Greening the UK's economic model.
Greening the British state is a political challenge which raises questions concerning the boundaries of the possible. Continuity with existing institutions is a great deal easier than challenging the various interests that benefit from them. Herein lies an important but under-appreciated dimension of the problem. State institutions are not simply the malleable product of political will. They represent the uneasy and contradictory compromises fashioned by successive politicians to contain the competing demands made by different social interest groups on the exercise of state power. When politicians seek to transform them, they confront the constituencies of entrenched interests that are their beneficiaries. It is for this reason that institutions --by definition, practices that are 'relatively enduring'--resist change.
The challenge, then, is to analyse the margin of political possibility and identify strategies for greening state institutions that minimise politically costly or socially regressive conflicts with the beneficiaries of existing institutions, whilst at the very same time building progressive societal coalitions for bigger, more ambitious changes in the near future. What, then, are the politically realistic, short-term policies which could trigger cumulative change in the balance of social forces in the long-term? What are the short-term policies which could shift the parameters of the politically possible in the long-term? Here we advocate the potential of a green industrial strategy and green quantitative easing as the first steps toward a green and socially just transformation of British political economy.
Green Industrial Strategy
It came as a surprise to many when Theresa May re-institutionalised industrial policy in the British state. The return of 'industrial policy', a phrase which most on the Labour front benches have been reticent to use in recent decades, reflects May's purported desire to make 'capitalism' operate 'more fairly for workers'. (1) In her early speeches as Prime Minister, her critique of a corporate world which had become dis-embedded from society was married to a statist rhetoric which implicitly rejected Thatcherite doctrine. In January 2017, she argued that 'people who are just managing, just getting by, don't need a government that will get out of the way, they need a government that will make the system work for them'. The creation of the Department for Business, Energy and Industrial Strategy (BEIS), to be headed by Greg Clark, suggested that her rhetoric would be matched by policy action. Its publication in November 2017 of a white paper on Industrial Strategy, whilst hamstrung by the Treasury's austerity drive, was promising in its identification of many of the UK's economic ills and apparent willingness to accept an interventionist role in coordinating economic activity. (2)
The creation of BEIS not only marked the comeback of industrial strategy, but also a re-shuffle of policy portfolios which integrated an interventionist industrial policy with energy policy into one department. The Secretary of State for BEIS is now tasked with overseeing the policy objectives associated with both of these areas, and thus appears to be well positioned to coordinate a new state project designed to decarbonise the economy. Industrial policy under this Conservative Government has yet to reflect the hybridity of these objectives, although 'clean growth' is acknowledged by the white paper as one of the 'grand challenges' facing the UK economy, but the institutional design established by May presents a clear opportunity for a future Labour minister to hit the ground running by launching a green industrial strategy.
Certainly, there are many international cases which BEIS could deploy as templates for such a strategy. The 2016 TUC report 'Powering Ahead' concluded that the German and Danish approaches to supporting 'green growth' were laudable examples which the UK would do well to learn from. (3) Germany's recent growth in renewable electricity generation has created more than 380,000 jobs, with the United Nations Environmental Programme forecasting that figure to rise to 700,000 by 2030. Danish industrial policy, meanwhile, has focused on the development of the wind turbine industry through preferential taxation (electricity feed-in tariff; tax breaks for wind projects) and funding for research and development, which has resulted in a buoyant renewables export industry. Denmark has consistently set ambitious clean energy targets and its industrial policy demonstrates the effectiveness of aligning economic and environmental goals.
Investment in the UK has not been channelled into sustainable industries to the same degree. It is not that the 'shovel-ready' projects do not exist. As Polly Billington pointed out in Renewal last year,
The Solutions Project at Stanford University estimates there could be more than 250,000 construction jobs and nearly 500,000 maintenance jobs in 100 per cent renewable energy by 2050 in the UK alone. They estimate that we could reduce our energy demand by 44 per cent, cut health costs and reduce deaths from pollution by 20,000 a year. (4)
Specific sectoral synergies between environmental protection and jobs have also been flagged up by Fernanda Balata in a previous edition of Renewal, when she proposed a 'Blue New Deal' for Britain's coastal communities; a scheme which combines public investment and other forms of governmental support with local knowledge and expertise. (5) This is an agenda which seeks to deliver sustainable jobs whilst mitigating the environmental crisis, yet the UK government has done little to drive investment in this area in recent decades.
As Tim Di Muzio has pointed out, private investment is typically attracted to carbon-intensive industrial sectors. This acts as an investment barrier to a low-carbon transition. (6) The international evidence, however, suggests that the state can play a role in 'crowding in' private investment. As the TUC rightly conclude in their report, Denmark's industrial strategy and Germany's Energiewende show that 'when the government sets its strategy and designs its economic, industrial and environmental policies around that strategy, it creates the certainty that the private sector needs to invest'.
