Scottish-born economist - Angus Deaton - recently published his new book - An Immigrant Economist…
I have been in Sydney today for meetings. I caught an early train and then back again in the afternoon. Trains journeys are great times to read and write and this blog has been written while crossing the countryside (Sydney is nearly 3 hours south of Newcastle by train). The trip is slower than car because the route is still largely based on the first path they devised through the mountains and waterways that lie between the two cities. The curves in places do not permit the train to go faster. The government is promising however a fast train with a much more direct path (up the F3 freeway I guess). Anyway, several readers have asked me whether I am familiar with the 1943 article by Polish economist Michal Kalecki – The Political Aspects of Full Employment. The answer is that I am very familiar with the article and have written about it in my academic work in years past. So I thought I might write a blog about what I think of Kalecki’s argument given that it is often raised by progressives as a case against effective fiscal intervention.
I dealt with Kalecki’s arguments extensively in one of the chapters of my PhD. Also in 1999, I specifically published a peer-reviewed article arguing that the concerns raised by Kalecki about the opposition that the captains of industry would raise if any government tried to maintain full employment are not binding on a modern Job Guarantee scheme. You can read a working paper version of that article for free – The Job Guarantee and inflation control.
The Job Guarantee
To refresh your memories or introduce you as a new reader to the work I have done on the Job Guarantee concept here is a brief summary of its features. Hardened billy blog-types can skip to the next section (as long as you are sure you know all the ins and outs).
The Job Guarantee that I have advocated for many years now is based on a fundamental understanding of the way the modern monetary system operates. While it may be construed as a job creation scheme it is actually a macroeconomic policy device to ensure full employment and price stability is maintained over the private sector business cycle.
The Government operates a buffer stock of jobs to absorb workers who are unable to find employment in the private sector. The pool expands (declines) when private sector activity declines (expands). The Job Guarantee fulfills this absorption function to minimise the costs associated with the flux of the economy. So the government continuously absorbs into employment, workers displaced from the private sector.
The “buffer stock” employees would be paid the minimum wage, which defines a wage floor for the economy. Government employment and spending automatically increases (decreases) as jobs are lost (gained) in the private sector.
So the Job Guarantee works on the “buffer stock” principle. I first thought of this idea during my fourth year as a student at the University of Melbourne (in the late 1970s). The basis of the policy came to me during a series of lectures on the Wool Floor Price Scheme introduced by the Commonwealth Government of Australia in November 1970.
The scheme was relatively simple and worked by the Government establishing a floor price for wool after hearing submissions from the Wool Council of Australia and the Australian Wool Corporation (AWC). The Government then guaranteed that the price would not fall below that level by using the AWC to purchase stocks of wool in the auction markets if demand was low and selling it if demand was high. So by being prepared to hold “buffer wool stocks” in low demand and release it again in times of high demand the government was able to guarantee incomes for the farmers.
However, with some lateral thinking you can easily see that what the Wool Floor Price Scheme generated was “full employment” for wool! If the Government fixed the price that it was prepared to pay and then was willing to buy all the wool up to that price then you have an equivalent scheme.
This works just the same for labour resources – just unconditionally offer to buy all labour at a stated fixed wage and you create full employment. What should that wage be?
Job Guarantee Wage:
To avoid disturbing private sector wage structure and to ensure the Job Guarantee is consistent with stable inflation, the Job Guarantee wage rate is best set at the minimum wage level. The Job Guarantee wage may be set higher to facilitate an industry policy function. The minimum wage should not be determined by the capacity to pay of the private sector. It should be an expression of the aspiration of the society of the lowest acceptable standard of living. Any private operators who cannot “afford” to pay the minimum should exit the economy.
The Government would supplements the Job Guarantee earnings with a wide range of social wage expenditures, including adequate levels of public education, health, child care, and access to legal aid. Further, the Job Guarantee policy does not replace conventional use of fiscal policy to achieve social and economic outcomes. In general, the Job Guarantee would be accompanied by higher levels of public sector spending on public goods and infrastructure.
Family Income Supplements:
The Job Guarantee is not based on family-units. Anyone above the legal working age is entitled to receive the benefits of the scheme. I would supplement the Job Guarantee wage with benefits reflecting family structure. In contrast to workfare there will not be pressure applied to single parents to seek employment.
