The Economic Failure Of Green Quantitative Easing

Varied people have various plans for how the future would be. Some even have ingenious, cunning even, plans about how this can all be done. The problem with nearly all of them is that they’ve not understood why it is that we’ve already decided not to do things that way. One such is this idea of Green Quantitative Easing. The idea is simple enough, if we could just create money for quantitative easing then why can’t we do so in order to build the Green Nation so urgently desired? Insulate every house, kill off the motor car by finally having an integrated public transport system and so on.

There are, quite obviously, certain problems with such a plan, the most monetary being that it doesn’t understand how QE worked. We have massive, £450 billion or so, amounts of money creation in regular QE because we didn’t spend the money into the economy. Thus we had to have lots of money creation because it wasn’t working through into that real economy. The moment we do in fact spend our newly created money on real things than that’s not true. We can do either trivial amounts of the money making or we get inflation that is. Not a hugely useful policy therefore.

But there’s a deeper ignorance in this from Richard Murphy:

[perfectpullquote align=”full” bordertop=”false” cite=”” link=”” color=”” class=”” size=””] As someone with strong green leanings that worries me. At another level, it’s fairly obvious that this is a problem of sequencing. Those protesting are right to complain when the tax increase is designed to limit their access to travel that is, for many, a basic necessity when there is no viable alternative available. This is the sequencing error: what should have happened, and will have to happen, is that the investment in the replacement technology for those that needed to be made redundant must take place before penal measures to prevent the use of old technology are enacted. This is why I wrote green quantitative easing. The whole purpose of Green QE is to ensure that the funding is available to ensure that the invetsment in essential climate change technology can take place before it is too late. [/perfectpullquote]

This goes to the very heart of the economic debate over what to do about climate change. The Stern Review – as with near every other economist who has studied the problem – says that we should have either cap and trade or a carbon tax. And absolutely not planning by government of what should be built where and by whom. Because no one actually knows what should be built where and by whom. We are, in fact, back with Hayek and the Pretence of Knowledge.

An economy is a complicated thing and there are all sorts of bits of it which produce emissions. We might think that we’re cutting emissions by doing something and plan for it, insist upon it, and yet then find out that, through this complexity, we’ve increased them. Say, biofuels as an example. It’s also true that most knowledge is local. We end up with better results by setting incentives, like a carbon tax, then allowing that local knowledge to play out.

So, what’s Murphy’s point? We should go build all that Green infrastructure first. But our problem is that we don’t know what that’s going to be. Not a sausage, not a scooby. Because we don’t know how people are going to respond when we change those incentives.

Fuel duty rises. OK, so what are people going to do? Take the train more? Work from home more often? Live in a flat above the office? Not drive to see Granny at Christmas? Change jobs to have a shorter commute? Change houses so as to have? Ride a bike? All of these are possible reactions, near all of them will be done by some people, we don’t know what the aggregate is going to be though.

So, do we build more train sets? Build out superfast broadband? Alter city centre planning rules? Buy Granny a closer family? Sponsor employment sites? Lower stamp duty to make the housing market more liquid? Build bike lanes?

Obviously, we don’t do all of these things to the capacity that everyone can do them because not everyone will. So, what’s the mix? We don’t know. The only way we will know is after we’ve seen how people respond to the changes in incentives. That is, the correct investments to make in our Green world are emergent from our adding that Pigou Tax. Not something we can plan at the start, simply because we just don’t know.

But then Murphy doesn’t know this either which is why he suggests such ridiculous things, that we should exhaust the resources of the nation building when we’ve no damn clue what we should be building.