Deficit Reduction Through Sustainable Economic Growth Home
Director, Office for Sustainability
Southern New Hampshire University
The challenge we face in the 21st century is to achieve sustainable economic growth in the face of economic and ecological challenges. This policy memo presents an overview and outline of a plan for deficit reduction and elimination through sustainable economic growth.
The program for sustainable economic growth, in sum, will create millions of sustainable jobs, slash energy waste and pollution, improve energy efficiency, build the renewable energy infrastructure, and replace income taxation with ecological taxation. The program will help establish the basis for a long-term sustainable prosperity through the use lof market based means catalyzed by government policy and investments, and by new ecological market rules.
This is not simply a call for an additional needed economic stimulus at a time of constrained fiscal resources. It is a plan for government policy and investment initiatives to redeploy resources, to catalyze and leverage on a very large scale private investment and initiative. The goal is to support sustainable long-term economic growth and an ecological transformation of the economy.
The failure of the U.S. stimulus package is, in part, a reflection not simply of insufficient size, but in poor targeting of resources for sustainable job creating investment. South Korea , by contrast, focused it's stimulus dollars on green technologies, advanced transport and rail, energy efficiency, renewable technologies, green houses with greatly superior and sustainable consequences.1
This is a program not for demonstrations, but for transformation. We need the same kind of national commitment and energy, with all of us working for the common good in the face of enormous peril, that swiftly transformed United States production and consumption in WWII. We have to place the United States on what amounts to a war footing to deal with profound long-term ecological and economic threat that fundamentally imperils our future well being.
Keynesian orthodoxy is to measure the increase of aggregate demand through increased government spending. The old time religion is inadequate. Our opportunity now is to mine the enormous monetary savings and resource inefficiencies in our energy and production systems to catalyze the expansion and growth of new competitive green industries. These green industries will create millions of jobs in the context of sustainable economic growth that leads to ecological improvement while reducing pollution, depletion and ecological damage
We have tens of millions of unemployed or underemployed. We have enormous deficits. We have enormous waste and inefficiency in our energy systems. We are facing an unfolding ecological catastrophe. We have, as well, enormous human resources and productive capacity, This outline will discuss policy and some economic figures. It will be followed by a memo further outlining costs, jobs creation and revenue creation estimates, as well as energy and cost savings. This program rejects categorically the belief that we are involved in a zero sum game, that our only choice is that we must either cut spending and dismantle crucial services, which will further undermine the economy, or increase spending enormously at a time when the coffers are bare.
This program for sustainable economic growth rests on the belief that we have tools beyond ordinary monetary and fiscal policy of the control of interest rates and increasing spending. Instead, it rests on the understanding that our enormous economic potential can be employed for sustainable ends and put into motion through the proper application of new market rules, new policy incentives, and new investments that will create millions of jobs and return to the Treasury interest on the billions invested and hundreds of billions in tax revenue from new profitable economic activity.
The good news is that there are enormous opportunities for cost-effective and profitable investment. Both our energy and production systems are characterized by fundamental inefficiencies, unnecessary waste, and undesirable ecological consequences. In terms of both energy and manufacturing, we can in a cost effective matter, using the proper application of existing technologies, increase the thermodynamic and input efficiency by a factor of four or five. We can do much more with less, and operate a dynamic 21st century economy on a sustainable and prosperous basis.
Literally and figuratively we need to see the light. The latest LED lamp, for example, is several times more efficient in terms of lumens per watt and last several times longer than conventional incandescents that produce much more waste heat and materials to be discarded than light.
• Make economic growth mean ecological improvement, not ecological destruction;
• Create millions of sustainable community jobs;
• Use available low cost or no cost market based means;
• Replace income taxation with ecological consumption taxes that will send market price signals for sustainable economic growth throughout the economy;
• End most housing foreclosures and stimulate new construction through simple rule changes;
• Build the efficient renewable energy system;
• Enhance revenue through a small tax on financial transactions and tax haven profits;
• Develop multiple investment means for sustainable prosperity.
