As I noted yesterday, last evening I accepted an invitation to speak on a panel…
The full employment fiscal deficit condition
Many readers ask me to provide a Modern Monetary Theory (MMT) rule for sound fiscal management. I had done this often but apparently not concisely enough. It is important to understand what the limits on fiscal deficits are in term of prudent fiscal practice given that terms such as fiscal sustainability, fiscal consolidation, fiscal austerity are in the media almost every day without fail. The mainstream version of fiscal responsibility is based on false premises and is not an applicable guide for sovereign governments to base their policy decisions on. MMT provides a coherent fiscal position for governments to aim for. In this blog, I juxtapose that position with the sort of narrative that is now coming out of the OECD with renewed vigour – after they went a bit quiet once it was clear they were exposed by the magnitude of the economic crisis. But they are back, strutting and arrogant as before and threatening the jobs of millions. So here is the full employment fiscal deficit condition that makes a mockery of the IMF and OECD narratives.
The full employment fiscal deficit condition
As background you might like to read this blog – Functional finance and modern monetary theory – for more discussion.
In an open economy, if there was no government spending or taxation (so a fiscal balance of zero) the level of economic activity (output) will be determined by private domestic spending (consumption plus investment) and net external spending (exports minus imports). If one or more of those spending sources declines, then activity will decline.
A spending gap is defined as the spending required to create demand sufficient to elicit output levels which at current productivity levels will provide enough jobs (measured in working hours) for all the workers who desire to work.
A zero spending gap occurs when there is full employment. From a functional finance perspective (outlined in the blog above) the role of government fiscal policy is obvious – to ensure there is no spending gap.
It becomes obvious (and incontestable) that if the private spending sources decline from a given position of full employment, the only way that the spending gap can be filled is via a fiscal intervention – direct government spending and/or a tax cut (to increase private disposable income and stimulate subsequent private spending).
That is a core insight of functional finance which underpins MMT.
Another way of thinking about this is to start simply.
The sources of spending which flow and add to aggregate demand are:
- Household consumption (C)
- Private Investment (I)
- Government spending (G)
- Export revenue (X)
The income (payments to resource owners involved in the production of output) that is generated by these spending flows can be used in the following ways:
- Taxation payments (T)
- Household consumption (C)
- Household saving (S)
- Import spending (M)
Clearly, the sources of income have to equal the uses (as a convention of the National Accounts). This allows us to write the two sides of income generation like this:
C + I + G + X = C + S + T + M
Given C cancels out we know that:
I + G + X = S + T + M
The left-hand side of this equation always is brought into equality with the right-hand side via income adjustments (that is, variations in the level of aggregate activity brought about by spending variations). That is the essential first-principle involved in understanding how the macroeconomy works.
So if for example, Private Investment increases (G and X constant) this stimulates aggregate demand (spending) and firms react by increasing output to meet the new orders. This requires them to increase employment and the increased income is then used to increase saving (S), pay more tax (T) even if tax rates are unaltered, and increase imports (M).
The economy stops expanding again once the change in Investment is equal to the sum of the changes in S, T and M. This dynamic response and subsequent resolution is what we term an movement to a new equilibrium response.
The left-hand side (I + G + X) are called injections – because they inject new demand into the economy whereas the right-hand side (S + T + M) are leakages – because they drain aggregate demand, where aggregate demand is the total spending in a domestic economy per period (say a quarter or a year).
Implicit here is the fact that the increase in investment stimulated rising consumption (C) and the induced consumption stimulated subsequent increases in income and so on. That is the basis of the spending multiplier. Please read my blog – Spending multipliers – for more discussion on this point.
A macroeconomy is in a steady-state (that is, at rest or in equilibrium) when the sum of the injections equals the sum of the leakages. The point is that whenever this relationship is disturbed (by a change in the level of injections, however sourced), national income adjusts and brings the income-sensitive spending drains into line with the new level of injections. At that point the system is at rest.
Three points should be noted.
First, this position of “rest” does not necessarily have to coincide with full employment. The system will adjust to dramatically lower levels of injections and come to rest even if there are high unemployment levels. This was denied by the mainstream orthodoxy who fought it out with Keynes (and Marx before him). One contribution of Keynes was to convince the Western academics (who didn’t want to be convinced by Kalecki or Marx) that economies could settle at very high levels of unemployment and would stay there unless budged by an intervention (that is, a fiscal policy stimulus).
Second, when an economy is “at rest” and there is high unemployment, there must be a spending gap given that mass unemployment is the result of deficient demand (in relation to the spending required to provide enough jobs overall). Please read my blog – What causes mass unemployment? – for more discussion on this point.
Accordingly, if there is no dynamic which would lead to an increase in private (or non-government) spending then the only way the economy will increase its level of activity is if there is increased net government spending – this means that the injection via increasing government spending (G) has to more than offset the increased drain (leakage) coming from taxation revenue (T). That is, a fiscal deficit is needed because there is a non-government spending gap.
Third, this doesn’t mean that a fiscal deficit is always required. We need one more condition to establish that case for on-going fiscal deficits. If the non-government decisions taken together (so consumption and saving decisions by households, investment decisions by production firms and the external sector) indicate a desire to “net save” which might be written as
I + X < S + M then the only way the level of activity can be maintained on an on-going basis (at any rate of unemployment) is if G > T. That is a fiscal deficit is required on a continuous basis to sustain a given level of activity.
In this case, a fiscal deficit “finances” the desire by the non-government sector to save by maintaining sufficient demand to produce a level of income which will generate that level of net saving.
Functional finance is very clear – responsible fiscal policy requires two conditions be fulfilled:
1. The discretionary fiscal position (deficit or surplus) must fill the gap between the savings minus investment minus the gap between exports minus imports.
In notation this is given as
(G – T) = (S – I) – (X – M)
Which in English says for income to be stable, the fiscal deficit will equal the excess of saving over investment (which drains domestic demand) minus the excess of exports over imports (which adds to demand).
If the right-hand side of the equation: (S – I) – (X – M) – is in surplus overall – that is, the non-government sector is saving overall then the only way the level of national income can remain stable is if the fiscal deficit offsets that surplus.
A surplus on the right-hand side can arise from (S – I) > (X – M) (that is, the private domestic sector net saving being more than the net export surplus) or it could be associated with a net exports deficit (draining demand and adding foreign savings) being greater than the private domestic sector deficit (investment greater than saving) which adds to demand.
2. Most importantly, the prior discussion focused on the level of income remaining stable but as we have seen doesn’t necessarily define a full employment condition.
We can define a full employment level of national income as that which is generated when all resources are fully utilised according to the preferences of workers and owners of land and capital etc.
Given that S, T and M are all positively related to the level of national income, there is a unique level of each of these flows that is defined at full employment. Changes in behaviour (for example, an increased desire to save per dollar earned) will change that “unique” level but for given behavioural preferences and parameters we can define levels of each.
So lets call S(Yf), M(Yf) the corresponding flows that are defined at full employment income (Yf). We also consider investment to be sensitive to national income (this is outlined in the so-called accelerator theory) such that higher levels of output require more capital equipment for a given technology. So I(Yf) might be defined as the full employment flow of investment. We consider export spending to be determined by the level of World income.
Accordingly, to sustain full employment the condition for stable national income is written more specifically:
Full-employment fiscal deficit condition: (G – T) = S(Yf) + M(Yf) – I(Yf) – X
The sum of the terms S(Yf) and M(Yf) represent drains on aggregate demand when the economy is at full employment and the sum of the terms I(Yf) and X represents spending injections at full employment.
If the drains outweigh the injections then for national income to remain stable, there has to be a fiscal deficit (G – T) sufficient to offset that gap in aggregate demand.
If the fiscal deficit is not sufficient, then national income will fall and full employment will be lost. If the government tries to expand the fiscal deficit beyond the full employment limit (G – T)(Yf) then nominal spending will outstrip the capacity of the economy to respond by increasing real output and while income will rise it will be all due to price effects (that is, inflation would occur).
In this sense, MMT specifies a strict discipline on fiscal policy. It is not a free-for-all. If the goal is full employment and price stability then the Full-employment fiscal deficit condition has to be met.
How many times have you read any of this in IMF, OECD or other official documents over the last 30 years – the neo-liberal years? Answer: never!
As we examined in the blog – Life in the IMF fantasy world – the IMF constructs the fiscal condition in an entirely different way – divorced from the rest of the macroeconomy.
They define the goal of fiscal policy is to close the “fiscal gap” which they defined as:
… Over an infinite horizon, it measures the adjustment needed for the government to meet its intertemporal fiscal constraint, so that the present value of the excess of future expenditure and current liabilities over future receipts is zero. It has been argued that when fiscal pressures are concentrated in the long run, as in the United States, using the infinite horizon definition is preferable because finite horizon measures of the gap can underestimate the necessary adjustment …
That is, G – T = 0 when calculated over the “lifetime” of the government (the “intertemporal fiscal constraint” to use the jargon). That is, pure unadulterated nonsense.
It tells you nothing about the saving and spending preferences of the private sector. It tells you nothing about the dynamics of the external sector.
