Frank Duenzl/picture-alliance/dpa/AP Images
Countless wind turbines at the San Gorgonio Pass Wind Farm
This article is part of the Prospect roundtable on the case for a new large source of public capital.
With the prospect of a Biden presidency spending trillions in stimulus money, including $2 trillion in green investment alone, policy thinkers are debating new institutions to manage a renewed U.S. industrial policy, invoking the New Deal and World War II mobilization. In her new proposal, Saule T. Omarova makes the case for a National Investment Authority (NIA) to retool the American economy for both massive investment and climate action at speed and scale. Omarova rightly recognizes that decarbonization isn’t only about the public sector. Private capital too will play a role—but which one?
Omarova’s work, based on earlier writings of hers with fellow Cornell Law professor Robert Hockett, provides a 21st-century update of the New Deal era’s Reconstruction Finance Corporation (RFC), but with a twist. Omarova’s latest proposal tries to do a lot of things at the same time; I agree with many of them. Like Omarova, I want to find the best way forward to rapidly channel trillions of dollars to clean energy; adaptation to inevitable climate damages; transformative improvements to frontline communities through good jobs, housing, and social services—and the list goes on. I support Omarova’s efforts to flesh out the country’s industrial policy, and to ensure that the public sector maintains an ownership stake in the firms it lends a hand to through wise public subsidy.
But the NIA also muddies the Green New Deal waters in its embrace of certain kinds of public-private partnerships. Here, we must be careful.
The task ahead is daunting. As the Intergovernmental Panel on Climate Change put it in its landmark 2018 report on the 1.5 degrees Celsius of warming, we’ll need “rapid, far-reaching and unprecedented changes in all aspects of society.”
While orthodox economists have long upheld that the almighty carbon tax would be sufficient, they’ve got it dead wrong. In fact, a rapid transition requires three driving forces: massive green investments, smart regulations, and getting prices right. Investments will be a mix of public and private, but what the mix looks like, and who will be in the driver’s seat to steer it, is still up for debate. Climate regulations have proven effective time and time again, ranging from clean-energy standards for the energy sector to CAFE standards for the transportation sector—the two most-polluting sectors in the economy. And it’s high time for the U.S. to stop handing out massive amounts of fossil fuel subsidies and bailouts while letting corporations get away with dumping pollution into our atmosphere—our greatest shared inherited resource—for free.
Specifically, the NIA seeks to tackle the investment side of things. In large part, it is trying to answer the “how will you pay for it?” question. Estimates vary regarding just how much investment is needed to transition to a renewable economy. But with a range of 2 percent to 5 percent of GDP per year over the next ten years, they suggest Biden’s proposed $2 trillion would be just a down payment. I have detailed my concerns regarding the NIA proposal in previous writing with Daniel Aldana Cohen. Here are my main areas of praise and apprehension. There’s agreement regarding the idea of a green bank. On the public side, many state and local governments have to pay significantly higher yields on bonds than does the U.S. government. A new public green bank could simply channel cheap and stable credit by leveraging the full faith and credit of the United States to benefit local, state, federal, and tribal investments. Rather than going to municipal bond markets, localities could simply borrow directly from the green bank. By reducing the cost of credit, the green bank will speed the transition for public entities. Another function could be lending to private-sector decarbonization efforts, many of which face financing constraints. Here, the government would lend directly to private entities for efforts ranging from scaling production to weatherization to the electrification of buildings and vehicles.
Second, the NIA would create a National Capital Management Corporation, or “Nicky Mac,” to take on riskier investments. Omarova sees this as essentially a public option for private equity, which would place greater public control over investment. The devil, as always, is in the details.
Omarova seeks to structure Nicky Mac like a “a typical Wall Street asset management” entity, with the goal of “soliciting private investors—pension funds, insurance companies, university endowments, foreign sovereign wealth funds, and so on—to purchase passive equity stakes in its funds.” While some of these funds will be invested in private enterprises, much would be directed toward public projects.
Let’s break this down. The premise is that there are private investors right now who lack solid, stable, profitable outlets for investment—something like blue-chip manufacturers might have offered in an earlier capitalist era. But because of structural shifts in the economy (e.g., financialization), these options can’t soak up all the capital that’s sloshing around. So instead it increasingly moves into speculative sectors—like luxury housing that often sits empty, or exotic financial products—that have no social benefit, and are highly risky to both investors and the economy. So, according to Omarova, there is basically excess capital looking for a stable home.
