Employment guarantees are better than income guarantees

A debate in development economics concerns the role of cash transfers to alleviate poverty. This was reprised again in the New York Times article (January 3, 2011) – Beat Back Poverty, Pay the Poor – which I hopefully began reading with employment creation schemes in mind. I was wrong. The article was about the growing number of anti-poverty programs in the developing world, particularly in the left-leaning Latin American nations, based on conditional cash transfers. There is no doubt that these programs have been very successful within their narrow ambit. They also are used by some progressives to argue for an extension of them into what is known as a Basic Income Guarantee (BIG). For reasons that are outlined in this blog I prefer employment guarantees as the primary way to attack poverty. I think the progressives who advocate BIGs are giving too much ground to the conservatives.

The NYT article describes an anti-poverty program in Brazil. It notes that “Parts of Brazil look like southern California. Parts of it look like Haiti. Many countries display great wealth side by side with great poverty. But until recently, Brazil was the most unequal country in the world.” But on a positive front it notes that “Brazil’s level of economic inequality is dropping at a faster rate than that of almost any other country”.

Interestingly, the writer notes that with on current trends the income distribution in Brazil will be less unequal than the (growing) inequality in the US. I will write a separate blog about inequality another day. In this blog – The origins of the economic crisis – I note that one of the underlying causes of the current crisis was the growing inequality in incomes in the advanced nations created, in part, by legislative support for real wages growth to lag behind productivity growth.

The redistribution of national income to capital (away from labour) created two separate dynamics: (a) it provided the real income for the growing financial sector to speculate with; and (b) it created a need for credit by the household sector to maintain strong consumption growth as the real wage lagged. It meant that with tighter fiscal policy positions being driven by neo-liberal fervour, economic growth was continued (temporarily as we saw) via the growing indebtedness of the non-government sector.

So the growing income inequality in the advanced world is an interesting topic in its own right and an examining of the causal factors helps us to understand: (a) some of the more insidious facets of the increasing dominance of neo liberalism, and; (b) the underlying dimensions of the current crisis.

You might also like to consider the series of articles in the Slate Magazine which analyse income inequality in the United States. They are very interesting.

Back to Brazil. The NYT articles brings attention to “a single social program that is now transforming how countries all over the world help their poor”.

The specific Brazilian program in question is the – Bolsa Familia – which is a conditional cash transfer system based on the family unit and is modelled on a common design that many countries are now employing.

The conditionality is targetted on aspects of the development process that the government feels is essential – such as children’s attendance at school or health clinics, parental education in areas such as nutrition and health care. The payments are usually given to woman as a paternalistic gesture – because woman tend to provide food and lodging for their children instead of gambling or drinking the proceeds (as men have a tendency to do).

The aims of such programs are inter-temporal – to alleviate poverty now (that is, reduce financial hardship immediately) but to also set in place a dynamic that influence the choices the poor make with respect to the future of their children (in particular, with respect to education and human capital augmentation).

So the program provides resources so that the next generation will be better able (via improved nutrition, health and education) to cope with a labour market that has locked their parents out of income earning opportunities.

I have some sympathy with this approach as I will explain but I also caution against a view that poverty is a “supply-side” or “deficient-skills” issue. There is also a significant demand-side issue which manifests in the form of a need for real wages growth and adequate employment opportunities being available. The approach taken to development by the large international agencies like the World Bank and the IMF is typically to eschew demand-side initiatives and focus on fiscal austerity.

By undermining employment creation, fiscal austerity initiatives also damage the potential for supply-side initiatives. Please read my blogs – Bad luck if you are poor! and There is no positive role for the IMF in its current guise – for more discussion on this point.

In terms of the South American conditional cash programs, the BBC ran a two-part series in August 2009 called Cash in Hand which was very interesting and well-made although I didn’t agree with some of the economic analysis that underpinned the program.

The series, in two parts was made by One Planet Pictures and you can view then from the following links – Part 1 – Part 2.

Further, here is a PBS link to a video – Plan to Beat Poverty With Cash for Choices – about the Mexican version of the program which is called Oportunidades, and has become the model for other nations. Oportunidades impacts on around one-third of the Mexican population and scales the grant to the children’s educational participation.

The World Bank notes that the Brazilian program:

… reaches 12.7 million families (or nearly 50 million people) and is among the most effective social protection programs in the world, having helped raise approximately 20 million people out of poverty between 2003 and 2009 and well as significantly reducing income inequality.

The World Bank reports that “Between 2003 and 2009, poverty … has fallen from 22 percent of the population to 7 percent”. That is certainly an excellent result (even if the poverty lines being used – PPP $US2 per day – are very low).

The program has also been used as a safety net device to “mitigate the impact of the food and oil prices increases, and more recently of the global crisis and economic downturn.”

Many critics of such programs always focus on the possibility of corruption (money not spent properly) etc. The NYT article notes that the programs have not only reduced poverty but are also reducing income inequality. The article also notes that:

For skeptics who believe that social programs never work in poor countries and that most of what’s spent on them gets stolen, conditional cash transfer programs offer a convincing rebuttal. Here are programs that help the people who most need help, and do so with very little waste, corruption or political interference. Even tiny, one-village programs that succeed this well are cause for celebration. To do this on the scale that Mexico and Brazil have achieved is astounding.

The moralists always criticise these type of programs because they consider them paternalistic interventions to free choice. In most microeconomics textbooks you will find some discussion about the “optimality” of cash transfers versus in-kind (or conditional) transfers. The mainstream economists usually conclude that unconditional cash transfers are “best” because they allow “free choice”.

The reality is that when confronted with a starving child it is always better to give them “food” than give their father money to drink or gamble away! Children do not have “free choice”. I could write a whole blog about this sort of debate.

Further, the results from these programs are a powerful testament of how active fiscal policy initiatives can be targetted to improve public purpose – which in these nations is prioritised to alleviating extreme poverty.

I note that these nations are very “open” to trade and currency fluctuations but still the fiscal initiatives that are domestically-targetted can be very effective.

While there are positive features of these programs I prefer an alternative approach to poverty alleviation. I did some work for the ILO in South Africa in between 2007-2008 study evaluating the South African Expanded Public Works Program and providing guidance on how to improve the program and create a functional minimum wage framework.

This program employed 1 million people in its first 5 years and has more ambitious targets in the second five year period. Many of the recommendations I made in my report were included in the second five-year plan.

I cover some of the issues drawn from that international experience in these blogs – The real World Cup – Employment guarantees in vogue – well not really – Employment guarantees in developing countries.

The South African government has typically favoured cash transfers as a major poverty alleviation strategy. The EPWP which is a targetted public works program is an additional job creation strategy that aims to provide some income support to households.

I concluded that the EPWP was a very effective means of reducing poverty and the vast majority of the participants were able to cross the poverty line while they were in receipt of the income. The problem with the scheme was that it was not demand-determined. It was supply-rationed which reflected the fiscal conservatism of the South African government, heavily under the sway of the IMF.

I recommended that the scheme be expanded into a full-blown Job Guarantee and that the minimum wage be set at a level that supports an inclusive social lifestyle for the recipient.

What is a Job Guarantee

The basis of the proposal is that the sovereign government unconditionally offers a public sector job at the minimum wage to anyone willing and able to work, thereby establishing and maintaining a buffer stock of employed workers. This buffer stock expands (declines) when private sector activity declines (expands), much like today’s unemployed buffer stocks, but potentially with considerably more liquidity if properly maintained.

The sovereign government is thus offering to purchase a resource for which there is currently no market price – a zero bid input. In this sense, it expands its spending not by competing with other resource users but by utilising an unemployed resource. We call this spending on a price rule rather than a quantity rule.

Currently, governments tend to spend on quantity rules – so they plan a budget deficit of a certain size and allocate program budgets to match. This is a flawed approach because it relies on them being able to exactly predict the spending gap that the deficit needs to fill. The likelihood of under-spending and leaving labour resources unemployed is high under this approach.

It is far better to have some leeway in the budget where the spending gap is closed with a employment guarantee – which means that the government would always be able to create “loose” full employment (buying labour at zero bid rather than competing in the market for it) and the deficit would be whatever it had to be – that is, exactly the right size relative to GDP.

So the JG fulfils an absorption function to minimise the real costs currently associated with the flux of the private sector. When private sector employment declines, public sector employment will automatically react and increase its payrolls. The nation always remains fully employed, with only the mix between private and public sector employment fluctuating as it responds to the spending decisions of the private sector. Since the JG wage is open to everyone, it will functionally become the national minimum wage.

While it is easy to characterise the JG as purely a public sector job creation strategy, it is important to appreciate that it is actually a macroeconomic policy framework designed to deliver full employment and price stability based on the principle of buffer stocks where job creation and destruction is but one component.

There is no question that advanced countries could fairly quickly introduce this type of scheme. Most have sovereign governments that have no difficulty creating a demand for their currency. Most have elaborate taxation, welfare and other administrative procedures which allow government to engage with their populations. Most have systems of checks and balances which do not prevent corruption but tend to make it harder to become entrenched.

A government that is not sovereign in its currency may not have the fiscal capacity to run a JG system without raising revenue first. So a state government in a federal system could clearly administer and operationalise an employment guarantee but would have to “finance” it with revenue. A national government which issues its own currency does not face these revenue constraints.

The question then is whether this a Job Guarantee could provide a solution to the massive income insecurity arising from chronic unemployment in developing countries which may not have the same degree of fiscal sovereignty or institutional machinery capable of administering such a program.

A Job Guarantee in developing countries

There are particular challenges with a small developing nation introducing a Job Guarantee.

First, the so-called “formal sector” may be relatively small so that most production and employment is located in the informal sector where wages and conditions are likely to be highly variable and unregulated.

