As a Brit living in a country that drives on the other side, I still have a moment of hesitation crossing the road; looking both ways, both sides. I was about to cross the road yesterday to go to a conference on banking, and as I stopped the thought crossed my mind that maybe economists in the mainstream are so used to one way of doing things that they are not looking in the right direction either. I couldn’t shake the feeling something has been missing. Why have the warnings about climate change not changed anything? How are things different now that the IPCC has put its foot down and stated clearly that we need to exit fossil fuel burning and transition to clean, renewable energy? Maybe low inflation is not the answer, but HIGH inflation?
The economy that lives on speculation is deeply flawed
I was on my way to listen to Professor Richard Werner’s lecture on why we need small local banks and not big national ones. As Professor Werner explained in his lecture, you can do productive things with money and non-productive things. It is hardly the sign of a functioning economic system that people today can make more money on counter-productive investments than ones that support, for example, sustainable development. Yet banks willingly lend to people to buy assets that in no way contribute to GDP.
Investing in new, productive assets does more for people than investing in existing assets
Let me explain: an investment to build, say, a hydro-electric generator facility has a lot of productive potential. Firstly, it creates employment all the way down the supply chain, from the builders to the equipment suppliers. Secondly, by providing power, the facility can help the local economy for many years to come creating more jobs and opportunities. All that money contributes to GDP.
Much money created by borrowing still brings no GDP
But what about an investment to buy an existing property or even, say, a work of art? The purchase will not create more work, it will not provide more accommodation, and if the building is poorly insulated, will continue to consume energy in a counter-sustainable way. However, the same building, with almost no work-creating investment, can change hands over time at ever increasing prices. This brings more money into the economy, but no change in what is produced.
Frantically bidding against each other on over-priced property is not healthy
People are bidding over one another for property, driving lending up, meaning it gets more and more of a struggle for people to pay a larger proportion of their monthly income in interest. The situation is untenable and economically unhealthy. We need people’s incomes to be spent in a way that creates jobs. Jobs that mean the essentials of life are covered for all in a way that respects natural resources and nature.
Large banks are uninterested in local economy “too big to be bothered”
If I understand the professor correctly, large banks pour a lot of investment money into buying existing, often fossil-fuel dependent, assets. It makes sense for them, as most banks are large and need to invest in large deals that create the return for their investors. They just don’t have the capacity to handle a load of small loans for, say, home insulation, small solar cell installations or local food initiatives.
Pension funds: too restricted to help local economies
The same goes for pension funds. Only stock- market listed companies are available for them to invest in, and companies the funds invest in are themselves after the big deals, building the big factories and the big shopping centers etc.
Focus on what to spend the money ON
The problem, then, that I believe sustainability-minded economists should be focused on, is not how to get more money flowing in the economy, but rather at to look what the money is being spent on. We need to be looking the other way, quite simply, towards addressing the challenge of stimulating investment in the clean-energy (often local) sustainable livelihood-creating economy.
Let me lay down the challenge to political economists everywhere: how can speculation in existing property be dampened and investment in the clean energy society stimulated? How can this transition happen at the same time as jobs and homes become available to everyone?
One solution, proposed by the Swedish Sustainable Economy Foundation, (TSSEF.se) is to use differentiated, progressive lending rate mechanisms to maintain house prices at around replacement value. This will discourage speculation in housing and encourage investment in productive activities.
Floating lending rate mechanism
Let me describe the mechanism in principle: In this mechanism, a government body sets a base lending rate on existing properties. This rate is raised and lowered depending on the relation between mean property prices and mean property building costs. To discourage bubbles in property prices, interest rates are raised (making loans more expensive) until prices start to come down to the level of replacement prices. If property prices are below replacement rates, the base lending rate is lowered. This will make loans cheaper and encourage demand for new properties.
The Foundation proposes a floating base rate that a government board changes at regular intervals depending on the speed of response from the market. If the response is slow, the rate gets raised.
Base lending rates on refurbishing existing properties, or building new, sustainable infrastructure, on the other hand will be kept at the lowest possible.
Loans must come down to reflect real prices
At the same time, the Foundation recognizes that house prices do not reflect real value. In many cases, there is no hope of house owners, with their current incomes, paying off the house in their lifetimes. House prices need to come down closer to replacement value. Or inflation needs to rise to reduce the relative value of the debt. With a mechanism to cap property price increases in place, it would be possible to drive up inflation by increasing demand for goods and services. This could be done by reducing VAT temporarily as a kind of “economy holiday”. If costs for employment were to be also temporarily relieved through say employer tax discounts, consumption and employment could go up, and this would drive inflation.
Fees on pollutants to create the clean economy
So TSSEF gives us one possible solution to investment. However, much consumption has a high climate impact. Is there a way to change consumption patterns with market-based economic instruments? The Foundation suggests a progressive and flexible pollutant fee. The fee is on all import or extraction of fossil fuel. Again, the fee is raised until fossil fuel use reductions follow a desired trajectory. (This phase-out trajectory derives from the IPCC (International Panel on Climate Change) framework.)
All fees collected are paid into taxpayers’ accounts
Unlike with the interest rate mechanism, the money collected from the fossil fuel fees is channelled back into the economy as a (for example) tax rebate for every tax payer. The reason for this is to ensure that consumption (and thereby employment) is kept up. Merely making fossil energy-containing products and services more expensive will not help the economy if consumers cannot afford to buy clean alternatives.
So there is the challenge to economic policy, to central banks and to the banking community as a whole: come up with a plan to keep food on the table, a roof over our heads, a fossil phase-out and our dignity intact.
About the latest report from IPCC http://ipcc.ch/report/ar5/syr/
Professor Richard Werner http://www.project-syndicate.org/commentary/karl-theodor-zu-guttenberg-and-richard-a–werner-propose-a-strategy-to-boost-lending-for-investments-that-contribute-to-gdp
The Documentary Princes of Yen (with Prof. Richard Werner) http://princesoftheyen.com/
One the best ways to learn about floating lending rates, VAT surcharges and pollutant fees is to participate in a simulation. Read more about simulations on the TSSEF home page.
Read the white paper that explains flexible fees.
Flexible fees http://tssef.se/?p=367