This is, of course, a key component of what the Green New Deal Group passionately advocated in the wake of the 2008 financial crash. Their agenda, which was tragically drowned out by debt fetishism in public discourse, was two-fold. Firstly, a sustained programme of investing in, and deploying, clean energy infrastructure, energy conservation and energy demand management. Amongst other things, this would entail prioritising investment in 'clean jobs' for low-carbon sectors, investment in skills and training to prepare workers for such 'jobs of the future', and retrofitting and insulating homes to lower energy bills and usage. The UK's low-carbon economy is slightly larger today than it was in 2008, but the growth has been negligible compared to that of continental Europe. Secondly, they called for an economic reform agenda entailing the re-regulation of national and international financial systems, the utilisation of banks owned or partially-owned by the public, the closure of tax loopholes, and tax increases for the most affluent. The implementation of a 'Green New Deal' would see the state adopt a more prominent role in regulation, innovation, and the re-direction of capital, with the goal of facilitating the growth of specific economic sectors.
The Green New Deal agenda remains salient. It is not so far removed from what Mariana Mazzucato would term the 'Entrepreneurial State'; a state which can create new markets in sectors where private capital is risk-averse, through public investment and public sector research and innovation. (7) A first step in this direction would be for the government to strengthen the hand of the existing Green Investment Bank so that it can seek to nurture ventures in the fields of solar and wind power and low-carbon transport.
A green industrial strategy could put in place the foundations of a more sustainable economy in Britain, and now appears to be a feasible proposition in Westminster. Just as importantly, a green industrial strategy would fundamentally alter the sources of jobs and tax income in the British economy, creating strong political incentives for future governments to protect and support these sectors. In other words, it would fundamentally alter the balance of social forces in the UK. A green industrial strategy represents a series of incremental changes within the realms of the politically possible that would cumulatively facilitate more ambitious proposals and transformative changes in the longer term. A green industrial strategy can be seen as an incremental step towards the type of systemic change which is demanded by the environmental crisis.
Green monetary policy
Fairly or otherwise, every Labour policy since the financial crisis has been met with the question: 'And how will you pay for that?' In political terms, Corbyn's approach of rejecting the premise of the question has definite merit. Yet it still demands attention. A clear financial plan is vital to alleviating the fears of the British electorate and helping to 'crowd in' private investment in green infrastructure.
There are several pathways which are open to the next Labour government, which could be utilised depending on the prevailing economic and political conditions. The most obvious is to raise the capital for pubic investment via taxation, thereby resolving the market's collective action problem of low investment. A second option would be to borrow money from the capital markets and capitalise on the relatively low returns on 10-year bond yields (returns are hovering around 1 per cent at the time of writing, as capital is looking for a safe haven at a time of uncertainty). Both represent viable options and partial solutions. We cannot ignore, however, the obstacle presented by the importance of the Treasury in British politics. (8) Nor can we ignore the political difficulties for the Labour Party of borrowing or taxing to finance its activities. The 2008 financial has become inaccurately established in the public consciousness as a crisis of public debt overseen by the Blair and Brown governments.
Another viable route would be to divert the existing corporate subsidies awarded to energy companies with high levels of ecological impact. According to the UK's Environmental Audit Committee, energy subsidies are currently 'around [pounds sterling]12bn a year; much directed at fossil fuels'. (9) This figure is significant, but it represents only a fraction of the cost of a truly transformative green industrial strategy.
Instead, the financing solution for the next Labour government should not be fiscal policy but monetary policy. Since 2009, the Bank of England--along with a series of other Central Banks around the world--has launched successive rounds of Quantitative Easing (QE) which has shown us that there is a new mode of injecting money into the economy; one which is insulated from fluctuating levels of growth, and one which can be infused with a social and ecological purpose by the next Labour government. Quantitative Easing--a term coined by Richard Werner to denote the Central Bank's scheme of creating new bank reserves for the purpose of purchasing financial assets--has formed part of an extraordinarily experimental age of monetary policy. To date, [pounds sterling]435 billion has been injected into the economy by the Bank of England's Asset Purchase Facility, which has created new bank reserves in order to purchased bonds and gilts from the capital markets. The Bank is supposedly aiming to sell the assets at an unspecified later date, but in practice it would take many years to unwind [pounds sterling]435 billion of assets without triggering panic in the financial markets.
The Bank's asset purchases, broadly speaking, have conformed to the investment preferences of the capital markets in order to ensure 'market neutrality'. This has led to the large-scale purchase of government and corporate bonds. By remaining 'market neutral' the Bank of England can continue to claim that they remain an apolitical institution of economic governance, but its present role in economic governance can hardly be seen as neutral.
