Greg Ip’s Wall Street Journal article Wednesday highlighted provisions in the “Green New Deal” that claim a massive new U.S. funding program can be effortlessly financed by the Fed. Mr. Ip and an op-ed in Wednesday’s Washington Post decry the idea on grounds that it would be inflationary and politicize the Fed. However, considerably worse could come of this infrastructure-funding concept. Progressives such as Rep. Alexandria Ocasio-Cortez should take careful heed: Fed Funding for all things green could make U.S. economic inequality a still more dismal prospect.
The idea behind turning the Fed into a federal green bank echoes the Fed’s own thinking when it began buying trillions in the midst of the crisis. Believing that stimulating residential housing would jump-start the economy, the Fed set aside its scruples and bought agency debt and MBS in addition to direct Treasury obligations. Starting in about 2012, mortgage lending began to pick up, but much of it was cash-out refinancings and virtually every dollar of it depended on a government guarantee and taxpayer-backed secondary market. To this day, overall real U.S. house prices are down about ten percent, with large swaths of lower-priced U.S. housing markets still struggling to recovery. It turned out that Fed asset purchases in targeted economic sectors do not, in fact, stimulate private-sector activity as hoped.
Would Fed purchases of green bonds do any better for targeted growth and economic inequality? I doubt it. As I’ve laid out in a speech last year to the Federal Reserve Bank of New York, QE has had dramatic, adverse impact on economic inequality. The central bank for central banks might, one would think, have been sympathetic to QE given its short-term, beneficial impact on the U.S. economy immediately after the 2008 crisis. However, BIS research in fact finds that U.S. output didn’t gain from the Fed’s trillions, but those who held equities saw a huge boost in financial-asset valuations. Another BIS paper links this equity-price impact directly to U.S. inequality, showing the disparities between asset ownership across the wealth-equality spectrum. More recent research from the Federal Reserve Bank of Minneapolis discussed in a recent Economic Equality blog post brings these data forward to show that QE’s equality impact is even worse.
The BIS isn’t alone in anticipating QE’s limitations. In 2013, a top U.K. financial policy-maker, now-Lord Adair Turner, asked “how do we get out of this” in a speech proposing that central banks blast through limited QE holdings to create what Ben Bernanke, channeling Milton Friedman, more colorfully called “helicopter money.” Mr. Bernanke’s worries about so sharp a divergence of monetary policy into the fiscal field focused particularly on threats to Fed independence. He nonetheless found considerable upside to it during periods of acute macroeconomic stress. Janet Yellen brought this thinking forward in 2016, when she also posed the “how do we get out of here” question in Jackson Hole by floating the idea of expanding QE to include corporate bonds. A formidable financier, Ray Dalio, also espouses helicopter money as a monetary-policy fix.
With all this high-powered brainstorming contemplating helicopter money, it’s little wonder that AOC and her colleagues conjured it up to fight climate change. The putative benefits laid out in all these authoritative comments surely led them to believe that helicopter money dropped where they want it – on U.S. green bonds – would make the Green New Deal real without the troublesome problem of persuading Republicans to vote for its funding. If it makes the Fed a little less independent, so be it; if inflation runs a little too “hot,” as Ms. Yellen coined it, no worry. From the progressives’ perspective, a less-independent Fed might not be all that bad if they are the ones dictating the policy and a bit more inflation would, they reason, finally stoke some real wage and output growth.
But, coloring the paper coming from the helicopter green doesn’t correct for QE’s crowding-out impact. If Treasury issued green bonds, then there would be a new source of ultra-safe assets in the market which investors could hold, on which they would pay taxes, and from which jobs might indeed flow. If the Fed instead gobbled up the green bonds, then it would diminish supplies of safe assets above and beyond the shortages already induced by QE here and around the world. Central banks now hold about $14.5 trillion on their balance sheets, meaning that investors desperate for yield must head into the equity markets, yield chase in the bond market, or otherwise bid up the valuation of financial assets for as long as macroeconomic and financial-market conditions remain benign. With the Fed now bent on holding most of its portfolio about as is, new green Treasury obligations in the private market might offset potential shortages of ultra-safe assets, giving households new, higher-return savings options and offering prudent institutional investors options beyond continuing to push up equity and bond prices.
In 2009, the Obama Administration gambled on an $800 billion spending package in hopes of billions of “shovel-ready” infrastructure projects that would quickly boost employment and thus improve economic equality. A decade later, it’s clear that this simply didn’t work. There’s a huge difference between short-term spending to boost growth through programs that reduce household debt, subsidize employment, or otherwise enhance transfer payments and big-ticket programs that then drip a little money here, a little money there into the economy. The U.S. could well get a good deal greener by 2050, but the process would likely be considerably slower than if the returns on green bonds were received by private investors who then used them for near-term spending even as the federal government put the proceeds to use for massive projects.
In short, American might well get greener over time if the Fed funds the green new deal, but it will also get poorer. It’s hard enough making structural changes to fiscal policy, but at least the income and wealth engines mostly work when they are well aligned with private-sector and household incentives. Put all the bonds in the Fed and financial markets will continue to make the richest Americans even more posh without affording any near-term respite from ever-worsening income inequality.