The program will include a combination of low cost or no cost measures and cost-effective investments instituted on national scale to:
• Build the efficient renewable energy resource system including a smart national super-grid using high voltage direct current lines (HVDC) to replace existing fossil fuels. Efficiency is the low hanging fruit, that if pursued aggressively and cost effectively, can make the efficient renewable transformation a readily achievable goal-- if pursued with the vigor and clarity that guided our program to put a man on the moon.
In twenty years we can largely eliminate fossil fuel use without carbon taxes and without cap and trade schemes through a combination of economic efficiency improvements and renewable development. This can be accomplished through mandated efficiency improvements, renewable portfolio standards combined with new low-bid market driven feed in tariffs (FIT), and a range of market driven mechanisms for efficiency and renewable development and massive private investment catalyzed by government action described below.
We can improve energy efficiency several fold by systematically taking advantage of second law of thermodynamics improvements such as cogeneration and district heating and cooling, the use of heat pumps and geothermal Carnot cycle measures for heating and cooling, the use of electric vehicles, the use of existing motor, appliance, and lighting technologies that can enormously increase effective output, for example, LED lighting technologies that produce many more lumens of light per watt of electricity and can last for decades.
Continental scale efficient renewable grid system will integrate over time high efficiency end users, distributed and large scale distributed generation, cogeneration, district heating and cooling. The ability of such continental scale renewable grids to cost effectively meet powers needs on a 24 hour a day, 365 day basis has been modeled in detailed for Europe by German scientist Gregor Czisch.2 Modeling for the United States has been undertaken by scientists such as Daniel Kammen, Director of Renewable and Appropriate Energy Lab at UC-Berkeley,now the World Bank's Chief Technical Specialist for Renewable Energy and Energy Efficiency. Efficient continental scale networks with diverse renewable resources connected by HVDC transmission and with appropriate storage are inherently balancing. When wind is calm in the east, for example, it will be blowing in the west
• Reduce government expenditure through increased energy efficiency.
Government can be among the first beneficiaries of large scale efficiency and renewable resource improvements. Energy saved is, by far, cheaper than fossil fuel energy purchased and consumed. Enormous private investment will be quickly mobilized to meet government demand for efficiency and renewables. The U.S. Army for example is the world's largest single oil consumer. Hundreds of billions of private investment will respond quickly to government mandates for efficiency improvement and provide zero government capital and positive cash flow financing. Payment is made from the stream of savings.In effect, we can mine government waste to both save money and create enormous numbers of jobs in the private sector.
This is the model I have been using for efficiency and renewable development at SNHU in partnership with companies such as Schneider electric, United Technologies and Government Capital, a Texas based private investment group specializing in institutional and municipal finance. I would be happy to assist in writing the specs and arranging the financing for a government wide zero government capital positive cash flow investment plan. We could hit the ground running.
These investments will save taxpayers money, create jobs, and increase tax revenue from increased economic activity.
• Create millions of sustainable green collar community jobs through the use primarily of market, policy, and investments for efficiency, renewable installations, transmission and storage, and electric vehicle charging infrastructure throughout the economy.
It's generally estimated that a million of dollars of efficiency investment will create over 20 jobs. But in certain labor intensive areas, job creation will be much higher. For example, it's estimated by the Energy Corp, that each million dollars invested in low income energy efficiency will produce 216 jobs3. A conservative estimate of the multiplier effect is $2.5 million of economic activity for each million of efficiency investment.4
Zero user capital and positive cash flow financing, as discussed above, is already the basis of efficiency and distributed renewable development in the private sector. For example, I work on such projects at SNHU with Schneider Electric and with United Technologies.
Thus we can expect that each billion of capital invested in positive cash flow projects will create on the order of 20,000 or more jobs and $2.5 billion of economic activity. This is stimulus activity we can believe in. Its based on private investment catalyzed by government action and results in green job creation and increased economic activity.
Credit barriers can be overcome by use of low interest revolving loan funds with repayment through deductions from savings on utility bills. Investment in such loan funds can be required by all financial institutions that received TARP funds. Financial performance of such revolving loan funds has been excellent with a 5% loss reserve quite adequate that can be backstopped by government guarantee beyond 5% loss.
The market based mechanisms to catalyze and finance the job creating efficient renewable transformation are many, and together will constitute an effective framework for energy investment and transformation.