It creates a faux framework by assuming that “the present value of the excess of future expenditure and current liabilities over future receipts is zero” (Why?) and then the conclusion follows – fiscal balances should be in balance over the infinite horizon.
This framework erroneously assumes that this is a financing constraint and fiscal deficits have to be “paid back” by which they mean the debt issued to “finance” the deficits have to be paid back via primary fiscal surpluses (excess of taxes over government spending).
Clearly, a sovereign government is never revenue constrained because it is the monopoly issuer of the currency. As such, the mainstream (IMF) framework misses the point entirely. The entire mainstream discussion about fiscal consolidation and fiscal sustainability and the limits of fiscal policy is based on false premises. It has no application to modern monetary economies.
From the perspective of Modern Monetary Theory (MMT), the whole question of fiscal sustainability has to be in terms of maintaining full employment and price stability. The Full-employment fiscal deficit condition provides the focus for policy makers in this regard.
Please read the suite of blogs – Fiscal sustainability 101 – Part 1 – Fiscal sustainability 101 – Part 2 – Fiscal sustainability 101 – Part 3 – for more discussion on this point.
So before we question whether the “limits” of prudent fiscal policy have been reached we need to collect information from the labour market rather than the bond markets. The existence of mass unemployment is striking evidence that the fiscal deficit is too small and needs to be expanded.
One way the mainstream gets around this obvious point is to contest the definition of full employment. Accordingly, they invoke a bastardised concept of full employment which they call the Non-Accelerating-Inflation-Rate-of-Unemployment (NAIRU) which says that the economy is fully employed when inflation is stable (irrespective of how many workers are unemployed or underemployed).
Further, if the government doesn’t like that level of unemployment and/or underemployment (perhaps for political reasons) then the only way they can reduce the NAIRU without causing inflation is to operate at a structural level – less regulation, lower welfare benefits, cutting wages particularly minimum wages).
In other words, fiscal policy initiatives designed to influence aggregate spending are futile at best and highly inflationary at worst.
In terms of the MMT Full-employment fiscal deficit condition, policy designed using some estimate of the NAIRU (which are always above what a reasonable definition of full employment might be) will cause the economy to settle at levels of national income (and real GDP growth) that are insufficient to generate enough jobs.
The mainstream NAIRU-based policy framework, followed by the IMF, the OECD and central banks etc is biased towards entrenching mass unemployment and pressuring policy makers to introduce pernicious anti-worker and anti-equity policies under the guise of structural reform.
Please read my blogs – The dreaded NAIRU is still about! and NAIRU mantra prevents good macroeconomic policy – for more discussion on this point.
The OECD is back to their old tricks …
The OECD, the organisation that has spearheaded the abandonment of full employment in all its member countries since releasing the supply-side blueprint in 1994 – The Jobs Study, seemed somewhat oblivious to the fact that all the policies that governments introduced under their guidance which allegedly made labour markets resilient and flexible through active labour market programs (scrapping worker protections, undermining welfare payments and wages, attacking trade unions etc) failed to prevent the major economies from going belly up once aggregate demand collapsed.
Some 15 years after the OECD Jobs Study was released, the OECD economies still generated high unemployment rates and broader forms of labour underutilisation have increased. The trend to part-time and casualised employment which fails to provide enough hours of work to match the preferences of the workforce is widespread throughout OECD countries.
There is also strong evidence to show that active labour market programs of the type praised by the OECD have been largely ineffective in reducing unemployment and improving the outcomes of the most disadvantaged workers in the labour market. The situation will worsen in the current downturn.
In the period before the crisis, it was difficult to see what has been achieved by the supply-side labour market policies other than to punish the most disadvantaged workers in our communities.
Please read my blogs – The OECD is at it again! and The OECD should close and its staff redeployed into productive activities – for more discussion on this point.
After 12 years or so of preaching that more deregulation was necessary, in the face of the fact that unemployment remained high, the OECD themselves started to recant a little.
In 2006, the OECD started to acknowledge that its policies were failing and were based on wrong modelling. Over the last 20 years or so, many academic studies sought to establish the empirical veracity of the orthodox view that unemployment rose when real wages, welfare payments and workplace protections increased. This has been a particularly European and English obsession. There has been a bevy of research material coming out of the OECD itself, the European Central Bank and various national agencies, in addition to academic studies.
The overwhelming conclusion to be drawn from this literature is that there is no conclusion. These various econometric studies, which have constructed their analyses in ways that are most favourable to finding the null that the orthodox line of reasoning is valid, provide no consensus view as has been shown convincingly by several studies (including work of my own).
Partly in response to the reality that active labour market policies did not solve unemployment and instead created problems of poverty and urban inequality, some notable shifts in perspectives became evident among those who had wholly supported (and motivated) the orthodox approach which was exemplified in the 1994 OECD Jobs Study.
In the face of the mounting criticism and empirical argument, the OECD began to back away from its hard-line Jobs Study position. In the 2004 Employment Outlook, OECD (2004: 81, 165) admitted that:
… the evidence of the role played by employment protection legislation on aggregate employment and unemployment remains mixed … [and that the evidence supporting their Jobs Study view that high real wages cause unemployment] … is somewhat fragile.
Then in 2006, the OECD Employment Outlook entitled Boosting Jobs and Incomes, which claimed to be a comprehensive econometric analysis of employment outcomes across 20 OECD countries between 1983 and 2003 went further. The study sample for the econometric modelling included those who adopted the Jobs Study as a policy template and those who resisted labour market deregulation. The Report revealed a significant shift in the OECD position. OECD (2006) found that:
- There is no significant correlation between unemployment and employment protection legislation;
- The level of the minimum wage has no significant direct impact on unemployment; and
- Highly centralised wage bargaining significantly reduces unemployment.
These conclusions from the OECD in 2006 confounds those who have relied on its previous work including the Jobs Study, to push through harsh labour market reforms; retrenched welfare entitlements; and attacks on the trade unions. It makes a mockery of the arguments that minimum wage increases and comprehensive employment protection will undermine the employment prospects of the least skilled workers.
OECD (2006) found that unfair dismissal laws and related employment protection do not impact on the level of unemployment but merely redistribute it towards the most disadvantaged – including the youth who have not yet developed skills and have little work experience.
We examined all this literature in our 2008 book – Full Employment abandoned.
Fast-track to 2009 – at the height of the crisis, the OECD released a Report (September 16, 2009) – Governments must act decisively on jobs – where, in relation to fiscal policy OECD acknowledged “that these measures are playing a positive role”.
In releasing that document, the OECD Secretary-General Angel GurrÃa said that:
Governments must act fast and decisively to prevent the recession turning into a long-term unemployment crisis … Employment is the bottom line of the current crisis. It is essential that governments focus on helping jobseekers in the months to come …
They were still pushing the structural ideas but in a toned down form and acknowledging that the fiscal interventions (stimulus packages) were playing a positive role to attenuate the rise in unemployment.
That humility didn’t last long. Fast-track to April 2011.
In their latest Going for Growth 2011 report (Published April 7, 2011) you see that the OECD is back to their dirty old ways.
In the speech launching the Report, the OECD Secretary-General Angel GurrÃa made the following extraordinary statement:
… most mature economies are growing at a pace that is insufficient to reduce unemployment significantly … As the capacity of fiscal and monetary policies to further support the recovery runs out, a new emphasis on structural reforms is the only way to boost growth and job creation.
In fact, unemployment continues to rise overall.
The following table is taken from the OECD’s own Harmonised unemployment rate data. Note these are all computed on common labour force definitions. The data compares the average for 2009 with December 2010 for OECD countries with published data.
There is data for February 2011 which is incomplete and shows slight improvements in some nations and worsening situations in other nations. But the point is not substantially altered using December 2010 figures.
While the crisis remains (relative to their 2009 statment) the emphasis has now changed remarkably. According to this corrupt institution, there is no longer anything positive that fiscal policy can do to reduce unemployment and governments have to go back to more deregulation, more wasteful training programs designed to force compliance on income support recipients, more attacks on welfare benefits and minimum wages and the rest of it.
Well here is a question.
Imagine the US government announces a Job Guarantee today whereby the federal government would provide a minimum wage job (at a realistic socially viable minimum wage) to anyone who wanted to work and couldn’t find employment elsewhere.
The jobs would be permanent and involve community and environmental development activities. There would be no other income support available from government for those who were capable of working. All other income support would be maintained (aged pensions, sickness and disability support pensions).
Question: How many workers would report to the Job Guarantee depot next morning for work?
The OECD thinks none. I think millions.
The challenge to conservatives is that if they really believed that the unemployment was an entirely structural problem they should have not fear of a Job Guarantee program because no-one would turn up for it and the fiscal outlays would be minimal – running an office that does nothing!
The reality is that they fear such a program would be very successful.
You might like to read this blog – Boondoggling and leaf-raking … – where I outline in some detail the responses that we received in 2004 after tha Australian Local Government Association (the peak body of Local Governments in Australia) endorsed a Job Guarantee proposal that I had put forth. This was in fact a modified Job Guarantee which we called the Community Development Job Guarantee and involved guarantees to the long-term unemployed and a Youth Guarantee providing education, training and employment for young unemployed people. We wanted to test the political water and saw this as a transition to a full unconditional Job Guarantee for anyone who didn’t have work and wanted it.
