Green Recovery Investments May Depend on Making Monetary Theory Cool Again
Opinion & Analysis
With the Trudeau government expected to introduce a vision for a just, green recovery in its Speech from the Throne later this month, a profound shift in national monetary policy—yes, monetary policy—is emerging as a cornerstone of the new strategy.
It might just be that, to jump-start the national economy in the midst of a global pandemic while simultaneously confronting the global climate crisis, tapping into a burgeoning cleantech economy, and tackling long-standing societal inequalities, one of the government’s deeper challenges will be to make monetary theory cool again. (Again, you ask?)
Like this story? Subscribe to The Energy Mix and never miss an edition of our free e-digest.
“It’s true that something rather exciting is happening in the realm of monetary theory, of all places,” said author and policy analyst Seth Klein, whose new book, A Good War: Mobilizing Canada for the Climate Emergency, hit the bookstores this month. “In the response to COVID, unappreciated by much of the public, the Bank of Canada has been playing an incredibly important role. It’s a role we haven’t seen them play since the Second World War. And it’s a template for what we now need on a larger scale for the climate mobilization.”
In an interview with The Mix in June, Klein pointed to a key lesson from the pandemic that governments in Canada and elsewhere must now apply to the climate emergency.
“Fundamentally, the COVID crisis has shown us what’s possible when we’re ready to see an emergency for what it really is. Governments start to take over certain supply chains. Resources and personnel are redeployed,” he said.
“And in fiscal policy, just like in a war, governments spend what they have to spend, deficits be damned. That, to me, is one of the most extraordinary things out of this current crisis. The government is prepared to run a C$250-billion deficit,” with the Bank of Canada buying up billions of dollars in government bonds per week. [The total now stands at $343 billion.]
“So now, the cat is out of the bag,” he added. “This has revealed what was possible all along, whether it was to tackle the climate emergency, or the poverty and homelessness emergency, we could have done this all along.”
In his book, Klein calls for a program modelled on Second World War Victory Bonds, to engage Canadians and build wider social solidarity in response to the climate emergency. But he said proponents of modern monetary theory (MMT) argue that citizen bond purchases aren’t even necessary in purely economic terms: contrary to an economic truism that’s been drilled into most of us all our lives, any national government that has its own central bank and runs its own currency can simply create the money to do what needs to be done.
“Were a single country to do that alone, it would potentially pose a challenge to its currency,” he explained in a follow-up interview last week. “But if all governments are starting to move in this direction, it can actually be done.”
In a country like Canada, where the federal government holds the monetary levers but much of the investment in a rapid decarbonization plan rests with cities and provinces, it would also make sense for the central bank to buy municipal and provincial bonds, Klein added. “It’s the federal government that has access to this sovereign currency and its own bank,” he said. “Provincial and municipal governments don’t, but that’s a huge amount of the climate infrastructure we need, so they need the federal government to come up with the money.”
With interest rates sitting below inflation and expected to hold at record-low levels through 2023, “you’re actually making money issuing 30-year bonds. You’ll be selling it back at a lower value than you pay in interest,” he said.
“But think about what green infrastructure and Green New Deal infrastructure is. It’s zero-emission, affordable housing. Child care spaces. Renewable energy projects. High-speed rail. Other public transit infrastructure. Most of those things have monthly income streams: The $10-per-day child care bill. Your train ticket. Your transit fee. Your monthly utility bill. Which is to say that, if you can borrow at a fraction of 1% to build these things that will have a revenue stream for the next 50 or 70 years, it’s foolhardy not to be doing that at an incredible scale right now.”
So far, much of the day-to-day news coverage in the run-up to the Throne Speech has focused on the spending and deficit levels the government may be preparing to take on, rather than the return Canadians can expect on that investment. When Finance Minister Chrystia Freeland tables her first fiscal update later in the fall, “that outlook will put a price tag on the priorities set out in the speech: investments to make the Canadian economy more environmentally friendly, money to support and protect vulnerable people (such as seniors living in long-term care centres), money for child care to ensure women don’t have to choose between work and their kids, and plans to address systemic racism,” CBC reports.
“In normal times, spending on those initiatives would be constrained by concerns about the size of the deficit, or the Liberals’ own preoccupation with maintaining the lowest debt-to-GDP ratio among the G7 countries. Economists call such constraints ‘fiscal anchors’—benchmarks that ensure governments exercise some discipline when they roll out their spending plans.” But “none of that appears to apply now.”
“We are not turning off the taps at this moment,” a Liberal Party insider told CBC’s Chris Hall. “It’s all going to take money on a scale we haven’t seen before.”
More broadly, “Liberal insiders say they are preparing to move beyond any fiscal anchors, arguing the challenges laid bare by the pandemic require innovative spending efforts—not just by Canada but by countries around the globe,” Hall adds. “It all suggests this government’s prescription for the post-COVID economic recovery will not be limited by the orthodoxy that deficits are bad, or the Paul Martin legacy of producing a string of balanced budgets in the late 1990s and early 2000s.”
That direction was reinforced by the announcement for Canada Recovery Benefit (CRB), a 12-month, $22-billion emergency benefit program the government is proposing to replace the Canada Emergency Response Benefit (CERB). “The new program will pay $400 a week—$100 less than the CERB—to those who have some lost some or all of their income due to the pandemic and don’t qualify for Employment Insurance,” the Globe and Mail writes. “But the CRB allows recipients to earn much more income than either the CERB or [Employment Insurance] before benefits are reduced. Those and other elements of the CRB resemble the features of a guaranteed basic income—particularly in the way it would allow some poorer Canadians to boost their earnings significantly.”