Second, the country may only produce a small range of commodities and rely on imports for a large number of other types of goods. In many situations, these imports are luxury goods which do not increase the welfare of the general population. These sort of countries also rely on a very narrow range of exports to generate foreign exchange. In these cases, rising GDP and incomes can quickly push up imports and place the exchange rate under pressure. This problem is exacerbated if the exchange rate is linked (pegged) to another currency (often the former coloniser) or if the currency has been wiped out by so-called “dollarisation”.

Third, the administrative capacity of the national government might be quite limited and domestic infrastructure might be inadequate to allow any significant increase in productive capacity.

Under these circumstances, introducing a Job Guarantee at the minimum wage operating in the formal sector will generate significant flows of labour out of the informal sector. This would, in turn, increase wage incomes substantially and boost demand for consumption generally but also imports of goods and services (so-called “luxury” goods) which were previously too expensive for the workers.

The result would be that the balance of trade would deteriorate and foreign reserves would be depleted quickly. These reserves are necessary if the central bank is to maintain the exchange rate parity (as note above – these countries often have a fixed exchange rate system). The exchange rate would thus begin to depreciate and this pushes up import prices. If left unchecked, a full blow exchange rate crisis occurs and this usually becomes a broader domestic crisis as the government is forced to cut back aggregate demand to check imports.

That is the worst-case scenario that critics of the Job Guarantee present in relation to developing countries.

So what is the answer?

First, as the economy develops, the minimum wage paid would have to be closer to the average paid in the informal sector to reduce the progam impacts on aggregate demand. To ensure an effective policy attack on poverty is in place, the Job Guarantee could then be supplemented with a range of social wage items provided on an “in-kind” basis. The government could offer domestically-produced food (not imported), clothing, housing and other services such as child care, aged care, public health, education and transport to JG workers to supplement their wage income.

Second, the JG workers could be employed on projects that provided many of these domestically-produced goods and services which would minimise the impact on the public budget and the trade balance.

So taken together, these design features and supplementary policies would improve the trade-off between growth in real incomes and the trade balance.

But it remains that we would want the JG workers to have greater command over income and we would also expect some of the capital required to support the program (tools etc) will be imported. This requires some forward planning by the Government. It could directly link imported material and tools required for the program to export earnings (that is, controlling imports). It could also link them to international aid. So regular international aid to poor countries could be used to maintain a Job Guarantee. However, the local government should never used funds “borrowed” from the international agencies for this purpose unless there is clear evidence that the JG will directly stimulate exports (and provide the currency to pay back the loans).

Further, the aim of the JG in these circumstances is to be as labour intensive as possible in the first instance to provide as many employment opportunities as is possible. So the capital required will be minimised while the nation is adjusting to higher levels of employment.

But this doesn’t mean the JG would produce nothing of value. A well targetted program would engage the JG workforce in large public infrastructure projects such as road construction and water management (drainage etc), which would directly increase the nation’s export capacity by reducing the costs of private business and providing an attractive investment environment.

So as long as the program is phased in carefully and the activities planned to enhance the productive capacity of the nation, the Job Guarantee approach can be successful. A phased-in approach also provides time for the government to also build its capacity to run the scheme on a “learning by doing” basis.

Many development economists, who have a concern for poverty argue that providing a basic guaranteed income is better in developing countries than providing a Job Guarantee schemes because the scale of the problem is too large. The argument is that in high unemployment countries where there is already a high wage sector defended by vested interests, the introduction of an employment guarantee based on public works projects would be unsustainable.

This is a common argument made by development economists against employment guarantees as a solution to poverty arising from mass unemployment.

However, notwithstanding the points I have made above, these criticisms are typically based on notions of financial unsustainability underpinned by a government budget constraint. Clearly, the same sort of arguments are used in advanced countries by neo-liberals. But a thorough understanding of how the modern monetary system operates will show you that these orthodox neo-liberal notions of fiscal unsustainability are without foundation.

Apart from the points made above, there is nothing intrinsically different in a developing economy that maintains sovereignty of its own currency that would prevent the introduction of a JG, particularly when such economies lack adequate social and economic infrastructure. There are political, ideological and perhaps administrative issues that need to be confronted but these are common to all development policy suggestions.

Some people might argue that these governments have problems collecting taxes and therefore their currency is not sovereign. Well in many developing countries, there is an alternative currency used by the citizenry to ease transactions. But they still have to meet their tax obligations in the sovereign currency and thus it still is demanded and traded. This is the case even in Zimbabwe!

However, if no-one uses the currency of issue and no taxes are paid then the government isn’t sovereign. But it will not be able to do anything in this situation much less introduce a Job Guarantee. I am hard pressed to think of a country in this situation. I know of many where dual currencies mix inside the country but none where there is no demand for the currency of issue.

The most typical case of currency impotence is dollarisation. There the government has no fiscal indepedence and would be advised to work out ways to reduce and eliminate the dollar currency from its country over time.

Minimum wages and cash transfers

In my work on South Africa, I noted that setting a minimum wage that will provide a buffer against poverty is complicated by the fact that household size and composition varies across the population. This problem bedevils efforts to set poverty lines because there are considerable differences in household consumption due to these composition differences that complicate meaningful comparisons.

Poverty line studies seek to construct a “normalised” household consumption unit based on per capita estimates or in more advanced studies “equivalence units”.

The relevance of household size and composition for minimum wage setting is less than clear cut. The question at issue relates to the extent to which we want the wage distribution to reflect the overall income distribution aspirations of the government.

I considered it would become too unwieldy to build adjustments for family size and age composition into the EPWP minimum wage determination framework. Instead I thought that poverty line measures should be equivalised where possible (and achievable) and the social grants (cash transfer) system used through family assistance grants to supplement the EPWP wage.

So I recommended that the role of the EPWP minimum wage was to ensure that the worker receives enough resources to escape poverty and that the role of the social wage (cash transfer) as supplementing the EPWP wage to ensure the worker’s family escapes poverty. The social wage clearly also has a broader role to play outside of the EPWP policy framework.

I recommended a scaling up of the social wage to ensure that essential public services such as education, health and aged care and the like are provided in adequate supply. This public goods approach to services reduces the need for households to have private income. This is where the debate on conditionality becomes relevant where the cash transfer is delivered to individuals.

In general, I think the cash transfers should be targetted to ensure children are protected. I reject the mainstream economics notion that “the individual knows best”. In a family situation, the application of this assertion is fraught, especially in very poor communities.

In South Africa, it is without doubt that over the last 10 years, the dramatic increase in provision of social grants in South Africa, which have targeted the poor and disadvantaged has been an effective strategy to reduce the burden of poverty.

The data is compelling in this respect especially with respect to child support assistance which is spread across foster care, care dependency and child support grants.

The rationale for the extension of the cash transfers system in poor nations is that a large proportion of the population falls outside the economic mainstream, and given their poor employment probabilities, they are often unlikely to gain from economic growth and new employment opportunities.

For this portion of society, cash grants are an important source of income. Rapid expansion of the social security net between 2000 and 2006 has undoubtedly had a large impact on poverty in the developing world.

But in general, I reject this approach to poverty alleviation – and consider employment guarantees rather than income guarantees to be a more effective solution.

Basic income guarantees as a solution to poverty

Many researchers and policy commentators seize on this type of data as the basis of their advocacy for the introduction of a Basic Income Guarantee (BIG) as the primary policy weapon against poverty. They highlight the fact that there is a lack of employment alternatives available to citizens in poor nations and that the cash grants have demonstrated an ability to reduce poverty in that country. In that vein, the introduction of a BIG would seem to be an easy way to eliminate poverty.

The provision of an unconditional BIG, set at a ‘liveable’ level and payable to all citizens, is advocated by a number of public policy theorists as a means of addressing income security. Most BIG proponents believe that full employment is now unattainable – which I consider to be an unnecessary concession to the mainstream NAIRU mythology. The problem is that BIG are a major progressive policy position. In general, conservatives do not support any form of government guarantee.

I have always argued that BIG is palliative at best. I consider advocacy of BIGs as being a major failing of the progressives to provide a viable alternative to mainstream fiscal austerity and “free market” approaches to economic development. Advocacy of BIG is based, in my view, on a failure both to construct the problem of income insecurity appropriately and to understand the options that a government which issues its own currency has available to maintain full employment.

I argue that there are no economic constraints in poor nations such as South Africa to achieving full employment. Only ideological and political constraints exist. In fact, each policy response (BIG or JG) requires that the same ideological and political barriers, relating to philosophical notions of citizenship and individual rights, be confronted and overcome. But when compared to a full-scale public sector employment program, the BIG is a second-rate option and is inherently inflationary.

The existence and persistence of unemployment and the link to income insecurity is generally recognised by BIG advocates but the former is rarely explained. An exception, is leading BIG advocate Phillipe Van Parijs (a Belgian) who presents both an explanation of unemployment and a related model of BIG financing.

Drawing from orthodox neoclassical economic theory, Van Parijs considers that unemployment arises because wage rigidities impede atomistic competition and prevent the labour market from clearing. Various explanations for the wage rigidities include trade union power, minimum wage legislation, and bargaining processes, which generate efficiency wages (insider-outsider arrangements). So unemployment is caused by the departure from competitive equilibrium rather than any macroeconomic failure (that is, aggregate demand deficiency)

Van Parijs then proposed a rather bizarre, and very neo-liberal solution in terms of a redistribution of the ‘property right’ represented by the alleged existence of ’employment rents’, associated with scarce jobs. He said that we should give each person “a tradable entitlement to an equal share of the jobs that are available at any point in time.

Accordingly, BIG payments can be “financed” by taxing workers who enjoy “employment rents”. He said that:

… these rents are given by the difference between the income (and other advantages) the employed derive from their jobs, and the (lower) income they would need to get if the market were to clear. In a situation of persistent massive unemployment, there is no doubt that the sum total of these rents would greatly swell the amount available for financing the grant.