The Job Guarantee would be funded by the sovereign government which faces no financial constraints in its own currency. In the context of the current outlays that are being thrown around in national economies, the investment that would be required to introduce a full blown would be rather trivial. It would be operated locally though.
The Job Guarantee maintains full employment with inflation control. When the level of private sector activity is such that wage-price pressures forms as the precursor to an inflationary episode, the government manipulates fiscal and monetary policy settings (preferably fiscal policy) to reduce the level of private sector demand.
This would see labour being transferred from the inflating sector to the “fixed wage” sector and eventually this would resolve the inflation pressures. Clearly, when unemployment is high this situation will not arise.
But in general, there cannot be inflationary pressures arising from a policy that sees the Government offering a fixed wage to any labour that is unwanted by other employers.
The Job Guarantee involves the Government “buying labour off the bottom” rather than competing in the market for labour. By definition, the unemployed have no market price because there is no market demand for their services. So the Job Guarantee just offers a wage to anyone who wants it.
In contradistinction with the NAIRU approach to price control which uses unemployed buffer stocks to discipline wage demands by workers and hence maintain inflation stability, the Job Guarantee approach uses the ratio of Job Guarantee employment to total employment which is called the Buffer Employment Ratio (BER) to maintain price stability.
The ratio that results in stable inflation via the redistribution of workers from the inflating private sector to the fixed price Job Guarantee sector is called the Non-Accelerating-Inflation-Buffer Employment Ratio (NAIBER). It is a full employment steady state Job Guarantee level, which is dependent on a range of factors including the path of the economy. Its microeconomic foundations bear no resemblance to those underpinning the neoclassical NAIRU.
It also wouldn’t be worth estimating or targetting. It would be whatever was required to fully employ labour and maintain price stability.
Workfare or Work-for-the-Dole:
Many people think that the Job Guarantee is just Work-for-the-Dole in another guise. The Job Guarantee is, categorically, not a more elaborate form of Workfare. Workfare does not provide secure employment with conditions consistent with norms established in the community with respect to non-wage benefits and the like.
Workfare does not ensure stable living incomes are provided to the workers. Workfare is a program, where the State extracts a contribution from the unemployed for their welfare payments. The State, however, takes no responsibility for the failure of the economy to generate enough jobs. In the Job Guarantee, the state assumes this responsibility and pays workers award conditions for their work. Under the Job Guarantee workers could remain employed for as long as they wanted the work. There would be no compulsion on them to seek private work. They could also choose full-time hours or any fraction thereof.
The Job Guarantee would be integrated into a coherent training framework to allow workers (by their own volition) to choose a variety of training paths while still working in the Job Guarantee. However, if they chose not to undertake further training no pressure would be placed upon them.
I would abandon the unemployment benefits scheme and free the associated administrative infrastructure for Job Guarantee operations. The concept of mutual obligation from the workers’ side would become straightforward because the receipt of income by the unemployed worker would be conditional on taking a Job Guarantee job.
I would start paying a Job Guarantee wage to anyone who turned up at some designated Government Job Guarantee office even if the office had not organised work for that person yet.
For financial reasons explained below, the Job Guarantee would be financed federally with the operational focus being local. Local Government would be an important administrative sphere for the actual operation of the scheme. Local administration and coordination would ensure meaningful, value-adding work was a feature of the Job Guarantee activities.
Type of Jobs:
Surveys of local governments that we have done reveal a myriad of community- and environmentally-based projects that could be completed if Federal funds were forthcoming.
The Job Guarantee workers would contribute in many socially useful activities including urban renewal projects and other environmental and construction schemes (reforestation, sand dune stabilisation, river valley erosion control, and the like), personal assistance to pensioners, and other community schemes.
For example, creative artists could contribute to public education as peripatetic performers. The buffer stock of labour would however be a fluctuating work force (as private sector activity ebbed and flowed). The design of the jobs and functions would have to reflect this. Projects or functions requiring critical mass might face difficulties as the private sector expanded, and it would not be sensible to use only Job Guarantee employees in functions considered essential.
Thus in the creation of Job Guarantee employment, it can be expected that the stock of standard public sector jobs, which is identified with conventional Keynesian fiscal policy, would expand, reflecting the political decision that these were essential activities.
