Haley: Governments Need Long-Term Investment to Get Green Stimulus Right

Governments that hope to recapture the gains and avoid the pitfalls of the last big round of economic stimulus more than a decade ago should double down on decarbonization and energy efficiency programs—and take a careful look at the thinking of 1930s-era economist John Maynard Keynes for a guide to the best strategic investments, says Broadbent Institute Policy Fellow Brendan Haley.

While the very concept of stimulus is associated with Keynes, Haley argues in a post this week for Policy Options, it was misused in the response to the 2008 global financial crisis. The result was a boom and bust from which countries, communities, and households never really recovered.

“What was missing from the quick-hit stimulus was a move by the government to define a new trajectory for investment and innovation for decades to come,” he writes. “A focus on long-term investment would have been truer to Keynes’s ideas and would have defined the economic direction needed to lower greenhouse gas emissions. This time, we need to get it right.”

Haley looks back to the last economic crisis, which “came after decades of reducing the capacity of the public sector and deregulating financial markets.” After the crash, governments recognized that public sector spending could drive up demand and create jobs. But “the 2009 and 2010 Canadian budgets focused on tax cuts, and most spending commitments lasted only two years,” he writes. “For climate change, there was some support for clean infrastructure, and the ecoEnergy retrofit program to improve energy efficiency. In the U.S., by comparison, renewable energy and energy efficiency investments were eight times higher on a per capita basis.”

But the problem was that very little of that activity was sustained, after a G7 meeting in Iqaluit in February 2010 kicked off a shift to low-interest rate monetary policies that “chiefly benefitted wealthy asset holders, while a sputtering real economy could only offer insecure part-time and precarious work to many,” he adds. As a result, “clean energy sectors experienced a boom and then a bust. The ecoEnergy retrofit program was cancelled in 2010, which made it difficult for energy efficiency implementers to regain the trust of consumers and contractors.”

A closer reader of Keynes’ work would have revealed a more productive path. “He was concerned with industrial structure, and encouraged spending in strategic sectors,” Haley writes. “He also favoured sustained public investment to provide full employment and stabilize the economy against the inherent instability of financial markets.” Then-U.S. president Franklin Roosevelt largely followed that advice, and his policies “ushered in a post-war ‘golden age’, when the main trajectory for demand, investment, and innovation was defined by technologies such as the automobile, and new appliances in suburban houses. The Cold War introduced missions for government-led innovations in areas like space exploration that reverberated through the domestic economy.”

The contrast between those experiences now points to the need for a “socially useful mission that can direct public and private investment and innovation”, the same way suburbanization and the Cold War did for an earlier generation. Haley points to the climate crisis as the obvious focus.

“Today, the clean economy sector has all the characteristics that Keynes saw in working class housing in the 1930s,” he writes. “Decarbonizing our energy systems presents large and continuing scale of potential demand for decades to come,” with energy retrofits to reach a 2050 net-zero emissions target requiring a more than tripling in the annual retrofit rate “by finding new approaches to logistics, marketing, financing, and manufacturing.” He calls that “a public purpose mission that needs to be led by governments, with significant potential to benefit from entrepreneurial business models and investors capable of earning returns from energy savings.”

More broadly, “retrofitting our homes, building a clean energy grid, electrifying transport, and restoring nature are activities that increase economic activity across a wide geographical distribution.,” Haley adds. “A clean economy transition can create jobs and local investment opportunities across the country, mitigating the squabbles that have traditionally occurred because of regionally specific natural resource endowments.”

His post looks at some of the existing climate action funding programs that could be ramped up to meet the challenge.