Green Keynesianism and the Global Financial Crisis

Kyla Tienhaara

• Publisher: Routledge
• Year: 2018
• ISBN:
  9781351375665
• Edition: 1
• Topic: Economics
• Subtopic: Sustainable Development
• Index: Economics

It is widely accepted that limiting climate change to 2°C will require substantial and sustained investments in low-carbon technologies and infrastructure. However, the dominance of market fundamentalism in economic thinking for the past three decades has meant that governments have generally viewed large spending programs as politically undesirable. In this context, the Global Financial Crisis (GFC) represented a huge opportunity for proponents of public investment in environmental projects or "Green Keynesianism".

This book examines the experience of Australia, Canada, Japan, Korea, and the United States with Green Keynesian stimulus programs in the wake of the GFC. Unfortunately, on the whole, the cases do not provide much optimism for proponents of Green Keynesianism. Much less funding than was originally allocated to green programs was actually spent in areas that would produce an environmental benefit. Furthermore, a number of projects had negligible or even detrimental environmental outcomes. While the book also documents several success stories, the research indicates overall that more careful consideration of the design of green stimulus programs is needed. In addition to concrete policy advice, the book provides a broader vision for how governments could use Keynesian policies to work toward creating an "ecological state".

This book will be of great interest to students and scholars of environmental politics, environmental economics, political economy, and sustainable development.

PART I

Introduction

1 Too big to fail

Maybe Wall Street was, in fact, too big to fail. Maybe an injustice had to be done in defense of the common good. I wasn’t convinced by this argument, but I understood the logic of interventionism. I wonder, though, why this same logic doesn’t apply to the planet. Is the Earth not too big to fail?

Sean Illing (2015)

On May 2, 2008, Cyclone Nargis swept into the low-lying Irrawaddy River Delta in central Myanmar. Storm experts had been tracking the cyclone for days, but at the last moment it unexpectedly turned and adopted a much more devastating path. Winds upward of 119 miles an hour pounded the impoverished country and set off a storm surge that reached 25 miles inland. Families sleeping in simple shacks within the Delta were caught unawares and swept out to sea. Whole villages and townships were laid to waste. More than 140,000 people were killed in the worst disaster the country had ever seen (UNEP 2009a). As Casey (2008) remarks, Nargis “was Asia’s answer to Hurricane Katrina … [but] many times more deadly.”

A few days later, on the other side of the world, with reference to a crisis of a very different nature, United States (US) Treasury Secretary Hank Paulson remarked that he believed that following the failure of investment bank Bear Sterns, “the worst is likely to be behind us” (Phillips and Palleta 2008). But Paulson, like the experts tracking Nargis before it turned, was wrong. Four months after his optimistic prediction, Paulson was bailing out Fannie Mae and Freddie Mac, two huge mortgage firms (Irwin and Goldfarb 2008). What became known as the Global Financial Crisis (GFC), which would lead to the Great Recession (or by some accounts, the “Lesser Depression”), had begun in earnest by early September 2008.

In both cases, experts failed to anticipate the devastation that would be wrought by the impending crises, and the warnings of those sounding the alarm bells were not heeded. In the case of Nargis, there were limited data for experts to rely on, as Myanmar has no radar network to help predict the location and height of storm surges. Further, the military junta in power failed to act on the information available and evacuate those in low-lying areas. In the US, economic analysts did not lack information, but were blinded by an ideological belief that the economic system could not fail. Presidential candidate John McCain famously declared that the “fundamentals of the economy are strong” mere hours before global financial services firm Lehman Brothers filed for bankruptcy protection under federal law, sending markets into a tailspin (Time Magazine n.d.; Stein 2011). It is not possible to know whether drastic action at an earlier time might have averted the GFC or limited the loss of life in Myanmar, but each provides a stark lesson about the consequences of complacency.

At first glance, these events may appear to be entirely unrelated, but they are not. The devastating impacts of Cyclone Nargis cannot be divorced from the broader environmental crisis that the world has been facing for several decades. There is no definitive evidence that this cyclone was amplified by climatic changes. However, it is widely believed that in the future, the frequency and magnitude of storms, and the vulnerability of low-lying areas, will increase worldwide as temperatures and sea levels rise (UNEP 2009a). Further, the heavy loss of life from Nargis is primarily attributable to the extensive removal of mangrove forest in the Irrawaddy River Delta, which could have served as a buffer from the storm surge (UNEP 2009a).