Open Economy Impacts:
The Job Guarantee requires a flexible exchange rate to be effective. A once-off increase in import spending is likely to occur as Job Guarantee workers have higher disposable incomes. The impact would be modest. We would expect any modest depreciation in the exchange rate to improve the contribution of net exports to local employment, given estimates of import and export elasticities found in the literature.
I will come back to open economy issues in a later blog seeing as there has been some consternation from some commentators recently.
The Job Guarantee proposal will assist in changing the composition of final output towards environmentally sustainable activities. These are unlikely to be produced by traditional private sector firms because they have heavy public good components. They are ideal targets for public sector initiative. Future labour market policy must consider the environmental risk-factors associated with economic growth.
Possible threshold effects and imprecise data covering the life-cycle characteristics of natural capital suggest a risk-averse attitude is wise. Indiscriminate (Keynesian) expansion fails in this regard because it does not address the requirements for risk aversion. It is not increased demand per se that is necessary but increased demand in certain areas of activity.
The Job Guarantee can provide a government with a policy framework to maintain continuous full employment without putting pressure on the inflation rate.
Does it solve all problems? Answer: Definitely not. It is a safety net buffer stock system only.
The maintenance of full employment – Kalecki and the Captains of Industry
It is easy to show that the introduction of the Job Guarantee and compared the outcomes to a NAIRU economy. However, there are further issues that arise when we consider the maintenance of full employment using the Job Guarantee policy.
While orthodox economists typically attack the Job Guarantee policy for fiscal reasons, economists on the left also challenge its validity and effectiveness. In 1943, Michal Kalecki published the Political Aspects of Full Employment, in the Political Quarterly, which laid out the blueprint for socialist opposition to Keynesian-style employment policy. The criticisms would be equally applicable to a Job Guarantee policy.
Note the references to Kalecki’s 1943 article come from the collection published in 1971 – Michal Kalecki “Political Aspects of Full Employment”, Selected Essays on the Dynamics of the Capitalist Economy, Cambridge: Cambridge University Press, 138-145.
Kalecki’s article begins by defining what he calls the economics of full employment and it is very interesting to re-read it in the light of the present crisis. He adopts what was then the emerging Keynesian position that:
… even in a capitalist system, full employment may be secured by a government spending programme, provided there is in existence adequate plan to employ all existing labour power, and provided adequate supplies of necessary foreign raw-materials may be obtained in exchange for exports.
He says that “(i)f the government undertakes public investment (e.g. builds schools, hospitals, and highways) or subsidizes mass consumption (by family allowances, reduction of indirect taxation, or subsidies to keep down the prices of necessities), and if, moreover, this expenditure is financed by borrowing and not by taxation (which could affect adversely private investment and consumption), the effective demand for goods and services may be increased up to a point where full employment is achieved. Such government expenditure increases employment, be it noted, not only directly but indirectly as well, since the higher incomes caused by it result in a secondary increase in demand for consumer and investment goods.”
Remember he was writing in 1942 and while governments had gone off the gold standard the convertible currency mentality was still firmly in place waiting to be restored in the Post War period by the Bretton Woods agreement.
In a fiat monetary system such as most nations operate within today the reference to government expenditure being “financed” by taxes or debt-issuance is redundant. A sovereign government is never revenue constrained because it is the monopoly issuer of the currency. But Kalecki’s point is that the stimulus works by increasing effective demand (purchasing intentions backed by cash) and so the more public demand can be created the more stimulatory it will be.
He further notes that the expenditure multiplier will magnify that initial spending injection. So pretty straight Keynesian macroeconomics being outlined.
He then goes on to describe how the government gets the funds:
It may be asked where the public will get the money to lend to the government if they do not curtail their investment and consumption. To understand this process it is best, I think, to imagine for a moment that the government pays its suppliers in government securities. The suppliers will, in general, not retain these securities but put them into circulation while buying other goods and services, and so on, until finally these securities will reach persons or firms which retain them as interest-yielding assets. In any period of time the total increase in government securities in the possession (transitory or final) of persons and firms will be equal to the goods and services sold to the government. Thus what the economy lends to the government are goods and services whose production is ‘financed’ by government securities. In reality the government pays for the services, not in securities, but in cash, but it simultaneously issues securities and so drains the cash off; and this is equivalent to the imaginary process described above.