These mechanisms include establishing open markets in efficiency “nega-watts”,“nega-therms” , nega-tons” and stored energy for electricity, for heat, and for cooling that makes cost effective efficiency and storage a means of energy “supply”.
We can help drive efficiency, renewable and storage development using low bid driven feed-in tariffs (FIT) for efficiency, energy storage and transmission. In contrast to existing FIT programs where prices are set by government, a low bid driven FIT would award FIT contracts to low bidders through periodic auctions using market means to drive down prices on an ongoing basis.
We can use on large scale the above mentioned investments in revolving loans funds for efficiency and renewables that require zero user capital and are paid back with interest through utility bill savings.
We can take advantage of the hundreds of billions of dollars spent by energy users through establishing mechanisms to facilitate the general use of renewable energy hedges as a means to help finance the efficient renewable energy transformation. Renewable energy financial hedges are risk reduction mechanisms. They provide energy developers with fair long-term income streams and energy users with fair predictable long-term prices.
The renewable energy hedge hedge acts like a traditional commodity hedge between a commodity producer, a wheat farmer, for example, and a commodity user, a baker, for example. Both parties agree to a strike price for the commodity . If market prices rise, the farmer sends the amount above the strike to the baker. If prices fall, the baker sends the difference to the farmer. Renewable energy hedges settle monthly. Renewable energy hedges that guarantee long-term income streams for developers facilitate and reduce coast of private capital.
For both small and large energy users, including low income individuals, we can establish means that facilitate the sale of revenue rights from renewable resource plant capacity, transmission lines, efficiency or storage systems that will both build user assets and hedge against energy price fluctuations. For example, for a $1,000 investment, a user may obtain a revenue right for all output from a renewable facility above 3 cents a kilowatt hour. The remaining income is used by the facility for operations and maintenance and other expenses.The one time payment removes credit issues. The revenue right becomes an asset. It can be made available to low income energy users through ow interest loans repaid from stream of income.
• Apply these market based and low-cost finance national programs for building installation, re-lamping, cogeneration, district heating, heat pump installation, geothermal systems, renewable energy storage, renewable energy generation, renewable transmission systems, and electric vehicle charging infrastructure.
There are enormous savings and job creating opportunities for systematic and comprehensive national programs in building insulation, envelop tightening, re-lamping, new high efficiency motors and appliances, new direct digital control systems and integration of control systems with real time electricity price signals, installation of electric vehicle charging infrastructure with ability to use electric and hybrid vehicles batteries for supply of grid power. Vehicles pay for charges and receive payment for providing power from batteries that respond to price signals during peak loads to help balance the electric grid.
• Phase in an ecological consumption tax system to replace income taxation and send price signals for sustainability throughout the economy.
In ten years we can replace all income taxes with ecological consumption taxes on a zero new net revenue basis if desired. As ecological consumption taxes are phased in, income taxes are phased out.
An ecological value added tax (EVAT) can be placed on all goods and services to send ecological price signals throughout the economy. An EVAT is a smart sales tax that places higher rates on good and services that are more polluting, depleting, or ecologically damaging. All items, initially by SEC code would be rated as sustainable, low polluting, average polluting,or high polluting. The more polluting, depleting and ecologically damaging, the higher the EVAT tax. Sustainable goods will gain market share and be more profitable; unsustainable goods and services will loose market share and be less profitable;. The market will send clear signals for sustainability to both consumers and producers. Price and profit will drive sustainable conduct.
The EVAT is a smart sales tax that avoids double taxation. It is largely self-enforcing since it uses a credit for invoice system where businesses get credit for all purchases and pay taxes only on the value they add. It provides through Final Sales to Domestic Consumers, the largest possible tax base that will send sustainable price signals throughout the economy making sustainability a competitive advantage and profit center.
The EVAT will tend over time to a flat sales tax on almost all goods and services which will be sustainable, with high taxes placed on polluting outliers. This is because as the EVAT makes high polluting goods loose market share, to maintain revenue, tax rates will rise sustainability on the medium polluting items that are now, in effect, high polluting.
Ecological consumption taxes systematically internalize externalities and allow the price system to send clear market signals for sustainability and use the self-interest of producers and consumers driven by price to do its job. It will allow for economic growth to lead to ecological improvement. Ecological consumption taxation is the basis for building sustainable zero pollution-zero waste production and consumption systems employing an industrial ecology where the “wastes of all processes become inputs for other goods.