In turn, the forces that have driven the environmental crisis also created the GFC. Fundamentally, both crises have largely emerged because of an economic system that promotes overconsumption (leading to unsustainable consumer debt) and infinite (but inequitably distributed) growth (Green New Deal Group 2008). Further, as Ayres (2014) points out, the simplification of the global economic system in recent decades, driven by demands for economic efficiency, has led to instability. As trade barriers have fallen and a select few large-sized firms have come to dominate the market, the complexity and the subsequent resilience of the global economy has been reduced. This loss of resilience is mirrored in ecosystems around the world, which have been simplified through land clearing and species extinctions, also driven largely by demands for the efficient production of goods. The environmental sustainability of any model of capitalism is the subject of ongoing debate. However, there appears to be widespread acceptance that the form that has held sway since the early 1980s, variously referred to as “neoliberalism” or “free-market fundamentalism,” and the globalization that has attended it, has been devastating for the global environment (Christoff and Eckersley 2013). The demands of the global economy have accelerated climate change and driven significant changes in land use around the world, leaving people in countries like Myanmar extremely vulnerable.

The connections between the causes of the crises are critical to understanding the broader context of this book; however, they are not its central focus. Nor is this book about ways to simultaneously solve both crises, although others who address the same topic often frame their work as providing solutions. This book is primarily concerned with the opportunities that emerged in 2008 for environmentalists – activists, government officials, scholars, or businesspeople – to advance an environmental agenda by piggybacking state-led responses to the GFC. The book focuses on government measures aimed at promoting an economic recovery after September 2008, rather than efforts to reform the financial system to prevent future crises. It discusses the extent to which these measures were harnessed to produce the double dividends of employment and environmental benefits, such as emissions reductions.

It is an old adage that in every crisis there is an opportunity. Cyclone Nargis presented an opportunity for the world’s leaders to acknowledge the stark realities of a warming world and the consequences of environmental destruction. However, if Hurricane Katrina’s devastating impact in the US could not provide an impetus for action on climate change, then a disaster – no matter how horrific – in a far-flung corner of the world, remote from the halls of power, was highly unlikely to do so. Conversely, the GFC was not a phenomenon that major economies could afford to ignore. Several firms were deemed “too big to fail” and bailed out, but that was not enough to avert disaster. Greater government intervention in the market was required, which flew in the face of the prevailing economic orthodoxy. The state, once thought to be in “retreat” (Strange 1996), was back at center stage and the much-neglected and frequently derided English economist John Maynard Keynes was resurrected and restored to his place as the most influential economic thinker of the last hundred years (Skidelsky 2009). Naomi Klein (2008) argued at the time that the GFC should be for neoliberalism what “the fall of the Berlin Wall was for authoritarian communism: an indictment of ideology.”

This disruption of the status quo created an opening for a substantial improvement in the relationship between capitalism and nature, and significant state-led action on climate change and other environmental issues. Presumably trying to channel Winston Churchill, ¹ US President Barack Obama’s Chief of Staff Rahm Emmanuel was quoted, with reference to the GFC, as saying “you never want a serious crisis go to waste. And what I mean by that it’s an opportunity to do things you think you could not do before” (quoted in Seib 2008). This book examines the degree to which governments, in 2008 and 2009, pursued action they believed difficult to undertake under the constraints of neoliberalism to address the global environmental crisis. In particular, it explores the extent to which governments embraced “Green Keynesianism,” which is defined here as government intervention in the economy through public policies that aim to achieve full employment and environmental sustainability.

This opening chapter first provides a brief introduction to the twin crises of environment and economy. It then discusses the twin opportunities that the GFC presented to the environmental movement. Subsequently, key literature that informs this study on the international political economy of the environment and comparative environmental politics is introduced. Next, the qualitative case study approach and the selection of countries whose policies are examined in the book are explained. The political, economic, and environmental context in each country is then outlined. Finally, an overview of the remainder of the book is provided.

The crises

The GFC started as the US subprime mortgage crisis that resulted from the bundling and repackaging of “toxic” assets as “safe” investments (Kamin and DeMarco 2010; Duca 2013). The initial crisis appeared relatively contained, affecting only countries outside the US that were exposed to the subprime market (particularly the United Kingdom [UK] and European countries). However, in the last quarter of 2008, the crisis escalated dramatically with the collapse of Lehman Brothers and the bailout of American International Group, the largest insurance company in the US. On the heels of these events came similar collapses and rescues of financial institutions in other advanced economies. As the knock-on effects of the credit crunch sank in, emerging economies also began to suffer. What began as a crisis in one sector in one country eventually became “the world’s first truly global financial crisis” (Omarova 2009, 157).

Most advanced economies suffered deep recessions as a result of the GFC. The International Monetary Fund (IMF) reported a 0.8 percent decline in global economic output in 2009 (IMF 2010). Global trade in manufactured goods fell sharply, with repercussions for East Asian economies in particular (IMF 2009). At the same time, plummeting commodity prices severely affected countries in Africa, Latin America, and the Middle East. The International Labour Organization (ILO) estimates that 212 million people were unemployed in 2009, almost 34 million more than in 2007 (ILO 2010). The Great Recession is considered the most severe economic downturn since the Great Depression.

