A full employment bill – sort of!

You know something is wrong when the unemployment rate in major holiday destinations persist at high levels. Typically, these areas have what economists refer to as seasonal unemployment – so that during the off-season (when the holiday makers are back home) there is very little labour market activity but once the vacation period begins there are many jobs and people. I have lived in various surf locations for many years and one such location had a steady-state population of 1000 or so residents and on Boxing Day this swelled to 25,000 and that new population endured for the ensuing holiday period (until the Australia Day weekend – January 26). Many of the surf crew and musicians would take jobs during this period and work very long hours (the surf was typically bad during the summer anyway) and use the savings to eke out an existence for the rest of the year – sometimes also accessing unemployment benefits sometimes not. The US Bureau of Labor Statistics published a bulletin (September 7, 2010) for the Cape Cod area which is one such major holiday region in the US. The situation there is dire and requires an immediate policy response from the US government. Unfortunately, this issue appears to be off the policy agenda. Well, until this week at least. A Democrat from Ohio has introduced a “full employment bill” which aims to eliminate the US central bank (good) and restore the US government’s currency sovereignty for keeps. The problem is that it goes down some dead-ends and avoids facing up to the real issues. So it is a well-motivated full employment bill – sort of!

The US Bureau of Labor Statistics published a bulletin (September 7, 2010) for the Cape Cod area which is one such major holiday region in the US. The BLS publication reported that:

Barnstable, Dukes, and Nantucket Counties all had unemployment rates that were higher in July 2010 than one year earlier. Dukes County posted the largest over-the-year increase at 1.2 percentage points; Barnstable and Nantucket counties had increases of 1.0 and 0.8 percentage points, respectively. The national unemployment rate was unchanged over this same time period … Cape Cod and the Islands have experienced appreciable unemployment rate increases over the last three years … By July 2010, jobless rates had more than doubled in both Barnstable (up 4.0 percentage points) and Dukes (up 2.9 points) Counties, while almost quadrupling in Nantucket (up 3.5 points). Nationwide, the unemployment rate nearly doubled from July 2007 to July 2010, rising 4.8 percentage points.

The following graph described in the publication as “Chart 1. Unemployment rates for the United States and counties comprising Cape Cod and the Islands July 2007 and July 2010, not seasonally adjusted” presents a comparison between July 2007 and July 2010 for these Cape Code countries.

The message is clear – if the seasonal spending associated with vacations is insufficient to stimulate the local labour market then something is seriously wrong with the economy.

According to US BLS data, as at November 2010, there were 15.119 million US workers unemployed and 13.3 million so-called marginal and underemployed workers (that is, according to the BLS U6 category). These are the underemployed or hidden unemployed. They would take more hours or a job if it was offered.

The reality is that in a functional sense – that is, in assessing the potential productive labour supply – the marginal workers are no different to the officially “unemployed” workers. If demand for labour increased both pools of idle labour could be drawn upon to take the jobs.

The following graph shows the evolution of the official unemployment rate and the U6 BLS measure – Alternative measure of labor underutilization U-6 – which is defined as “Total unemployed, plus all marginally attached workers plus total employed part time for economic reasons, as a percent of all civilian labor force plus all marginally attached workers” since 1994 (when the U6 measure was first published).

The gap between the two series varies little which means that the threshold between the labour force and marginal status is highly cyclical. The situation that is presented by this data is dire and should ring alarm bells in every politicians office in America. I get the impression, however, that the polity is more concerned with other issues – like status of minorities in the armed forces.

Before I get a torrent of hate mail accusing me of being anti-gay let it be known that I am not. That issue is very important but in my view is not of the same sense of priority as the unemployment disaster – just my value judgement. As an aside, if I was legislating about membership of the armed forces in the US I would make it illegal for a heterosexual to be in the forces. That should cut down a bit of destructive global activity!

The historical record suggests (certainly during the Great Depression) that job relief programs that various governments have implemented to try to attenuate the massive rise in unemployment were very beneficial in terms of containing the costs associated with unemployment.

Having workers locked out of the production process because there are not enough private jobs being generated is not only irrational in terms of lost income but also causes society additional problems, such as rising crime rates. Direct job creation has been a very effective way of attenuating these costs while the private sector regained its optimism. In fact, it took about 50 years or so after the Great Depression for governments to abandon this way of thinking.