The ALGA wrote to the then Federal Minister for Employment and Workplace Relations Kevin Andrews and received a reply on August 13, 2004 outlining why the Government rejected the Job Guarantee. You can download this stunning document HERE.
If you read the then Minister’s response, you will see that his Government was actually scared of letting market forces work when it comes to providing advantages and opportunities to the most disadvantaged workers in our communities. They preferred to keep them suspended in a void of joblessness and cycle them through clearly irrelevant training programs. They seemed to distrust the ability of the private sector to structure interesting and attractive jobs to lure workers away from Job Guarantee positions.
For example, the Minister claimed that the workers might never want to leave the Job Guarantee despite the fact that the private sector would be able to hire out of the Job Guarantee workforce by simply offering more attractive employment conditions. To think that the workers would never be lured out of the Job Guarantee is to display a staggering lack of confidence in market forces.
This is what he said:
Offering guaranteed jobs at the FMW can also have perverse impacts on incentives. Although you suggest that CD-JG jobs would not substitute private sector jobs, once on a Government funded guaranteed job for unlimited duration that pays the FMW, a person may not see the advantage in seeking or taking up a private sector job. Furthermore, although both the Government subsidised workers would earning wages similar to some private sector workers, it is unlikely that they would have the same attendance and work performance requirements as in a mainstream job. A CD-JG type job guarantee may also act as a disincentive for some short-term unemployed people (eg those unemployed for 9-12 months) to take up mainstream minimum wage jobs because of the guarantee of a job if they remain unemployed for a short while longer.
Note: FMW = federal minimum wage.
The letter really encapsulated the irrational fear that the mainstream have of these types of programs. I urge you all to refresh your memories of how palpably ridiculous the arguments raised against such policies are.
The OECD is now once again enforcing the ideology though. Their confidence is returning after being battered by their failure to (a) reduce unemployment significantly during an extended growth period; and (b) failing to see the crisis coming and failing to have a policy framework that could deal with the crisis.
As to their claim that there is not fiscal space left I refer you all to my introductory discussion. For sovereign nations, there is no fiscal constraint yet approaching that would prevent them from expanding their fiscal deficits and targetting a jobs rich future for their citizens.
We are nowhere near the Full employment fiscal deficit condition and recent trends suggest we are moving further away from it with the consequence that things will not improve any time soon.
Conclusion
I actually liked the tenor of Dean Baker’s recent article (April 13, 2011) – Some market discipline for economists – which carried the conclusion:
Whenever I have raised this point in conversations with economists, they invariably think that I am joking. When I convince them that I am serious, they think the idea of holding economists responsible for the quality of their work to the point of actually jeopardising their careers is outrageously cruel and unfair.
The reality is that tens of millions of people across the globe have seen their lives wrecked because these economists did not know what they were doing – or worse, had doubts but chose the safer route of groupthink. It is outrageous that ordinary workers who were doing their jobs can end up employed, while the economists whose mistakes led to their unemployment can count on job security.
Dean and I share these experiences when dealing with our professional colleagues.
If I was in charge of the governments that fund the OECD (particularly the US) I would take the advice from my newly created fiscal efficiency committee (an arm of the elected government) and terminate that funding that the OECD receives forthwith because it is a gross inefficiency. That would satisfy the likes of the IMF who want to eliminate wasteful public spending.
Ah, but the IMF would also have its funding withdrawn and labour market programs would be offered to all OECD and IMF staff to “retrain” and become “more employable”.
That is enough for today!
About what the fools deserve …
That Kevin Andrews piece is an absolute joke. What happens if you put a young unemployed person in a CD-JG, they gain the skills they don’t currently have and are more likely to be picked up by the private sector.
He goes on to say Work for the Dole is superior and goes on the ideological rant about a stick being better than a carrot.
It is such an OMG! Valley Girl response; From the Minister for Employment at the time (and he’s one from that side I didn’t mind…until now)
Presumably Andrews’ logic rests at least partly on the importance of job security. Too many low paid jobs have had their terms and conditions dramatically worsened in the last 30 years – low-paid workers have low job security, low job benefits, work variable hours, etc., etc. This is a vast saving to employers.
So you can see that employers might see a threat in JG work that is only marginally less paid.
It’s the same reason as some people stay unemployed on benefits. When you have a load of hoops to jump through to get benefits, then a job that only marginally increases your income and a high marginal tax rate that has no job security is not worth the risk.
Bill, I’m not sure about your claim that if unemployment is explained entirely by structural factors, no one would turn up for JG work. If the structural problems ALSO apply to JG work then you have a point. E.G. if it’s daft employment regulations that are causing unemployment and those regulations also apply to JG work, then you have a point.
On the other hand suppose unemployment is caused primarily by a failure of the price of labour in different geographical areas to reflect demand for labour or productivity in those areas. You’d then get inflationary pressures in high employment areas before full employment was attained in high UNEMPLOYMENT areas. This was widely regarded as a problem in the UK a few decades ago. I would call that “structural”, though I realise it does not feature on your list of structural problems. In this case, I don’t see why people would not turn up for JG work – in both types of area.
There would be no other income support available from government for those who were capable of working.
In other words, your version of the JG is a state sponsored form of slavery.
Dear MamMoTh (at 2011/04/13 at 23:08)
How about thinking a moment before you come up with an all-embracing one-line conclusion to what many of us have given years thinking and researching about? That would be nice.
In the meantime, perhaps you might like to read this blog – Would the Job Guarantee be coercive?.
best wishes
bill
“So you can see that employers might see a threat in JG work that is only marginally less paid”
And so they should. Employers that refuse to improve their working conditions and pay sufficiently will simply cease to exist.
And good riddance to them.
Two more things I wish to say:
1. Prime Minister Gillard gave a speech tonight that had a lot of the old stick rhetoric but also had an anecdotal example of a fellow from a high unemployment area requiring at the very least an entry level job. She was using it to define the human face of unemployment but if she could just follow that rhetoric across the whole unemployment malaise Prime Minister JG should arrive at a JG (Job Guarantee).
2. The first half of this post should be a policy brief for any future incoming government.
Absolutely right, Neil.
Dear Bill, I have indeed thought for a long time on your preferred version of the JG which is summarized in the one line I quoted, and that was my conclusion. I understand that you don’t agree with me though.
Mammoth –
You are a troll and prevent thoughtful discussions in your comments by agitating others through gross misrepresentations and silly one liners. Write your own blog about your thoughts and maybe a group of like minded individuals can discuss your ideas.
Dear Bill,
Thanks for this post. I work for OECD and really would not like to lose my job. But, then, I am a SW engineer who works to help publish the stats. Perhaps, I am not that useless
Rob,
Thanks for that response. I am going to use it as my standard retort to trolls.
Compare living off £65.4 a week to say £320 at decent living minimum wage.
What’s better?
What’s ‘slavery’?
Unemployment/’job”seeker’ ‘allowance’ is the state paying someone little to fill in bits of paper.
The unions (at least in the UK) might object to the JG on the basis that the government might be tempted to use it to undermine the wages of existing jobs – the “why pay more for street cleaners” argument. The question then is – how do you discriminate between JG jobs and “normal” government functions that should be better paid.
Ralph, using the citizen’s decent living minimum wage approach as in London and various other cities, the decency threshold varies according to local market conditions, wouldn’t that make a difference?
Great blog Bill.
I always pick up something new whenever you go over the basics.
Thanks.
Dear Bill
just a question
how mmt consider interest spending on public debt?
i mean govt spending is a part of aggregate demand
what about interest spending?
I believe the Job Guarantee is conceptually elegant, yet I have to admit I have still not overcome some of the “mainstream” concerns about unplanned consequences. But I want to be clear that I am still giving it the benefit of the doubt, and even if the JG turned out to be badly flawed in practice, it would be hard for it to be worse than what we have now, so I’m all for giving it a try.
Bill is right that the private sector is flexible enough to lure workers from a JG program. But the core question for me is, “at what price premium to the JG wage?” There may be only so far that the private sector can go in making conditions better for many jobs before it has to raise wages more than just marginally. Bill does say in the boondoggle post that “If the private labor market is tight, the non-Job Guarantee wage will rise relative to the Job Guarantee wage” and explains how that gets resolved through normal fiscal tightening. (But I might add that if you have to go beyond automatic stabilizers and get into raising taxes on anyone, politics do make reality more challenging than theory).
What if the effective wage premium needed to lure workers from the JG is high even when the labor market is not tight? A JG could have appealing aspects that would raise this premium meaningfully… e.g., job security, comfort/complacency/inertia, choice of location (no need to relocate to find work?), shorter commute time (just how local is the guarantee?), inability to be fired (I agree most do want to work but there are always some who do as little as possible), potential for too little oversight due to corruption or ineptitude of JG managers, etc… I suspect these are all solvable but the question is how easy is it to solve all of them without a large private sector wage premium needed? (I really don’t know the answer so am not trying to imply it MUST be a large premium). And, someone will ask, so what? I guess it all ends in politics anyway… controlling any inflationary pressure that does arise and making sure the JG doesn’t retain too many who would otherwise be adding to private sector capacity and productivity.
