William Darity Jr. explains why scarcity isn’t everything.
One of the consistent obstacles for aggressive action to address global warming is encapsulated in the question, “How will we pay for it?” While it is hard, if not impossible, to imagine a priority greater than preventing the planet from being rendered inhabitable for human life, the heaviest carbon emiting nations consistently say they are not prepared to cut other categories of their national budgets, particularly their defence expenditures.
So, in routine fashion, the annual UN Conferences on Climate Change (COP28), held in early December in Abu Dhabi, concluded with a formal multinational agreement that promised no more than a continued, tepid response to global warming. That conclusion leaves sea waters to continue to rise and threaten to swallow entire island nations and destroy coastal communities worldwide.
The key assumption is that to achieve the scale of spending required to meet the climate crisis must compel a country to cut other items from its financial ledger. According to this line of reasoning, we cannot do it all; we cannot have it all. Explicitly or implicitly, spending decisions are confined by scarcity.
The key assumption is that to achieve the scale of spending required to meet the climate crisis must compel a country to cut other items from its financial ledger.
Scarcity is the basis of the premise in Economics that all human decisions are necessarily made in a world where our wants always exceed the resources to meet them. It is typically the first idea introduced to students in an economics class. Scarcity is positioned as the foundation of the field of economics, the field of study of the social factors shaping material well-being. Its hold on economics is tenacious and destructive. It is especially pernicious in its impact on policy thinking.
With scarcity as the cornerstone for economic analysis, we are led to the overweening importance of a companion set of concepts which invariably follow in its trail: rationing, trade offs, tastes, preferences, and opportunity cost.
Particularly relevant to the cost of addressing climate change is opportunity cost – the notion that any spending commitment on one set of items precludes expenditure on another set. It really amounts to a claim that any expenditure is necessarily an opportunity lost. And that conceals the possibility that spending commitments, particularly from the public sector, might produce entirely new opportunities.
Well-designed redistributive measures that transfer resources from rich to poor can improve life chances for those on the bottom while only marginally altering the life chances of those at the top.
For example, additional government spending under conditions of less than full employment, particularly during recession or depression, can rejuvenate economic activity. That, in turn, can support greater prospects for improved health and well-being of a population, as well as renewed or expanded life options. Well-designed redistributive measures that transfer resources from rich to poor can improve life chances for those on the bottom while only marginally altering the life chances of those at the top. From the perspective of the individual, successful financial investments can lead to higher future incomes and wider choices. Opportunity cost obscures the possibility of spending as a mechanism for opportunity creation.
When we de-centre scarcity as the bedrock of economic analysis, we also can rid ourselves of that question: “How are you going to pay for it?” It no longer can offer an automatic barrier to new public spending, especially spending intended to produce transformative change.
Indeed, as the proponents of Modern Monetary Theory argue, as sovereign issuers of a currency, national governments’ expenditures are not bound by budget constraints like households. In principle there is no intrinsic limit to government spending, unless it enacts self-imposed budget constraints like the pernicious debt ceiling law passed by the US Congress in 2021. Compounding the confusion is the failure to recognise that an increase in the federal deficit does not have to constitute an increase in the federal debt. Whether or not a rise in the federal deficit is financed by incurring new debt obligations is a matter of policy choice.
As sovereign issuers of a currency, national governments’ expenditures are not bound by budget constraints like households.
Debt finance is a policy decision, and it is a policy choice that does not have to be made.
Ultimately, national governments should not engage in unlimited expenditures unsupported by taxes because of the danger of triggering drastic inflation. However, new expenditure programmes can be designed to mitigate the inflation risk, without necessarily requiring new taxes.
Consider a proposal to address the US’ racial wealth gap through reparations for black Americans whose ancestors were enslaved in the US. This would entail an expenditure in the vicinity of $16 trillion. If this was done without a major increase in taxes, the inflation risk could be limited by taking two steps:
- spread the expenditures over multiple years, preferably no longer than a decade; and
- make direct payments in the form of less liquid assets than simple cash transfers. Examples include, payments made as trust accounts, annuities, or other types of endowments with built-in delays on personal spending.
Over a ten-year horizon, a $16 tr price tag for reparations would amount to $1.6 tr a year. In response to the repercussions of the pandemic, the US Congress appropriated $2.6 tr and spent $1.6 tr in fiscal year 2020 alone in response to the COVID crisis. In response to the post-2008 Crash Great Recession, Congress appropriated $800bn under the American Recovery and Reinvestment Act of 2009. This was apart from the substantially larger outlays directed toward the banks by the Federal Reserve. Furthermore, if the nation is in a prime aggregate opportunity-creation setting – a recession – inflationary pressures will be low in the first place.
A federal job guarantee, an assurance that all American adults can obtain a public sector job at non-poverty wages with a benefits package including health insurance, is a widely popular policy. In a 2019 survey, 70% of registered voters indicated they support the national government ensuring that all persons who want a job can have a job. Oddly, it has obtained little Congressional traction.
Estimates of the average annual expense of such a programme range from $500 bn to $750 bn. In this case, the answer to the question of “How will you pay for it?” can be straightforward, even from a scarcity-driven vantage point. The amount involved is less than total federal spending on anti poverty programmes. Expenditure on those programmes simply could be reduced markedly and resources transferred to fund a federal job guarantee.
Even in the absence of such a direct cost transfer, once we break with scarcity thinking, funding of a federal job guarantee becomes eminently feasible—particularly given the opportunity creation dimensions of exorcising unemployment and poverty from American life.
Scarcity thinking propels us toward the premise that every financial action we take that produces a gain for someone always must produce a loss for someone else. There are situations when that zero-sum thinking is warranted, but they are not universal.
Maybe we cannot have it all, but we certainly can have more than we have. We can have good things. We can have better things. To get from here to there we have to dispose of the belief that scarcity is an eternal and universal human condition.