Now we tolerate high levels of unemployment without a clear understanding of the magnitude of costs that that policy position imposes on specific individuals and society in general. The neo-liberal publicity machine has been running full bore for a few decades now to convince us that unemployment is not a major issue that should be addressed. Rather, they say it is an optimal choice made by individuals about their time allocation. Students leave universities with this notion etched in their minds.

Of-course, what the neo-liberals don’t admit is that they understand Marxian analysis in the sense that they know a reserve army of idle labour allows firms to suppress labour costs. The problem is that full employment is actually better for profits than having mass unemployment. That reality has seemingly escaped the ideological zealots in their feverish campaigns to tilt the playing ground firmly in favour of capital. They actually have got it wrong on both accounts!

I invite you to read this blog – What causes mass unemployment? – for more on this debate.

The upshot is that the single most rational thing a government can do is to ensure that there are enough jobs to match the available labour force. Mostly, they fail badly to achieve this level of sophistication.

In the growth period before the current crisis few countries had returned to the full employment states that they achieved in the Post World War 2 period up until the mid-1970s when the OPEC oil shocks led to a paradigm change in macroeconomic policy setting. The neo-liberal approach emphasised fiscal austerity to support an increasing reliance on monetary policy for counter-stabilisation.

So already in this period of relatively better economic growth there were substantial losses being recorded both in terms of lost GDP (production and income foregone) and the additional personal and social costs that accompany persistent unemployment.

It is well documented that sustained unemployment imposes significant economic, personal and social costs that include:

• loss of current output;
• social exclusion and the loss of freedom;
• skill loss;
• psychological harm;
• ill health and reduced life expectancy;
• loss of motivation;
• the undermining of human relations and family life;
• racial and gender inequality; and
• loss of social values and responsibility.

These costs are enormous and dwarf the measures that various governments have come up with to estimate losses arising from so-called microeconomic inefficiencies (such as transport systems not running on time etc).

Please read my blog – The daily losses from unemployment – for more discussion on this point.

However, if you examine the public debate in most nations at present you will read more on a daily basis about the public debt crisis (which is exactly?) and the need for fiscal austerity than you will read articles calibrating these daily losses from labour underutilisation.

I have actually struggled over my professional life to understand how we can be so stupid to accept this silence. Why do we tolerate politicians who abandon a commitment to full employment? Why don’t we demand to know what the Treasury estimates of the losses of unemployment are?

In Australia, there has been very little research on this issue – most of it has been done by myself and close colleagues.

Anyway, I was interested sometime ago to learn that an American politician – one Dennis Kucinich, a Democrat from Ohio – was introducing a full employment bill – or the National Emergency Employment Defense Act 2010.

The press are emphasising the “conservative” nature of Kucinich’s proposal – to wit – that it calls for the abolition of the central bank (The Federal Reserve) and a “return to sound money” (Source).

They note that the rabidly conservative Ron Paul and his fellow misguided tea party supporters have also advocated the same thing. One of the original tea party organisers (Karl Denninger) said this of the proposed bill:

I’m stunned. Really.

Dennis Kucinich, which many people have (properly) labeled as one step removed from a communist in the past, and who has a reputation as having a hard-core left slant in his politics, has just written up and introduced a bill that will fundamentally restore the free market – for real – to banking and credit … His bill would end the process of money issuance by The US Federal Government as a debt instrument. It would thus restore actual “lawful money” as Ron Paul claims to want, but in a form he has never, ever elucidated.

So the right think this is their agenda and that perception is advanced by some of the unnecessary aspects that are in the proposed legislation (for example, the elimination of private credit creation by banks). More about which later.

Apparently, the motivation for the bill comes from the American Monetary Institute – see Kucinich on Youtube in this respect.

Kucinich described his motivation and action in the following way:

The National Emergency Employment Defense Act of 2010 would allow the federal government to directly fund badly-needed infrastructure repairs and fund education systems nationwide by spending money into circulation without increasing the national debt. The bill would end the current practice of fractional reserve lending, whereby the economy depends upon private financial institutions to lend money into circulation.