The EVAT as a consumption is regressive, in that lower income people spend almost all income , while the rich do not. The regressive nature of the EVAT can be remedied by a negative income tax that would hold the lower two income quartiles harmless from tax rate increases.
My Book Markets, Democracy & Survival (2007) ,available for free download on line, discusses the EVAT in detail. <http://www.ecocivilization.info/id39.html>
• A no cost means to end most housing foreclosures and encourage new housing construction that will drive economic recovery simply by once again allowing U.S. Bankruptcy Court judges to rewrite residential mortgages to market in bankruptcy as is done for commercial mortgages for both principle and interest. This will also allow elimination of ineffective federal mortgage rescue efforts and save tens of billions of dollars appropriated for demonstrably ineffective mortgage foreclosure efforts.
Most people with jobs or other income and with underwater mortgages heading for foreclosure are likely technically bankrupt and will be able to negotiate a reduction before bankruptcy filing of interest and principle to reflect current market conditions. This is the way that the market had always, until 1979, served as a check upon mortgage lending, and to respond to economic downturns helping to avoid tidal wave of foreclosures for those who bought high and cannot pay when the economy turned south.
Staunching the foreclosure wave will stabilize housing markets, and stimulate the construction of new housing that is a key to job creation and historically served as a key marker of an end to recessionary periods
• Require prudent investments by all financial institutions that have received TARP funds in revolving low interest loan funds for efficiency, storage and renewables and for small business loans, with 5% loss reserve supported by government loan guarantees beyond the 5% level. This is a reasonable demand in exchange for trillions of aid provided by tax payers to imprudent bankers. In any case, these will likely be productive investments with high repayment rates since they will result in positive cash flows and automatic repayment through utility bills.
Deficit Reduction Through Sustainable Economic Growth focuses on increasing economic activity and tax collection through investment and sending proper economic signals for sustainable growth and not through tax increases. There are, however, two areas in which justice and fairness and common sense suggest are called for: a tiny transaction tax on global financial speculation and closing loopholes that hide profits through the use of tax havens
• Enhance revenue by a low transaction tax on global financial speculation Tax payers were forced to pay trillions to bailout the consequences of imprudent financial speculation, It is certainly equitable to levy a tiny tax on such largely speculative and enormous daily financial transactions that will in part help reimburse taxpayers for the consequences of the speculation driven financial collapse.
The trillions of money in daily financial speculation in such as credit default swaps and currency trade and arbitrage should be subject to very small tax. A tax rate of .0001 that's 1 ten thousandth of value would raise 100 million per trillion in financial trade. A tax rate of .001 thats a thousandth of value would raise one billion per trillion of financial trade or a few hundred billion dollars a year for U.S. taxpayers. This is not an unreasonable price to pay in exchange for the many trillions in financial bailout money. Facing the choice to either raise income taxes, and/or slash social security and medicaid, or levy a tax of one thousandth of value on the speculative financial transactions tax payers have rescued should be an easy decision.
The Continuous Linked Settlement Institution based in the Federal Reserve of New York deals with 17 currencies and settles 90 percent of these financial instrument and currency trades trades daily. It operates on the foolproof PVP system or Payment Versus Payment that handles both buy and sell transactions simultaneously and provides a robust audit trail. It could very easily add a very small transaction tax fee to each trade. The efficiency, transparency, and security of the PVP system will make it highly unlikely for investors to attempt to move enormous flows of speculative funds to other new and poorly secured venues just to avoid payment of a tiny transaction tax.
• Close loopholes on the profits of transnational corporations avoided through paper transactions using international tax havens.Such global tax havens are widely employed by corporations to hide profits from taxation through self-dealing paper transactions. these transactions can be made subject to tax and captured to make sure that we all pay our fair share. Working families and small businesses should not be forced to shoulder the tax burden avoided by rich individuals and corporations employing international tax havens. It is fundamentally corrosive of democracy to create a system where taxation becomes only the obligation ofthe poor and middle classes.
I welcome questions and discussion of this plan. I would be happy to meet with interested parties.
Further Financial Details
A forthcoming memo will discuss financial details further.