In the language of Modern Monetary Theory (MMT), the government just credits bank accounts when it spends (or posts a cheque) and debits them when it taxes. The funds that it borrows (that is, the funds the private sector use to purchase the public debt instruments) come from the government spending. It is a wash. The government spends and then drains the reserves by selling bonds. The private sector do not have to “use up” any holdings of prior savings to purchase the debt.
Of-course, the government spending creates demand which leads to an expansion of output and income. The income growth, in turn, generates extra saving in the economy. In this way, spending brings forth saving.
Kalecki’s imaginary process is totally unnecessary in a modern monetary economy operating a fiat currency system. There is no necessity to drain the reserves that are created by the deficit spending. The government is in fact doing the private sector a favour by issuing debt because it is providing the bond holders with a risk-free (guaranteed) annuity (income stream) which it can always fall back on when speculation in other financial assets is subject to excessive uncertainty about price movements.
The government could just as easily pay the same return on bank reserves held at the central bank if it wanted to provide a reward to the private sector. The point is that a reserve balance is equivalent to a 1-day government bond with zero return (unless there is a support rate paid). Draining the reserves by issuing a government bond merely alters the duration composition of the outstanding government securities.
Kalecki then showed why the central bank can always maintain “the rate of interest at a certain level … however large the amount of government borrowing.” He said that:
In spite of astronomical budget deficits, the rate of interest has shown no rise since the beginning of 1940.
As is the case in the current period. The central bank sets the interest rate and it can control longer-term interest rates if it so chooses. There is a question as to whether it can control all rates. It can but that would require it to offer an infinite fixed-price offer for all securities, which is not practical. But by controlling key rates (for example, longer term bonds) the central bank can condition the other rates via shifts in portfolio compositions.
Finally, to complete his story on what a Keynesian expansion involves he said:
It may be objected that government expenditure financed by borrowing will cause inflation. To this it may be replied that the effective demand created by the government acts like any other increase in demand. If labour, plants, and foreign raw materials are in ample supply, the increase in demand is met by an increase in production. But if the point of full employment of resources is reached and effective demand continues to increase, prices will rise so as to equilibrate the demand for and the supply of goods and services … It follows that if the government intervention aims at achieving full employment but stops short of increasing effective demand over the full employment mark, there is no need to be afraid of inflation.
Once again, a very similar story to that offered by MMT. In this paragraph it is clear that unless inflation is sourced from a cost shock (like an energy price hike), then expanding nominal aggregate demand will only come up against what Keynesians used to call the “inflation barrier” if there is no capacity of the real economy to respond to that demand impulse.
I have often indicated that my economic roots come from Marx through Kalecki. Kalecki was a Marxist economist. Marx was the first to really get to grips with the idea of effective demand – that is, spending backed by cash. Kalecki understood this intrinsically.
There has been a debate which fascinated me as a graduate student as to whether Keynes was influenced by Kalecki’s work as he wrote the General Theory which was published in 1936. Keynes had published the Treatise on Money in December 1930. At this stage Keynes, influenced by his mentor Alfred Marshall was still operating in the Quantity Theory of Money paradigm. However the Treatise demonstrates that Keynes was starting to have doubts about the mainstream macroeconomics that he was operating within.
For a start he observed changes in monetary aggregates that were not associated with changes in the price level and vice versa. That possibility had to that date been denied by economists working in this tradition. He started to look for alternative explanations for inflation and focused on the relationship between investment and saving. He noted that if investment was greater than saving then inflation will result and vice versa. He realised then that when the economy is recessed (saving draining demand more than investment is injecting demand) then spending had to be stimulated and saving discouraged.
At the time, the then orthodoxy claimed that thrift was needed when there was recession. Keynes said of this “For the engine which drives Enterprise is not Thrift, but Profit.”
So there was some hint that he was moving away from the “classical” tradition and moving along a path that would realise the General Theory some six years later. But it remains that the Treatise was still very much a work within the Quantity Theory of Money tradition.
Kalecki, however, never worked in that tradition. He clearly understood what Marx had been writing in the Theory of Surplus Value about effective demand and in 1933 published (via the Research Institute of Business Cycle and Prices in Poland) a famous piece in Policy Proba teorii koniunktury, which broadly translates to a Search for a Theory of Demand and outlined his very comprehensive understanding of business cycle dynamics. It is a very rich model of the macroeconomy and how aggregate demand interacts with the aggregate supply capacity of the economy.
