Thanks to the formidable advocacy of Alexandria Ocasio-Cortez, the idea of a Green New Deal has attracted widespread attention on both sides of the Atlantic. Billed as a “new national, social, industrial, and economic mobilization on a scale not seen since World War II”, it is perhaps unsurprising that critics have focused on the price tag.

In response, many Green New Deal proponents cite the ideas of Modern Monetary Theory (‘MMT’). Although MMT has been quietly growing in prominence for many years, the school of thought’s association with the Green New Deal has propelled it into the limelight.

MMT holds that ‘money is a creature of the state’, and that a sovereign government with its own currency and central bank faces no financial constraints on spending. Other limits do exist – most notably inflation, but also political and administrative constraints – but money itself is no object.

MMT scholars contend that the Green New Deal is a perfect opportunity to mobilise underused resources through deficit spending, simultaneously transforming the economy and improving living standards. They pour scorn on those who argue that ‘we can’t afford’ a green transition. As Robert Hockett, a professor at Cornell University, has argued: “where were the ‘pay-fors’ for Bush’s $5 trillion wars and tax cuts, or for last year’s $2 trillion tax giveaway to billionaires?”

MMT also recognises the links between climate change and inequality, and suggests that a smarter approach to public spending can combat both. In particular, a ‘job guarantee’, whereby the public sector will employ anyone willing and able to work at a fixed wage, alleviating unemployment and insecure work, is associated with several prominent MMT thinkers.

In Britain, the Labour Party is developing its own plan for a green transition. Rebecca Long-Bailey, the Shadow Minister for Business, Energy, and Industrial Strategy, recently announced an “unprecedented call for evidence” on how a surge in green investment could help local communities and economies. In recent months Labour has come under increasing pressure to embrace MMT thinking.

But while MMT offers an empowering narrative, its insights must be accompanied by some pragmatism. A successful green transition will require much more than increased government spending, and there is no escaping hard choices.

Towards a new political economy

In order to succeed, any Green New Deal must be rooted in good governance. But there is currently a gap, in political economy terms, between the idea that the state can centrally fund the green transition, and an emerging consensus that viable, sustainable societies of the future will be characterised by a broad distribution of power and resources. The task of commandeering the fiscal power of the nation-state while also responding to local needs gives rise to a number of practical challenges.

One of these relates to taxation. From an MMT perspective, tax ‘destroys’ money by taking it out of the economy. Changes to taxation levels are thus the preferred policy lever with which to manage demand and control inflation. However, taxation also serves many other purposes, which it would be naïve to think will always align neatly with controlling inflation. Richard Murphy, a member of the original British Green New Deal Group and one of the main UK-based proponents of MMT, describes several functions for tax, including penalising ‘bads’, redistributing income and wealth, and improving democratic representation.

In practice, policymakers may find it difficult to harmonise these different functions of taxation while also funding a just and sustainable transition. For example, a high and consistent carbon price will likely be needed to disincentivize polluting activity, even while the state undertakes a vast public works programme to build alternative energy systems. Taxation of dirty vehicles will be required to incentivise people to switch to electric. Consumption taxes will need to be carefully calibrated to reduce our over-use of resources without popping the consumer credit bubble our economy currently relies on.

Careful institutional design will be required to ensure that these trade-offs are managed, while inflation is controlled. This is just as important as MMT’s central observation that the state can always pay its debts, but thinking around these institutional questions is far less developed.

Secondly, there is the issue of how MMT might work with theories of democracy and ownership, an area of particular interest to the Labour leadership. Several different concepts of the role of the state have been discussed in the context of the sustainable transition. Writing in the New Statesman, the journalist Paul Mason has argued that “for a post-capitalist economy to take off, it has to work as spontaneously as the market does.” This requires the state to be an “enabler and rule-setter for a diverse ecosystem”. But for the transition itself – especially if driven by MMT-style fiscal policy – the state will need to take on a more commanding role, which Mason forebodingly terms ‘capitalist Stalinism’. These are radically different modes of governance, and striking a balance or transitioning between them will pose major challenges for our democratic system. Those advocating an activist role for central government must be candid about its limitations, and could seek lessons from distributed energy and participatory budgeting.

Thirdly, a Green New Deal is often presented as an exercise in coalition building, with the state sitting at the centre. The Ocasio-Cortez resolution calls for “transparent and inclusive consultation, collaboration, and partnership with frontline and vulnerable communities, labor unions, worker cooperatives, civil society groups, academia, and businesses.” Careful thought must be given as to how these seemingly diverse priorities and interests can be balanced. Building a coalition involves compromises, and the experience of other European countries is instructive. In France the gilets jaunes, are a recent example of what can happen when climate policy is badly designed, having first mobilised in order to protest new fuel duties. It is at least conceivable that a similar backlash could make it politically difficult for a government trying to implement a Green New Deal to raise taxes to control inflation.

Germany has had greater success with its renewable policies, for instance by allowing households to profit by selling excess energy back to the grid. Nevertheless, it has unfortunately struggled to uproot the last vestiges of coal power from its energy network. Today German coal jobs are relatively few, but their existence is inconsistent with achieving Paris-consistent decarbonisation. Crucially, however, they are well unionised – a fact that highlights how the interests of trade unions and the sustainable transition are not perfectly aligned.

It also remains unclear how exactly a federal job guarantee can be reconciled with empowering local communities. If central government guarantees a job for a newly unemployed coal plant worker, might that worker be forced to move to a region or locality where there is spare capacity in, say, retrofitting other people’s homes? Does the final say over how real resources are allocated (as opposed to financial resources) rest with Washington (or Whitehall), with local authorities, or with worker-owned local businesses? And how might the scheme as a whole respond to a reduced working week?

Finally, the rediscovery of the state’s spending power does not mean green campaigners can forget about private investment. Hyman Minsky, whom many MMT scholars cite as a key influence, went to great lengths to emphasise the importance of private finance. Writers like Robert Hockett uphold that legacy today, but this is often lost in tit for tat debates about public debt. Although many activists highlight the role that private finance plays in carbon capitalism, often the contribution it must make to turbo-charging a green transition is overlooked.

Globally, the task of greening private finance lies with the Taskforce for Climate-Related Financial Disclosures. Central banks and financial regulators are currently mulling proposals to ask firms to release information about the risks they face from climate change. More and better information should help markets allocate investment more efficiently. A Green New Deal platform would be more credible, and more likely to succeed, with a plan to map and leverage the power of private investment flows. In the UK, the Labour Party could state its intention to make disclosure of climate-related risk mandatory for all reasonably sized firms at a particular date in the near future.

However, central banks are rightly cautious over the financial risks posed by both sides of the climate investment dilemma. While carbon-intensive ‘stranded assets’ could result in large financial and economic shocks, rapidly increasing green investment produces risk in the form of unproven technologies and business models. An MMT-inspired plan to bring the Federal Reserve or Bank of England under direct government control will merely shift responsibility for this delicate balancing act.

Overall, current plans for a Green New Deal leave many questions unanswered, even when we acknowledge that financing is no barrier. Critics are queuing up to dismiss the Deal as a ‘utopian’ idea that doesn't address real world trade-offs.

It’s up to us to prove them wrong.