Congressman Kucinich stated, “The staggeringly bad employment and economic numbers represent a massive problem which cries out for bold action. Rather than crossing our fingers and hoping that banks will finally lend some of the billions of public dollars they haven’t thus far seen fit to lend, we can take action. My bill would replace the Federal Reserve System’s dependence on private banks to create credit. In its place, a Monetary Authority under the Treasury Department would directly inject liquidity into the economy by purchasing much needed public infrastructure repair. Today, we have idle capital, millions of able-bodied but unemployed workers, unused equipment, and record low interest rates. These conditions are the best possible time to make a long-term investment in our nation’s infrastructure. My bill would do exactly that.”

There are clearly elements about the proposed bill that I like but overall it is misguided not only in its construction of the problem but also in its implementation of the solution.

I totally agree that the waste I noted above in terms of unemployment and underemployment is a crime and the US government is now overseeing a failed state of its own making.

But we need to be careful about how we understand that policy failure and pick on the right cause and the best solution. Much of Kucinich’s solution is peripheral to the problem and would damage the private sector. I am not an apologist for the private sector but the fact is that the US economy is mixed and heavily private. I understand that and would not advocate conservative deflationary strategies which curtail enterprise.

Appropriately regulated private enterprise is a foundation stone for a mixed economy. We can debate whether a mixed economy is necessary but that is the reality we are dealing with in the US. It is a modern monetary system with a strong private component.

The proposed bill is well motivated although probably confused:

To create a full employment economy as a matter of national economic defense; to provide for public investment in capital infrastructure; to provide for reducing the cost of public investment; to retire public debt; to stabilize the Social Security retirement system; to restore the authority of Congress to create and regulate money, modernize and provide stability for the monetary system of the United States, retire public debt and reduce the cost of public investment, and for other public purposes.

When you read further you realise Kucinich thinks that the issuance of public debt is “costly” and the “social security retirement system” will present a fiscal headache. Neither proposition is true.

I note that things have become worse since the proposed bill was drafted because it says “Nearly 15,000,000 Americans are currently unemployed, another 12,000,000 estimated Americans are underemployed”. As you will see from the November 2010 data above the numbers have grown.

Several descriptive clauses about the plight of America are well-taken (covering housing, health, wages, etc). Then you read statements such as:

The United States is not financially capable of capitalizing on the burgeoning demand for wind, solar and other renewable energy technologies which reduce the cost of energy and help protect the environment, the continued use of non-renewable energies such as coal and oil create a national security crisis as well as long-term economic vulnerability.

That is a totally erroneous assertion. The US government could purchase any of these technologies if they are for sale in US dollars any time it wanted to. It could employ scientists on US dollar wages or provide research funding to solar scientists in US dollars any time it chose. There is not financial constraint on the US government exploring alternative energy.

Kucinich also claims that while public “bailouts” have been provided to banks they are refusing to invest in small business and the private sector is not creating jobs. He says the “country is stymied by competing forces: a desire to put people to work and an aversion to borrowing money to create programs to do
so”.

Yes, the US economy is in recession and these dynamics are typical of such a depressed state. But in a modern monetary system the US government is capable of turning those dynamics and stimulating economic activity. The real problem is a lack of aggregate demand growth. When the private sector is not willing to spend and the external sector is a net drain on aggregate demand then the spending gap has to be filled by government deficits.

There is no other solution and Kucinich seems to understand that when he says:

The aforementioned conditions require comprehensive action by the United States Congress to create full employment, invest in America and secure our Nation’s long-term economic, social and political future; and that such action is within our Constitutional right and responsibility … The authority to create money is a sovereign power vested in the Congress …

However, he notes that when the US Federal Reserve was created in 1913, the Congress “effectively delegated the sovereign power to create money, to the Federal Reserve system and private financial industry” which has undermined the capacity of the “of Congress to exercise its Constitutional responsibilities to provide resources for the general welfare of all the American people.”

How? Apparently, this arrangement has led to a range of maladies including the “unbridled expansion of national debt, both public and private”; and “excessive reliance on taxation of citizens for raising public revenues”; “drastic increases in the cost of public infrastructure investments”; “record levels of unemployment and underemployment” and “persistent erosion of the ability of Congress to exercise its Constitutional responsibilities to provide resources for the general welfare of all the American people.”

I generally disagree with that assessment. First, the Congress is dysfunctional for political reasons. The current US government has all the power it needs to advance public purpose. When the Democrats held the majority in both houses it could have expanded the fiscal deficit to the level necessary to support an apropriate level of aggregate demand.