He presented his theory in 1933 to the International Econometrics Association, which was a prestigious body. He subsequently published the paper in English in 1935 (in Econometrica). So a much richer version of the General Theory was in the public arena some 3 years before Macmillan published Keynes’ tome.
Joan Robinson, who was a Cambridge academic at the time, wrote later in her Collected economics papers that:
Michal Kalecki’s claim to priority of publication is indisputable. With proper scholarly dignity (which, however, is unfortunately rather rare among scholars) he never mentioned this fact. And, indeed, except for the authors concerned, it is not particularly interesting to know who first got into print. The interesting thing is that two thinkers, from completely different political and intellectual starting points, should come to the same conclusion. For us in Cambridge it was a great comfort.
Kalecki did not meet Keynes (at Cambridge) until 1937 and the latter was fairly dismissive. The issue of whether Keynes had been influenced by Kalecki’s earlier work remains unresolved. Staunch followers of Keynes say no, whereas those scholars who do not see Keynes as being the central figure in the development of the theory of effective demand, such as me, lean to the view that the transition from the Treatise (1930) to the General Theory (1936) was so great that it is likely that Keynes knew what Kalecki had written and published and was influenced by it.
The 1943 article that I have been discussing in this blog – The Political Aspects of Full Employment – extended Kalecki’s business cycle model to include political considerations.
Anyway, all that was a digression.
After outlining the economics of effective demand and showing that technically full employment was the logical consequence of a government permitted to use its fiscal capacity to manage total spending, Kalecki then introduced what he called the political aspects.
Accordingly, Kalecki (1971: 138) said:
… the assumption that a Government will maintain full employment in a capitalist economy if it knows how to do it is fallacious. In this connection the misgivings of big business about maintenance of full employment by Government spending are of paramount importance.
The alleged opposition by big business to full employment mystified Kalecki because the higher output and employment would seemingly be of benefit to workers and capital alike.
Kalecki (1971: 139) lists three reasons why the industrial leaders would be opposed to full employment “achieved by Government spending.”
- The first is an assertion that the private sector opposes government employment per se.
- The second is an assertion that the private sector does not like public sector infrastructure development or any subsidy of consumption.
- The third is more general and involves a dislike by the private sector “of the social and political changes resulting from the maintenance of full employment” (emphasis in original).
One is tempted to respond to Kalecki with the reference to the long period of growth and full employment from the end of WWII up until the first oil shock (excluding the Korean War). During that period, most economies experienced strong employment growth, full employment and price stability, and strong private sector investment over that period under the guidance of interventionist government fiscal and monetary policy.
This period of relative stability was only broken by a massive supply shock (OPEC petrol price hike), which then led to ill advised policy changes that provoked the beginning of the malaise we are still facing after 25 years.
In Kalecki’s defence, it might be argued in reply that it took 30 odd years of the Welfare State to generate the inflationary biases that were observed in the 1970s. This is a popular view to explain why it took so long for the Keynesian consensus to break down.
Kalecki (1971: 139-140) explains how the dislike by business leaders of government spending:
… grows even more acute when they come to consider the objects on which the money would be spent: public investment and subsidising mass consumption.
So he is asserting that the private sector is just anti-government if the public activities do not favour their narrow sectoral interests. However, there was never a convincing argument presented then or by the progressives who still use the 1943 argument by Kalecki to justify their own scepticism about full employment policy approaches such as the Job Guarantee.
If public spending overlaps with private spending (the classic example is toothpaste) then according to Kalecki, 1971: 140):
… the profitability of private investment might be impaired and the positive effect of public investment upon employment offset by the negative effect of the decline in private investment.
So business leaders will be very well suited according to Kalecki if there is no such overlap. But ultimately the government will want to move towards nationalisation of industries to broaden the scope for investment. This criticism is inapplicable to a buffer stock route to full employment. Job Guarantee jobs are most needed in areas that have been neglected or harmed by capitalist growth. The chance of overlap and therefore substitution is minimal.
Of-course, I am not arguing that the government might use the Job Guarantee as an industry policy and may deliberately target an overlap to drive inefficient private capital out of the economy. That would be beneficial but would probably engender resistance from private capital of the type Kalecki noted in this article.
