A flawed but historically robust emergency response to the Covid-19 pandemic by Congress and our nation’s central bank helped America avoid the second Great Depression that so many prominent economists feared. Still, few progressives are declaring mission accomplished: The Biden administration and Democratic legislators are mired in political trench warfare over how to pay for desperately needed infrastructure and a climate change package.
President Biden has so far ruled out any measure that would increase deficit levels. And Republicans are arguing against any new taxes on the affluent or businesses. Because many states and cities now report surpluses rather than the yawning deficits that were predicted last year, most conservatives say Congress should use as-yet unspent local aid dollars from spring’s American Rescue Plan to pay for the infrastructure, rather than issue new spending.
The standoff is a microcosm of a much larger dilemma that we’ll be stuck with for years: For America to tackle climate change, it most likely needs not only to expand federal efforts but also to build up state and local governments’ capacities to make their cities more eco-friendly and build things like new flood walls or drainage systems. Yet for such efforts to be politically viable, policymakers probably have to avoid burdening people with unpopular middle-class tax hikes. (This knowledge has led President Biden to pledge, first as a candidate and now as president, that he will never increase taxes on families earning under $400,000 annually.)
One way to avoid this circular debate on deficits, taxes and spending, while still undertaking a green transformation, is to provide states and cities with cheap, reliable low-cost loans that are easy to pay back. Fortunately, America’s central bank — the Federal Reserve — gave us a model of how this could work during the coronavirus crisis.
Economists at the Fed have given glowing reviews to the central bank’s emergency credit line to states and cities, called the Municipal Liquidity Facility. Despite its soporific name, it was an unprecedented extension of the Fed’s “lender of last resort” powers: It inserted the bank into the municipal bond market, which states and cities basically use to even out revenue streams and finance some large projects. And it was successful in its primary mission: The Fed’s very entry into this market prevented its collapse and kept private lending flowing. It kept borrowing levels relatively near the prepandemic status quo.
Still, because the Fed itself didn’t offer very generous loan terms compared with private lenders, the M.L.F. directly lent to only two borrowers — the state of Illinois and New York’s Metropolitan Transportation Authority. Then, Republicans in Congress and the Trump administration shut it down in December.
But in both its modesty and its success, the M.L.F. suggested that something more radical (and sustainable) was possible. Recently, a growing chorus of economists, legal scholars and policy experts have proposed a suite of initiatives that could replenish the public employment ranks — which have yet to recover from the Great Recession — and boost the credit lines of states and cities as the climate emergency deepens, all by relying on the inexhaustible monetary powers of the Federal Reserve.
Of course, the very same Republicans who forced the M.L.F. to shut down in December would oppose a broad expansion of the Fed’s mission. And it could make some cautious Democrats queasy as well. Nevertheless, the ideas are gaining momentum in academia and finance too.
“We’re seeing a political debate about what the Fed can and can’t do that we haven’t seen before,” said Amanda Kass, the associate director of the Government Finance Research Center at the University of Illinois at Chicago. “The door has been slightly cracked open. And there’s a fight between those who want to fling the door open and those who want to slam the door closed.”
If the door-openers win, and their plans find a way through Congress soon, then America might be able to expedite the financing of a green transition, despite the presence of Republicans, who still oppose aggressively decarbonizing the economy.
So how would this workaround work in practice?
Many of the experts and proponents of expansionary policy I spoke to suggested a Fed guarantee for the municipal bond markets. This would radically reduce the borrowing cost for states and cities investing in their communities and adapting to climate change. Instead of something like the Municipal Liquidity Facility’s high-interest emergency credit, the Fed could establish a permanent program for issuing these governments municipal bonds with very friendly loans that are easy to pay back.
There’s an overarching reason a pilot program pushing the boundaries of federal financing could plausibly be pulled off. And it’s very simple. “It’s boring if it’s at the Fed,” Claudia Sahm, a senior fellow at the Jain Family Institute and a former Federal Reserve economist, told me. The central bank’s perceived nonpartisan super-competence would generate buy-in from Wall Street and insurers — something crucial, she said, for getting approval from Congress and maintaining any program’s permanence through election cycles.
In a forthcoming research paper, two scholars from the Berggruen Institute — Yakov Feygin, an economic historian, and Pooja Reddy, a former Morgan Stanley municipal banker — lay out their version of how such a program could work. They call for the creation of a municipal bond market led by a government-sponsored entity like Fannie Mae or Freddie Mac, the longtime federally backed home mortgage companies created by Congress that we depend upon. Fannie and Freddie are able to ensure that American homeowners enjoy stable, affordable mortgage terms precisely because the mortgage loans they buy from initial lenders are, ultimately, backed by the full faith and credit of the United States, which calms investors. The Berggruen Institute plan essentially seeks to replicate that financial dynamic for state and local government loans.
A different proposal by Anusar Farooqui, an economic policy writer, and Tim Sahay, an environmental policy expert at the Green New Deal Network, focuses on making sure that any bonds issued by the government would truly address the climate crisis. Their plan would publicly charter a green bond ratings agency staffed by scientists and economists that would evaluate all bonds for climate impact, then penalize polluters with less attractive loan terms while guaranteeing, through the Fed, top-rated green bonds. This would ensure that the money raised by these municipal bonds actually goes to a green transition and avoid the pervasive “greenwashing,” in which the private sector markets investments that don’t actually reduce emissions as eco-friendly projects.
To truly supercharge green investment, Robert Hockett and Saule Omarova, professors at Cornell Law School, want to create a National Investment Authority, which would finance state and federal public investments in new infrastructure by “pooling municipal bonds” into a nationwide market. According to their white paper, released in 2018, this agency would be “operationally situated between the Federal Reserve and the Treasury,” much like the M.L.F. And the authors advertise the plan as a throwback to the banklike Reconstruction Finance Corporation from the Depression era — the government-owned organization that contained the Federal Housing Administration and the Rural Electrification Administration.
As the professors write in their proposal, because the agency would be “explicitly backed by the U.S. government,” it would be a larger, “more powerful market actor than any private municipal-bond-pooling entity” and “attract great interest from large institutional investors,” who would see the bonds as similar to U.S. Treasury securities, the safest government bonds in the world.
Mr. Hockett, a former staff member at the International Monetary Fund and the Federal Reserve Bank of New York, told me his plan would also put public servants appointed by democratically elected leaders back in the driver’s seat of national economic development. For decades, “shareholders and corporate managers could characterize themselves as the primary institutions of development,” he said. “This was the neoliberal project.”
Any of these proposals would mark a radical break in American public finance, but something similar will be necessary to catch up to the rest of the world: In May, China’s first government-approved real estate trust for infrastructure debuted to overwhelming investor demand.
In the end, these financing proposals are all workarounds compared with the preferred option among some progressives: simply having Congress directly spend the money without using the private markets at all. It’s also true that opening the door wide on central-bank financing would provoke considerable opposition. And this defiance wouldn’t come just from top Republicans, like Senator Pat Toomey of Pennsylvania, who demanded the M.L.F.’s death this past winter. Some centrist Democrats would balk as well.
Still, Ms. Sahm, the former Federal Reserve economist, argued, “Toomey and others get exercised because the Fed is competent,” not because it isn’t. “They would get it done.”
Alex Yablon is a journalist who writes about policy and economics. He is a contributing opinion writer for Business Insider and publishes a newsletter at alex-yablon.ghost.io.
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