The socially regressive consequences of British QE have been detailed by numerous studies, including those by the Bank itself. The Bank recognised in a 2012 publication entitled 'The distributional effects of asset purchases' that the median household owned [pounds sterling]1,500 of assets, whereas the top 5 per cent of households held an average of [pounds sterling]175,000 each--40 per cent of the financial assets of the household sector as a whole. (10) The winners and losers of such a policy are evident. Josh Ryan-Collins of the New Economics Foundation calculated on the basis of these figures and the wealth distribution data from the ONS that QE had increased the financial asset and pension wealth of the top 10 per cent of households by a staggering amount--between [pounds sterling]128,000 and [pounds sterling]322,000 each. (11) That such wealth was gifted to the wealthiest members of an already unequal society, whilst deflationary measures on wages were being imposed, by a supposedly apolitical government agency, is stupefying.
The claim of neutrality is also belied by a recent LSE study on the environmental consequences of QE. Sini Matikainen, Emanuele Campiglio and Dimitri Zenghelis concluded that the 'unintended structural bias towards carbon-intensive industry incumbents' had exacerbated climate change. (12) The market-conforming character of the Bank of England's asset purchases can be seen as undermining any attempts to re-balance the UK economy away from its existing trajectory.
Perhaps these failings could have been partly excused had the policy been successful in boosting aggregate demand and investment. Circumstances may have been worse without QE, which is the BoE's common refrain, but using monetary policy to promote an economic recovery has been (to quote Keynes) 'like pushing on a string'. Commercial bank lending and investment remain low, despite the capital influx and the stabilisation of interbank lending, and the growth in demand has been anaemic. Perhaps even more remarkable than the radicalism of this monetary experiment, therefore, is that it has failed to significantly support an economic recovery in the decade since the global financial crash.
In this context those attempting to seize upon the present moment of monetary activism have argued that the quantitative easing programme ought to be recalibrated. They argue that a form of quantitative easing which was infused with socio-ecological purpose would help instigate a greener and more jobs-rich economic recovery, rather than simply re-capitalise the balance sheets of the financial sector.
The proposal of 'Green QE' has been supported most vociferously by the Green New Deal Group and the New Economics Foundation. The proposal is that the Bank of England would buy bonds from a body such as the Green Investment Bank operating under government direction and subject to government guarantees, which would use the capital to provide cheap loans for strategically significant projects. It appears to be an opportune strategy for channelling investment in low-carbon or energy-efficient industries and infrastructures, and one which combats the pre-existing dominance of money creation for investment held by private banks.
Persuading the Bank of England will be a challenge. Indeed, the strategic selection of its management team by the next Labour Chancellor of the Exchequer may form one component of the proposed greening strategy. Yet the Governor of the Bank of England, Mark Carney, has repeatedly articulated the dangers of climate change. He has warned that the world's next 'Minsky moment'--a sudden major collapse in the value of a central asset category--could be induced by the geological effects of climate change. These have subsequent impacts upon the perceived value of financial assets and the companies which hold them. Carney has already accepted, in correspondence with Green Party co-leader Caroline Lucas, that 'greening' the next wave of QE is a possibility. (13) With the Bank recently being awarded the additional task of addressing systemic risks to economic stability such as climate change as part of its macroprudential remit, a transformative change to the Bank's practices is not out of the question. As Alexander Barkawi put it in the Financial Times, attuning monetary policy to the systemic risks facing the UK economy is 'a logical and necessary next step'. (14)
A further round of QE--one which is more strategically attuned to addressing the economic and environmental pathologies of the British economy--ought to play a leading role in a public investment strategy designed to transform the unsustainable economic model of the UK. Yet it also represents a model of weakening the state's dependence on the activities of the private sector for its financing. Historically the state has been reliant upon the tax income generated by the broader economy and has thus been incentivised to encourage economic growth even in environmentally unsustainable sectors. The introduction of QE has weakened this dependency. Admittedly, it is no silver bullet (or 'magic money tree', to use the condescending Conservative slogan), given the twin threats of hyperinflation and currency debasement. These are real threats to macroeconomic stability if QE is used to excess, and is not tempered by tax policies where necessary. Wielding the tools of contemporary monetary policy, in addition to fiscal policy, requires attentiveness to the inflation indicators, which may constitute the limits of QE's usage. However, it remains an existing tool of public investment--one which currently produces socially regressive and environmentally destructive outcomes--which is ripe for progressive repurposing by an incoming Labour government. In the context of post-2008 monetary policy, a Labour Government must contemplate when QE is appropriate, the degree to which it can be harnessed to finance economically prudent policies, the means by which it can offset the risks, and the character of the asset purchases comprising the policy.