Kalecki (1971: 140) acknowledges that the “pressure of the masses” in democratic systems may thwart the capitalists and allow the government to engage in job creation. It is clear that one of the features of the neo-liberal era has been the vehemence in which they have pursued public indoctrination aimed at changing our attitudes to full employment and the jobless. In Australia, a vile nomenclature was developed in the 1980s and refined since then to vilify the unemployed and to imprint in the public mind that unemployment was voluntary and due to laziness, poor attitudes or inability to apply oneself to personal skill development.
The idea that mass unemployment was an outcome of systemic failure at the macroeconomic level was actively eschewed by the plethora of right-wing think tanks that emerged during this modern era to disabuse us of our previously held views about solidarity and collective action. Please read my blog – What causes mass unemployment? – for more discussion on this point.
With that in mind, Kalecki’s principle objection then seemed to be that “the maintenance of full employment would cause social and political changes which would give a new impetus to the opposition of the business leaders.” The issue at stake is the relationship between the threat of dismissal and the level of employment.
In this regard, Kalecki (1971: 140-41) says:
Indeed, under a regime of permanent full employment, ‘the sack’ would cease to play its role as a disciplinary measure. The social position of the boss would be undermined and the self assurance and class consciousness of the working class would grow.
Kalecki is really considering a fully employed private sector that is prone to inflation rather than a mixed private-Job Guarantee economy. The Job Guarantee creates loose full employment rather than tight full employment because the buffer stock wage is fixed (growing with national productivity). The government never competes against the market for resources in demand when it offers an unconditional job to any unemployed workers under a Job Guarantee. By definition, any worker who takes a Job Guarantee job has zero bid in the private market (that is, no private firm is prepared to pay for their labour at the prevailing wages and prices).
The issue comes down to whether the Job Guarantee pool is a greater or lesser threat to those in employment than the unemployed when wage bargaining is underway. This is particularly relevant when we consider the significance of the long-term unemployed in total unemployment. It can be argued that the long-term unemployed exert very little downward pressure on wages growth because they are not a credible substitute.
The Job Guarantee workers, however, do comprise a credible threat to the current private sector employees for several reasons:
- The buffer stock employees are more attractive than when they were unemployed, not the least because they will have basic work skills, like punctuality, intact.
- This reduces the hiring costs for firms in tight labour markets who previously would have lowered hiring standards and provided on-the-job training. Firms can thus pay higher wages to attract workers or accept the lower costs that would ease the wage-price pressures.
- The Job Guarantee policy thus reduces the “hysteretic inertia” embodied in the long-term unemployed and allows for a smoother private sector expansion because growth bottlenecks are reduced.
The Job Guarantee pool provides business with a fixed-price stock of skilled labour to recruit from. In an inflationary episode, business is more likely to resist wage demands from its existing workforce because it can achieve cost control. In this way, longer term planning with cost control is achievable.
So in this sense, the inflation restraint exerted via the fluctuating employment buffer stock under the Job Guarantee is likely to be more effective than using a fluctuating unemployment buffer stock under the mainstream NAIRU strategy.
The International Labour Organisation (1996/97) says, “prolonged mass unemployment transforms a proportion of the unemployed into a permanently excluded class.” As these people lose their skills, warns the ILO, they are no longer considered as candidates for employment and “cease to exert any pressure on wage negotiations and real wages.” The result is that “the competitive functioning of the labour market is eroded and the influence of unemployment on real wages is reduced.”
In what form does Kalecki see the opposition by capitalists coming? I am leaving aside the political rationale where presumably funds directed to sympathetic political parties and control of the media could all be effective means to oppose an incumbent government. He is very vague about what might transpire.
Kalecki (1971: 142-143) outlines that counter-stabilisation policy is not a concern of business as long as the “businessman remains the medium through which the intervention is conducted.” Such intervention should aim to stimulate private investment and should not “involve the Government either in … (public) investment or … subsiding consumption.”
Kalecki (1971: 144) says if attempts are made to
… maintain the high level of employment reached in the subsequent boom a strong opposition of ‘business leaders’ is likely to be encountered. As has already been argued, lasting full employment is not at all to their liking. The workers would ‘get out of hand’ and the ‘captains of industry’ would be anxious to teach them a lesson.
But how would they do this? Kalecki seems to imply that the reaction would work via business and rentier interests pressuring the government to cut its budget deficit. Presumably, corporate investors could threaten to withdraw investment. An examination of the investment to income ratio in Australia over the period since the 1960s is instructive.