He claims that in this way, a BIG enables workers to live a decent, if modest, life without paid employment. Van Parijs concludes that the claim that Malibu surfers are living off others is a serious misrepresentation because they live off:

… their share, or less than their share, of rents which would otherwise be monopolized by those who hold a rich society’s productive jobs …

But the implicit full employment concept that the BIG advocates construct is unacceptable, because it is engineered through an artificial withdrawal of the available labour supply, so that some of the unemployed are reclassified as not in the labour force. There are insurmountable problems with this representation of income insecurity and the BIG financing model.

The following points can be made:

  • Within their own logic, efficiency wage bargains reflect freedom of association and maximising decisions for both parties to the contract. Productivity would fall if firms only offered the competitive wage. Recruitment would become more difficult and turnover would rise. The wage outcomes are not dysfunctional and are not imperfections that can be eliminated to restore an otherwise (perfectly) competitive labour market.
  • Clearly, if workers are willing to work at the efficiency-wage, and there are queues for jobs, then there must not be enough demand for the output they produce. Unemployment is demand-deficient in this case and firms would not hire more workers at lower wages.
  • Justice for BIG proponents apparently occurs when there are no employment rents, which means wages equal their (textbook) competitive levels. Assume that the imperfections (that create the rents) could be eliminated then within the logic of the competitive neoclassical model there would be equal endowments, market-clearing real wages and zero involuntary unemployment. There would also be zero employment rents and zero employment envy, but also no tradable commodities to support the basic income. In other words, this form of BIG financing depends on the existence of market imperfections.
  • The BIG literature presumes that the good life enjoyed by the employed worker is at the expense of the unemployed and that scarcity is the problem. But while jobs might be scarce at present, are there no useful activities in which the unemployed could be engaged?

The final point is at the heart of the difference between the BIG and Job Guarantee approaches to income insecurity. The solution to income insecurity has to go beyond palliative care. Unemployment is the most significant source of income insecurity.

A more efficacious, and less apologetic, response to unemployment requires an understanding of why some people do not have access to paid employment and to alter the conduct of macroeconomic policy so that it achieves sustainable full employment at reasonable wages. This requires, in part, the implementation of a JG as noted above and the understanding of Modern Monetary Theory (MMT) as outlined in these blogs – Deficit spending 101 – Part 1 – Deficit spending 101 – Part 2 – Deficit spending 101 – Part 3.

BIG theory and MMT

In addition to constructing the problem of income insecurity incorrectly, the mainstream BIG literature advocates the introduction of a BIG within a ‘budget neutral’ environment. This is presumably to allay the criticism of the neo-liberals who eschew government deficits.

Any sovereign government has a monopoly over the issue of fiat-currency. One of the sensitive issues for BIG proponents is thus its perceived ‘cost’. This issue has been an important part of the debate in South Africa and other developing nations.

An understanding of MMT allows us to appreciate that much of the debate about the viability of the BIG is conducted on the false premise that the government is financially constrained.

Once we recognise that there is no financial constraint on government spending, many of the problems created by BIG theorists can be avoided. First, if the budget impact is kept to a minimum, there would only be a small increase in aggregate demand resulting from a modest BIG scheme which would be unlikely to provide sufficient hours of work to meet labour force preferences.

Second, it is highly unlikely that labour participation rates would fall with the introduction of the BIG, given the rising participation by women in part-time work (desiring higher family incomes) and the strong commitment to work among the unemployed. But there could be an increase in the supply of part-time labour via full-timers reducing work hours and combining BIG with earned income.

Third, employers in the secondary labour market will probably utilise this increase in part-time labour supply to exploit the large implicit BIG subsidy by reducing wages and conditions.

Fourth, some full-time jobs may be replaced with low wage, low productivity part-time jobs leading to falling investment, skill accumulation and ultimately falling average living standards.

Finally to “finance” a more generous BIG but keep the budget impact modest, higher taxes would be necessary which could impact on labour supply if substitution effects dominate. While some BIG advocates typically argue that there will be little impact on the participation rate of the recipients of BIG who are on low pay or are unemployed, others point to the liberating impact on individuals who can make real choices about whether or not to participate in paid work.

Under budget neutrality, the maximum sustainable BIG would be modest. Aggregate demand and employment impacts are likely to be small, and even with some redistribution of working hours; high levels of labour underutilisation are likely to persist. Overall this strategy does not enhance the rights of the most disadvantaged, nor does it provide work for those who desire it.

However, whether the BIG is to be modest or not, profound macroeconomic problems would still accompany its introduction. Persistent unemployment can be avoided by the introduction of the BIG through a net government stimulus (deficit). That is, the unemployed could be persuaded to drop out of the labour force upon receipt of an income guarantee.

But the value of the currency will fall given that nothing is provided in return for the government spending. The resulting inflationary bias would invoke interest rate adjustments (given the current inflation-first approach adopted by central banks) that would constrain the economy from achieving sufficient growth to offer real employment options to all aspiring workers.

Demand for labour would clearly increase more through a net government deficit than under a budget neutral regime. However it is the impact on labour supply that is of critical importance. If the level of BIG is increased, total labour supply is likely to decrease, while the impact of lower tax rates on the labour supply of incumbent workers would depend on the relative magnitudes of their income and substitution effects.

Given the net stimulus to employment and output, there is the logical possibility of excess demand for labour at full employment, resulting from the artificial reduction of the full employment level of employment, which compounds the inflationary pressure. The alternative is that the excess demand for goods would be increasingly met via imports with consequential effects for the exchange rate and the domestic price level, which would accentuate the inflationary pressure.

In the absence of an inbuilt counter-inflation mechanism, rising wages would make the BIG relatively less attractive. This may lead to some “lifestylers” choosing to return to the labour market, while the government may respond by raising taxes and/or reducing government expenditure, which would tend to raise unemployment. In both cases demand pressure would decline, but to the extent that the inflationary process had assumed a cost-push form, wage and price inflation may only decline slowly.

It is thus possible that an unsustainable dynamic could be generated in which there were periodic phases of demand-pull inflation and induced cost-push inflation at low rates of unemployment, followed by contractionary policy and high rates of unemployment. These economic outcomes are consistent with the indiscriminate Keynesian policy of the past.

The dynamic efficiency of such a pattern is highly questionable given that the hysteretic consequences of unemployment keep being manifested. Even if this Keynesian expansion could achieve full employment, considerable economic inflexibility is created. The ebb and flow of the private sector cannot be readily accommodated, and the likelihood of inflation is thus increased.

In addition, the inflationary process at full employment could threaten to change the distribution of real income, weakening the inducement to invest and making the achievement of sustained full employment even more difficult.

Over time there would be political pressure to raise the BIG in line with changing community expectations that reflect higher wage levels. Policy makers would need to correctly anticipate the impact on labour supply.

Thus, the introduction of a BIG policy is likely to be highly problematic with respect its capacity to deliver both sustained full employment and price stability.

In contradistinction, the JG approach is a far superior way to sustain full employment with price stability in the face of private spending fluctuations. The JG is in effect a buffer stock that operates under a fixed price/floating quantity rule.

Given the JG hires at a fixed price in exchange for hours of work and does not compete with private sector wages, employment redistributions between the private sector and the buffer stock can always be achieved to stabilise any wage inflation in the non-JG sector. The payment of market wages to JG workers undermines this counter-inflation mechanism, so that the full employment policy is reduced to an indiscriminate Keynesian expansion. The JG pool thus ebbs and flows according to private sector demand levels.

Finally, we need to consider the effect of a BIG on social attitudes to work and non-work. While BIG advocates argue that the universality of the payment will make it more acceptable to the community, this claim ignores the distinction between BIG recipients who choose to work and those that choose more leisure and no paid work.

There is a presumption in the BIG literature that the good (employed) life that the worker has is at the expense of the unemployed and that the scarcity of jobs is the problem. We cannot say that the provision of an income without work is equivalent to the provision of an income with a job, when there is evidence of significant social needs in local communities, which remain unmet due to inadequate levels of spending to fund the jobs. Scarcity is the chosen policy position of government, rather than being a natural occurrence.

Payment of a BIG to all citizens would signify a further withdrawal by the State from its responsibility to manage economic affairs and care for its citizens. Young people must be encouraged to develop skills and engage in paid work, rather than be the passive recipients of social security benefit.

The failure to engage in paid work cannot be narrowly construed as an inability to generate disposable income which can be addressed through a benefit, but entails a much broader form of exclusion from economic, social and cultural life, which has highly detrimental consequences. There are substantial social benefits that arise from the provision of stable work with decent wages, health and retirement benefits.

BIG advocates fail to explain how its availability will promote meaningful engagement on the part of the disadvantaged, who have limited income earning opportunities. The universal availability of the BIG, does not overcome the stigma associated with voluntary unemployment of the able-bodied, who do not have caring or other responsibilities.

The achievement of full employment would rule out the need for a BI, if those citizens who are unable to work, due to illness; disability or caring responsibilities were eligible for social security benefits. This is precisely the JG solution.

Work remains central to identity and independence, and persistent unemployment remains the central cause of income insecurity. While the introduction of an BIG has superficial appeal – by allowing individuals to subsist without work – the model fails to come to grips with the failure of macroeconomic policy to provide paid employment opportunities and secure incomes for all.

Initially, the question is how much do you interfere with the market allocation system. Neo-liberals emphasise the sanctity of the market allocation system and argue that it is better to achieve non-economic objectives such as equity via non-market transfers.

I have always considered that equity (and by implication poverty) is also a substantial economic problem – a failure to maximise the potential of the most value resource available to any country – its labour.

In that sense, most of the debate surrounding the relative merits of in-kind versus income transfers; and the relative merits of using the wage system to achieve redistributive goals fail because they are based on flawed textbook market models that ignore market failure and second-best arguments.