Bill also says in that post, “the Job Guarantee wages cannot rise unless the Government decides to increase them.” It seems the political challenges could be non-trivial in avoiding JG getting indexed to inflation to maintain a living wage, thus ratifying any inflationary pressures that begin, especially if the wage premium needed to lure from the JG turned out to be non-trivial.
I know Bill has a long paper on the JG and I’ve looked through parts of it in the past but recall not finding some answers I hoped for. I should look again, but I would be curious to know if that is the most comprehensive source to work through some of these details or if there are other resources.
“What if the effective wage premium needed to lure workers from the JG is high”
Then intrinsically the private sector job is a load of crap and the ‘private sector operator’ shouldn’t be allowed to profit by creating such a thing.
Why is it so difficult to see that the economy is there to serve the people and flogging people to death for a pittance in miserable conditions shouldn’t really be rewarded.
We need the crap jobs on poor wages to cease to exist. That then creates space for more socially minded operators to move in and reset the standard.
Profits and investments will be squeezed and warped until things drop into a new equilibrium. Lots of people operating slave factories will either adapt or go bust.
No doubt to lots of whining from business groups about how things are so unfair now that they have to compete for people.
“The question then is – how do you discriminate between JG jobs and “normal” government functions that should be better paid.”
I don’t think you do. It’s for the unions to justify why their members pay is at that level.
It would also be for the unions to justify why people should be left on the scrap heap to keep their members in clover, and to explain how that attitude is different from the bankers.
I think that along with the JG, the developed world also has to rethink free trade. This works for capitalists (multinational corporations are doing great) but it is forcing workers to compete increasingly with Third World standards – low wages, no benefits and no protections. This is insanity and makes no sense at all. A few people are getting rich and the rest are getting crammed down. It is already resulting in social unrest, and this is just the beginning.
Neil Wilson,
Thanks for responding, but your response struck me as very black and white, good and evil (‘load of crap’, ‘flogging to death’, etc).
I stated up front that I give the JG the benefit of the doubt overall but wondered how the free market’s relative preferences for JG versus private sector jobs would express themselves via the mechanism of relative wage adjustment. (I didn’t say no one would work for the private sector, just that there could be legitimate benefits in the eyes of workers inherent to some constructions of a JG such as commute time that could raise that premium.). From that I wondered what harmful macro impact that might have if any, and pondered ways it might be mitigated without dooming the JG.
Tom Hickey,
I agree regarding free trade. It is being used to undermine democratic sovereignty for the benefit of a few.
How can a nation retain sovereignty if it can’t meet its people’s needs using resources within its borders?
Let me follow up with an actual example. Let’s say someone works for a burger joint a half hour drive from home. While I’m sure today’s fast food joints have enormous room for improvements in conditions, there are going to be improvement limits to any private sector job. For example, someone still has to deal with rude customers without breaking the law in the manner of their response!
If the local JG lets you pull weeds in a park while listening to audio of your choice a five minute walk from home, that might prove a compelling alternative. So the burger joint might need to offer a non-trivial wage premium to keep that worker.
I wondered how widespread this type of unresolvable differential in conditions could become, and what macro impacts it might have. You can argue that the private sector should be forced to always match or exceed the JG conditions (so that wages don’t have to be the differentiator), but I don’t see that as necessarily realistic (but am open to evidence).
I’m not claiming to know up front that the average JG job would inherently have better conditions than the average minimum wage private sector job run by even the most socially minded owners, as it might not, but posing the question is part of exploring unexpected consequences.
hbl, those are very valid concerns that I share. One way the private sector could compete with the JG is by offering a career path. So those who prefer the prospect of a better position in the future will stay in the private sector even if it didn’t match the conditions of the JG at the present.
My biggest concern with the JG from a macroeconomic perspective is that you cannot guarantee any minimum standard of living by guaranteeing a fixed nominal wage unless the government gets involved in the production of the basic needs the JG wage is supposed to cover.
Dear HBL (at 2011/04/14 at 8:05)
I think that if there is a market then you allow it to work within bounds. So the private burger shop will either have to make their jobs more attractive or invest in capital equipment that makes their workers more productive so they can support a higher wage level …. OR … go out of business.
That is the nature of “free” enterprise that the neo-liberals extol the virtues of. My view is that the minimum wage should be the lowest wage that a sophisticated society is prepared to tolerate which provides for a socially inclusive and comfortable existence. The market should not determine that – it is a socio-cultural construct as much as anything. The market then determines wages on top of that.
I also am surprised when opponents to the JG object to the fact (not you) that the workers might actually enjoy working in JG jobs that add value to the community or environment and are convenient to their residence etc. What the hell is wrong with workers being happy with their jobs? Most disadvantaged (low-pay) workers never enjoy their work.
So if the private employers cannot come up with something better and the JG jobs provide income security, convenience and some job satisfaction is society better off? Answer: clearly.
The anti-JG lobby (OECD etc) are continually invoking policy suggestions that amount to a race to the bottom. The unfettered private market pushes the labour market back to penury. The JG puts a floor into the labour market and only the more productive private firms survive.
best wishes
bill
The JG puts a floor into the labour market and only the more productive private firms survive.
It only puts a floor on the nominal minimum wage, not on the supply of the basic goods and services the JG should provide for.
As you say, the JG could put out of business firms that were providing those goods and services, which would lower the floor on the supply side.
Bill,
I appreciate your response! I agree with most of it.
My difference of opinion seems to mostly center on whether the majority of entry level jobs can realistically meet or exceed the conditions of JG jobs. (We are talking short to medium term, not after ten years of further technological innovation). If they don’t, they either go out of business (as you say), or raise wages and prices. In the latter case, if their customers are willing to pay the higher prices, you get an economy-wide upward price adjustment. Standard of living then falls for the JG workers because what they buy costs more. If they in turn get a raise to maintain a living wage, then you run the risk of ongoing inflation.
But of course the conflict can be resolved with the right targeted tax policy, then it’s a matter of getting through the mucky politics. How difficult that is would depend on how large that inflationary impact of the JG was. Perhaps it would be tiny and easy to address!
Bottom line, I do support the JG concept overall, I just like to explore real world implications beyond the polished high level theory.
It only puts a floor on the nominal minimum wage, not on the supply of the basic goods and services the JG should provide for.
As you say, the JG could put out of business firms that were providing those goods and services, which would lower the floor on the supply side.
Non sequitur. The JG gives income to people that would otherwise be unemployment, thereby increasing nominal aggregate demand, which sends a signal to invest. We are talking aggregates here. Of course, some firms will be negatively impacted if they are bottom fishing, but in aggregate, the economy will be stimulated by the addition of NAD from new incomes, there will be a buffer of employed instead of unemployed, and there will be a price anchor also. What’s not to like about this?
Anyone who thinks that JG would have to be boondoggling doesn’t get out much. Even it fairly affluent places, there is a lot of public work that not only could be done but really needs to be done. I used to enjoy walking in a wood park near my home some time ago, but the city budget got tight and they let the path get overgrown. This is a large area it used to occupy several workers. Now that park is pretty much unusable after several years of inattention. Sure, volunteers “could’ take care of it, but that is unreasonable to expect and impossible to enforce. It did not happen.
Here’s the context of the quote PM Gillard gave last night
It’s a start.
hbl–
You wrote: “JG getting indexed to inflation to maintain a living wage” However, that approach undermines the anti-inflationary role of the JG.
D
Tom @9:43 . . . exactly right. Further the JG does all this within local communities–so, a small town in Iowa would have newly and even long-time unemployed earning a living wage, enabling greater demand for main street businesses that then might not shut down in a down turn, and so forth. You might then have less migration out of these towns, again providing somewhat more likelihood that the main street can survive. And, still better, the town might not have to pay a ransom to the next Wal Mart promising to create minimum wage jobs.
@hbl 9:24,
I don’t follow your arithmetic here. Say that the JG job pays a wage W
A certain proportion L of employment in the economy is in the low wage entry level sector that has to compete directly against JG jobs ~ 0<L<1.
A certain proportion E of the cost of production at the firms paying those low wage entry level employees is due to their wages ~ 0<E<0. The rest of their costs of production are higher cost employees, material costs, equipment costs, utilities and etc.
The local Taco Bell has to either beat the JG wage or shut down. Say they have to pay a 20% premium. If their low wage labor cost is under 20% of their cost of production, and they are less than 25% of the whole economy, that is a 5% increase in costs for that sector, a 1% increase in costs across the economy. If fully passed as an increase in the minimum wage, that have to increase their wages a further 0.2% from the original basis, which would be a 0.01% increase in costs across the economy.
If there is any shift between wage and profit share, its even smaller. And that is without even including the fact that they are gaining additional business due to customers with more secure employment so that they are likely to be able to sell higher margin products and gain an improved marginal revenue product from a given workforce on the back of improved effective demand.
