Researchers: Governments can finance radical social and environmental measures without growth

Research Team at Freie Universität Berlin Proposes Monetary Policy Program for Degrowth Transformation

According to new research led by a researcher at the Otto Suhr Institute at Freie Universität Berlin, the level of gross domestic product (GDP) has no impact on the ability of sovereign states to finance investments in radical decarbonization and ambitious social policies such as universal public services and a jobs guarantee. Their study ,,How to Pay Saving the World: Modern Monetary Theory for a Degrowth Transition" has just been published in the journal "Ecological Economics": https://www.sciencedirect.c­om/science­/article/p­ii/S092180­0923002318

,,In order to slow down the climate collapse, public spending must be massively increased. Only through government investment can a timely phase-out of fossil fuels still be achieved," says PhD student Christopher Olk of the Otto Suhr Institute for Political Science at Freie Universität Berlin and head of the study "How to pay for saving the world: Modern Monetary Theory for a degrowth transition. There is a widespread belief that governments can only increase spending if gross domestic product (GDP), and thus the tax base, grows. Otherwise, there is supposedly a threat of inflation or too much public debt. This would mean a problem, since GDP growth runs counter to ecological goals.

For this reason, a majority of climate scientists worldwide are now calling for "degrowth" - i.e. the democratically planned dismantling of socially less necessary and ecologically particularly harmful industries - in rich countries in order to make timely decarbonization possible. Key degrowth measures include the expansion of universal public services and a job guarantee in sustainable sectors. Governments thus face the question of how to finance the necessary environmental and social measures in a degrowth transformation.

This is the question that Christopher Olk’s research team wants to answer. The researchers argue that public investment can indeed be increased without GDP growth - while simultaneously dismantling destructive and less useful industries and without inflation.

The article, published in the journal ,,Ecological Economics," follows modern monetary theory (MMT) and explains why states with monetary sovereignty are fundamentally not subject to financial constraints. "Contrary to what conservative economists* claim, public spending is actually not constrained by tax revenues, but by the productive capacity of the economy," explains Christopher Olk, lead author of the article. The limits to public spending are thus the social and environmental limits to production. For publicly financed decarbonization, according to Olk, some resources that have so far been used for socially less necessary production must be shifted to resource-efficient public supply systems through targeted policy measures.

To this end, the researchers propose a comprehensive set of monetary and fiscal policies to prevent inflation and ensure economic stability during a degrowth transition. These include stronger regulation of private money creation by banks, progressive taxation of capital income and energy and resource consumption, targeted price controls, robust public utility systems, and the introduction of an emancipatory, democratically organized job guarantee in sustainable sectors. This holistic policy framework has the potential to build broad democratic support for a transition to a more sustainable future.

"In the face of an escalating climate crisis, our governments are not protecting the livelihoods of the people," Olk said. "But people can only demand better policies if they know that government austerity policies do not follow economic constraints, but are precisely a political decision."

There is no doubt that existing debt rules at the European and national levels stand in the way of the necessary public spending. The researchers suggest suspending them in the face of the existential climate crisis, as in the Corona crisis, or replacing them in perspective with a democratic control body.

According to Christopher Olk, Colleen Schneider (Vienna University of Economics and Business) and Jason Hickel (University of Barcelona and London School of Economics), degrowth requires above all a politically well-organized social base. Concerns about financial feasibility, worries about possible inflation, and about the impact on one’s standard of living often lead to skepticism about radical social and ecological transformation. In contrast, the authors show how such a transition is macroeconomically feasible and propose a practical economic policy program that can achieve ecological and social goals simultaneously.