I oppose the use of a BIG as the primary means of poverty reduction for the following reasons:

  • It creates a dependency on passive welfare payments.
  • It creates a stigmatised cohort.
  • It does not provide any inflation buffer and is inconsistent with the macroeconomic principles spelt out by MMT.
  • It does not provide any capacity building. A BIG treats people who are unable to find adequate market-based work as “consumption” entities and attempts to meet their consumption needs. However, the intrinsic social and capacity building role of participating in paid work is ignored and hence undervalued. It is sometimes said that beyond all the benefits in terms of self-esteem, social inclusion, confidence-building, skill augmentation and the like, a priceless benefit of creating full employment is that the “children see at least one parent going to work each morning”. In other words, it creates an intergenerational stimulus that the BIG approach can never create.

    • Unlike the BIG model, the Job Guarantee model meets these conditions within the constraints of a monetary capitalist system.

    It is a far better vehicle to rebuild a sense of community and the purposeful nature of work. It is the only real alternative if intergenerational disadvantage is to be avoided. It also provides the framework whereby the concept of work itself can be broadened to include activities that many would currently dismiss as being leisure, which is consistent with the aspirations of some BIG advocates.

    It also allows for capacity building by integrating training and skills development into the paid work environment.

    So I do not favour cash grants being extended to some form of BIG as the primary means through which the fight against poverty is conducted. Instead, I argue that, large-scale employment programs be introduced and cash transfer systems be used to ensure that families of workers are also able to live beyond poverty.

    I also consider it essential, that consistent with poverty alleviation objectives, that the Job Guarantee wage (which would become the minimum wage) should be paid upon the person signing in for work irrespective of whether the government can offer meaningful work at precisely that time.

    While this might have the semblance of a BIG, the dynamics of this system would be very different. The primary source of income would still be work (or a willingness to work) and it would then be the responsibility of the government administration not to waste this great productive capacity through inefficiency.

    It would also recognise that frictions exist across time and space which would require the on-going Job Guarantee wage to be paid while workers shift housing or projects change.

    No person who is capable of working in any nation should be left without an adequate income if they are willing and able to work. For those unable to work because of age, disability, illness or child-rearing, the primary source of poverty alleviation should be a upgraded cash grant system.

    Aside – nasty monetarists or something

    Someone brought to my attention how a North American blog (run by academic economists) had attacked me personally claiming that I have “less than zero understanding of “mainstream” macro”. The personal attacks were very vehement which is one thing.

    They were attacking this blog – Money neutrality – another ideological contrivance by the conservatives.

    First, the blogger writes under a nom de plume (that is, doesn’t tell you who s(he) is). I always think that is a fairly weak position and I always take personal responsibility for my writing and views. I don’t hide behind anonymity.

    Second, if you check a range of standard (mainstream) macroeconomics text books (including the leading texts) that are used in undergraduate teaching then my rendition of the “mainstream” labour supply theory is very accurate and I was, in fact, very generous in my depiction. If I am wrong and my depiction is a “less than zero” representation then what are the major textbooks doing?

    Third, I note the anonymous writer admitted to not even reading the above blog in its entirety. It is typical of the mainstream – to have pre-conceived (religious) positions and attack the alternatives without fully reading or learning about what the alternatives are.

    The same WWW site exhibits an appalling understanding of the way monetary economies actually work and have promoted such erroneous concepts as the money multiplier to describe the way the banking operates.

    Apparently, my claimed deficiencies relate to the way the topic is dealt with at the more advanced level. Yes, I could always present things at that level given my training but a blog is a blog and I have tens of thousands of readers each day most of who I suspect are not professionally trained macroeconomists (to their credit). In other words, I try to keep my blog as inclusive as possible.

    I won’t link to the site because I suspect they get very little traffic and probably think that my inflaming me into a war of words I will send my daily audience there and give them a boost. My assessment is that their material is not worth reading. It is just the same old nonsense that academic departments deliver up to their brainwashed students every day of the year.

    Sorry boys, I won’t bite.

    Musical memory

    I listened to this today – Baker Street – out of respect to the singer who has died overnight – RIP.

    It was the era (record released in 1978) of big (read heavy) productions with soaring alto sax solos (at least in this song), synth drums and synths simulating orchestras – not necessarily my taste – but a defining era in modern music. The best part is the beautiful closing guitar solo on a Fender stratocaster (set on the neck pick-up for those who know) – very tasteful and very appropriate.

    As an aside, I read in Rolling Stone once that Slash claimed that the Baker Street guitar solo was his inspiration for his own solo on Sweet Child o’ Mine. I thought at the time that somewhere along the way Slash got very lost in translating this into that! A strat is not an LP, for a start!

    That is enough for today!

    Related Posts

    This Post Has 71 Comments

    1. Very sad that Rafferty has gone. Another one that has died too young. Baker Street will be top of my Spotify playlist today.

      Is it possible to combine the Income Guarantee approach with the Job Guarantee, by simply proving an income guarantee to everybody who does ‘useful work’ in return for a standard weeks labour (unless exempt by reason of age or infirmity). What I call a ‘Universal Pension’.

      As far as I can see that just redefines what a ‘zero’ wage is and it means that the voluntary sector and even the private sector can provide the guarantee jobs as well as the public sector and there can be no question of the public sector crowding anybody out then. They would just provide top ups in areas where there weren’t enough ‘zero wage’ jobs.

    2. As an aside, I read in Rolling Stone once that Slash claimed that the Baker Street guitar solo was his inspiration for his own solo on Sweet Child o’ Mine. I thought at the time that somewhere along the way Slash got very lost in translating this into that! A strat is not an LP, for a start!

      Are you sure it was Sweet Child o’ Mine not Estranged?

    3. Bill, There is an inconsistency above, as follows.

      Assuming unemployment is above the level at which inflation is a serious problem, the best way of raising employment is a straight increase in AD, rather than JG (not that JG would do any HARM in these circumstances).

      Thus the real niche for JG is in dealing with unemployment when the latter is relatively low. But in relation to financing JG, you then say “A national government which issues its own currency does not face these revenue constraints.” Well hang on – printing and spending extra money equals a rise in AD. Assuming we are dealing with “niche JG”, the result would be excess inflation.

    4. The intro to Baker Street immediately reminded me of ‘The Wait‘ by Mahavishnu from their 1987 album Adventures in Radioland. And John McLaughlin acknowledges the influence in this eulogy in the Sun (sorry). The album version is closer to Rafferty’s original but I can’t find a link.

    5. “North American blog (run by academic economists)”

      Which blog are you talking about Bill? Because people might think you are talking about me. But I’m not anonymous. Nick Rowe is my real name. And though I disagree with you on a lot of things (agree on others), I don’t remember making any personal attacks. And certainly none anonymously. I put my name to what I write.

      I think you might have two blogs conflated. (Or maybe I’m just paranoid!)

    6. JG will not solve very much if there isn’t a honest economic politics to balance demand-side towards full employment. With OECD deep entrenched in NAIRU not much will probably help. The risk in such a environment is that a JG will be used to squeeze public sector wages and set JG wages on an absolute minimum to use the unemployed created by the NAIRU economics as “free” public labor.

      Neither is Micro loans or addressing “deficient-skills” issues any miracle cure for poverty and is by no means any substitute for a decent macroeconomic regime in the interest of full employment and development for all the citizens of a country.

      The middle class “progressive” liberals just love those schemes, and then they sort of not have to puzzle their heads with NAIRU and class issues.

      “When I give food to the poor, they call me a saint. When I ask why the poor have no food, they call me a Communist”
      ~ Dom Helder Camarare

    7. No fair! I understand you not wanting to propagate neo-classical nonsense but Bill, at least tell those of us who want to know which blog it is what the url is, perhaps by individual email if you prefer.
      It certainly isn’t Nick Rowe as he had a long back and forth with several MMTers a little over a year ago. Ultimately it wasn’t very satisfying and drove poor JKH up the wall but it was signed and Nick R did engage (in a way).

    8. I am the one who informed Bill. The very unprofessional and unrealistic attack came from someone with the nick name Adam P. He usually pontificates on General Equilibrium Theory with all the dream world assumptions it is based on!

    10. Many years ago I adviced a team from the US that designed a national “Head Start” program for Brazil that had direct expenditures rather than cash transfers for the same services of early childhood education, health, nutrition, food stamps, family counseling etc. They never implemented the program!

    11. The post in question is easy to find on Adam’s blog, Canucks Anonymous. Not linking to it seems a bit weird, but I guess it makes little difference.

      There is related discussion on (at least) two post’s over at Nick Rowe’s blog:

      worthwhile.typepad.com/worthwhile_canadian_initi/2010/12/income-effects.html

      which links to Adam P’s post, and also further discussion of MMT in the comments to,

      worthwhile.typepad.com/worthwhile_canadian_initi/2010/12/expectational-wicksell.html

      Panyotis,

      I found it somewhat ironic that you described Adam P’s post as “unprofessional”, since the blogger who Adam reminds me of most, in (acerbic) style if not (rather different) content, is… er, Bill Mitchell.

    12. Ah Panayotis!
      Hi. I too was a student of Tom Asimakopulos although at the undergraduate level. I was his Honours Micro Teaching Assistant at McGill for two years in the mid-1980s. I greatly appreciated his rigorous insistence on the role of the assumptions in neoclassical economics and how deviations falsified analysis. Sadly most of mainstream economics is gibberish because the highly restrictive nature of its assumptions are ignored. Bill notes this from time to time. I did an undergraduate degree in chemistry before doing a Masters in economics. Economics drove me up a wall because it portrayed itself as scientific despite the obviously nonsensical assumptions of the mainstream. Of course mainstream economic conclusions are mostly driven by political considerations with the ”economics” determined post hoc to satisfy political convenience. (Thank you Bill for rerunning Sumners stuff and showing it’s nonsense. No wonder the mainstream doesn’t like you) Pretty sad. I remember sharing my despair with Jack Weldon, who you must have known, when I noted I learned more economics walking around Montreal observing events and conditions in the city than in most economics courses. He agreed and noted that in the 1980s economics was at a historic low point much as it had been a century or so before and that Keynes had brought it out of that bleak period. Pretty discouraging since by that measure we had 50 years to go before economics became relevant again. Given how poorly the mainstream has performed in recent years it looks like he was bang on. Just another 25 years to go! Thank goodness for Bill’s and friends’ blogs.

