Bringing Green economics into Keynes GDP equation..

A food for thought paper by Jonathan Harris of Tufts University. This is a must read and is valid for India as there is a war between environmentalists and growthistas.

He says we could mix Keynesianism with Green economics:

In the wake of the global financial crisis, Keynesianism has had something of a revival. In practice, governments have turned to Keynesian policy measures to avert economic collapse. In the theoretical area, mainstream economists have started to give grudging attention to Keynesian perspectives previously dismissed in favor of New  Classical theories. 

This theoretical and practical shift is taking place at the same time that  environmental issues, in particular global climate change, are compelling attention to  alternative development paths. Significant potential now exists for “Green  Keynesianism” — combining Keynesian fiscal policies with environmental goals.  But there are also tensions between the two perspectives of Keynesianism and  ecological economics. Traditional Keynesianism is growth-oriented, while ecological  economics stresses limits to growth. Expansionary policies needed to deal with recession  may be in conflict with goals of reducing resource and energy use and carbon emissions.  In addition, long-term deficit and debt problems pose a threat to implementation of  expansionary fiscal policies.

This paper explores the possibilities for Green Keynesianism in theory and  practice, and suggests that these apparent contradictions can be resolved, and that Green  Keynesian policies offer a solution to both economic stagnation and global environmental  threats.

Basically the paper gives a twist to the Keynes GDP Formula = C+I+G+ (X-M)

In previous articles, I have suggested that a new breakdown of the major sectors  of aggregate demand is useful in thinking about alternatives to current economic growth patterns (Harris, 2007, 2009). Specifically, the three major sectors of consumption,  investment, and government spending can be divided into subsectors representing  material goods, services, resource-intensive and resource-conserving investment, and  investment in human and natural capital.  

The idea is that we can then distinguish between those macroeconomic aggregates  that should be strictly limited – resource-intensive consumption and investment, and  energy-intensive infrastructure – and those that can expand over time without negative  environmental consequences. The latter would include large areas of health, education,  cultural activity, and resource- and energy-conserving investment. The conclusion is that there is plenty of scope for growth in economic activity, concentrated in these categories, without growth in resource throughput , and with a significant decline in the most damaging throughput, that of carbon-intensive fuelsA revised breakdown of macroeconomic categories would look something like this:

Cg = consumption of non-durable goods and energy-intensive services
Cs = consumption of human-capital intensive services
Cm = household investment in consumer durables
Ime = investment in energy-intensive manufactured capital
Imc = investment in energy-conserving manufactured capital
In = investment in natural capital
Ih = investment in human capital
Gg = government consumption of non-durable goods and energy-intensive services
Gs = government consumption of human capital-intensive services
Gme = government investment in energy-intensive manufactured capital
Gmc = government investment in energy-conserving manufactured capital
Gn = government investment in natural capital
Gh = government investment in human capital

He then expands and reorganises the Keynes equation:

Y = [Cg + Ime + Gg + Gme]  + [Cs + Cm + Imc + In + Ih + Gs + Gn + Gmc + Gh] + (X – M)

The first part of the equation is the Green investment/consumption which has to be lowered overtime. The second bit is traditional output which has to be increased. The policy has to balance the two which is both a challenge and opportunity:

To satisfy sustainability criteria, the terms in the first set of brackets should be stabilized or reduced over time, but the terms in the second set of brackets can be expanded. These categories are sensitive to various kinds of government policy, so different options are available to achieve the desired results. Regarding the government spending terms, these are clearly in the domain of fiscal policy (more on this below). The investment categories are responsive to a variety of tax and other incentives, as well as possibly preferential provision of credit to certain sectors. The consumption categories may also be affected by tax policy, in particular a carbon tax or equivalent that raises the price of fossil fuels and all fossil-fuel intensive goods and services, as well as by subsidies and tax credits for favored activities. 

Regarding the foreign sector term, which has here been left in the traditional form, it would certainly be possible to break the import and export categories down in a similar fashion. Trade policy to affect these is a trickier question. If, for example, “greener” production in one country is offset by imports of more energy- and carbonintensive goods from abroad, either border tariffs or some kind of globally coordinated policy is required to prevent “leakage”. Without going into the many ramifications of this issue, it can simply be noted that trade policies will need to complement domestic “green Keynesian” policies. It is likely that this would require significant revision of some WTO guidelines that prevent environmental onsiderations from being a part of trade policy.

So you know the idea is to get investments which promote, solar energy, reduces carbon print etc..

Fiscal policy is the central element of an environmentally-oriented Keynesianism. As noted above, expansionary monetary policy is essential for recovering from recession, but it lacks any differentiation between environmentally beneficial and harmful GDP categories. Fiscal policy can be specifically targeted. There are recent examples of this in the Obama administration’s 2009-2010 stimulus package. In part this was directed towards traditional types of spending such as highway maintenance, but a significant portion (about $71 billion) was specifically oriented towards “green” investments, together with another $20 billion in “green” tax incentives. 

The double benefit of such policies is that they promote employment and also advance a transition to a more environmentally sustainable economy. In terms of the GDP categories outline above, they expand the beneficial categories, with a focus on public and private investment. It is easily possible to envision much larger programs of this nature. For example, the stimulus program included $5 billion for weatherization programs. A major nationwide program for building energy efficiency retrofit could easily be ten times as large. The stimulus program temporarily quadrupled U.S. spending on energy research and development; a permanent increase of this magnitude would have enormous long-term benefits in promoting a transition to efficiency and renewables.

The reference has some earlier papers as well from the Prof. Nice stuff..

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