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Investment is win-win for global economy and climate, Stiglitz argues

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Recently Joseph Stiglitz, the Nobel-prize-winning economist and senior fellow and chief economist at the Roosevelt Institute, gave a very interesting speech in South Africa concerning climate change and the global economy. He argued that by implementing policies that help to reverse global warming, we can also reverse the global economic downturn. Although he also pointed out many barriers to doing so, he outlined some interesting policy proposals.

For me, the most interesting part of his speech concerned the use of a Keynesian approach, not just for a single country, as is usually done, but for the entire world economy. John Maynard Keynes pointed out that when the private sector is unable to generate enough demand in the economy, that is, it is unable generate enough spending from consumption and investment, then the government must step in to kickstart spending. Thus in recessions and depressions many now acknowledge that at some point it may be necessary for the government to spend more than it takes in to get the economy moving again. (See numerous articles from Marshall Auerback on this basic idea.)

There are a couple of fine points to what Keynes was saying, however, that are either often glossed over or challenged. First, he asserted that when demand is low, saving can get in the way of recovery. So -- and this is the part that is ignored -- since the rich save more than the poor, their excess income gets in the way of recovery. The horrendous implication, from the rich person's point of view, is that they should be taxed more. The less direct way to put this, which is the way it is discussed even in much of the progressive media, is that an "unequal distribution of wealth" leads to negative economic outcomes. The important statistic for the U.S. is that while in 1970 the top 1 percent of households pulled in about 10 percent of total income, now they receive close to 25 percent. Not good, from a purely Keynesian perspective.

So what does this have to do with climate change? Since he was speaking in South Africa, it was easy for him to point out that the world distribution of wealth is very unequal. Because of this inequality, it will be much harder for developing countries to create less carbon-intensive economies through large-scale investment than for developed countries. In addition, the poorer countries consume more and the richer countries save more. So an obvious policy approach is to tax financial transactions, which moves money from something that (to be charitable) involves savings into consumption and investment by developing countries. The richer countries could also simply give grants to the poorer countries. Stiglitz claimed that about $200 billion per year would be required to help developing countries make the transition to a less carbon-intensive future, which could be financed from a financial tax.

The second implication of Keynes' ideas is that the economy needs more investment when it is in a downturn. We certainly need a good deal of investment to create less carbon-intensive economies, and it so happens that, according to Keynes, investment, particularly in factories, is the best way to pull economies out of slumps. While he famously suggested that digging holes and filling them up again would also do the trick, he clearly preferred doing something useful with investments on the grounds that investment is generally good for a society and that it is a surer way to speed recovery than consumption.

Stiglitz argued that what we have now is an inadequate level of global aggregate demand, which is to say, there isn't enough consumption and investment for the entire global economy to pull out of the recession. Thus, he stressed, reversing climate change is an opportunity for the economy, not a drag. We need investment for the good of the climate and we need investment for the good of the economy -- therefore what we have is a win-win situation.

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http://www.grist.org...limate-stiglitz

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