Yet, while accomplishing the SDGs will benefit the economy, we believe insufficient thinking (and action) has been invested into exploring how macroeconomic policy can support their achievement.
Achieving the SDGs and the Paris Agreement will require trillions of dollars in expenditure over the coming decade. Mobilising this capital will require a concerted effort by the public and private sectors and yet, so far, several traditional macroeconomic preconceptions are inhibiting the flow, in particular of public capital.
For his New Deal, US President Franklin D. Roosevelt famously called for ‘bold, persistent experimentation’. His ideas on fiscal stimulus – revolutionary at the time – are now commonplace. Arguably, the current ‘perfect storm’ of crises – Covid, climate change, biodiversity loss and social inequality – creates a similar opportunity for revolutionary thinking. Here, we explore these themes and consider an outlook for how macroeconomic policy may evolve in the future.
In particular, we explore two themes currently being debated in government halls and central bank boardrooms that have the potential to influence sustainable development:
- Government often manage budgets, similarly to households, with the aim of ‘balancing the books’. However, the notion that reserve currency governments with central bank funding cannot default is challenging this view.
- Central banks are often considered ‘independent’ players focused on their specific mandates, typically price stability and full employment. This notion is being challenged by the concept of ‘functional finance’, which argues that government fiscal and monetary policy should be managed with a view towards its impact on the real economy. 
We explore each of these issues in the following sections.
“MMT reasoning is undeniably sound – if you can create your own money, you can always pay your bills”
Debt, deficits and inflation – There is room for more
Modern Monetary Theory (MMT) has garnered headlines in recent months for its claim that government debt levels and deficit spending do not matter as measures in and of themselves since governments with access to a printing press cannot default on their obligations. Instead, MMT posits that the only real governor of public expenditure should be inflation.
This is generally perceived as a controversial position, for two reasons.
- Firstly, many economists and politicians believe government balance sheets should be managed as a household’s as evidenced by the common refrain from policymakers related to expensive legislative proposals: “How are we going to pay for that?”
- Secondly, concerns abound that large fiscal expenditures, which might be rationalised by MMT policies, would generate uncontrollable inflation.
To take these concerns in turn, for reserve currency countries such as the US, there are few credible arguments that speak to the absolute importance of federal debt or deficits outside of their potential deflationary or inflationary impact.
On the contrary, the MMT reasoning here is undeniably sound – if you can create your own money, you can always pay your bills. This is true even if other policy choices may be preferable in extremis. The operative word here is choice. A government can choose to default, e.g. to drive home a political point or to avoid some other less preferable outcome. However, it does not need to do so if it can mint its own currency.
As to inflation, all economists agree it is important to keep it in check since the consequences of runaway inflation can be dire. However, the economics profession lacks a ‘unified theory’ of inflation, which makes resolving this concern difficult.
The mainstream argument is that deficit spending of the sort encouraged by MMT-driven policies would lead to runaway inflation; parallels are often drawn between the modern US economy and, for example, emerging and/or historical economies such as Zimbabwe, Weimar Germany or the US in the 1970s where (hyper)inflation was an issue.
“Reserve currency governments have more capacity to spend than previously thought… also to address the SDGs and achieve the ‘Paris’ commitments”
We believe two of these analogies are spurious at best on the sole basis that there is almost no similarity in terms of size, dynamism or global importance between 2000s Zimbabwe, 1920s Germany and the US economy of today. Each of these historical inflation crises was unique.
Recent history also undermines concerns of excess spending leading to inflation. Again, to use the US as an example:
- Many mainstream economists predicted that after the Great Financial Crisis of 2008/9, quantitative easing (QE) would lead to hyperinflation. These predictions proved to be wrong. Indeed, QE1 was succeeded by QE2 and QE3.
- Relief spending in response to the current pandemic has served to generate short-term inflation, but whether this will endure remains to be seen.
- None of the significant deficit spending in the US across the last several administrations – both Republican (Bush, Trump) and Democrat (Obama) – has led to runaway inflation.
While inflation concerns related to MMT cannot be resolved outright, we believe it is clear from recent experience that reserve currency governments likely have more capacity to spend than previously thought. Indeed, significantly more expenditure by the public sector is needed to address the SDGs and achieve the commitments of the Paris Agreement.