    13. Stephan:

      But Adam P.’s not a monetarist; I am (sort of).

      And “The same WWW site exhibits an appalling understanding of the way monetary economies actually work and have promoted such erroneous concepts as the money multiplier to describe the way the banking operates.” definitely sounds like me, and certainly not Adam P.. I must be the last person alive who doesn’t accept Bill’s (mainstream) view on the money multiplier.

      Bill must mean me!

      See what trouble you’ve started, Panayotis! Now Bill and me are mad at each other.

      By the way, has anyone seen Bill recently? Because there’s a guy with an Australian accent hammering on my office door here in Cana……

    14. Dear Nick Rowe (at 2011/01/06 at 0:32)

      I was not referring to your blog. I have linked to it in the past when the debates have been relevant. As far as I can gauge you debate in the same spirit as I – and own up to your contributions.

      I don’t agree with your monetarist position but I respect your honesty and your academic approach.

      Please see a doctor to treat your paranoia (-:

      I am sorry if you were impugned by my reference.

      best wishes
      bill

    15. Dear Keith Newman (at 2011/01/06 at 3:44)

      Fairness doesn’t come into it. My blog is not an advertising channel.

      best wishes
      bill

    16. Dear Keith,

      Tom and Jack, past presidents of the Canadian economic association were great teachers that left us prematurely. They had a great understanding of the real economy and I miss their great insights. In memoriam!

    17. Dear Nick Rowe (at 2011/01/06 at 7:21)

      You said:

      Now Bill and me are mad at each other.

      At least one side of that pair-wise attribution is false.

      best wishes
      bill

    18. @Nick Rowes
      Cool down. I’ve met Bill recently in The Netherlands. He’s fine. Nothing to worry about. We wondered whether the menu option “eat some monetarists” in the restaurant would be worthwhile a trial? But we are gourmets. So we decided otherwise.

    19. Nick Rowe,

      i did not start anything. I felt that the attack on bill was unprofessional because it was personal and I thought that Bill should know abou it. You have every right to disagree with what Bill is saying but is important to examine the assumptions his analysis was based. I respected your post although I disagree with the assumptions you used. I pointed out the importance of assumptions on the post I left on your blog.

    21. “We wondered whether the menu option “eat some monetarists” in the restaurant would be worthwhile a trial? But we are gourmets. So we decided otherwise.”

      Monetarists aren’t very filling – too much hot air.

    22. To defend Conditional Cash Transfers (CCTs) against Bill’s criticisms (not that I don’t think that a Job Guarantee is also a good idea): Various evaluations of CCTs have shown that they lower unemployment among recipients. The most plausible (to me) explanation is that having that income reduces household stress and enables people to have the time and resources to apply for and get jobs (eg having a haircut and a mobile phone and not being distraught with worry over your kids starving). Furthermore CCTs are directly transferring money to those with a high marginal propensity to spend and a desperate need for more resources, so they boost demand very effectively (which also lowers unemployment) and have much lower administrative overheads than most other unemployment relief programs (including a JG I suspect). A “good neighbour” effect has also been shown, where households near those who receive CCTs for e.g. sending their kids to school are more likely to send their own kids to school even if they aren’t getting the CCT. cf the International Poverty Centre (subset of UNDP)’s study “Evaluating the Impact of Brazil’s Bolsa Família: Cash Transfer Programmes in Comparative Perspective”.

      “The reality is that when confronted with a starving child it is always better to give them “food” than give their father money to drink or gamble away!” – not necessarily (particularly not if the money goes to the mother). Food aid programs have a poor track record. They have frequently been used as a dump for excess (subsidised) crops from the west, tend to be foodstuffs which aren’t traditionally part of the local diet, are easily hijacked, and can drive local farmers out of business. This kind of thinking is what has given us Income Management for NT Aborigines.

    23. Bill,

      “The government could offer domestically-produced food (not imported), clothing…”

      Obvious and desirable side effects of the above strategy are energy efficiency, reduced carbon output and improved aggregate demand.

      As a South African who immigrated to the UK and then Canada (just after the start of the crisis), I find your blogs very interesting reading.

      I’m not an economist/finance professional but have become increasingly interested in the economic situations in my 3 home countries and your blog really helps open my mind to the problems and options that each country faces. You may even help me make the best decision about where to move to next (or to be satisfied with where I am now).

      Just wanted to say thanks for your generosity in sharing.

      BTW I recently visited Australia for the first time and am now looking at adding it to my list of home countries 🙂 Beautiful place indeed!

    24. I went and visited the blog that Bill references and I agree with his conclusions. The blog in question is full of incomprehensible jargon to the layman. Whilst I find some of Bill’s recent blog posts contain some jargon, in the grand scheme of things his posts are laid out so the everyman can understand it. As our knowledge increases so will our ability to understand the limited jargon that Bill employs.

      Keep up the good work Professor Mitchell.

      Thank you for your time and patience with all of us.

    25. Bill said:

      “We call this spending on a price rule rather than a quantity rule.

      Currently, governments tend to spend on quantity rules – so they plan a budget deficit of a certain size and allocate program budgets to match. This is a flawed approach because it relies on them being able to exactly predict the spending gap that the deficit needs to fill. The likelihood of under-spending and leaving labour resources unemployed is high under this approach.”

      I am very interested to hear more about the idea of spending according to a price target rather than a quantity target. I have seen you mention this idea before, do you have a detailed post about how this would work in practice?

      Specifically, suppose the Australian govt implements a JG, and we attain genuine full employment. At this point now, how does the govt determine what an appropriate level of spending is?

    26. I’d like Bill to address this point from the link:

      worthwhile.typepad.com/worthwhile_canadian_initi/2010/12/expectational-wicksell.html

      ***

      “The natural rate of interest is ZERO”

      bilbo.economicoutlook.net/blog/?p=4656

      “Posted by: Gizzard | December 18, 2010 at 09:24 AM”

      ***

      Gizzard. Thanks for the link. But he’s wrong.

      Posted by: Nick Rowe | December 18, 2010 at 09:56 AM

      ***

      Really badly wrong.

      In a growing economy, or one with a positive rate of time preference, the natural rate will be positive in real terms. Bilbo wants the central bank to set a zero nominal rate. Now economists like Milton Friedman understand that a zero nominal rate might be possible, if we had deflation. Bilbo doesn’t. And Bilbo doesn’t want deflation either, presumably. Bilbo wants a zero nominal rate, and so a zero or negative real rate, and fiscal policy to prevent inflation getting out of hand. That can be done, for a time, but it would normally mean running very large permanent fiscal surpluses. So the government saves by a large enough amount to offset the gap between private investment and savings. And if the government runs permanent large surpluses, eventually the debt goes to zero, then negative, and eventually the government owns the whole capital stock of the country. So we end up in communism. Now, Bilbo is certainly not a communist, but that’s where his preferred policy would lead.

      Sorry.

      Posted by: Nick Rowe | December 18, 2010 at 10:15 AM”

      I believe Nick is assuming large permanent gov’t surpluses lead to an accumulation of medium of exchange leading to financial asset purchases by the gov’t. If so, what possibility has he left out?

    27. The overnight rate and the rate on tsy’s are used by the financial sector as benchmarks in setting spreads. With a zero overnight rate and no tsy’s, for example, would banks then lend at zero, or even at extremely low rates that would be inflationary? Of course not. Banks are in the business of making money, and they lend against their capital commensurate with risk. They would set the rates they charge on loans based on the principles of credit extension independently of government price setting (the cb’s overnight rate) and without using government benchmarks (yield curve on tsy’s).

      Government would adjust fiscal policy relative to employment and price stability using the sectoral balance approach. Government has fiscal tools to avoid not only inflation (taxes withdraw NFA) but also deflation (deficits inject NFA).

      Where’s the problem here? I don’t see what Nick is talking about.

    28. Fed Up: I followed that blog at Worthwhile. Interesting to see two schools of thought talking past each other :-). Scott Fullwiler did engage in the discussion though. Did you read his comments? He also linked to two papers to explain his point of view. Here are excerpts from one:

      If inflation is going on, he will see rising prices and rising profits, and will be stimulated to borrow
      capital unless interest rate rises; moreover, this willingness to borrow will itself raise interest rate.
      (Fisher 1907)

      The occurrence of a new-found belief firmly held, that a certain rate of inflation will occur, cannot affect
      the rate of interest. But the growth of uncertainty about what rate of inflation, if any, is in prospect, can
      send up the rate of interest. (Harrod 1971)

      …In conclusion, the idea that interest-rate variations on monetary assets are the result of expected
      future inflation seems doubtful. Another explanation is required and Keynes provided one via the
      notions of liquidity preference and marginal efficiency of capital (the money rate of return on nonmonetary
      assets). In this case, the uncertainty about the future liquidity of financial positions created by
      inflation may lead to an increase in interest rate because of the higher liquidity premium attached to
      money in front of the unknown future. The only direct effect of inflation is that it increases the
      marginal efficiency of capital. Contrary to Fisher, it is the rate on non-monetary assets that adjusts for
      inflation….

      See Winterspeak’s recent blog posts on inflation expectations for more discussions them (not) leading to inflation.

