Use deficits to fund climate fight

What worked in WWII will work against new threat of global disaster

We desperately need to get serious about fighting climate change — humankind’s ability to live on this planet is at stake.

We already know much of what we need to do: convert from coal to renewable energy, subsidize electric cars, weatherize buildings, plant a trillion trees, etc., etc.

These activities will cost a lot of money. The good news, however, is that much of the necessary spending will not require higher taxes. We can pay for much of this effort in the U.S. by running federal budget deficits. They will not raise taxes now or in the future. And they need not cause serious inflation.

Budget deficits are only inflationary when they cause total spending to exceed the economy’s capacity. At that point public and private consumers begin bidding against each other for the available goods and services, causing prices to increase. However, much of the fight against climate change will involve creating new economic capacity or reorienting existing capacity, both of which will minimize the inflationary impact of the necessary spending.

For example, insulating houses or planting trees can be done by people who are currently unemployed, of whom there are far more than the official unemployment rates. Current spending on energy production obviously needs to be reoriented from fossil fuels to renewables. There are costs to that transition, but once it is made, there is no reason to spend more on energy production than we do today — perhaps much less.

It is true that the bonds sold by the Treasury to cover deficits add to the national debt. But our experience in World War II showed this is nothing to be afraid of, especially in the face of a true existential threat, whether it’s fascism or climate change.

Individual Treasury bonds must be repaid, but they are simply refinanced as they come due, so we do not need to raise taxes to repay them. The amount of the total debt never has to be reduced but can keep increasing forever, along with our expanding economy. We have been doing this without a problem for most of our 230 years.

Running budget deficits does not require begging China or any other foreign government to buy our bonds. When the Treasury offers bonds for sale to cover deficit spending, foreigners are free to buy them if they have dollars, because the Treasury only borrows in dollars. Foreigners acquire these dollars by trading with Americans. They can only be invested in the U.S. If they choose not to buy Treasury bonds, they will have to buy other American assets instead, like real estate or Intel bonds. In that case, the Americans who would otherwise have bought those assets will buy the Treasury bonds instead. It is not any harder to repay bonds held by foreigners than it is to repay bonds held by Americans.

At the beginning of World War II, the Federal Reserve reassured the country that it would supply all the money needed to win the war. Thereafter we had plenty of shortages of real resources and skilled workers, but we never had a shortage of money because money is something a sovereign government with its own currency can always create.

We should adopt the same financial know-how in waging war on climate change. We covered 40% of World War II spending by raising taxes and the other 60% by borrowing — half in savings bonds and half from banks and the Federal Reserve, both of which just created the necessary funds). The economic and human costs of the war were huge. The financial costs were completely manageable.

The threat to the planet today is as serious as the threat from fascism in the 1940s. Back then we reacted courageously but intelligently. We had leaders who understood the financial system and were determined to use it to help preserve democracy. We must revive that financial understanding today to save our planet.