Greening Macroeconomics:
New Thinking, New Teaching
Jonathan M. Harris
and Joshua Uchitelle-Pierce
http://ase.tufts.edu/gdae
Copyright © 2014 Jonathan M. Harris
Teaching Macroeconomics: Missing Perspectives
Current texts (e.g. Mankiw, Principles of Economics) lack
treatment of:
• Instability (assume classical long-run full-employment)
• Inequality (no empirical assessment of increasing inequality,
no treatment of macro effects)
• Environment/Resource limits (only brief mention)
• Infrastructure and Social Investment (very limited treatment)
Limitations and biased policy implications arise from
assumptions of Aggregate Supply/Aggregate Demand model
The assumption of a fixed Long-Run Aggregate Supply curve means that
government policy is ineffective, affecting only the price level in the long run.
Source: Mankiw, Principles of Economics, 5th ed., Chapter 33
A New Approach to Teaching Macroeconomics
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Dynamic approach to AS/AD
Recognition of inherent instability
Active government policy responses
Importance of distribution and inequality
Consideration of resource and environmental
limits
The Aggregate Supply Curve
As the economy approaches its maximum capacity, inflation levels tend to rise as excessive demand for
workers, goods and services, and production inputs pushes up wages and prices.
Unemployment
WagePrice
Spiral
Inflation rate (π )
Aggregate Supply (AS)
Maximum
Capacity
Output (Y )
Y*
Source: Goodwin et al., Macroeconomics in Context, 2nd ed., Chapter 13
Expansionary Fiscal Policy in Response to a Recession
An expansion of government spending, as well as a program of tax cuts, shifts the AD curve to the right.
Inflation rate (π )
Unemployment
AS
E1
AD1
E0
AD0
Y*
Output (Y )
Source: Goodwin et al., Macroeconomics in Context, 2nd ed., Chapter 13
Factors affecting AD, AS
• AD: instability of investment, variability of
consumption based on income distribution and debt,
fiscal and monetary policy, trade in open economy
• AS: technology, natural resource and environmental
constraints, institutions, infrastructure investment
• All of these factors are the proper domain of
economic analysis and policy; cannot simply rely on
“efficient markets”. Different equilibria, disequilibria,
and varied growth paths exist
GDP AND CO2 EMISSIONS
25.00
Brunei
CO2 Emissions per Capita (Metric Tons)
United Arab Emirates
Bahrain
20.00
United States
Saudi Arabia
15.00
Kazakhstan
10.00
Norway
China
5.00
Sweden
India
Switzerland
Gabon
-
-
5,000
10,000
15,000
20,000
25,000
30,000
35,000
40,000
GDP per Capita (2005 $, PPP)
CO2 emissions are correlated with GDP, but different growth
paths exist, including low-carbon paths.
45,000
50,000
INCOME SHARES OF TOP 10% AND TOP 1%
60
Top 10 Percent
50
Percent
40
30
Top 1 Percent
20
10
0
1917 1922 1927 1932 1937 1942 1947 1952 1957 1962 1967 1972 1977 1982 1987 1992 1997 2002 2007 2012
Inequality in the U.S. has risen to levels not seen since the 1920s, with
macroeconomic consequences including increased debt and more unstable
aggregate demand
GDP and GPI Per Capita (2000 US $)
GDP AND THE GENUINE PROGRESS INDICATOR
Gross Domestic Product
Genuine Progress Indicator
Increasing GDP does not necessarily mean increasing well-being;
other indicators may be needed.
PROJECTIONS FOR STABILIZED GDP/CAPITA IN CANADA
Index (2005=100)
300
250
200
GDP/Capita
150
100
GHG
Unemployment
Poverty
Debt to GDP
50
0
2005
2010
2015
2020
2025
2030
2035
Year
A macroeconomic model for Canada shows that GDP/capita can be stabilized while
improving social indicators and lowering environmental impacts.
Source: Peter Victor, Managing Without Growth, 2008.
Greening Macroeconomics
• Revised National Income Accounts
• “Green Keynesian” policies of Social
Investment for Full Employment
• Carbon Tax, Resource Taxes
• Limits to Growth
Examples of “Green” Macro Policy: U.S.
•
$787 billion dollar stimulus package included about $71 billion for specifically
“green” investments, plus $20 billion in “green” tax incentives.
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Energy efficiency in Federal buildings and DoD facilities -- $8.7 billion
Smart-grid infrastructure investment -- $11 billion
Energy and conservation grants to state and local governments -- $6.3 billion
Weatherization assistance -- $5 billion
Energy efficiency and renewable energy research -- 2.5 billion
Advanced battery manufacturing -- $2 billion
Loan guarantees for wind and solar projects -- $6 billion
Public transit and high-speed rail -- 17.7 billion
Environmental cleanup -- $14.6 billion
Environmental research -- $6.6 billion
Aggressive Federal policy action including “green” investments “probably
averted what could have been called Great Depression 2.0 . . . without the
government’s response, GDP in 2010 would be about 11.5% lower, payroll
employment would be less by some 8 ½ million jobs, and the nation would
now be experiencing deflation.” (Blinder and Zandi, “How the Great Recession
was Brought to an End”, 2010).
Examples of “Green” Macro Policy: Portugal
• Portugal government-led transition from fossil fuels towards
renewable power, with the percentage of renewable supply in
Portugal’s grid up from 17 percent in 2005 to 45 percent in 2010.
• $22 billion investment in modernizing electrical grid and developing
wind and hydropower facilities.
• Portugal will recoup some of its investment through European
Union carbon credits, and will save about $2.3 billion a year on
avoided natural gas imports.
“Portugal Gives Itself a Clean-Energy Makeover,” New York Times August 10, 2010.
Policies for Full Employment
• Increased hiring in public sector: teachers, police, transit
and park workers, etc.
• Large-scale building retrofit publicly financed but carried
out by private contractors
• Increased public R&D expenditures with accompanying
higher education investment (“Sputnik” precedent)
• Major energy efficiency and renewables investment,
partly public and partly incentivized private investment
• Investment in public transit and infrastructure
Policies For Climate Stabilization
• Carbon tax or equivalent (cap & trade with auction) – must be
≥ $100/MT C ($30/MT C02) and rise over time. (govt.
estimates of social cost of carbon $21/t C02, Ackerman and
Stanton $28-$893, rising to $64-$1550)
• Recycle revenues of ≥ $150 billion for energy efficiency,
renewables, progressive rebates
• R&D investment ($3-12 billion)
• Infrastructure investment – hi-speed rail, public transit, green
buildings
• Efficiency standards for cars, machinery, buildings
• Preferential credit or subsidy for energy efficiency
investments
Other relevant publications from Tufts University
Global Development and Environment Institute