Functional finance – Coming off the sidelines
For a long time, monetary policy in particular has been focused on nominal budgetary goals with limited emphasis on the distributional or environmental impacts of related actions. Indeed, many central bankers are ardent supporters of the independence and impartiality of their institutional mandates with regard to climate or other sustainability issues.
“Can central banks fight climate change? We believe they have a role to play”
A shift in this view is being driven in part by a recognition that impartiality is a difficult line for central banks to walk. For instance, post-GFC QE conducted by the ECB and the Bank of England in corporate bond markets resulted in disproportionate support for high-carbon-emitting industry sectors.
The US Federal Reserve exhibited similar high-carbon dynamics with its corporate bond purchases after the start of the Covid-19 pandemic.  Its Paycheck Protection Program money reached fewer minority communities than white communities.
Moreover, central bankers are increasingly aware that real world issues such as climate change can have a dramatic impact on financial markets, and vice versa. Enter the Network for Greening the Financial System (NGFS) – a global group of over 90 central banks and supervisors that convenes “to enhance the role of the financial system to manage risks and mobilise capital for green and low-carbon investments in the broader context of environmentally sustainable development.”
Research by the macro-financial work stream of the NGFS found that the “physical and transition risks posed by climate change can have substantial macroeconomic and financial stability implications.”
Even so, the uncertainty around economic estimates of climate impacts and the legal ability of central banks to do more than react to such impacts has led to a robust and much needed debate. At the International Monetary Fund’s 2019 annual meeting, the headline seminar was: “Can Central Banks Fight Climate Change?” In this session, panellists called for greater coordination between central banks and regulators around climate policies. 
Since then, debate has given way to action in some markets; the head of the ECB has indicated a desire to expand the bank’s remit to include consideration of environmental and social issues. Notably, the Bank of England recently explicitly changed its monetary and financial policy committee remits “to reflect the government’s economic strategy for achieving strong, sustainable and balanced growth that is also environmentally sustainable and consistent with the transition to a net zero economy.”
SDGs, Paris and MMT – Working towards a sustainable future
These actions and statements by monetary policymakers are arguably similar to some of the MMT precepts. While adopting these MMT-like approaches may not be intentional, they nevertheless signal a clear direction of travel in macroeconomic practice towards a more functional and fiscally coordinated remit for central banks.
Furthermore, to achieve the SDGs and the baseline target of the Paris Agreement, significant additional coordinated public and private sector spending will be required. Estimates of incremental investment needed to fulfil the SDGs start at USD 2.2 trillion a year up to 2030 or at least 1.5% of world GDP. That means the global annual spending required to meet the SDGs is less than the US government’s USD 3 trillion+ budget deficit in 2020. The private sector is mobilising to address these investment goals, but without significant state action, they are unlikely to be met.
Such costs are undeniably significant, but the long-term macroeconomic benefits of eliminating poverty and halting climate change should offset them over time, even if the payback period is hard to estimate.
“This lack of urgency puts us all at risk. We must use the tools at our disposal – including macroeconomic thinking and policy – to usher in a more sustainable”
Taken altogether, the expansion of monetary policy considerations to include long-term environmental and social targets that support traditional macroeconomic goals will likely be necessary if we are to achieve the SDGs while maintaining price stability and full employment.
There is nothing like a crisis to focus the mind. Most central bankers were not experts in pandemic response, but all have paid significant attention to the crisis – and the tools needed to respond – over the past two years.
A failure to achieve the SDGs and the Paris Agreement will have lasting and dire consequences for our planet, our society and mankind’s ability to maintain (let alone improve) global living standards. The fact that they are not halting the movement of people and goods in their tracks has rendered them less urgent to many policymakers.
It is this lack of urgency that puts us all at risk. We must use the tools at our disposal – including macroeconomic thinking and policy – to usher in a more sustainable future.
 Functional Finance Definition (investopedia.com). In his original conception of functional finance, Abba Lerner was primarily concerned with using fiscal and monetary policy to manage down unemployment and maintain price stability. The Modern Monetary Theory (MMT) movement has broadened this aim to ‘advancing public purpose’: EconStor: Modern Monetary Theory and the public purpose.
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