The following graph shows shows the investment ratio and the unemployment rate for Australia from 1959 to 2009 using labour force and national accounts data available from the Australian Bureau of Statistics).
The investment ratio moves as a mirror image to the unemployment rate, which reinforces the demand deficiency explanation for the swings in unemployment. The rapid rise in the unemployment rate in the early 1970s followed a significant decline in the investment ratio. The mirrored relationship between the two resumed albeit the unemployment rate never returned to its 1960s levels.
Far from being a reason to avoid active government intervention, the Job Guarantee is needed to insulate the economy from these investment swings, whether they are motivated by political factors or technical profit-oriented factors.
Another factor bearing on the way we might view Kalecki’s analysis is the move to increasingly deregulated and globalised systems. Many countries have dismantled their welfare states and enacted harsh labour legislation aimed at controlling trade union bargaining power.
Trade union membership has declined substantially in many countries as the traditional manufacturing sector has declined and the service sector has grown. Trade unions have traditionally found it hard to organise or cover the service sector due to its heavy reliance on casual work and gender bias towards women.
It is now much harder for trade unions to impose costs on the employer. Far from being a threat to employers, the Job Guarantee policy becomes essential for restoring some security in the system for workers.
There have been major reductions in barriers to international trade and global investment over the last 20 years. While globalisation may still not have as large an impact on depressing wages as say the effects of declining union membership, anti-labour legislation and corporate restructuring, there is still concern about the destruction of jobs in manufacturing and the downward pressure on wages.
Richard Du Boff wrote in his 1997 article – Globalization and Wages, The Down Escalator – published in Dollars and Sense:
As international trade wipes out jobs in manufacturing, the displaced workers seek jobs somewhere in the service sector, exerting downward pressure on the wages of maintenance and custodial workers, taxi drivers, fast food cooks, and others who hold similar positions. Even if the displaced workers can be absorbed easily, their new service jobs will usually pay less than their old jobs, pulling down average low-skill wages. And the effects will not be restricted to low-skilled labor. A worldwide labor supply network is now extending to middle-range skills. India has a large pool of English-speaking engineers and technicians who make roughly the same wages as low-skilled workers in the United States.
Finally, but looking to the future, those who criticise the Job Guarantee from a Kaleckian viewpoint have to address the issue of binding constraints. Kalecki comes from a traditional Marxian framework where industrial capital and labour face each other in conflict. The goals of capital are antithetical to those of labour.
In this environment, the relative bargaining power of the two sides determines the distribution of income and the rate of accumulation. Industrial capital protects its powerful position by balancing the high profits that come from strong growth with the need to keep labour weak through unemployment.
However, the swings in bargaining power that have marked this conflict over many years have no natural limits. But the concept of natural capital, ignored by Kalecki and other Marxians, is now becoming the binding constraint on the functionality and longevity of the system.
It doesn’t really matter what the state of distributional conflict is if the biosystem fails to support the continued levels of production. The research agenda for Marxians has to embrace this additional factor – natural capital.
The concept of natural capitalism developed by Paul Hawken and others provides a path for full employment and environmental sustainability within a capitalist system.
So who are the deficit terrorists?
My argument here does not seek to disabuse anyone of the notion that there is no political lobby that is well organised and against the fiscal intervention by government – that is, when the benefits do not flow to some narrow wealthy sectoral interest group (like Wall Street bankers).
Quite clearly we are witnessing an obscene campaign that is successfully opposing the use of fiscal stimulus and undermining the well-being of a great many people. But it is also undermining the core industrial sectors like manufacturing and construction where the old “captains of industry” were prominent.
This blog is now having to conclude (my train journey is nearly over and it is too long anyway). So I will address this issue again another day. One of my PhD students (our guest blogger Victor) is nearly ready to submit his thesis and he will write more for us on the political constraints to full employment.
The point I would make is that the major political blockages are no longer those that Kalecki foresaw. The opponents of fiscal activism are a different elite and work against the “captains of industry” just as much as they work against the broader working class.
The growth of the financial sector and global derivatives trading and the substantial deregulation of labour markets and retrenchment of welfare states has altered things considerably since Kalecki wrote his brilliant article in 1943.
Back tomorrow. If you are sick of it have a day or two off. If not have a go and see how much progress you are making (notwithstanding the dilemmas that emerge when my questions suck!)
And so ends my train blogging – and that is enough for today!