So I don't see what share of low wage labor in total cost of production and what kind of premium over the the JG wage is required to get to the the kind of inflationary spiral you are imagining.
Dear Mr Mitchell
I’m fairly new to this site, so I may be missing things, but I think that you put too much emphasis on aggregates. I would argue that investment is something problematic. Investment is to consumption what exports are to imports. Exports are only a means to finance imports, and investment is only a means to produce goods and services for consumption. Investments are a cost, and costs should be minimized.
Investment should not be simply added to consumtion but must be more or less proportionate to consumption in the long term. For instance, there should some ratio between tractors and agricultural output. Simply producing more tractors will not do if increases in farm output do not follow. Investment must follow consumption, not precede it.
Since investment is not intrinsically desirable and since it should be in a reasonable proportion to consumption, increases in government expenditure or a reduction in taxes should aim primarily at increasing consumption, not investment. If most goverment expenditure goes in investment, there may overinvestment. If there is overinvestment, the boom will be followed by a bust. In the US, Spain and Ireland, there was massive overinvestment in housing. The consequences ot that are well-known.
Strictly speaking, houses are consumer durables, but they work like investments. Rows and rows of empty houses in the US, Spain and Ireland testify loudly to the dangers of overinvestment. In conclusion, we should not only look at aggregate expenditure but also insure that the right amount of it goes to consumption. If too much goes to investment or exports, it isn’t sustainable and people will have a lower standard of living than they could have. Wouldn’t the Germans be better-off with more domestic demand and fewer exports, and wouldn’t the Americans, Irish and Spaniards have been better-off if they had invested less and consumed more during the boom?
dehbach,
Agreed. Trying to be concise, I didn’t fully explain each step in my scenario. After a broad CPI increase, either JG wages are left unchanged, which exerts some influence in preventing further price increases (I wonder how much?) while likely moving some people below a “living wage”, or you increase JG wages and potentially undermine the JG’s anti-inflationary role, as you say.
BruceMcF,
I think you follow my arithmetic in a qualitative sense, but you took it a step further by attempting to quantify it (I had admitted any inflationary effect might be small, I simply didn’t know).
So, thanks for the example! Assuming it is somewhat representative of real life numbers, perhaps there wouldn’t be much reason for concern. I certainly didn’t mean to imply there would be an inevitable inflationary spiral!
Just in case what I wrote previously wasn’t clear… Bill talks about firms that can’t compete with the JG work conditions going out of business. It’s important to distinguish between the micro and macro. Of course within an industry the only “best” firms will survive. My question is whether certain entire industries (customer service jobs? janitorial services?) that might currently be at minimum wage are by their nature less appealing. If there is no reasonable way for those industries to compete in attractiveness with the JG positions (depending on how those positions are constructed), then entire industry cost structures might shift upward to some extent to attract workers. Certainly that’s not inflationary in all scenarios, but in an economy closer to capacity, some groups might have to have their consumption of real goods and services reduced to make space (in an inflationary sense) for the increased consumption of real goods and services by workers in those industries who are now being paid minimum wage plus a premium instead of minimum wage.
Once again, I’m not saying the JG won’t work or is a bad idea, because it seems like a great idea, but I think it might run into more political challenges than some assume (beyond the obvious up front ones). And as I read him (perhaps incorrectly) Bill seems to have an implicit assumption that every private sector industry has the potential to be just as appealing to workers at a given wage as a JG job, if only the owners had the right competitive incentive to stop exploiting the workers. If that’s what he’s saying, he might be right, but I’m unconvinced.
Oops, I didn’t really mean “assumption that every private sector industry has the potential to be just as appealing to workers at a given wage as a JG job, if only…”. I should have said “assumption that private sector industries that currently employ many people at minimum wage have the potential to be just as appealing to workers as a JG job at that same wage, if only…”.
Tom @ 9.43
Sorry, it might seem easy to dismiss my concern with Non Sequitur but you don’t address it at all.
You might think that AD will pick up and firm will respond by increasing production, I think that is extremely naive. And please note that this will happen when you transition from unemployment to the JG, not when you transition from the private sector to the JG during a recession in which case AD will decrease. The JG only sets a nominal minimum income, like it or not. It does nothing to guarantee the real income that will determine if people can afford their basic needs (nor what those basic needs really are). Believing it will it’s just wishful thinking.
I am sorry about your park becoming unusable. I do agree that it’s a shame to let it go while you keep bombing arabs all over the world. (Just kidding, I know you could do both!). But that is an example of the public services you should expect from your (local) government, not from the JG. Why should the park be taken care of counter-cyclically?
Sorry, MamMoTh, but I don’t buy into your nominal income and real income here. Only about 25% of the US economy is real income as far as production of goods goes. The rest is service that doesn’t produce anything “real.” That means in your interpretation that the US is “living off” the 25%, of which a significant sector is producing military goods that are irrelevant to the domestic sector. The JG would expand the service sector slightly and some of what it would do would count as public investment. We are still using wilderness cabins built in national parks by the WPA.
Sorry Tom but that is not the difference between nominal and real income, it has nothing to do with goods or services, but about how much a nominal income can buy of goods and services.
Ultimately, my view on the JG is very simple: it should be targetted on very specific groups, namely, young men (18-24) and, possibly, racial groups where poverty is ripe such as Indigenous Australians (or other communities where unemployment is double digit). Noel Pearson has advocated a JG for the latter, while the former would serve to reduce crime rates and repeat offenders (clear correlation between crime and unemployment). The groups are very niche in and of themselves to overburden our resources in their communities (indeed, I assume shops, if there are any in these destitute regions, would love the boost in demand and increase their output capacity!), and this addresses (a) the failures of our education system and (b) cultural barriers that require mending. The results in European countries are clear. Switzerland has a nominal guarantee is some more communal cantons (civil servants from early tertiary leavers and one may argue – I don’t – through military service which they provide some funds for nominally for a JG [ha]!), while Norway has a JG (expressly) for its youth – oh those horrible, underdeveloped states! They also have price stability, although tax reductions (abolition of payroll taxes etc) for such workers would also be an obvious option.
A problem I have with a sweeping job guarantee is that it presupposes capitalism in and of itself is unstable, hence a need for a automatic “buffer” for the state to intervene and which is afford to it as a monopoly issuer of its own currency. I disagree with the former tacit assumption. I’m going down the Georegist path that once the state collects “rents” (broadly defined) and thus liberate capital and labour, exogenous events aside (asteroids that hit the earth – even I assume resources would be deployed in the long-run that will promote full employment), capitalism is not only dynamic but stable. All the major recessions / downturns are preceded by speculation in natural resources (land, copper, gold, silver etc), and the credit process that makes this happen. Thus, it is indeed a matter of taxation, but we should be focusing on institutional guarantees first, rather than a sweeping buffer stock.
If unemployment is above the level at which labour shortages contribute too much to inflation, there I no room for JG in that raising demand is a better option.
But if unemployment is AT the level at which the labour market contributes to inflation, JG has a huge problem, as follows.
If JG schemes employ just JG people and no permanent skilled labour, capital equipment or materials, the JG scheme will be ludicrously inefficient. On the other hand, JG cannot pinch skilled labour from the existing economy, given the above assumption. Nor can the JG system order up materials or equipment from the existing economy because that would require the employment of more labour in the existing economy, which would be inflationary, given the above assumption.
If anyone is interested in the solution to this paradox, it is here:
http://ralphanomics.blogspot.com/2011/02/make-work-job-guarantee-wpa-etc-should.html
bill, I believe you need to add a medium of exchange supply and its velocity to your model.
“The sources of spending which flow and add to aggregate demand are:
Household consumption (C)
Private Investment (I)
Government spending (G)
Export revenue (X)”
I believe that is Y = C + I + G + X (or NX).
If so, can you have the C, I, G, and/or NX coming from oustide the time period measured by Y?
If so, can that cause economic problems with the various entities’ budgets?
EDIT to: “outside”
Tom Hickey said: “I think that along with the JG, the developed world also has to rethink free trade. This works for capitalists (multinational corporations are doing great) but it is forcing workers to compete increasingly with Third World standards – low wages, no benefits and no protections. This is insanity and makes no sense at all. A few people are getting rich and the rest are getting crammed down. It is already resulting in social unrest, and this is just the beginning.”
Would this make sense to someone who wrongly believes that real aggregate demand is unlimited so that economies are always supply constrained?
Are the rich trying to “steal” the real earnings growth and retirement of the lower and middle class?
“I don’t think you do. It’s for the unions to justify why their members pay is at that level.
It would also be for the unions to justify why people should be left on the scrap heap to keep their members in clover, and to explain how that attitude is different from the bankers.”
Neil, I think you’re making a false distinction here, between workers and workers on the JG. The threat as far as the unions are concerned will be that their members will be sacked, “rehired” on the JG, and suffer a wage cut.
