Jack Dempsey/AP Photo
A wind turbine blade during the opening of the Vestas blade factory in Windsor, Colorado, in 2008
This article is part of the Prospect roundtable on the case for a new large source of public capital.
The economic fragility revealed by the COVID-19 pandemic has opened an Overton window for progressive economic policy. Anathema even a year ago, bold reforms like a systematic industrial policy are now attracting interest from mainstream politicians on both sides of the aisle. Among the more exciting prospects is the proposal to renew the Reconstruction Finance Corporation (RFC), which the U.S. successfully used to finance the World War II economic mobilization as well as much of the New Deal.
It is little surprise that, as the idea of a Green New Deal is in the air, the RFC idea would not be far behind. The National Investment Authority (NIA) outlined by Saule Omarova here and in academic work with Robert Hockett points to the scale of ambition for a public financial institution that should guide policy efforts, and builds on the suite of tools used by the RFC. Fortunately, there are ample experiences at the state, local, and international levels that show how policymakers might sequence a new suite of public financial institutions.
Lock in early success: Authorizing a green bank now is the first step to more progressive public investment
We do not have to reach to the distant past for lessons about what to do now. In the last decade, at least 17 states and localities in the United States have created green banks or funds capitalized with public dollars. American green banks have caused $5.3 billion in clean-energy investment since 2011, with $1.5 billion of this investment taking place in 2019. According to the Green Bank Network, globally, over a similar period, green banks have invested or committed $24 billion that has mobilized an additional $46 billion in private funding for a total of $70 billion. They invest in renewable energy, energy efficiency, electric vehicles and their infrastructure, smart cities, sustainable agriculture, green affordable housing, and other emerging sectors. While doing so, they drive the creation of good jobs, lower-cost services, and the reduction of carbon pollution and other environmental degradation.
Green banks have focused on accelerating the clean-energy transition. Since the U.S. energy system is largely privately owned and operated, the green banks focus on “crowding in” private capital into both technologies that are commercially viable and competitive now, and those that with some support very well could be. The aim is accelerating private investment by correcting temporary or perceived market barriers.
In July of this year, the House of Representatives passed H.R. 2, which envisions creation of a nonprofit national green bank called the Clean Energy and Sustainability Accelerator (also called the National Climate Bank). Its model would, if funded by Congress at the $35 billion level, create over five million jobs through mobilizing nearly $500 billion of total investment in the first five years of activity. In addition to energy, it would target building efficiency and electrification, grid infrastructure, clean transportation, industrial decarbonization, sustainable agriculture, and climate resilience, with significant amounts reserved for frontline, low-income, and communities of color. The proposal is based on over ten years of work by groups like the Coalition for Green Capital. Sens. Markey and Van Hollen sponsored an extremely similar bill for a National Climate Bank (S. 2057) in the Senate, with an express mandate to finance the equitable and rapid unwinding of high-carbon assets, which could further enhance a green bank.
There have been some suggestions that the green bank be housed within (and thus wait for) NIA legislation. One of the central arguments we have heard in our conversations is the fear that progressives will only have one bite at the apple and that lawmakers will be exhausted after a single bill passes. According to this logic, passing a green bank now means no NIA later. This line of thinking may underestimate the potential for a green bank to serve as a cornerstone institution to the more expansive capacities of an NIA, reinforcing the political support and rationale for it.
Especially if Democrats do not control (or only narrowly control) the Senate, they may find that proposals for public entities that work with private companies and utilities could pick up crucial centrist Democratic and Republican votes. Indeed, Nevada’s green bank was signed into law by a Republican governor; Connecticut’s green bank was passed with virtually unanimous bipartisan support; and one of the biggest supporters of state green banks in the Senate is none other than the current Republican senator Lisa Murkowski. Because ideas like the national climate bank are road-tested at the state level, they will be more appealing to centrists and conservatives and could be the way to get to 50 votes in the Senate. The climate bank should be passed as early as possible to pave the way and build support for an NIA to be added on top or next to it later.
We’ve done this before: establishing public financial institutions and building on their success
This bricolage approach was precisely the model of the RFC. As Andrew Bossie and J.W. Mason have written in a series of reports, the RFC was set up in 1932 to assist the banking sector. However, over time, it expanded and subsidiaries were set up that gave loans to state and local governments, developed the synthetic rubber industry, conducted geoeconomic warfare against Germany, and insured against wartime property damage. These subsidiaries were set up and stood down as needed, enabling public-sector workers to develop expertise in numerous sectors of the economy. Some less transformative agencies spawned in part by the RFC model, like the Small Business Administration and Export-Import Bank, outlasted their parent and are still around. And one of history’s most successful banks (and successful U.S. exports), Germany’s KfW, was explicitly modeled on the RFC and continues to operate, underwriting patient investments in the real economy while private finance chases speculative gains.
A similar story can be told about the World Bank. At its creation as the International Bank for Reconstruction and Development (IBRD) in 1944, it had a limited business model of raising capital by selling bonds to institutional investors, and making loans to sovereign borrowers.
The limits of this tool soon became apparent. First, it meant no loans to private businesses. Thus, in 1956, the IBRD got a sister institution: the International Finance Corporation (IFC), which could make such loans. But that still left a gaping hole: The necessity of generating returns to repay loans meant that the bank lent to profitable sectors like roads, utilities, and dams in middle-income countries. This left out the very poorest countries and high-value social projects. So in 1960, a third institution—the International Development Association (IDA)—was created that could give interest-free loans or grants.
The World Bank Group was designed to address a different set of economic-development challenges in a different time, but the history of its expansion has important lessons for the current pathway to American green industrial policy. There are emerging sectors—think energy storage—that can and should be financed on a commercial basis. There needs to be a public financial institution like the National Climate Bank that is oriented toward crowding ever more liquid and low-cost capital into these sectors as quickly as possible. But for other sectors—think adjustment assistance for frontline communities, but also water, rural broadband, and electric rail—that may not be finance-able privately but that have enormous social value and positive impact on economic development, productivity, and competitiveness, a public financial institution is the sole or anchor investor in these projects and will support the entities—state, regional, and local governments; community development financial institutions; impact investors; municipal utilities; rural cooperatives; land trusts; and others—that put mission first. Public capital—that can bear risk, be patient, and be structured concessionally—is critical to both these functions.
Public finance can help the economy grow more equitably and sustainably
A basic appeal of a public bank is a pot of money outside of the normal appropriations process, but it does much more. The mid-20th-century economist Joseph Schumpeter taught us that economic growth is driven by deployment of (social and technological) innovation in the market, and that banking is a sort of “social permit” that signals to society the future sources of return (in his time, banks were shaping industrialization). A public financial institution is a fiscally efficient way of doing this, yielding more innovation dollars than expenditures toward policy objectives. Market-steering public credit can also guide the market to “proper” banking, steering capital toward productive uses and serving as a fulcrum for the liftoff of the third (no-carbon) industrial revolution. And critically, public financing can shape the direction and rate of commercial deployment, leading to greater, more equitable low-carbon growth, driving efficiency and transparency that create savings, and in quantifying and valuing positive externalities.
Every idea has a life cycle. Some move fast, some move slow. At this point, we can’t predict whether the NIA idea will gain in three months the momentum it took green banks ten years to achieve. But the good news is that we can chart a progressive policy path that locks in gains on the way.