At the very same time, we have an austere U.S. public sector, with low levels of public investment, crumbling infrastructure, and a Green New Deal that’s piling up proposals requiring significant financing.
So the proposal is some old-fashioned matchmaking: steer the errant capital into good productive uses. But much of what needs funding doesn’t—and shouldn’t—come with revenue streams. Some social needs are not profitable, like a Green New Deal for public housing, landscape restoration and public leisure infrastructure, retrofits to public buildings, and countless other ideas for nonprofit public infrastructure.
Omarova assumes that the public can’t afford to do this on its own.
The proposal is some old-fashioned matchmaking: steer the errant capital into good productive uses.
How, then, will the private capitalists be repaid? Omarova thankfully doesn’t propose the privatization of public goods. Instead, she aims to utilize financial engineering for social purposes. Experts would determine the fraction of overall economic growth enabled by these investments; Nicky Mac would then pay back private investors on that basis. The returns might not be that high, but they would be stable. In a low-growth, low-interest-rate economy—where we are, and are likely to stay—this should be an attractive part of a private portfolio.
But is it really the case that the U.S. can’t raise its level of public investment, currently just over a third of the gross domestic product, to over 40 percent—a level closer to the stingier Western European countries? Maybe even higher! True, that would require political mobilization, potentially taking money and power from the wealthy through taxes and regulation, and dramatic changes to how the government works. Then again, we live in an exceptionally unstable moment where the old rules are clearly broken.
What’s more, Omarova’s proposal also implies either a radical overhaul of economic governance or a technocratic, elite-driven process. This is worrisome. I’m not convinced that an NIA would be staffed by leftist economists with the public’s interest in mind. On the contrary, it’s easy to imagine, in practice, the old revolving door between Wall Street and the White House’s economic leadership team. Good intentions have been yielding disappointing-at-best results in public-private partnerships for decades.
While I salute Omarova and Hockett’s specific concern to find productive investment outlets for workers’ pension funds, I should note that these are not run by workers, but by conventional fund managers. The priority for workers’ pensions should be restoring workers’ control over their own retirements. And I’d prefer to make more conventional financial instruments, like tightly regulated green bonds, and sectors like clean-energy manufacturing, reliable choices for pension investment, while having public investments be public.
In other words, the problems of footloose capital and crumbling public infrastructure should be tackled separately. Let’s use taxes on wealth, capital gains, financial transactions, and other forms of the one percent’s wasteful riches to stanch the flow of speculative, socially perverse private investments. Couple heavy progressive taxation with financial reforms to end shareholder primacy.
And since we’ll need to mobilize politically no matter what, let’s organize in the streets, communities, and workplaces around highly popular public investments, steering public funds into worthy projects by expanding on already-existing tools, ranging from deficit spending to credit policy to higher taxes on the rich.
One can even point to the successes of the Obama administration’s 2009 green stimulus—far too small to make the needed changes, but certainly a proof of concept that coordinated investment in renewables through a mix of direct spending, loan guarantees, and procurement policies can deliver fast results.
The problems of footloose capital and crumbling public infrastructure should be tackled separately.
Going back further, there are other lessons we can take in from the Great Depression and the WWII mobilization. During that time, the government took a large role in financing and directing investment—both public and private. As we’ve learned from the work of Mariana Mazzucato, J.W. Mason, Mark Wilson, and others, the government played, and must continue to play, a pivotal role in managing and hedging risk in the economy. A great deal of investment and credit policy took place under the RFC along with the Defense Plant Corporation (DPC). The RFC, which oversaw dozens of agencies, financed large swaths of investment across the economy from 1932 until it was dissolved by Congress in 1957. But the RFC was complemented by the DPC, which carried out large-scale direct public investment, often creating new industries out of thin air (along with workers and some steel, of course), and outright owning the means of production. And crucially, the DPC and other state organs coordinated investment.
If anything, this is the twin challenge we face in the 2020s: spending enormous sums of money fast, and doing so wisely. Our challenge in the coming decade isn’t to reward private investors looking for a safer return on investment; our challenge is compressing two or three decades of gradual decarbonization into one, and doing so in a way that begins to remedy centuries of racial and economic injustice, lifts up workers, and keeps communities safe from extreme weather, all at the same time.
I’m grateful to Omarova and Hockett for years of work developing NIA blueprints. Only robust debate can advance proposals, and I hope this response proves fruitful.