Theresa May has, perhaps surprisingly, already made steps to reviving the idea of industrial policy in the UK. She has recognised some of the failings of the UK economy and public discontentment with them. Industrial strategy must be a component of the next Labour government's policy agenda, but it ought to be tailored to both the economic and environmental failings of the present growth strategy.
A Green Industrial Strategy would bolster the number of sustainable jobs in the short-term, but in increasing its systemic importance it also alters the composition of the UK economy and the UK's balance of social forces in the long-term. This, iteratively, will make more profound change possible. If married to a re-purposed monetary policy, it would also institutionalise a steady source of green financing which is relatively immune from the business cycle.
This, we believe, gets to the heart of what political economy is all about. It combines the 'art of the possible' with a sober analysis of the economic constraints facing policy-makers. A Green Industrial Policy and a greening of monetary policy represent strategies for negotiating or circumventing existing constraints in order to make even greater change possible for subsequent Labour governments. The urgent need for progress cannot be overstated.
Dan Bailey is a post-doctoral researcher at the Political Economy Centre, University of Manchester.
Martin Craig is a Research Associate at the Sheffield Political Economy Research Institute, Sheffield.
(1.) G. Parker, 'UK ready to borrow to fund infrastructure spending', Financial Times, 6.10.16, https://www.ft.com/content/a6435046-8b93-11e6-8aa5-f79f5696c731
(2.) Department for Business, Energy and Industrial Strategy, Industrial Strategy: Building a Britain Fit for the Future, 27.11.17, https://www.gov.uk/government/publications/industrial-strategy-building-a-britain-fit-for-the-future; SPERI Industrial Strategy Commissioners react to government white paper', SPERI, 27 November 2017, http://speri.dept.shef.ac.uk/20i7/ii/27/speri-industrial-strategy-commissioners-react-to-government-white-paper/; Michael Jacobs, 'Why this white paper on industrial strategy is good news (mostly)', The Guardian, 27 November 2017, https://www.theguardian.com/commentisfree/2017/nov/27/white-paper-industrial-strategy-government-economy.
(3.) TUC, Powering Ahead: How UK Industry Can Match Europe's Environmental Leaders, 22.7.16, https://www.tuc.org.uk/research-analysis/reports/national/powering-ahead-how-uk-industry-can-match-europe%E2%80%99s-environmental.
(4.) P. Billington, 'Climate Change is a Class Issue', Renewal, 25.2, 2017, http://www.renewal.org.uk/articles/climate-change-is-a-class-issue.
(5.) F. Balata, 'Shaping a new deal for coastal communities', Renewal, 24.2, 2016.
(6.) T. Di Muzio, 'Capitalizing a future unsustainable: finance, energy and the fate of market civilization', Review of International Political Economy, 19.1, 2012, pp363-388.
(7.) M. Mazzucato, 'The Entrepreneurial State', Soundings, 49, 2011, pp131-142. https://www.lwbooks.co.uk/soundings/49/entrepreneurial-state.
(8.) C. Berry, 'Industrial strategy: here come the British', SPERI blog, 1.11.17, http://speri.dept.shef.ac.uk/2017/11/01/industrial-strategy-here-come-the-british/.
(9.) Environmental Audit Committee, 'Energy Subsidies', https://publications.parliament.uk/pa/cm201314/cmselect/cmenvaud/61/6103.htm.
(10.) Bank of England, 'The distributional effects of asset purchases', Quarterly Bulletin 2012 Q3, http://www.bankofengland.co.uk/publications/Documents/quarterlybulletin/qb120306.pdf.
(11.) J. Ryan-Collins et al. Strategic quantitative easing: Stimulating investment to rebalance the economy, New Economics Foundation, 2013.
(12.) S. Matikainen, E. Campiglio and D. Zenghelis, The climate impact of quantitative easing, Grantham Institute Policy Paper, 2017.
(13.) P. Clark and C. Giles, 'Mark Carney boosts green investment hopes', Financial Times, 18.3.14, https://www.ft.com/content/812f3388-aeaf-11e3-8e41-00144feab7de#ixzz2wUaCIIwt.
(14.) A. Barkawi, 'Why monetary policy should go green', Financial Times, 18.5.17, https://ftalphaville.ft.com/2017/05/18/2189013/guest-post-why-monetary-policy-should-go-green/.
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|Title Annotation:||THE NEXT ECONOMIC SETTLEMENT|
|Author:||Bailey, Dan; Craig, Martin|
|Date:||Jun 22, 2018|
|Previous Article:||The return of public ownership.|
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