      Professor Rowe says:

      Bilbo wants a zero nominal rate, and so a zero or negative real rate, and fiscal policy to prevent inflation getting out of hand. That can be done, for a time, but it would normally mean running very large permanent fiscal surpluses.

      If I understand correctly, Mr. Rowe, in accordance with the Fisher quote above, expects that a 0 overnight rate (and no bonds) will invariably induce inflation, which, in absence of a subsequent adjustment in nominal interest rates, can only be countered by fiscal tightening up until the point where the loanable funds market dries up completely, leading invariably to communism. This last argument seems particularly suspect to me, because, with negative net government spending, government could not require the real assets needed to make a new North Korea. It seems he confuses real with monetary assets.

      Anyway, according to MMT, an interest rate of 0 with 0 or negative net government spending would lead to deflation, not inflation and with the ‘loans create deposits’ logic, the loanable funds theory doesn’t apply. What Mr. Rowe is describing in my opinion, is the effect of a one-time adjustment from one system (positive nominal interest) to the next (0 nominal interest), not some uncontrollable spiral of self enhancing effects that must be stopped with monetary policy. This is a common line of reasoning by MMT skeptics, I find. In any case, the two schools predict opposite outcomes for the same policy proposal. Funny, that.

      The point I’m much less certain about than the correctness of MMT analysis regarding the importance (impotence) of inflation expectations, is the question whether the ‘no bonds’ proposal is a good idea. I believe Mr. Fullwiler and Bill are at odds over this question and I personally wonder whether, lacking incentive (subsidy) through interest rates, the relative unattractiveness of moving from illiquid to liquid assets wouldn’t cause greater uncertainty and thus volatility and so have the opposite effect its proponents anticipate. I also wonder whether fiscal policy alone would be a sufficient tool to target those uncertainties. I think it is based on a (Marxian?) distinction between capital and labour, and is aimed at forcing risk and uncertainty on the prior group for the supposed benefit of the latter. But this seems too simple to me (or is it me who is simple?). Even if the two are separable entities, they are nevertheless interdependent. Then again, I may not have grasped the concepts completely yet and so I’d be very interested to see the two of them discuss their views.

    29. Looks like Nick does not understand banking but it is so typical of monetarists.

      Banks need to fund their newly created credit due to interbank settlements. The funding requirement puts market pressure on *private* interest rates while bank investors, obviously, try to make positive real gain. In this sense unlimited liquidity provision by the central bank, as advocated by some MMTers, is dangerous without government absorbing “savings” from the non-financial economy. But then government will have to pay a positive risk-free interest rate.

    30. Good to see some discussion between the monetarists and MMTers, even if it is starting out as mini flame wars in comment sections. There needs to me more pressure put on the mainstream to fully explain their thinking since most often they usually finish their analysis and conclude that a certain level of undefinable “inflation expectations” will rule currency acceptance issues and that “business uncertainties” will rule labor market decisions.

      For a school of thought that loves math as much as they do, I’m waiting for them to quantify and measure “expectations” and “uncertainty”. How do we know if a titan of industry is truly “uncertain” as opposed to just ideologically opposed to paying higher taxes on any of his activities, or just hates paying employees a fair wage? Maybe with the advent of fMRI technology we’ll be able to find the uncertainty region of the brain and than we can hook them up to a machine and see if they are truly uncertain or just lying bastards.

    31. ” In this sense unlimited liquidity provision by the central bank, as advocated by some MMTers, is dangerous ”

      How is it dangerous. It sets the maximum price for money. The central bank price for lending money is always at a penalty rate. I’m sure somebody mentioned 25 basis points above the base rate would be sufficient to discourage its use

      However normally the savings from everybody else would push the rate below that towards zero. Only in times of stress when people cash in their deposits for the safety of a mattress would the liquidity provision get used.

    32. Anyone who doesn’t think mainstream economists actually believe their models (and I’ve heard several commenters say that, here and elsewhere) only needs to look at the back and forth going on here. The perspective on the other blogs is entirely from within their preferred models. All of their comments/critiques flow from there. There’s virtually no other reality to them worth considering.

    33. “I believe Nick is assuming large permanent gov’t surpluses lead to an accumulation of medium of exchange leading to financial asset purchases by the gov’t. If so, what possibility has he left out?”

      Looks like I’m going to have to answer my own question.

      The way I understand it from the accounting people is that the gov’t would NOT accumulate medium of exchange. It would basically destroy medium of exchange by having demand deposits and reserve accounts marked down.

      Is that correct?

    34. Here is one other question.

      What is the difference between net financial assets (a MMT term) and medium of exchange?

    35. Nick overlooks the complexity and impact of private sector interest rate risk premiums in his analysis. Scott has already made the point to Nick that “real rate” analysis is too simplistic and heavy handed as it is usually done.

      The idea that the state sets the nominal rate at zero applies only to the rate on state liabilities. Credit risk premiums are free to adjust. That means any “real rate” that is relevant to the private sector is free to adjust according to risk premium economics.

      On that basis, Nick is making an interesting but somewhat arbitrary judgement about the relationship between the risk free rate, private sector risky rates, aggregate demand, and the fiscal trend that would be necessary to achieve policy objectives regarding inflation and employment, etc. His forecast that spiralling surpluses would result is quite interesting, but highly conjectural, given his apparent lack of assumptions regarding the behaviour of risk premiums that are critical to the overall result.

      Spiralling surpluses means the state uses taxes to accumulate private sector assets. I’m not sure Nick has considered that this extreme version of fiscal tightening would drain the existing banking system of its deposits as well. Money supply would contract to the point of extinction. Somewhat of an overkill in terms of a reasonable degree of fiscal tightening, just because the overnight risk free rate is zero.

      There’s no reason to believe that private sector financial institutions would not price their own assets and liabilities and equity according to risk premiums that make it economic to do so. The entire subject of “real rates”, to the degree it is relevant at all, must be considered in this context. The only way that would not occur is if the state shut down competitive private sector financial intermediation altogether, and while reform is the intention, that particular end of days result is not. What would remain as the new result is the pricing of state liabilities at zero interest rates, which IS the intention in the context of the point Nick is addressing.

    36. Right, JKH. Also, there’s no reason why policy couldn’t adjust risk-premia you’ve mentioned if they wanted. May not be the most MMT-related policy, but nonetheless from a Minskian perspective it would be far better to go directly at, say, mortgage rate spreads over Tsy’s than to try and manipulate the overnight rate in hopes that you stabilize the real economy.

    37. Neil, “dangerous” was a poorly chosen word. I should have rather said questionable. There can be many reasons but the primary one for me is the right of people to save. And as long as CB sets overnight rates at 0, provides unlimited liquidity and economy is running a positive inflation rate, all these taken together punish savings of non-financial sector. It will be then a political decision to keep and scrap such system and that is why I find such policy prescriptions questionable. Banks have to be disciplined on the liability side or there should be alternative mechanisms to allow people to save. Like “Treasury direct” which many countries already have. But then it implies a yield curve of *positive* risk-free rates. I am, however, very much in favour of such solutions since, as a by-product, they allow government to observe savings desires of private sector in virtually real-time and therefore choose to act accordingly. This looks to me like a much more proactive strategy than, for instance, JG which just reflects via rising private unemployment the lack of private demand. It does not mean that JG is bad (no!). It has other benefits than just government spending, but its spending itself is a somewhat delayed reaction to slowing demand due to private savings. And this issue can be addressed and at least discussed.

      The spread between discount rate and base rate is moving the discussion from quantity to price. It might be a valid discussion but zero base rate somehow does imply unlimited liquidity, i.e. existence of substantial excess reserves. Either CB has to drain these reserves and then interbank market and base rate will serve their liquidity distribution function, or discount rate and its spread over the base rate become largely irrelevant.

    38. Sergei,

      Saving is its own reward. It gives you a pot you can draw on. There is no tablet of stones that say that asset shouldn’t depreciate like your car does.

      Why should savers be rewarded? That money comes off the back of other people’s efforts who then don’t get full recompense for their production.

      Only investment in actual productive assets should be rewarded.

    39. Neil Wilson: “Saving is its own reward. It gives you a pot you can draw on. There is no tablet of stones that say that asset shouldn’t depreciate like your car does. Why should savers be rewarded? That money comes off the back of other people’s efforts who then don’t get full recompense for their production. Only investment in actual productive assets should be rewarded.”

      The problem I see with this is that it ignores the reality that speculation is very lucrative in such a set up and also that speculation consumes massive real resources. Volatile asset prices create a speculation industry that has nothing to do with productive investment. The ideal would be if people could save and neither gain or loose purchasing power over time.

    41. Sergei, why should government provide the means to save in a capitalistic society when the private sector can do it?

      I actually don’t mind governments providing for retail savings, but the $-4-$ deficit offset requirement in a fiat system is government subsidy for the top of the town. The US government already offers retail savings bonds, even electronic, but most people prefer to hold CD’s anyway. Conversely, most tsy issuance goes to the top of the town, not only as rent but also as a subsidy.

    43. Nick overlooks the complexity and impact of private sector interest rate risk premiums in his analysis. […]
      The idea that the state sets the nominal rate at zero applies only to the rate on state liabilities. Credit risk premiums are free to adjust.

      But here, I would say that MMT overlooks the complexity of the various premia applied, as well as the arbitrage constraints imposed on asset prices.

      You cannot have one set of prices for government debt and a completely different set of prices for private debt. Moreover, the returns delivered will also be constrained by equity returns, which are endogenous and not subject to government control. Whereas MMT seems to argue that the only source of return should be the credit risk, over the long run the only source of return is the opportunity of investing in a growing economy.

      That means that even after adjusting for credit risk, you will get a positive risk-free return by purchasing a bundle of all assets of a given maturity, and this risk-free return *should* be equal to the return demanded of government-debt, and for long maturities, this will average to be the growth rate of the economy.