Spadj, all the evidence is is that Capitalism is unstable macroeconomically – there is no reason to think that it will automatically produce full employment – Keynes and the Great Depression should have laid that absurd idea to rest, but the bokor of Harvard, Chicago etc have revived this tired zombie. And there is no reason to think it is automatically stable financially – Minsky sez stability is destabilizing, particularly to the credit process, modern banking, which is the defining feature of capitalism. To the extent capitalism is stable, the JG will be meaningless. Why one earth should one restrict it? This makes it more like welfare, than the right it should be. Monetary economies without job guarantees deserve the word “insane” or Kafkaesque. Partial job guarantees make very little sense. It’s like having an army that will only defend short people from foreign invasions, or insuring only the left side of your body for accidental death and dismemberment.
“The threat as far as the unions are concerned will be that their members will be sacked, “rehired” on the JG, and suffer a wage cut.”
They may well be if there is no added value from the individuals for the work that they do. JG will shine a light on public sector largess and favouritism as much as it will put private sweatshops out of business.
Unions are well known wreckers of the ‘jobs for everybody’ schemes and that has to be countered by making sure that the JG wage is a living wage.
Decent Living Minimum Wages are pegged to 60-70% of median wages, surely what would happen is a further compression of wages compared to a lower or no minimum wage?
My fears about the JG are largely about the people working to administer JG work. If you think there is a need to boss people around by having a JG (rather than simply having a citizens dividend and leaving it down to individuals to decide what they could do to help their communities) then everything hinges on the capabilities and goodwill of those doing the bossing. There is massive scope for JG administration to be a magnet for the worst kind of power trip and squandering personalities.
@ Tom Hickey, Thursday, April 14, 2011 at 7:05
I couldn’t disagree more with your comment on free trade. If lower living standards for Westerners is the price to pay for increased living standards for millions of people in developing countries, then the more free trade, the better. Personally, I don’t care about fellow citizens of my country any more than I care about the citizens of any other country in the world.
“Unions are well known wreckers of the ‘jobs for everybody’ schemes and that has to be countered by making sure that the JG wage is a living wage.”
The problem is that these people are your (our) constituency – the low paid who we think should be getting paid more and have better terms and conditions – well above the JG wage. So it would make sense to carry them with us. They have a legitimate case if local government is going to sack people and re-hire on the JG wage (that’s more or less what is threatened by privatising services). So there has to be some kind of protection against that. I’m just asking – what form could that protection take?
hbl–
Where is that inflation going to come from though? The gov is buying off the bottom and in any event the currency is convertible (into labour at a fixed rate).
” They have a legitimate case if local government is going to sack people and re-hire on the JG wage”
If they are overpaid local services workers, then they are overpaid and they have to justify why they are overpaid to their peers – if anybody notices. That’s what equal pay legislation is about.
The constituency of people who are not unionised who are being squeezed by the private sector is vastly larger, so I see no reason to pander to a few with their feet under the table.
“There is massive scope for JG administration to be a magnet for the worst kind of power trip and squandering personalities.”
It’ll give the redundant bankers something to do then 🙂
dehbach,
The goal of buying off the bottom is perfect and one of the things I love about the contrast Bill makes between the JG and traditional Keynesianism! The question is of how well this goal can be achieved and what the secondary effects are.
My scenario rests on the assumption that there might be entire industries for which the [current] minimum wage work cannot be made as appealing as JG work would be, at the same wage. I also wondered about wildcard effects across all industries like shorter commute times for JG jobs, reduced incentive to relocate to find work, etc. This assumption could be wrong. But if it’s correct, and assuming the economy as a whole still demands the output of those industries, then wages (and prices of output) for those industries will rise enough to draw the workers they need away from the JG.
So, by setting a floor on both wages AND conditions, the JG could have unexpected effects on the wages in industries that can’t match the floor level of conditions established by the JG.
Workers in those industries who are now paid a premium will have additional nominal buying power and most likely spend it all. Now, either:
a) Those industries are essential enough that the rest of the economy lowers its savings rate in order to keep buying everything they used to buy before, plus pay the higher price for the output of those industries. This raises aggregate demand and could impart a strong inflationary impulse that would require some groups to have their demand lowered to prevent inflation taking hold (if the economy was near capacity). And note if inflation did increase then people would complain that the JG no longer pays a living wage. Or:
b) Nominal aggregate demand is unchanged because the private sector doesn’t lower its savings rate. The economy excluding workers in the repriced industries buys less output (either less output from those industries that now cost more, or cuts back on spending on other areas of the economy to afford the repriced industries). But the workers in the repriced industries would offset this by spending more, so total output would be the same (I think?). This would be more of a shift of which groups had buying power, and would not be inflationary, and might not be a big deal.
So, thanks for motivating me to work through it further 🙂 (I hope I got it right). If the degree of these effects was non-trivial (and I recognize the degree could be too small to matter)… then scenario (a) might lead to political fighting about whose demand gets reduced via taxes and whether the JG was worth it, and scenario (b) might involve just a realignment of consumption within the population — perhaps even a good thing, depending.
So once again, I’m not trying to be a naysayer, I guess I was just bothered by what seemed to be an assumption that all minimum wage industries should be able to be made as appealing as JG positions, without having to offer a higher wage. [And even that may have been my misunderstanding of Bill.]
“Spadj, all the evidence is is that Capitalism is unstable macroeconomically – there is no reason to think that it will automatically produce full employment – Keynes and the Great Depression should have laid that absurd idea to rest, but the bokor of Harvard, Chicago etc have revived this tired zombie”
That doesn’t address my point: why is it unstable? History (call it evidence) shows it has to do with ‘capitalising’ rents. Look at most of the major Panics in the United Sates, for example. These issues can be addressed via taxation. Having said that, I haven’t seen an economy other than a few German-owned Chinese colonies where all taxes are abolished (ok, except perhaps a few duties or excises) to create ‘single tax’ society like Kiaochow China (where at the they had full employment, until the Communists gained power). It’s never been the same since. The closet modern day version is Singapore or Hong Kong, again close to full employment. Pittsburgh has deployed similar ideas, and its housing market remained stronger and did not explode in prices compared to rest of the country.
Furthermore, I see many reasons why it would sure reach full employment with no pay roll, income, capital taxes etc (and other market distortions) – in short, liberating capital and labour, and taxing on land (and rents, broadly defined). This would also produce a massive inflow of investment given there is hardly any taxes that tax production itself. The new Switzerland or Liechenstein.
For this reason I am not inclined to be in agreement with you that capitalism per se is unstable, rather than the culture, institutions and tax regime that make it unstable by allowing speculation over genuine production.
hbl–
OK — so I think I understand where you are coming from. I think that you agree that there is SOME level of JG wage and conditions that is not disruptive, even on your view of the world. So, assuming that the JG program was implemented above that level then I think everyone agrees that there will be a one time adjustment as private sector jobs calibrate to the JG system.
I think its clear that businesses that offer labour a total compensation (wage and ‘intangibles’) package lower than a JG job will have to pay more or will fail. I (and I think Bill) do not see that as a problem.
One time changes to price level are not inflation.
And you are correct that at some level of capacity utilization (when the lowest private sector wage lifts off the JG level) that there could be inflation. HOWEVER, at that point the JG rolls are very low, and this will push the Gov sector closer to (or into) surplus (automatically) and that will drain demand. If that did not work then the Gov could (i) raise the JG wage; (ii) raise taxes; or (iii) take other steps to drain demand (like encouraging saving via tax policy or something).
In any event, on a moral level I do not think that favouring fighting the risk of inflation over the reality of chronic unemployment (and all the attendant effects) is justifiable.
D
Spadj —
“Why is [capitalism] unstable?”
Capital is accumulatory. So as more capital is accumulated in the hands of fewer capitalists, the market for goods disappears (less people can afford to buy). To circumvent this limit, capital employs technology (such a debt) to create demand. The private sector cannot run deficits forever, and eventually this comes crashing down. Thats unstable.
It is not an accident that capitalism keeps running into crisis. It is the nature of the system. MMT gives us the tools to make these cycles less severe and allows us to reduce the impact of boom-and-bust on labour/the unemployed.
D
dehbach,
I think we are largely on the same page.
Yes, most of what I’m discussing would be relevant when a JG was first implemented, not after one had been in place for ten years.
You say “If that did not work then the Gov could (i) raise the JG wage…”. I assume you mean lower the JG wage? But yes all three solutions are related to what I suggested might become politically contentious.
One more thing… you say “at some level of capacity utilization… there could be inflation… HOWEVER, at that point the JG rolls are very low.” I’m partly questioning how well that automatic hand-off occurs (to shrink the JG buffer as growing demand uses up overall economic capacity) and at what price… i.e., is the JG really the employer of last resort as intended, or does it exert a powerful pull on labor away from the private sector? To take an extreme and silly example, does it foster a generation like Japan’s “grass-eaters” who are content with low wage low consumption lifestyles… a low stress short commute JG job, making just enough money to live in their parents basement and play video games all day… maybe these people would have to be offered 500% of the JG wage to be motivated to join the private sector (again, using extremes to illustrate the scenario).