It could have changed the legislation governing debt-issuance – which are legacies of the fixed exchange rate, convertible currency system which failed in 1971. The only reason that these voluntary rules governing the way in which the US government spends survive is because the neo-liberal political forces which seek to limit the ambit of the public sector are dominant.

Reforming those institutional arrangement would have eliminated the need for “tax revenue” or debt-issuance to be associated with government spending. The intrinsic nature of the fiat monetary system already exist in the US – the opportunities that system presents the US government are just obscured by a range of nonsensical and voluntary constraints.

Please read my blog On voluntary constraints that undermine public purpose – for more discussion on this point.

Further, the costs in public infrastructure provision are not related to the interest-servicing associated with any public debt issuance. The only costs that matter are the real resources that are used in each project. I would conjecture that with technological change and productivity improvements the real costs of public infrastructure provision have actually fallen over the last decades.

Kucinich is thus confusing the budget outlays as costs and ignoring what really matters. The fact that public infrastructure development is poor in the US is a political issue – it has nothing to do with the intrinsic characteristics of the monetary system.

Moreover, the failure of the private banking system has arisen not because of the “fractional reserve system” (private bank credit creation) but because the regulators went AWOL and allowed the private market lobby to persuade the legislators that the markets could self-regulate. The crisis is a failure of regulation. A private credit economy can be stable if the regulatory environment is sound and enforced and fiscal policy is properly conducted.

I am amazed that Kucinich never really addresses the failure of the US government to use its fiscal authority appropriately. He is keen to blame monetary policy but the real culprit (along with the regulatory failures) is in the way fiscal policy has been abused.

I would certainly reform the financial system along the lines that I sketch in these blogs – Operational design arising from modern monetary theory and Asset bubbles and the conduct of banks. But I would not eliminate the private credit creation capacities of the banks.

My reforms would make banks act as banks and not act as speculative and shady risk-shifting institutions. I would also make them pay for their mistakes in judgement by appropriate deposit insurance mechanisms. I would never run a system that socialises the losses and privatises the gains. I would privatise all losses and have strong nationalised public banks as the bulwark.

I agree with Kucinich that the US government and all national governments should reclaim their currency powers:

Reclaiming the power of the Federal Government to create money, and to spend or lend money into circulation as needed, eliminates the need to treat money as a Federal liability or to pay interest charges on the Nation’s money supply to financial institutions; it also renders unnecessary the undue influence of private financial institutions over public policy.

There is no need in a fiat monetary system for the sovereign government to issue any debt. A sovereign government is never revenue constrained because it is the monopoly issuer of the currency. That principle should be the starting point for defining the role of government and its conduct.

The issuance of debt in a fiat monetary system has primarily been about interest-rate maintenance (see Deficit spending 101 – Part 1 – Deficit spending 101 – Part 2 – Deficit spending 101 – Part 3) but with central banks now paying interest on excess reserves that function is redundant.

The problem of debt issuance, other than all the unproductive “make work” jobs that exist in the “debt management agencies” of government and elsewhere in the bond markets, is that it is a subtle form of corporate welfare. I would eliminate all forms of corporate welfare. This is one of the more shameful forms of hypocracy I hear from the free market lobby.

They hate welfare entitlements being made available to the most disadvantaged citizens but scream for government bonds because they know they provide them with a guaranteed annuity and a risk-free asset to price their other “products” off. My point is that if you believe in private entrepreneurship you can hardly justify asking for government support. Please read my blog – Bond markets require larger budget deficits – for more discussion on this point.

Finally, eliminating the redundant practice of debt-issuance would abolish the sway (which is mostly political) that the amorphous bond markets have on democractically elected governments. It would separate the deficit debate (and the advantages of running persistent deficits in certain times) from the debt debate, the latter being used by the conservatives to scare the bjesus out of ordinary folk who think that a public debt explosion is always imminent.

Please read my blog – Who is in charge? – for more discussion on this point.