      Anytime government uses its powers to try to lower the return and subsidize capital investment, then you will get some sort of distortionary effect. Nick R. assumes that the distortionary effect will be rising consumer prices, but it could also be an investment boom and rising asset prices, with falling consumption shares. How this plays out is complex, but in either case, less than the optimum amount of consumption will be produced over the long run anytime you make consumption more expensive vis-a-vis investment.

      My current readings of MMT is that none of this is taken into consideration: e.g. endogenous capital growth, endogenous interest rates, etc. It is just assumed that all of these are exogenous variables that can be set by government decree with no consequences for anything else in the economy. Even talking about the government “controlling” the spread between 10 years and mortgages belies a certain curious belief that investors will pay whatever price the government decides for assets, and that opportunity cost decisions of borrowing capital versus lending capital, renting capital versus owning capital, play no role.

    44. “Anytime government uses its powers to try to lower the return …”

      That’s worth discussing. I hope others chime in as well.

      I actually view the “zero natural rate” as a peg of sorts – not entirely “natural” in that sense. Zero is just another number – but in this case its fixed.

      Fiscal policy must respond to maintain the integrity of the zero peg, consistent with other policy objectives – growth, inflation, etc.

      Is there really any system without a peg, in the abstract sense at least?

    45. The issue is whether it is fixed, or whether it is changed in response to changing economic conditions.

      But yes, prior to the era of modern banking, governments didn’t set interest rates at all.

      There is no reason why you would need to target rates, even in a fiat money context.

      You can let the credit markets set the call money rate and go about your business creating as much money as you want based on some other rule that doesn’t take interest rates into account. Then the interest rates would be whatever they are based on the relationship between the financial sector’s demand for reserves and what government happened to supply.

      I’m not saying that this would be a “good” policy, but there is no conceptual requirement that governments set banks’ cost of reserves at all, and certainly no requirement that the cost of reserves be pegged.

      One can also imagine a policy where governments lend reserves to banks unconstrained and uncollateralized at a zero rate, but impose an asset fee equal to the current 10 year treasury yield on all non-cash assets that banks hold on their balance sheets. If you want, you can make it a simple moving average to reduce volatility.

      Would you characterize such a policy as a “peg”?

    46. RSJ,

      I was wondering whether the rate for storing reserves should be zero and the rate for borrowing reserves from the central bank should just be the current price inflation rate.

    47. RSJ, interesting points. So thinking aloud…

      In the existing reality cash be design “returns” nominal zero or negative inflation rate. It is a subsidy of what? In the existing reality excess reserves return fixed 25bps. It is a subsidy of what? Both are “spot” liabilities of the government but the difference between the two is the subsidy of what?

      Do we already and by definition over-subsidize capital investment which without profitable consumption and/or exports blows up asset prices?

    48. A monopoly supplier with no cost or resource limits ( a Central bank) can always peg a price by adjusting its supply to satisfy any demand at the peg. I wont comment on Nick R. because he is not present in this discussion but only his apologists. His views I respect but are based on questionable assumptions given his blind belief in General Equilibrium Theory. Unlike some of his apologists at least he has a hypothesis!

    49. I am not a developer of MMT as I have my own framework of analysis but my reading of it says that it has no claim that credit risk is the only reason for a yield on holding portfolio assets. A savings flow is a residual of spending flows based on convention/conservation reasons which shift with a regime switch, but its holding as an asset in a portfolio allocation can be subject to a number of risk and pure uncertainty criteria as well as maturity dependent growth requirements which dictate yield and liquidity holding. You can even hold your savings under your mattress if uncertainty overwhelms you and you do not trust the monetary base whose value without any premium can be its own collateral!

    50. In case there is confusion what you hold under your mattress can be currency and any commodity you trust.

    51. RSJ . . . there’s no reason for the govt to issue long-term debt. US Tsy didn’t even do it for a long time. They were abolishing the 30y Tsy back in the late 1990s-early 2000s. And I completely disagree that the long-term risk-free rate will equal nominal growth over the long-term. First, which rate? 10y? 30y? Second, if you choose, say, 10y, look at the post WWII history. 1950-1979 the 10y was 2% less than nominal growth. 1979-2000 is 2% more. (And, from the data, those are very clear break points both statistically and qualitatively–regime change in monetary policy, so the influence of monetary policy is very clear.) Yes, averages to nominal growth, but very misleading to say that since an investor in either period had very different experiences for 20+ years in each case. I do agree that altering “spreads” isn’t as simple or even desirable as I was suggesting–just being quick there. The preferred Minskyan approach is to require that margins of safety be adjusted (which would take some time to explain the details since there are so many possible directions there), not necessarily to try and peg spreads at any particular place.

    52. Spending depends on income and if it is aggregated across the economy it equls the renumeration of resources, including productive capacity or equity premium, net foreign income and net financial asset income. Any private financial asset yields net out and have no impact. The only relevant interest rate for macro economic analysis is the premium return on net financial assets. As I have shown mathematically in a recent working paper the nominal income growth rate at the potential steady state of the economy is equal to the growth rate of net financial assets irrespective of the premium rate on net financial, assets which can be zero.

    53. Scott,

      ” And I completely disagree that the long-term risk-free rate will equal nominal growth over the long-term. First, which rate? 10y? 30y?”

      OK, as to which rate, the yield curve, as you go out to infinity, asymptotically approaches the consol rate, so “long term” rates are the consol rates — I am using Keynes’ terminology here. I think 10 YR is a decent proxy, because that far out, you don’t see a large difference, on average. Or, if you want, take the equity return, which averages to the same value.

      “Second, if you choose, say, 10y, look at the post WWII history. 1950-1979 the 10y was 2% less than nominal growth. 1979-2000 is 2% more.”

      Yes, there are long bull and bear cycles in asset prices.

      That’s true for housing, bonds, stocks, etc.

      I would argue that the reasons for this are that capital arbitrage takes a long time and that asset prices are prone to bubbles.

      But if you look at long run rates for Netherlands, U.K., France, and U.S., you do see that long term rates are the NGDP growth rate.

      Obviously in any specific period, they will be both higher and lower. If you bought stocks in 1965, then you would not have seen a positive return over the next 20 years either, but from that you can’t argue that the long run return is zero. If you had bought them in 1945, and held them for both the bull and bear market, you would have ended up with the NGDP return. Same for bonds.

      Re: statistical break points, yes the government, and monetary policy in particular, has a strong influence, just as market crashes are “break points”. Nevertheless should the government succeed in lowering the rates to say, 1%, then I would argue that NGDP growth would slow to 1% — maybe after 20 years, who knows? I don’t think that the government can force the consol rate to be different from the NGDP growth rate, but it can certainly engineering either inflation or deflation, or it could take steps to encourage or discourage real growth.

      That is why I think it’s preferable to focus on the inflation/growth dynamic, and let the market worry about pricing rates. All the government really *needs* to do is price the reserves it lends banks. And this should be part of an overall policy to neither advantage nor disadvantage the financial sector vis-a-vis the non-financial sector.

      But again, what I am arguing here are economic effects. It’s not a “theorem”, and these arguments don’t follow from any accounting identities. But then again, neither do the counter-arguments — that nominal rates are exogenous, for example.

    54. Spending components have a different variation or volatility and this variation can be cyclically dependent. For example, spending on capital resources or investment varies with the duration of its income flow and this can be shown to be a function of its leverage which also reacts procyclically. This variation also depends negatively on the aggregation factor or the number/size of transaction elements involved. For example, the consumption component is more stable as the number of transactions is large and each transaction is relatively small.

    55. Question for Panayotis – January 9 @3:01:

      I understand the first two sentences of your comment.
      However I don’t get: “The only relevant interest rate for macro economic analysis is the premium return on net financial assets.” Could you please explain that. For instance, which assets are these and who holds them? Thanks.

    56. Sergei,

      I am not arguing about the returns from holding cash. For the non-finacial sector, the returns from holding cash are zero, and MZM returns are very low — lower than FedFunds.

      For the financial sector, there are positive returns, set by government.

      It’s important to make this distinction, in that in the current system, government is supplying the financial sector with excess returns with a positive FedFunds rate, rather than supplying the economy as a whole with excess returns.

      The economy as a whole is still subsidized in some cases and penalized in others, because the effect on asset prices is pro-cyclical. By making it cheaper to borrow to buy the asset, you are increasing demand for the asset on the way up, and decreasing demand for the asset on the way down.

      So across long time periods — these pro-cyclical effects may wash out and government reserve rates are not going to force prices permanently higher or lower through that channel. They can cause huge multi-decade booms, followed by deflationary busts, and we should be worried about that, but they are not going to cause a permanent change in long term yields. The only channel by which low reserve rates force up asset prices is by letting the financial sector borrow at a rate below the current market rate, and then purchase assets itself. I.e. the asset demand coming from the financial sector itself, rather than merely allowing the non-financial sector to borrow to buy assets.

      Back to short duration assets. households are willing to give up some return on shorter duration assets in exchange for the liquidity. But they are only willing to do this up to a point — i.e., the portfolio composition of assets held by the non-financial sector is demand determined, and there is only a limited need for cash equivalents. You can argue that whatever that need is, it constitutes seignorage rents supplied to the financial sector.

      You can also argue, as many here do, that if government only issues short duration assets, then it will somehow “force” households to hold more short duration assets than they want, except I think this is difficult to achieve in practice.

      Generally, the amount of MZM assets held by the non-financial sector is already the cumulative size of federal deficit spending, so issuing only zero maturity liabilities wont necessarily force the non-financial sector to increase their MZM holdings at all. I would argue that it would result in changing the composition of assets backing MZM.

      It would make it harder for the financial sector to offer MZM liabilities and hold safe longer duration assets against those liabilities. That would be a good thing, IMO, but you could achieve the same result through other means — e.g. asset taxes, regulation, etc.

