The economic argument behind the Green New Deal

The Green New Deal proposed by Representative Alexandria Ocasio-Cortez and other progressives has dramatically changed the US debate on climate change. It calls for decisive and deliberate public investments to tackle climate change and other social challenges, particularly inequality.

This kind of directed investment is known as “industrial policy,” and it has long been controversial among economists. But Mariana Mazzucato, an economist at University College London and founder of its newly created Institute for Innovation and Public Purpose, has thought a lot about the need for such approaches—what she likes to call mission-oriented innovation policies.

Mazzucato, author of The Entrepreneurial State and more recently The Value of Everything, stresses that public funding has been crucial to key technological advances from the internet to biotech. We sat down with her to ask about the Green New Deal and how industrial policies might be used to take on climate change and other big societal challenges.

Industrial policy often gets a bad name among economists. Why are you so keen on it?

First of all, there are different types of industrial policies. There is the effective and there is the ineffective kind. The problematic industrial policies are ones that are just fueling growth in a limited part of the economy, and it doesn’t become a systematic way to transform the economy. I think functional, effective industrial policies are ones that change behaviors across different industries—rather than those that “pick” a couple of industries to subsidize. They are about economic transformation.

Is the Green New Deal an example of industrial policy?

It depends on how it gets interpreted. I was speaking with Alexandria [Ocasio-Cortez] about that back in September.

The Green New Deal will be much more effective if it is economy wide. And that is very much the spirit that [Ocasio-Cortez] and others in the Democratic Party are arguing for. This isn’t just about renewable energy. It’s about greening the entire economy. A Green New Deal is not just about renewables but also about getting every part of the manufacturing sector to transform itself in a green direction.

Why reference the New Deal pushed by President Roosevelt to get us out of the Great Depression?

There are two bits to the Green New Deal. One is the direction-setting that Roosevelt provided in getting new projects and infrastructure off the ground. This is where it is important to move away from a sectoral approach toward an economy-wide transformation. Another important part regards the word “deal,” or a new social contract between government, business, and citizens.

The greater the degree to which the Green New Deal can become a conversation about the direction of investment and innovation, but also the distribution of the rewards from a new public- private partnership, the more interesting it will be. What is the deal we want with these companies? What are the conditions we should be attaching?

Is it possible to address climate change while also achieving growth?

A Green New Deal should create new opportunities for investment, so that growth and sustainability move hand in hand. Growth has both a rate and a direction, and the GND is about the direction that can get us greener growth and that at the same time unlocks massively hoarded private investments. It should also put more pressure on profits being reinvested back into the economy rather than used for areas like share buybacks.

One of your books, Rethinking Capitalism, is critical of how many economists think about solving big problems like climate change. Why?

The mainstream economic framework sees policymaking as just fixing market failures. You’re waiting for something to go wrong, and then you bandage it up. But a green transformation needs to be more ambitious. It should be about co-creating, co-sharing markets alongside the private sector.

Steering investment toward public missions can stimulate investment and innovation, but this should be done without micromanaging. Set a direction and then use the full array of government instruments to fuel the bottom-up experimentation and exploration.

And keep focusing on the objective— in this case, reducing emissions.

Yes, keep your eye on the prize.