The issue of democracy is important and is addressed somewhat in Kucinich’s bill. It notes:

Under the current Federal Reserve System, the persons responsible for the conduct of United States monetary policy have been unaccountable to the Congress and the Nation, have resisted auditing by the General Accounting Office, and have claimed exemptions from some Federal statutes, including the Civil Rights Act of 1964, that apply to all agencies of the Federal Government … The conduct of United States monetary policy by the Board of Governors of the Federal Reserve System, and specifically the failure of Board members to safeguard the financial system against wholesale fraud and abuse of citizens, demonstrates the risks of maintaining a system wherein the power to create and regulate money has been delegated to private individuals who are unaccountable to the
People of the United States in any way, even through their representatives in Congress.

The creation of the central bank in this way was not in the best interests of the US people. The bank under Greenspan particularly, failed to maintain correct oversight of the financial system. They fell prey to the myth perpetuated by the bevy of mainstream economists that the business cycle was dead.
Please read my blog – The Great Moderation myth – for more discussion on this point.

I agree with Kucinich that abolishing the unaccountable central bank control over macroeconomic policy is a way forward and I have been advocating that for many years. In one paper (with Warren Mosler and published in Australian Journal of Labour Economics, 2002 – here is a free working paper version – Fiscal policy and the Job Guarantee – which not dissimilar from the final published version) we wrote:

In general, we argue that the electorate should periodically sanction policy at the ballot box. The idea of an independent central bank, which could impose harsh monetary policy, without political scrutiny would be an anathema to this objective

Further, in a paper published in 2006 (here is a free working paper version – Buffer stocks and monetary policy – the role of the central bank – which not dissimilar from the final published version) we outlined an alternative role for the central bank:

Given the overwhelming central bank focus on price stability, and the critical roll of today’s unemployed buffer stocks of unemployed, it is appropriate that the responsibility for the maintenance of the unemployed (or, better still, JG employment) program be placed in the realm of the central bank. The functioning and effectives of the buffer employment stock is critical to its function as a price anchor.

Condition and ‘liquidity’ is the key. Just as soggy rotting wool is useless in a wool price stabilisation scheme, labour resources should be nurtured as human capital constitutes the essential investment in future growth and prosperity. There is overwhelming evidence that long-term unemployment generates costs far in excess of the lost output that is sacrificed every day the economy is away from full employment (see Mitchell, 2001).

It is clear that the more employable are the unemployed the better the price anchor will function. The central bank is uniquely positioned to bring its research resources to bear on the issue of optimising its price anchor. We are hopeful that this would quickly recognise the obvious – continuous involvement in paid-work provides returns in the form of improved physical and mental health, more stable labour market behaviour, reduced burdens on the criminal justice system, more coherent family histories and useful output, if well managed. This is something at which a central bank should excel.

It is also the case the training in a paid-work environment is more effective than contextually isolated training schemes, which have become the fashion under the active labour market programs pursued by governments in all countries over the last two decades. Again, central banks will quickly recognise this and take immediate action to optimise the price stabilising aspects of their price anchor.

And any existing central bank worker not required for this important task could be retrained and pursue research towards a cure for cancer or aids or something else.

Kucinich’s solution to the failure of the Federal Reserve is to abolish it (and its private banking partners) and for the Congress to:

… reassume the powers and responsibilities granted to it by the Constitution.

This would allow the US government to achieve the stated aims of the bill articulated above – that is, full employment.

He wants the Federal government to use its capacity to spend for wide-scale “public investment in capital infrastructure” and to “incorporate the Federal Reserve System into the Executive Branch under the United States Treasury”.

I agree with both of these aspects of the proposed bill.

However, he also thinks that you would also have to “abolish the creation of money, or purchasing power, by private persons through lending against deposits, by means of fractional reserve banking, or by any other means.”

I disagree with that conclusion. It is an unnecessary step. Please read my blog – 100-percent reserve banking and state banks – for more discussion on this point.

I could comment further on the draft legislation but I have run out of “blog” time today.

Conclusion

The US government could immediately announce that it was prepared to provide a living (minimum) wage to anyone who wanted to work on public projects. The offer would be unconditional and permanent. The US government at present has all the capacity it needs to introduce such a policy.

Please read the blogs that result from this search string – Job Guarantee – for more information.

That proposal should have been a centrepiece of this proposed bill. I am disappointed that it is not.

The problem is political not financial. The same politics will likely undermine Kucinich’s bill although his “sound money” gymnastics are clearly appealing to the T-party set who are on the rise. It is sad that he has included that nonsense in an otherwise sound piece of proposed legislation.

That is enough for today!