While the world was experiencing the worst economic crisis in a generation, it was also faced with an environmental crisis of similar magnitude. In 2008–2009, research findings indicated that climate change was occurring far more rapidly than previously projected. Specifically, the arctic sea ice was shown to be disappearing at a far greater rate than scientists had predicted (UNEP 2009b). The World Wildlife Fund (WWF) released its Living Planet Report in 2008, which showed that biodiversity had declined by 30 percent over the previous 35 years. The WWF (2008) found that, in a business-as-usual scenario, the world’s fisheries were projected to decline by more than 90 percent by 2050.

These startling figures are only a few of the many that could be catalogued here, and the data accumulated since 2009 have demonstrated that the situation is worse than originally predicted. A group of researchers, led by Johan Rockström from the Stockholm Resilience Centre and Will Steffen from the Australian National University, developed the planetary boundaries framework in 2009, which “defines a safe operating space for humanity based on the intrinsic biophysical processes that regulate the stability of the Earth System” (Steffen et al. 2015, 1). According to their research, as of 2015, four of the nine planetary boundaries (climate change, loss of biosphere integrity, land-system change, and altered biogeochemical cycles) had been crossed.

If government intervention to rescue Wall Street was justifiable by the importance of financial institutions in maintaining stability in the global economy, the same logic should apply with respect to these critical biophysical processes. As Illing (2015) puts it, “the Earth is too big to fail.”

The opportunities

In his pithy remarks about not wanting to waste the crisis, Rahm Emmanuel effectively categorized the GFC as what historical institutionalists call a “critical juncture.” In a critical juncture, the structural (i.e., economic, cultural, ideological, organizational) constraints on political actors are “significantly relaxed for a relatively short period” (Capoccia and Kelemen 2007, 343). As a result, political actors have a greater range of options for action and leaders have “greater latitude in shaping policy than might be available in more stable periods” (Peters 2011, 76).

There was the potential for the GFC to be a critical juncture for the environmental movement. First, there was a need for governments to respond quickly to the crisis, which opened opportunities to direct government spending to environmental projects. Deficit-funded public spending (Keynesian fiscal stimulus) became not only politically acceptable, but also popular in many countries and was even promoted by international financial institutions like the IMF (2009). There was broad agreement among economists that fiscal stimulus should be “timely, targeted, and temporary” (known as the three Ts) (Elmendorf and Furman 2008; Stone and Cox 2008; Summers 2008). “Timely” means that spending plans should be implemented quickly. “Targeted” means that funds should be directed primarily at lower-income brackets and sectors of the economy most affected by the recession (thus, increasing the likelihood of the injection of money into the economy through further spending), creating a “multiplier effect.” Finally, “temporary” means that any stimulus should have a fixed end date. Other than the three Ts, there was no consensus on how public money should be spent.

It is widely accepted that limiting climate change to an average temperature rise of 2°C (or, even more ambitiously, 1.5°C) will require substantial and sustained investments in low-carbon technologies and infrastructure (OECD n.d.a). Some of these investments will of course be made by the private sector, independent of government action, or spurred on by the introduction of a price on carbon. However, in recent years, a consensus has emerged among environmental policy scholars that the transition to a low-carbon economy and the greening of basic infrastructure cannot be left to market forces alone. As Gore (2010, 732) notes:

Whilst markets might allocate resources effectively between existing activities, they are not effective in allocating resources between new and old activities, in generating structural change and in dealing with the social impacts of the associated creative destruction of economic activities and livelihoods.

In other words, government intervention in energy markets and government-administered rebuilding of basic infrastructure will be necessary regardless of the use of other strategies for achieving sustainability (whether market-based or regulatory) or the form of “new economy” that societies eventually transition to. Eskelinen (2015, 102) describes this conclusion as the “minimum common denominator in politics of environmental sustainability.”

The potential to direct Keynesian stimulus to environmental projects was recognized early by a small number of individuals and organizations (e.g., Green New Deal Group 2008; Pollin et al. 2008). The number of proposals for “green stimulus” or a “Green New Deal” grew throughout 2009 (Bowen et al. 2009; Houser, Mohan, and Heilmayr 2009; UNEP 2009c). At first glance, the benefits of coupling environmental protection with economic recovery appeared axiomatic. Then-United Nations (UN) Secretary-General Ban Ki-Moon and Al Gore (2009) wrote in the Financial Times that “continuing to pour trillions of dollars into carbon-based infrastructure and fossil-fuel subsidies would be like investing in subprime real estate all over again.” Proponents have argued that green investments create more jobs than “brown” ones (Pollin et al. 2008; Robins, Clover, and Singh 2009a) and achieve considerable economic savings for individuals and ...

Table of contents

• Cover
• Half-Title
• Series
• Title
• Copyright
• Dedication
• Contents
• List of figures
• List of tables
• Acknowledgements
• List of abbreviations
• PART I Introduction
• PART II Case studies
• PART III Conclusions
• Bibliography
• Index