacle to decarbonization is a lack of focused investment.Nicky Mac would overcome this by using public funds and government-backed investment vehicles to “crowd in” larger flows of private finance to help fund “commercially unprofitable projects like toll-free roads, adult education centers, or public parks.” In other words, Nicky Mac would ask the private sector to invest in nonprofit infrastructure investments. In what we believe to be an unprecedented move, Nicky Mac would pay back private capital for these investments by giving them a share of expected economic growth, perhaps in the form of dividends. Overall, the various components of the proposed National Investment Authority would create a new “new form of public-private partnership, in which the public leads and private capital follows.”
The NIA that Omarova proposes contains numerous institutional safeguards to prevent abuses and ensure that the public gets a good deal. Unfortunately, we still have serious reservations about key aspects of the plan. Atop the list is Nicky Mac’s reliance on private investment to fund nonprofit public infrastructure. The idea of providing private investors returns based on a project’s expected contributions to economic growth brings the privatization of public benefits to a whole new level.
It is difficult to determine exactly how much a repaired bridge, retrofitted public school, or zero-carbon affordable housing development would contribute to economic growth. It is one thing to make the case for a public investment on the grounds that it will likely boost the economy. These are educated guesses. It’s quite another to actually provide monetary benefits to investors based on that math, essentially privatizing any benefits of investments in human well-being.
We can promise our (hypothetical) child that if we make her breakfast, she will be more productive during the school day and ultimately get a better job. But if we do that, should the child literally sign a contract to give us a share of her increased wages? Shouldn’t the public sector just use public funds to provide children with meals?
With so many varieties of public-private investment proposals, the idea is that running up the deficit or otherwise mobilizing public resources for green investment is simply not politically viable. It’s true that the politics of deficit spending are challenging (unless we’re talking about war or tax cuts). But as Omarova notes, “Establishing a new federal entity like the NIA will require an Act of Congress.”
If one doesn’t have the political support to make wildly popular green investments, then one won’t have the political support to set up an institution to channel private funds with administrators who share the politics of Bernie Sanders and Elizabeth Warren. Instead, a political context of elite brokering and low political mobilization would likely yield more of what we have now: an NIA run by people with the politics of Treasury Secretary Steve Mnuchin or Obama’s Wall Street–loaned technocrats, who would govern the NIA with near-total deference to the finance sector and other large investors.
This is not just a problem with Omarova’s specific proposal. It’s a broader problem with any technocratic policy solution that attempts to make major changes to power relations without substantial political mobilization from below. Look to the modest expansions of public investment in the New Deal and the Great Society era: they were only made possible by a militant labor movement and disruptive protest. We’re simply not convinced that even the best-intentioned Biden administration aides would be able to win bipartisan support for an institution that drives down profit rates for public benefit, solely based on the institution’s technical merits.
If, on the other hand, progressives are going to put up a big fight for the needed investment—as we hope will occur—why not then fight directly for making spending on nonprofit, shared goods a public investment? Simply ramping up spending is also a lot easier to understand than Nicky Mac’s complex accountability mechanism. Simplicity of policy design would help both in executing the project and selling it to the general public. Support for massive public investment is already high; even policies like public investment in electric buses enjoy greater support than opposition among Republican voters.
Beyond these political considerations, the notion that the public sector itself cannot finance the public infrastructure needed for a GND, or broader social investment, is simply incorrect. As we’ve argued elsewhere, financing the public side of the GND should take place through regular deficit spending. Additional deficit spending for public investments amounts to a feature, not a bug, under current macroeconomic conditions. In contrast, funding these essential investments through the creation of new subsidized financial assets would actually drive up the cost of financing a GND, while ceding power to private capital, all to avoid a political fight that we actually want to have.
Ultimately, it’s the current lack of sustained political mobilization (including labor union strike action) that’s behind the failure to pursue broad public investments in decarbonization. The NIA’s most controversial proposal—providing returns to private investors for helping to fund nonprofit infrastructure—undermines the GND’s efforts to reduce the rampant inequality that has further shredded the social fabric of this country by redistributing resources unnecessarily toward savers. Furthermore, it relies on a premise—that “experts” will be able to apportion a share of economic growth to said investments, to be returned to private investors—that is highly dubious. And it’s not even clear there’ll be much of a political upside to such measures. Do we need to take these risks?