Now I know in that last paragraph I sound like the mainstream scare-mongerer’s that Bill rightly criticized, and I don’t believe that a likely scenario, but I used quantitative extremes to make it easier to illustrate my previous point in a qualitative sense. I’m not saying that means the drawbacks of a JG outweigh the benefits — I still think the benefits are significant! — I just wanted to work through what the macro effects might be (under some possible but not inevitable outcomes) and how they might be addressed.
…playing video games all day on weekends, and in the evenings, i mean! they would be at the JG job in the day 🙂
And yes so my comment isn’t taken out of context, as I said before, I *do* agree the private sector is flexible enough to draw people away from JG at the right mix of conditions and wages.
hbl–
I guess a lot of this is the ‘quality’ of the JG jobs. These are not going to be “awesome” and I think people will, on the whole, move to the highest paying jkobs, where we see payment as a combination of wage and quality-of-work. And I think (albeit without any citation) that in the depression, when the WPA was very JG like, we did not see the effects you speak of. See this, re: typtes of jobs: http://www.dailykos.com/story/2011/03/31/961138/-Job-Guarantee:Zero-Unemployment-Without-Causing-Inflation
And, even assuming everything you say is true, then its still just a one-time price adjustment.
D
stone: “There is massive scope for JG administration to be a magnet for the worst kind of power trip and squandering personalities.”
You mean a JG would take these people away from the private sector. Asshole shifting. 😉
Stone said:
“My fears about the JG are largely about the people working to administer JG work. If you think there is a need to boss people around by having a JG (rather than simply having a citizens dividend and leaving it down to individuals to decide what they could do to help their communities) then everything hinges on the capabilities and goodwill of those doing the bossing. There is massive scope for JG administration to be a magnet for the worst kind of power trip and squandering personalities.”
I agree 100%.
People need only look at the people currently administering the JobNetwork and Work for the Dole programs.
Unfortunately, the MMT proposal for a JG assumes that such barriers do not exist or they just simply ignore them.
Will Richardson: “Decent Living Minimum Wages are pegged to 60-70% of median wages, surely what would happen is a further compression of wages compared to a lower or no minimum wage?”
IMO, minimum wages would be better pegged to mean income, not median wages. We do want compression in income, don’t we?
IMO, minimum wages would be better pegged to mean income, not median wages. We do want compression in income, don’t we?
minimum wages do not guarantee compression of incomes. this never happened. you’ll need maximum wage as well, or a progressive enough income tax that has a similar effect.
Alex:I couldn’t disagree more with your comment on free trade. If lower living standards for Westerners is the price to pay for increased living standards for millions of people in developing countries, then the more free trade, the better. Personally, I don’t care about fellow citizens of my country any more than I care about the citizens of any other country in the world.
Alex, I agree with this in general and have said so for a long time. I have also noted that the agenda of global capital is to use this great leveling as an excuse to cram down workers into servitude rather than to uplift them to the middle class, with a decent wage, benefits and protections. Unless global capital is restrained from pursuing this agenda, this cram down is going to last until all available workers are run through, and that’s a pool of billions of people. We don’t need a super-class and with the rest of the world their serfs.
There are ways to encourage global trade without making it the road to serfdom.
A MamMoTh,
I thought you were making an Austrian-type nominal v. real argument here.
You might think that AD will pick up and firm will respond by increasing production, I think that is extremely naive. I still don’t see your nominal-real argument against the JG holding up.
If incomes pick up at the bottom that will increase NAD, and that sends a signal to invest more in response. What is naive about that? That’s what unemployment comp, food stamps and other safety net measure do as stimulus. I still don’t see your nominal-real argument against the JG holding up here.
Moreover, I think you are overlooking one of the chief reasons for a JG. Employed people are more employable than the unemployed and the longer one is unemployed the less likely one is to ever be employed. Many of the youth today, especially uneducated minority youth, race a lifetime of unemployment, and they will probably turn to crime, which has a cost to society as does incarceration if they are convicted and sentenced to prison. I would see the JG program as not only a “holding bin,” but also a training program. There are four major contributions to productivity – specialization, capital goods, human resource improvement (education, training), and technological innovation. I would put the JG under human resource maintenance and improvement. Productivity increase leads to increased living standard.
Tom my argument about nominal vs real wages applies to having a minimum nominal wage with or without the JG, as long as the JG does not affect the supply side. By the laws of supply and demand, higher AD will certainly increase both the supply and the price. What effect this will have on the real miminum wage will depend on many other factors including the size of the pool of people in the JG. Do food stamps increase the real purchasing power of food or the profits of food producers? Or both?
I have nothing against the social benefits of the JG you mention. You can argue though about whether the JG is the best way to achieve some of these goals. Should the JG or the education system already in place provide the training? The government or the private sector?
Spadj’s post said: “Spadj, all the evidence is is that Capitalism is unstable macroeconomically – there is no reason to think that it will automatically produce full employment – Keynes and the Great Depression should have laid that absurd idea to rest, but the bokor of Harvard, Chicago etc have revived this tired zombie”
That doesn’t address my point: why is it unstable?”
Too much debt and economy(ies) that go from mostly supply constrained to mostly demand constrained causing “instabilities related to time”.
dehbach post said: “Spadj –
“Why is [capitalism] unstable?”
Capital is accumulatory. So as more capital is accumulated in the hands of fewer capitalists, the market for goods disappears (less people can afford to buy). To circumvent this limit, capital employs technology (such a debt) to create demand. The private sector cannot run deficits forever, and eventually this comes crashing down. Thats unstable.”
Right, it hits the budgets of mostly the lower and middle class workers in the high wage countries. That is the entity experiencing negative real earnings growth. That is why there isn’t price and wage inflation from more and more debt.
And, “It is not an accident that capitalism keeps running into crisis. It is the nature of the system. MMT gives us the tools to make these cycles less severe and allows us to reduce the impact of boom-and-bust on labour/the unemployed.”
IMO, only if there is more currency with no bond attached. More gov’t debt is not the solution to too much private debt with both being owned mostly by the rich.
Tom Hickey said: “We don’t need a super-class and with the rest of the world their serfs.
There are ways to encourage global trade without making it the road to serfdom.”
IMO, we have a medium of exchange problem. There are too many demand deposits created from debt and not enough currency with no bond attached.
IMO, this medium of exchange problem is causing problem(s) in the “retirement market.”
What exactly are the economic assumptions behind the idea that all NEW medium of exchange has to be the demand deposits created from debt (meaning it has to be borrowed into existance)?
Fed Up–
While I agree that bond issuance is a waste of time, I don’t think it matters in this analysis. Bonds are just another type of government-issued financial assets.
D
Should the JG or the education system already in place provide the training? The government or the private sector?
The private sector has not stepped up, and the education system has failed also. This is not just a US problem either.
A great post!
The JG represents a huge step forward, no doubt. But I have a few nagging doubts. First off, its seems to solidify even further the commodity nature of labor within capitalism. In a world in which the very need for labor is declining due to technology, I’m a bit uncomfortable with the idea of tying income totally to a work requirement. The JG may be an excellent idea within the logic of capitalism but shouldn’t we set our progressive sites higher? Another doubt I have with the JG proposals I’ve seen is that it doesn’t at all address inequality. Bill seeks to set the JG wage as a minimum wage but I think a wider critique would question why there should be any differential in wage outside of hours worked. If we’re going to propose a program for a minimum wage, why not a maximum wage? And a maximum income as well.
I think the JG could be a good step forward. But would it be so if it became just a make work program within an oppressive capitalist regime?
I guess to sum up my post above: Do you think the JG program within a capitalist system is better (i.e. more socially just) than at least a partial socialization of the economy?
Fed Up: Bonds vs currency doesn’t matter, really. All forms of money are some kind of credit/debt. Currency is just a kind of bond. Government debt is money. “Demand deposits created from debt”=private credit money vs Government debt/NFA = government fiat money is what matters.
Money is not fundamentally a “medium of exchange” – that’s a path to the Austrian/Neoclassical/mainstream way of thinking. As Keynes emphasized, Money fundamentally is a unit of account – of credit/debt, which became a medium of exchange.
all NEW medium of exchange has to be the demand deposits created from debt (meaning it has to be borrowed into existance) All new money is not private credit money. The gov creates some. What you describe is government balanced budget/surplus conditions, which are dangerous. Yes, we have excessive private credit money. The government debt/gdp ratio (gdp being related to the quantity of private credit money) is too low for stability & prosperity. The working rule that the mainstream view is the opposite of the truth is rarely wrong.
Neil:“There is massive scope for JG administration to be a magnet for the worst kind of power trip and squandering personalities.”
It’ll give the redundant bankers something to do then.
Yes, they should be hired on the bankster/ Randroid /economist wage – which is lower than the regular JG wage, as these people have great expertise in producing bads rather than goods. But we should make lemons out of lemonade, and use these people to direct the JG workforce – listen to them carefully and do the exact opposite of what they propose.
Dear Jim,
the JG program isn’t just a “make work” program. Amongst other things there are a vast number of work activities which urgently need doing both in care for the environment (eg rehabilitation of all sorts of the land, rivers, coastal and marine ecosystems, care and maintenance for urban areas and renewal, just to name a few) and care and assistance for other people (the aged, the disabled and handicapped both physical and mental, teenagers etc). There is an enormous need for this type of work which the private and government sectors, for whatever reasons so far do not adequately address.
