economy as biophysical system laws of physics can’t make something from nothing, or vice versa ...
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Monetary and Fiscal Policy for a Steady State
Economy
Joshua FarleyCommunity Development and Applied Economics
Gund Institute for Ecological EconomicsUniversity of Vermont
Economy as Biophysical system
Laws of physics Can’t make something from nothing, or vice
versa Can’t do work without energy Entropy increases
Laws of ecology Structure and function
What is a Steady State Economy?
Does not extract renewable resources faster than they can regenerate
Does not emit waste faster than it can be absorbed
Resource and waste stocks must be compatible with provision of vital ecosystem services
Does not extract essential non-renewables faster than we develop renewable substitutes
Must account for all dissipative structures—humans and our artifacts that are maintained by flows of low entropy matter-energy
We are currently violating all of these conditions
“only two types of people believe in endless exponential growth: madmen and economists.” Kenneth Boulding
Uneconomic Growth
Rising marginal ecological costs
Diminishing marginal economic benefits
When costs exceed marginal benefits, growth has become uneconomic
How do we achieve a SSE?
Must reduce throughput by 50-80%
Forces us to think about distribution Why should the poor sacrifice to make the
future better off?
Dramatic difference between SSE and failed growth economy
Must redefine recession as increase in misery, poverty, inequality, unemployment
Relationship between SSE and
GDP GDP is reasonable proxy for throughput
‘Internalizing’ externalities would create enormous number of new market transactions
Reducing supply of essential, non-substitutable resources would increase value of market transactions
Current Monetary System:
Forces us to choose between continuous growth or collapse
Inherently unstable
Systematically concentrates wealth in the hands of the financial sector
Finances market goods and services even when public goods and services provide far greater social benefits
Current System:
Vertical money
$taxes
$
$
profits
Current System: Horizontal Money
What if there’s a great lending opportunity, and bank has already lent 19$?
Where do i (interest) and p (profit) come from?
More loans or more vertical money required. ECONOMIC GROWTH (physics and ecology)
What if p<i? Procyclical monetary system (positive
feedback loops) Inherently unstable
19x$
19$+i
19$+p19x$
$
Speculation and Money
on a full planet Essential resources and inelastic demand
Food, energy, water, land
Growing scarcity and inelastic supply Food, energy, water, land Stocks (not scarce, but inelastic supply)
Increasing concentration of wealth, hence pool of speculative capital
Speculation drives up short term financial returns on investment, reproduction rates of natural resources can rarely compete
Total US debt
Growth and Inequality or
Collapse Debt is 360% of GDP and growing faster
than GDP
Interest on total debt is likely to be 15% of GDP. Direct transfer to lenders
Goals for the Needed Monetary
System Ecological sustainability
Steady state throughput
Just distribution Fair distribution of wealth/assets provided by
nature or by society as a whole (e.g. unearned income), within and between generations
Efficient allocation Max QOL/sustainable throughput
Sustainable System:
Vertical money, 100% fractional reserve, green
taxes$
Taxes, AEAs
$ $
100% Reserve Banking
Current account (checking) deposits cannot be loaned Individuals pay bank to protect money Money belongs to individual, not bank
Time deposits available for lending during time period of deposit Depositor assumes risk No need for insurance or bailouts No net creation of money
Can be gradual or one-time increase in reserves
Great references available on request
Characteristics of desired system:
Money Creation Spent on public goods
Easy to target unemployment, misery, poverty
Central bank purchases state/municipal bonds Decentralizes money creation, fiscal policies
Loaned into existence Can be deposited in banks that service community,
available for banks to lend Money destruction
Auctioned Environmental Allowances set according to ecological constraints
Tax unearned income May need net creation to cover currently unpriced
transactions, or net destruction as we reduce throughput
Characteristics of desired system:
Countercyclical (negative feedback loops) Society as a whole benefits from seigniorage Not dependent on growth
Rethinking taxation
Not required for government revenue
Required to: regulate resource use back dollar achieve desirable income distribution adjust aggregate demand, reduce money
supply
Fiscal Policy
Expenditures Government can target money to address
unemployment, misery, poverty; provide public goods; restore natural capital
Taxation Tax rent, natural resource extraction, waste emissions Dramatic income tax increases, asymptotically
approaching 100% How much residual is enough for rich?
$5,000,000=99.9% tax rate $1,000,000= 99.98% rate
Relative wealth
Marginal tax rates and income share for
top 0.1%