QE for A Resilient Smart Green Future

“When we think of a Green New Deal, the issue of 'massive federal government expenditures' is inevitably the first roadblock on the way to constructing the grand vision and narrative," says Jeremy Rifkin in his new book "The Green New Deal." He made a clear and strong argument that a good portion of the financing needed to build out the infrastructure of Green New Deal will come from "global pension funds".

Pension funds are the deferred wages of millions of workers in the public and private sector, payable upon retirement from their employment. Amassed in just seven decades, pension funds are the largest pool of investment capital in the world by 2017 at $41.3 trillion. The US workforce becomes the most powerful voice, with assets exceeding $25.4 trillion in pension funds.

Jeremy states that the sheer economic clout that this astronomical amount of financial capital represents, if fully embraced and controlled by the millions of individual capitalists that make up this cohort, could lead to a fundamental realignment in the relationship between the global workforce and he economic institutions that govern the international economic order.

Two matters are important in Jeremy's argument. One is affordability of the proposed Deal and the other the new social capitalism for a sustainable future. Let's take a stab at both of them respectively, from different angles.

New Social Capitalism

In Jeremy's view, the dramatic move on the part of public and private pension funds to pull billions of dollars of their investment from fossil fuel sector and related industries and reinvest then in the smart green economy marks the coming of age of social capitalism.

Here comes the once-in-a-century-time COVID-19 pandemic. It turned into a job-killing machine. Businesses ahve closed by thousands as firms lost customers and governments invoked lockdown. Jobs, profits and the stock market have dropped dramatically. It is forecast that unemployment in the US will hit 10 million at least. Its 2020 GDP will be a solid negative percentage, estimated by some economists at -5.3%. The next big worry may be deflation, a general fall of prices. As we have seen in oil, the daily global oil demand has plunged from about 100 million barrels to 80 million. Prices have spiraled -downward. To make it even worse, there might be the bursting of a global asset price bubble, a global credit crunch, and a major reversal of capital flows to the emerging market economies.

In order to weather the two storms (at least) at the same time - public health and economic crises, governments of leading economies have launched series of relief and stimulus packages. Tens of trillions of US dollars are added to national and global economic systems through both financial and monetary instruments, and more expected to come, depending on how quickly and how effectively we will be able to contain the spread and contagion of the virus, how further the unemployment will continue to rise, and how effective the already launched stimulus will bring economy out of the dismal.

US Congress unanimously passed the Coronavirus Aid, Relief and Economic Security (CARES) Act late March, which was signed into law by President Trump right afterwards. A total of $2.2 trillion package, regarded as a third round, builds upon two earlier rounds of federal government support to fight the public health crisis and associated economic fallout - succeeding the $8.3 billion in public health support and the Families First Coronavirus Response Act. The Family First Act requires certain employers to provide their employees with paid sick leave or expanded family and medical leave for specified reasons related to COVID-19. These provisions will apply from the effective date through December 31, 2020.

The third round at $2.2 trillion covers broader relief for families, small and large businesses, expanded unemployment benefits and medicare and medicaid, medical workers and hospitals, cities and states, as well as development of vaccines, therapies and other public health response efforts

I still have two concerns. One concerns the sharp decline of job losses and the dwindling pool of pension funds. Employers are quickly firing their workers and cutting their shares of contribution to existing employees. For those who lost their jobs, it is uncertain when they will be able to get back to their foot and continue to contribute to their retirement funds. The other concerns the risk of the QE-triggered inflation, which threatens to shrink the size and value of the current pension pool.

Governments and their central banks do not necessarily consult unions and individual workers for their opinion or seek their agreement before they decide what monetary policy to roll out and how much QE will be injected into the economy and financial system. It is hard to assess accurately how much impact the pension funds will have to bear at this moment. But, I am glad to see that the newly passed CARES Act(s) puts as priorities to keep American workers paid and employed; and assist American workers, families and businesses by economic impact payments, tax rebates and credits, as well as expanded unemployment insurance, in policy and principle.

Weather the Storm with QE

Quantitative easing is a monetary policy that central banks deploys to purchase predetermined amounts of government bonds or other financial assets in order to add money directly into the economy, in particular when inflation is very low or negative and standards expansionary monetary policy becomes ineffective. It is an increase in the size of the balance sheet of the central bank through an increase in its monetary liabilities. QE is expected to help bring the economy out of recession and help ensure that inflation does not fall below the central bank's target.

Monetary instruments are used to pay for the bills. The FED, US central bank, takes charge of the monetary policy to finance the Act(s) while maintaining financial system dynamics and stability. It has three primary goals - 1) to support the market that allow banks to function with adequate liquidity; 2) to make sure that market for US Treasury bonds is working smoothly (which impacts the interest rates and inflation target); and 3) to make sure that the banks of some of America's biggest foreign trading partners have access to emergency dollar financing.

To accomplish these goals, the Fed first lowered interest rates to near zero. Then, it commits to buy at least $700 billion worth of Treasury bonds and agency-backed mortgages (probably much bigger in size in the end) to make it easier for US banks to borrow directly from the Fed. In the meantime, it is using the emergency authority to set up a vehicle to lend directly to businesses, in the commercial paper market, for the first time since 2008. Fed is turning into a world largest commercial bank today, in a sense.

Additionally, it signaled that it would now allow banks to use the capital and liquidity buffers (required reserve level) built up over the last ten years to support higher lending. And, the Fed agreed to lower the invest rate on its existing swap lines to allow foreign central banks to borrow dollars from the Fed and lend them to their own banks. This will provide banks outside the United States with access to longer-term financing.