There’s no question that decarbonization is going to take a mix of public and private capital. And we agree with Omarova that the public sector should play a leading role. But we disagree over some of the details in her proposal, and details matter. What should we do instead?
To start, we need to be clear about the big questions at hand. How should public projects be financed? Does this vary across scales of government? Why is there a clear lack of investment in building the green economy on both the public and private side? And why are we still extracting and burning fossil fuels? Is the sluggish pace of decarbonization due to a dearth of available funds? A lack of profitable investments? Technology? Or is it rather a problem of political mobilization?
Let’s first talk about how to properly finance and coordinate the investments on the private side of green stimulus. For rapid decarbonization, we need businesses to invest far more in green endeavors. On the planning side, the NIA moved the conversation forward, noting how to better coordinate private investment for decarbonization and beyond. The government should utilize credit policy to channel finance toward socially beneficial investments that currently face credit constraints. Think special financing for solar panels, electric vehicles, heat pumps, and zero-energy housing.
But we shouldn’t bring the profit motive into public investments. Credit policy for decarbonization instead should entail three components: loan guarantees for green investments, a public investment bank to serve the private sector, and the incorporation of a decarbonization mandate for the Federal Reserve.
The loan-guarantee program would solve the problem of excess risk associated with asymmetric information in credit markets. It would be similar to a renewable-energy loan-guarantee program established under the 2009 American Recovery and Reinvestment Act, which ended up being profitable for the government. The public investment bank would lend public funds directly to businesses that have a hard time accessing traditional finance on reasonable terms, including start-ups and small- and medium-sized enterprises. Here, public funds are indeed subsidizing private investment to a degree, but to solve a real failure in private credit markets. Finally, the Federal Reserve mandate would allow the Fed to keep interest rates low to achieve faster deployment of public and private funds for decarbonization projects, while it simultaneously purchased green debt through the public investment bank.
On the private side, the government can and should facilitate rapid decarbonization through credit and industrial policy. These actions will unquestionably require a significant buildout of state capacity, which the current administration has done much to undermine. On the public side, there is simply no need to subsidize private capital, except where private credit markets fail. It would unnecessarily increase the price tag of green stimulus and give up vital power to Wall Street. Financing these investment projects is straightforward (even if the politics are complex). Things get a bit more complicated when we consider the financial constraints of state and local governments. To address that problem, the federal government should simply provide cheap and stable financing to localities. If the Fed were to make low-interest loans directly to states, cities, and school boards, it would make it much cheaper to fund local climate initiatives—and this would be on top of grant programs, like a Green New Deal for Public Housing, that the deficit spending we outlined above would facilitate. (As Representative Alexandria Ocasio-Cortez has rightly noted, public housing, like all housing, is infrastructure.)
The problems we’re facing are largely political. And there’s yet to be a compelling case made that a return to private-public partnerships for public goods will finally grease the GND wheels. Instead, public finance for public projects and a guiding hand by the government in the private sphere can get us a very long way—but only with continued organizing in the streets to make it happen.
From there, we can continue to build on the GND movement’s two years of mobilization around massive increases to public investment. Increasing public spending in the United States would, in the context of rich industrialized countries, simply amount to a straightforward “best practice.” In most of Western Europe, government spending amounts to roughly half of GDP, compared to just over one-third here; and those affluent European countries use about half as much energy per capita as the United States. The increased regulation and public spending that Europeans have embraced wouldn’t solve every problem, but it is a proven method for curbing energy waste and speeding decarbonization.
At the same time, we should continue to press the case for taxing the wealthy, running deficits and providing grant funding for green investments, providing cheap finance to cities and states, and, ultimately, redistributing resources toward decarbonization and improving the quality of life in frontline communities.
It might feel daunting to add complex political economy to everyone’s to-do list as we gear up for such an intense and nasty election. But getting to argue over how to design an investment authority is like getting to argue over how to plan our dream city. For years, the climate movement’s economic preferences were irrelevant; nobody cared. Now, as we build enough power to shape the national agenda, economic planning debates are a sign that we could soon be winning.
Mark Paul is an assistant professor of economics at New College of Florida.
Daniel Aldana Cohen is an assistant professor of sociology at the University of Pennsylvania, where he directs the Socio-Spatial Climate Collaborative, or (SC)2.