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On the energy crisis, the Inflation Reduction Act, REPower EU and more

Nov 08,2022 - Last updated at Nov 08,2022

Mariana Mazzucato Says More…

 

Project Syndicate: In June 2020, you and Robert Skidelsky lamented that, despite the deployment of massive amounts of emergency financing during the pandemic, there was “little evidence” of any new fiscal thinking, as the spending was not “structured”. Does recent spending legislation in the United States, the CHIPS and Science Act and the Inflation Reduction Act, reflect progress in “rethinking the role and purpose of fiscal policy”?

Mariana Mazzucato: According to RMI Analytics, US President Joe Biden’s three big laws, the two you mention, and the Infrastructure Investment and Jobs Act, will more than triple the federal government’s average annual spending on climate and clean energy this decade, compared to the 2010s. They thus represent a critical opportunity to promote a just green transformation.

But such forecasts rest on the assumption that green investment trends remain on their current trajectory. And as the recent surge in coal and natural-gas investments, a response to the energy crisis triggered by the war in Ukraine, shows, investment trends can be fickle. If the potential of recent US legislation is to be realised, government must therefore set bold policy goals that include ensuring that the returns on the relevant investments are shared equitably.

Success will require paying attention to conditionalities. The US Department of Commerce could actively direct even larger sums to green technologies, including through grants, loans, and procurement contracts, if there were more deliberate green conditions attached. Conditions could also be attached to knowledge-sharing provisions, to ensure that companies do not abuse intellectual property rights.

PS: From the start of your recent book Mission Economy: A Moonshot Guide to Changing Capitalism, and in previous PS commentaries, you argue that changing capitalism will require us to overhaul “how government is structured,” “how business is run”, and “how public and private organizations interrelate”. You also acknowledge that the “longstanding political rift” between democracy and autocracy has widened. Does your fundamentally technocratic guide apply to both democratic, market-based systems and authoritarian, state-capitalist systems like China’s? Are there lessons  —  or warnings  —  that both sides should heed, especially concerning the state’s relationship with business?

MM: There is a deep sense of injustice, powerlessness, and distrust of elites permeating many societies today. This has eroded faith in democratic institutions and created fertile ground for populism and authoritarianism to thrive. But, regardless of the system in question, the fundamental imperatives remain the same.

First, we need to promote transparency and accountability for both the public and private sectors. Establishing new metrics and rigorous standards for dynamic policy evaluation is a crucial step in this direction.

Second, bold missions should not be pursued through a top-down, centralized framework. Instead, they should facilitate bottom-up, decentralised innovation and experimentation. Organisational flexibility and horizontal collaboration allow for active contestation and adaptability. Social movements can and must play a critical role in shaping such bottom-up processes everywhere.

PS: “Although global climate commitments are important”, you wrote after last year’s United Nations Climate Change Conference (COP26) in Glasgow, “they will not amount to much without the institutional foundation that the transition to a zero-carbon economy needs”. More broadly, as you put it in Mission Economy, governments have failed to address the climate crisis effectively, because they are “tinkering, not leading”. What would you like to see come out of COP27? At the same time, what should local-level “community-led missions” for tackling climate change look like?

MM: When it comes to the demands of the climate transition, both the public and private sectors are falling short. One major problem is that most recent discussions fail to pay appropriate attention to the role of direct public finance. COP27 represents an important opportunity to change that.

Public finance plays a critical role in creating new markets that accelerate the net-zero transition by generating new ideas to limit catastrophic global warming, and in supporting the development of the needed institutions. More fiscal space is also vital to mitigate the adverse consequences of the climate crisis in the Global South and on small climate-vulnerable islands.

A good example of “community-led missions” are the Camden Missions in London. The Camden Renewal Commission brought together businesses, community groups, and other local organisations to collaborate tackle societal challenges in the borough. This work was guided by a set of missions: For example, “by 2030, everyone eats well every day with nutritious, affordable, sustainable food”. Rather than focusing on separate interventions in particular sectors, the Commission considered how to combine the borough’s resources to tackle issues that require collective action.

 

By the Way…

 

PS: In Mission Economy, you describe your efforts in 2017-18 to “help the European Commission apply a mission-oriented approach to its innovation policy.” That work helped to produce reports explaining how to “map” a mission-oriented approach. How does a “mission map” work, and to what extent does REPower EU, the European Union’s response to the current energy crisis, reflect the method?

MM: The goal of a mission map is to guide us from identifying a problem to creating a mission to prompting sectoral investments in specific projects. So, you start with a simple question: What problem do I want to solve? You then frame the answer to that question as a goal capable of both inspiring cooperation across sectors and among different actors, and catalysing investment and innovation. Policy interventions like outcomes-oriented procurement and loans with conditionalities help to crowd in private investment toward this goal.

REPower EU provides a useful example. The plan’s overarching mission is to reduce the EU’s dependence on Russian fossil fuels and promote energy security and efficiency. The European Commission has committed to provide early-stage public funding to help create new markets, which the private sector can then develop further. In doing so, the commission is effectively promising to nurture a landscape of innovative, mission-oriented projects.

But to maximise impact, much care needs to be placed on the design of the partnerships. An interesting example is the effort by the German state-owned bank Kreditanstalt für Wiederaufbau (KfW) to promote a green transition by issuing loans to the steel sector, conditioned on the sector’s reduction of its resource use and carbon-dioxide production. Subsidised companies can receive loans of up to €25 million ($24.4 million).

PS: Discussions of inequality, one of the key challenges you highlight in your book, tend to focus on redistribution, especially through taxation. But you argue that, rather than merely attempting to mitigate inequality, we should be preventing it. What are the pillars of such a “pre-distribution approach”? Which interventions to improve value distribution ex ante would be the easiest to implement in, say, the US?

MM: Both redistribution and pre-distribution are necessary to achieve fair outcomes. But whereas the former focuses on cleaning up a mess, the latter aims to prevent the mess from being made at all, by getting the conditions for fairness right.

To understand how to transform wealth distribution fundamentally, we must first examine where value comes from. If it is created through collective efforts, the rewards should be shared among all actors involved.

There are various ways to do this. One is directly, whether through a public-wealth fund (financed by the returns from government-funded activities) or through equity stakes in companies benefiting from public investments. The returns can be distributed through a “citizen’s dividend”, which rewards collective-value creators with a share of the wealth they created.

Another option is to use place-based collective ownership structures. For example, in the United Kingdom and Sweden, the returns on collective value have been used to build vibrant and healthy common urban spaces. Such a system could easily be implemented in the US.

PS: What would you say to those who worry that if the state exerts more influence over innovation, private actors will be less willing to risk their own capital translating (state-funded) research into innovative goods and services? What must policymakers do to ensure that the private sector contributes to “grand outcomes”?

MM: The idea that governments crowd out business is mostly a misconception. In fact, historically, public investment has often had the opposite effect. For example, public investment in the Apollo programme in the US led to rapid advances in computing and digital technology through contracts with the private sector.

Because only the combined efforts of public and private sectors can bring the needed growth and transformation, government must catalyse new forms of collaboration. Policy instruments such as prize schemes, grants, and loans can help foster as much creative thinking as possible at the project level, and spur collaborative initiatives comprising mutually reinforcing and enhancing components.

 

Mariana Mazzucato, founding director of the UCL Institute for Innovation and Public Purpose, is chair of the World Health Organisation’s Council on the Economics of Health for All. Copyright: Project Syndicate, 2022. www.project-syndicate.org

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