“The degree to which these programs are multiplying and becoming permanent may also be construed as a back door toward a living wage or permanent income benefit,” wrote Derek Holt, Scotiabank’s head of capital markets economics, following the announcement.
“It corrects for problems in the labour market rather than simply patching them up,” commented Sheila Regehr, chair of the Basic Income Canada Network, adding that the CRB is “moving in the right direction” toward a basic income guarantee.
The Globe has details of the program.
While the emerging shift in federal economic and monetary strategy is raising alarms among some business writers, several recent analyses have suggested the change is long overdue, even exciting. On CBC, business columnist and former forest firefighter Don Pittis argues the shift to modern monetary theory isn’t on the horizon—it’s already here.
“Only a year and a half after I first wrote about MMT as a radical idea that effectively offered a bottomless piggy bank for new government spending, it appears that the fringe is going mainstream,” he writes. “And as COVID-19 pulls the rug out from under economic growth, some economists are beginning to face up to the fact that a version of MMT has moved from economic conjecture to economic fact.”
Pittis says most of the economists he interviewed on MMT were reluctant to give it any credibility, falling back to the statement that “you can’t keep on borrowing forever”. But Frances Donald, global chief economist at Manulife Investment Management, told him it’s a mistake not to acknowledge the reality of what governments and central banks around the world are already doing.
“The problem we have is that MMT is considered so fringe that many economists are even afraid to talk about it for fear of being viewed as complicit,” she said. But “like it or not, elements of MMT are already so embedded in our economy and financial system since COVID-19 developed that burying our heads in the sand isn’t going to help us.”
In his own interview with Pittis, author and political scientist Dr. Scott Aquanno echoed Klein’s view that inflation is only a very distant prospect. “I think what you might see, paradoxically, is a situation where the Bank of Canada is essentially printing billions of dollars to fund government debt and deficits but that inflation declines,” he said.
Aquanno is calling on Ottawa to establish a public bank “to lend to groups and projects that would be unlikely to get money through normal banking channels in spite of rock bottom interest rates,” Pittis writes.
In A Good War, Klein notes that the wartime government of Prime Minister William Lyon Mackenzie King established 28 Crown corporations, many of them led by “dollar-a-year men” who left their senior private sector positions to lead an incredibly fast economic transformation. So far, he told The Mix, “the Justin Trudeau government has created two, one of which is the Canada Infrastructure Bank, which is a vehicle for public-private partnerships, and the other of which is the Trans Mountain Pipeline Corporation, which makes us all proud owners of a 60-year-old pipeline. Quite the contrast.”
The Bank of Canada’s role in the story came through in a late August analysis in the Globe and Mail, with economics reporter Donald Parkinson pointing to a new five-year monetary policy framework that Freeland and the central bank’s new governor, former Mark Carney deputy Tiff Macklem, are due to introduce in the next year. That process may trigger “a potential policy change that could prove even longer-lasting than any pandemic recovery,” Parkinson writes. “The most recent decision of this magnitude was three decades ago,” when Mulroney-era finance minister Michael Wilson and then-Bank of Canada governor John Crow adopted inflation-fighting as a defining priority.
Parkinson sees that strategy as a success. “But after a decade of persistently weak inflation (bracketed by two major economic crises), many experts now openly question whether inflation targeting is the magic elixir it once was, especially in an environment of slow growth and depressed interest rates,” he writes. “The argument has never been stronger for new monetary policy innovations. And the Bank of Canada has made it clear that it is taking a hard look at its options,” with the expectation that the bank wouldn’t set a new direction unless the government was a “full partner in the decision”.
In signalling what she describes as an “activist agenda”, veteran Toronto Star columnist Chantal Hébert says Trudeau may be misreading an electorate that just craves bland stability after the deep, pervasive disruption of the pandemic. But business columnist David Olive counters that it’s downright exciting to see the PM using a moment of crisis to reinvent the economy—while suggesting the changes aren’t as drastic as they may appear at first glance.
“The Liberals seem intent on asking Canadians to consent to a sweeping economic renewal that tackles income inequality, the climate crisis, immigration, economic sovereignty, industrial self-sufficiency, the gender pay gap, Canada’s undernourished R&D sector, and considerably more,” Olive writes. “The Grits, in other words, are giving themselves an open-ended mandate for change, the ambition of which the country has seldom seen.”
Yet those changes won’t be particularly radical, given that “every advance they will propose is an expansion or acceleration of existing Canadian priorities and practices,” he argues. “On climate change, for instance, the Trudeau government wants to lay the groundwork for a Canada able to exploit the lucrative environmental industries that will help define the 21st century—a public- and private-sector project already under way but still in its infancy.”
And once again, as Klein and others are pointing out, interest rates have never been lower. “The government’s cost of borrowing to pay for pandemic relief, a permanently stronger social safety net, and seed capital for tech-oriented start-ups with export potential is therefore manageable.”
So the government’s real gamble is that the pandemic experience has left Canadians satisfied that relief dollars were well spent, and “geared to accepting sensible change on economic reinvention if a good case can be made for it,” Olive writes. “Actually, Liberals are betting that most Canadians are impatient for change in a gap between rich and poor that has widened even more during the pandemic, especially for women; and about our stubbornly slow progress in the fight against climate crisis.”
But making the case will be essential.
“The Grits could bungle this once-in-a-lifetime chance to create a more successful economy, as they did with the National Energy Program (NEP),” he concludes. “Or they can get it right, as they did with a Medicare system that Canadians cherish—a triumph that was achieved by a minority government.” And while the NEP “was sprung on Alberta and the country with notoriously little genuine consultation,” the Trudeau government has been “soliciting input all year from the premiers, leaders in industry, and organized labour, environmental, and poverty activists, and of necessity in a minority government, opposition leaders and backbenchers.”