"QE for the People"

Even though the CARES Act demonstrates a bipartisan effort, the general view is that it can barely reverse the trend and the economic fall out, let alone the impact of the COVID-19 pandemic on people. Shortly after the third round of the Act got passed at Congress and signed into law by President Trump, congressional leaders, specifically democrats, have started to eye the 4th round. The current number on the table is another $2 trillion, but with a focus on infrastructure and steering the economic recovery. Stay tuned.

A remaining question though is whether the QE will be able to create sufficient demand and get the economy back to its feet. To address this question, some economists in Eurozone, a few years ago, have proposed something called "QE for the people". Instead of flooding financial markets through buying government bonds or other securities by creating bank reserves, as the Federal Reserve has done, some suggest that central banks could make payments directly to households - spending the money into the real economy, on essential public investment such as green infrastructure, affordable housing and/or distributed as citizens' dividend to all residents.

eThis concept and argument seems aligned with the Democrats' leadership thinking in the CARES Act. In the 3rd round of the package, there is a specific item designated to send checks to low-income households - $1,200 each adult and $500 each child. House Speaker Nancy Peloci recently stated that she would want to see more money for state and local governments, small businesses, more direct payments to individuals, and extensions of some of the other provisions in the recently-enacted $2.2 trillion stimulus bill.

Pelosi's comments came after House Democrats spent much time during their debate for the 3rd round package, advocating for their infrastructure priorities to be wrapped into a fourth coronavirus response package, including funding for broadband, water systems, roads, and public transit. Democratic lawmakers gained optimism about the possibility of addressing infrastructure when Trump last week called for a $2 trillion infrastructure package to boost the economy.

Affordability of the Green New Deal

One crucial barrier for leading advocates for the Green New Deal at the Congress has been affordability. QE offers a best window of opportunity to straighten the argument of affordability and drive through the specifics. And yet, the fact is it is the political divide at Congress, not an issue of affordability, that had blocked any mentioning of the Deal's agenda item into the currently approved CARES Act.

As we have learned, environmentalists and some of their Democratic allies in Congress see economic stimulus discussions stemming from the novel coronavirus as a major opportunity to push their green priorities. When debating over how to pull the country out of what could be a deep recession caused by the virus and responses to it, clean energy industries and environmentalists had been pushing investments in renewable energy and emissions cuts as a potentially sizable driver of jobs and economic activity.

"Whether for the airline, cruise line, vehicle manufacturing, or other industries, Congress should require and encourage larger steps towards clean energy use, energy efficiency, a carbon price or verified offsets, and air and water pollution reductions that would mitigate in line with scientific recommendations both climate change and environmental injustice," more than a dozen environmental groups wrote to congressional leaders.

"This is a moment when ... regulatory changes, bridge loans, financial measures can be taken, so that when people are ready to get back to work, the best projects are shovel ready," those Green New Deal projects, said Daniel Aldana Cohen, one of the letter's authors and a sociology professor at the University of Pennsylvania, in his interview with E&E News.

But such efforts encountered strong opposition from Republicans who compared any environmental policy proposals to the divisive progressive plan. In the end, Democrats have to be more "pragmatic" and try to get as much of it done as possible.

"It's infrastructure, Stupid!"

When the Congress people returns to the Hill at end of April, I hope that the draft of the 4th round of stimulus shall be put together, with a clearly articulated vision and narrative, as well as detailed proposals, about investing in Green New Deal-type infrastructure. And even more so, I hope that a deal on the table in the end can bring together once again the bipartisan support. Fingers crossed!

Jeremy Rifkin has already developed a clearly articulated narrative and vision of the Green New Deal - the Third Industrial Revolution Paradigm. He states that the major economic transformations in history require three interactive elements to enable the system to operate as a whole - a communication medium, a power source and a transportation mechanism. Together, these three operating systems make up what economists call a general-purpose technology platform and a society-wide infrastructure. This forms the foundation of paradigm shift.

According to Jeremy, infrastructure. at the deepest level, is a techno-socio bond that brings together new communications technologies, new energy sources, new modes of mobility and logistics, and new build environments, enabling communities to more efficiently manage, power and move their economic activities, social life, and governance.

As the world largest economy, US is best positioned to lead such a transformation. Already a leader in most of the technologies, the country shall not "waste a good crisis" like the current pandemic, rather the parties shall use the QE-created financial capital and liquidity to finance a third industrial revolution infrastructure scheme. The projects proposed by many will lay a solid foundation of the general-purpose technology and society-wide infrastructure to set the country on global leadership of a clean revolution.

On March 4th, Chinese government launched a 3.5 trillion yuan RMB (about $ 500 billion) stimulus scheme that focuses on its new and quality infrastructure, or commonly called a Digitalization scheme. The goal is to set the country on a solid launching pad for a smart green economic transformation.

Last December, EU launched its European Green Deal, with one trillion euros public budget committed, to finance the transformation of its infrastructure, industries, technologies and human development. "A moonshot moment", the Deal is expected to accelerate EU's endeavor and leadership to become the first carbon-neutral continent by mid century.

President Trump said, at his daily COVID-19 pandemic White House Briefing today, that he would like very much to have next stimulus package for infrastructure, real and good infrastructure, "not Green New Deal" infrastructure. If I were President Trump, I would literally jump on the QE opportunity to transform the US infrastructure and economy guided by the Green New Deal. You don't have to call it the same name, if you don't feel like it. Name it any way you feel comfortable. The reason is simple - it's the right way; and the purpose is clear - to Make America Great again!

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