      So I don’t care about reserve rates per se, or even the composition of federal deficit spending. I don’t think either of these hits the non-financial sector directly. They hit the financial sector, and the beneficial or harmful effects are transmitted through the financial sector to households. The problems I have with these proposals is that in the current financial architecture, they would increase financial sector rents, they would increase volatility, and they might lead to either consumer or asset price inflation. But one can imagine a different financial architecture — one involving substantial asset taxes imposed on banks — in which having the government only issue cash and having zero reserve costs wont affect the non-financial sector at all.

    57. Why should government be in the price setting business at all? Let the market set the price of money.

      You object this favors rentiers? Tax away economic rent to incentivize productive investment.

      I don’t see a viable solution without taxing economic rent. Otherwise rent will eat up the economy, national and global.

    58. Here is some data on interest rate and growth

      “Fiscal Exit: From Strategy to Implementation” by the IMF. (2010)

      Of course, the title is horrible but Appendix 1 has data.

      Its not clear what the interest rate there means. Since it talks of data on debt, I would assume that its interest payments as a percentage of outstanding.

      For the US, it looks like the interest rate was higher than growth most of the time, though not an issue really. (graph on page 88 and data on 86-87

    59. Ramanan,

      That table is exactly in the post-volcker period, when rates were higher than NGDP as Scott pointed out. Prior to this period they were lower. Crossing the bull/bear cycle is the “break”. When it comes to asset prices, I think in terms of multi-decade periods of over and under-valuation, relative to fundamentals.

      Here is long term data on the U.S and U.K.

      //2.bp.blogspot.com/_fevQMK7kLEI/S5h1c57wjfI/AAAAAAAAAJ8/mMIFy1OBXfA/s1600-h/UK_LT_NGDP.png

      //3.bp.blogspot.com/_fevQMK7kLEI/S5h1cfsftPI/AAAAAAAAAJ0/QUDJ0u0Z7cQ/s1600-h/US_LTR_NGDP.png

      In both cases, the mean — both arithmetic and geometric computed over the entire sample is within a few basis points e.g. within about 10 basis points, of the NGDP growth rate.

      Note that the “breaks” correspond to important macro turning points — e.g. the Depression of 1807, the Depression of 1873, the Great Depression, and the 1982 rate hikes, with mini turning points within that.

      That makes sense if you believe that the market was consistently over-estimating NGDP growth during the boom, and then under-estimating it post-boom. I.e. it’s not that interest rates went up during the dis-inflationary period so much as they failed to fall far enough. Similarly, during the boom, NGDP always seems to outpace rates. Obviously, I don’t know whether this trend will continue in the future, but I do know that you need to look at more than a 30 year period — you need to look at 100 year periods. Looking at 30 year periods is what made home-buyers believe that prices only go up. And also as Scott pointed out, this means some generations of investors can be lucky while others are not.

    60. Tom,

      “Why should government be in the price setting business at all? Let the market set the price of money.”

      That’s not possible if the government is supplying money to banks whenever they ask for it. It has to supply this money at some price.

      If banks can turn around and buy other assets — compete with the non-financial sector for ownership of assets — then the government is already influencing the price of assets.

      The “value add” of the financial sector is not in borrowing short and lending long, the value add should be credit analysis. Banks should lend to customers who do not have access to the credit markets — households, small firms, etc.

      Any income earned purely from borrowing short and lending long is not due to extending credit to these groups, it is due to having special access to short term funding sources that the non-financial sector does not. It’s a rent.

      That is why one solution would be to let banks borrow short in unlimited amounts at zero rates, but then impose asset taxes on any long term assets on their balance sheet equal to the risk free rate of the maturity of the asset.

      As the financial sector does not itself “save” anything or make any capital commitment, there is no rationale for letting this sector earn a risk-free rate. Any returns earned should come *only* from bearing risk, and not from climbing the yield curve.

      Therefore you need to subtract out the expected risk-free return to get a no-rent return for the financial sector.

      On the other hand, the non-financial sector does produce output, and it can produce output in a way that has an overall economic value add over the cost of the inputs. And part of that value add will go to the capital supplied in the production process. If the economy is expected to grow, then that value add will be positive, even adjusting for risk.

      There are positive risk-free rates for engaging in production, particularly in a growing economy.

      The value added as a result of supplying capital should be the return earned. It’s difficult for the government to directly know or control this return — it’s difficult for anyone to know it — so I would prefer policies based on helping the system to function correctly, rather than a direct intervention in the asset prices.

      In other words, better job training, helping to close the bargaining power discrepancies between labor and capital, income tax policies, legal services, etc. Those are the types of interventions that I would favor, and I would put a tight fence around the non-productive sectors to ensure that they are earning zero rents.

    61. RSJ,

      Yes luck factor is important! Nice detailed graph covering good history.

      What do you mean by leading/leading in the graphs precisely ? Lagging would mean taking actual growth in the last ten years and taking the difference of this with the yield ten years back ?

    62. Keith Newman,

      The premium return on net financial assets is the monetary policy rate and any premium yield on public debt which is interest income to the private sector. I have argued many times this premium yield of longer maturity is only partially controlled by monetary policy unless the CB is integrated with the treasury and willing to absorb all available units in the secondary markets. The potential steady state rate of this debt at the long tail of the term structure, following Passinetti approximates the growth of labor productivity sufficient to compensate savings instead of working. I hope this short comment satisfies you as I have limited time today.

    63. Keith,

      If you are interested for more, leave me your email to send you a working paper of mine that deals with many of these issues altough it has a lot of math.

    64. RSJ: That’s not possible if the government is supplying money to banks whenever they ask for it. It has to supply this money at some price.

      Why does government have to supply money at some price? It’s cost of capital is zero.

      Regarding the rest, I agree that the solution is through taxing rent.

      The purpose of the banking system is not to make money through rent. It is to intermediate thereby facilitating productive investment (production) and transactions (distribution and consumption). Banks are basically public utilities. They need to be treated as such rather than as rent machines.

    65. Ramanan,

      yes, the lagging spread is yield[t] – 100*( (NGDP(t)/NGDP(t-10))^(1/10) -1), and the leading spread is
      yield[t] – 100*( (NGDP(t+10)/NGDP(t))^(1/10) -1)

      which is why the leading spread curve ends before the lagging spread.

      The long run average is the same, since ex-ante = ex-post over long time periods.

      But the above relationship only applies when capital is reproducible — e.g. in the industrial era. And of course you also need well-deveopped credit markets as well as institutions that allow capital arbitrage to occur. Prior to the industrial era, capital was really land, it was not reproducible, and interest rates were more a matter of custom or preferences rather than any underlying production characteristics. It seems to me that the belief that interest rates are exogenous holds only for a pre-industrial economy.

      You might enjoy looking at “A History of Interest Rates” — I think Google books has some lengthy excerpts.

    66. RSJ,

      Will look at it with the formula provided.

      The fact that there are shades of gray here makes the debate “real versus monetary” phenomenon difficult.

      For example, around 80s, the Fed kept hiking the interest rates at I guess it went to almost 20%, the other yields also went to those levels. The yields could not have been said to be decided by “the market”. The reason people give examples of the central bank setting the yield curve is to cite it as a proof to defend their thesis about interest rate being a monetary phenomenon.

      Moreover, emerging markets grow at phenomenal rates (nominal) but the yields stay at low levels compared to the nominal growth for an extended period of time.

      Also central banks themselves act depending on growth and no wonder you see relation to growth.

      To add complication to the matter, the Treasury is also issuing securities at various levels of the yield curve and there are local supply-demand effects at those points.

    67. For Panayotis @ 1:17:
      Thanks for the explanation. I didn’t know what you meant by ”premium return on net financial assets”. So this is the interest paid on long term central bank/treasury securities which injects net financial assets into the economy. With respect to the long term rate on government bonds not being entirely controlled by the central bank/treasury, that seems consistent with Warren Mosler’s view that the long rate for US treasuries is the expectation of the future fed rate plus some premium. (at least as I understand his view)

      I would like to see your paper although I won’t have time to look at it for a while. My work email: knewman@cep.ca.

      Thanks

    68. R,

      “For example, around 80s, the Fed kept hiking the interest rates at I guess it went to almost 20%, the other yields also went to those levels. The yields could not have been said to be decided by “the market”.”

      Or you can say that the long term rates kept rising (with inflation) and so the Fed was forced to hike short term rates as well. 🙂

      There is a lot going on here, R. First the CB does not have a lot of discretion as it is trying to adjust rates to match some target, not adjusting rates for its own purposes. This is the whole “instruments” versus “target” debate.

      Second you can argue that the market is trying to guess what the CB is doing, or that the CB is trying to guess what the market is doing. All you know is that all of these rates move together, but there are some basic constraints which, over long time periods, prevent long term rates from being “too high” or “too low”.

      What we do know is that in those cases when central banks do not engage in targeting but set rates based on political purposes (typically too low), then bad things happen to the economy. So you could argue that the CB can do anything it wants, but if it doesn’t want to destroy the economy, it loses all freedom and must set rates as best as it can to meet its target.

    70. “a failure … to understand the options that a government which issues its own currency has available to maintain full employment.”

      I’m just not in favor of central state communism. There’s no value to a state financing job programs, unless they’re truly democratically chosen, in an attempt to emulate the free market. But why not just give people money in the hand to vote for what labor they want. Whether or not that involves more jobs, it’s a question of who the best provider for an item is.

      If mostly mechanic labor ends up being best for the job, why fight it?

    71. Not to say I’m against job programs per say. But job programs need to follow another policy purpose, not exist for the sake of jobs alone.

      Like subsidies for green energy companies and the like are great job programs. If you can get a democratic majority to incentive the industry one way or another, then sure, we can have state sponsored labor in those branches, but not with a focus on creating jobs, but to do a good job saving the planet, or some other democratically chosen goal.

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