By supplying more of these services the JG would help to reduce the inequality in the community. Firstly the disadvantaged would benefit the most as they are the least able to afford support services and the longer term care and improvement to the environment benefits all.
Secondly, the unemployed would be better off than being on the dole so once again the inequality is reduced.
It might not then be all perfect equality (whatever that might be) but it would be far better than the current arrangements.
Cheers
Graham
Graham,
Agree it would be far better than today. And properly handled, it could be a back door way to attack the power of capital. I’m wondering though: if the general long term trend is toward increasing technological efficiencies and economies of scale, then one could easily see a rising percent of the population on the JG earning the minimum wage. It would seem this would have a depressing effect on overall purchasing power. I think one of the best answers for this would be for an increasing level of government social spending which would raise total income to its technological potential.
The logical end point of the JG coupled with functional finance spending looks like something resembling socialism. An excellent back door way of achieving radical change and something that will be fought tooth and nail by all who have a stake in the status quo!
Jim, Socialisation can happen under a capitalist economy too. For example in Australia we have universal healthcare and have had for a generation, there is no number of weeks limit to unemployment provided you pass the activity tests, it is similar in the UK and parts of Europe.
These countries have what is called a mixed economy but they still fall within the capitalist paradigm. I don’t see the JG proposing the commodity nature of labour (commodity prices don’t have a floor price, a JG does). What the JG does do is include idle labour as a resource. A resource that shouldn’t be idle. A resource that is not idle becomes productive and the benefits flow on to everyone.
@ Fed Up
Too much debt and economy(ies) that go from mostly supply constrained to mostly demand constrained causing “instabilities related to time”.
Again, that’s describing, not explaining. It does not answer why, or the process of change. Nor does it tells us which sectors go bust i.e. your aggregates conceal the most fundamental aspects of change (even though you note time is a matter). My point on speculation in land/natural resources. Look at the common motif in the Panics the US has had every 18 years – oversupply of properties, nominal debt obligations, savings after the bubble bursts etc.
I just don’t think capitalism is unstable, our tax system and institutions make it unstable. Only one way to settle this, of course – an actual experiment where the state derives its revenue purely from land.
dehbach,
Thanks, that dailykos link looks useful and I’ll read it when I have time.
“And, even assuming everything you say is true, then its still just a one-time price adjustment.”
Doesn’t that depend on structural factors? In my scenario (a) at 1:24 above, there are more dollars attempting to be spent post-JG. If the economy can expand output sufficiently, you get no price increase or inflation. If the economy can’t expand output, you get a one time price increase (but no inflation yet). If then a distributional battle to maintain spending power takes hold (because someone is effectively able to buy less goods and services than before), that’s when you’d have rising inflation.
But in an environment in which a JG was being implemented (i.e., it would likely happen at a time of high unemployment), and with today’s reduced bargaining power and less automatic Cost-Of-Living-Adjustments, then I agree that one time adjustment is more probable than inflation.
dehbach said: “Fed Up-
While I agree that bond issuance is a waste of time, I don’t think it matters in this analysis. Bonds are just another type of government-issued financial assets.
D”
Some Guy said: “Fed Up: Bonds vs currency doesn’t matter, really. All forms of money are some kind of credit/debt. Currency is just a kind of bond. Government debt is money. “Demand deposits created from debt”=private credit money vs Government debt/NFA = government fiat money is what matters.”
So if the gov’t were to say to you, I’ll give you $10,000 in currency with no bond attached or give you $10,000 in demand deposits with a gov’t bond attached (meaning you are going to pay taxes to pay the interest and probably even to repay the principal), which would you choose?
It seems to me there is a difference from an accounting, budget, and time standpoint.
It also seems to me what matters for the real economy is the medium of exchange supply, currency plus demand deposits (whether private or gov’t).
Some Guy said: “all NEW medium of exchange has to be the demand deposits created from debt (meaning it has to be borrowed into existance) All new money is not private credit money. The gov creates some.”
It seems to me both private debt and gov’t debt has an interest rate attached, repayment terms attached, and brings something forward from the future to the present. New currency with no bond attached doesn’t have those.
And, “What you describe is government balanced budget/surplus conditions, which are dangerous.”
Nope. I want to see various levels of gov’t with a balanced budget. I also want some type of currency printing entity running a deficit with currency with no bond attached meaning:
savings of the rich plus savings of the lower and middle class = dissavings of the currency printing entity with currency (and no bond attached and in most cases not 0) plus the balanced budget of the various levels of gov’t (which would be 0).
Spadj said: “@ Fed Up
Too much debt and economy(ies) that go from mostly supply constrained to mostly demand constrained causing “instabilities related to time”.
Again, that’s describing, not explaining. It does not answer why, or the process of change. Nor does it tells us which sectors go bust i.e. your aggregates conceal the most fundamental aspects of change (even though you note time is a matter). My point on speculation in land/natural resources. Look at the common motif in the Panics the US has had every 18 years – oversupply of properties, nominal debt obligations, savings after the bubble bursts etc.
I just don’t think capitalism is unstable, our tax system and institutions make it unstable. Only one way to settle this, of course – an actual experiment where the state derives its revenue purely from land.”
I’ll probably need to think of a better answer, but it seems to me that the buildup of debt and going from supply constrained to demand constrained is a process of change.
The sector that goes bust is the one experiencing negative real earnings growth (affecting budgets), usually the workers. The workers see prices, wages, and interest rates in the present and have certain assumptions about them in the future (like be optimistic and things will get better). This can affect whether they go into debt. If those assumptions turn out not to be true, they can go bankrupt.
I said: “What exactly are the economic assumptions behind the idea that all NEW medium of exchange has to be the demand deposits created from debt (meaning it has to be borrowed into existance)?”
I left something out. It should be:
“What exactly are the economic assumptions behind the idea that all NEW medium of exchange has to be the demand deposits created from debt (whether private or gov’t and meaning it has to be borrowed into existance)?
Supply decisions are made ex ante and demand is realised ex post.
It’s hardly a stable relationship.
Strange how wage compression’s happened in Europe, particularly Nordics like Sweden even though it’s ‘impossible’, certainly other action is needed but putting in a floor at a higher level would have an impact and I’m not aware of any maximums.
The overwhelming problem that I foresee with a job guarantee is a potentially large change in the relative prices of goods within the economy (because of the relative costs), and therefore consumption habits and perhaps employment. To be honest, I think the extent of this change is vastly underestimated.
Putting it bluntly, I think many low wage jobs are undesirable, and not just because of the pay. Little potential for meaningful progression up the ranks no matter how much effort you put in, dark working environment (factory/warehouse), extremely repetitious, physically tough and so on are all prominent features of low wage jobs (long commutes may be as well). These jobs however, make up crucial parts in the supply chains of many basic goods and services. Take agricultural farming for example. If farming businesses had to pay an extra 20% in wages to attract workers, as well as providing them longer breaks because of the physicality and so on, how would the price of fruit/vegetables change at the supermarket?
What I most certainly believe is that the prices of goods and services that are low skilled labour intensive (such as farming, fast food, some factories) would increase relative to the price of goods and services that use proportionately less low skilled labour (higher tech products). Would this end up pushing up the price of goods that the lower end of the workforce tends to consume, and somewhat negating the job guarantee?
@ Fed Up
Agreed, that “I’ll probably need to think of a better answer” but the latter part “but it seems to me that the buildup of debt and going from supply constrained to demand constrained is a process of change” still does not answer the common issue of most/all business cycles: WHERE (to) does this debt go (I argue the rentier – landlord, banker, owner of some natural resource) and WHY? and WHICH industries are most effected? I have provided some preliminary historical observations (apparent mirage of bottlenecks in housing, commercial property, tullips, copper – whatever natural resource), but of course this leads to oversupply (too much tullips, houses, properties) and these industries collapse (why do you need to build given you’ve built 6 years worth of housing supply?) taking other industries and sectors down with them (bankers, manufacturing) etc. Of course, Veblen’s price theory may be useful too as this orders production.
Anyways blogs are not the best place to deal with these matters…
hbl “is the JG really the employer of last resort as intended, or does it exert a powerful pull on labor away from the private sector? To take an extreme and silly example, does it foster a generation like Japan’s “grass-eaters” who are content with low wage low consumption lifestyles… a low stress short commute JG job, making just enough money to live in their parents basement and play video games all day… maybe these people would have to be offered 500% of the JG wage to be motivated to join the private sector”
-Is there a case to be made for low wage low consumption lifestyles if people are content with them? Isn’t unsustainable consumption and discontent with anything less than a multiple of one’s current income a big problem with our world? Apparently when Europeans first arrived in Australia, they found the people to be well fed and peaceful. Perhaps they had an economic system that had worked excellently for 60000 years.
“If farming businesses had to pay an extra 20% in wages to attract workers, as well as providing them longer breaks because of the physicality and so on, how would the price of fruit/vegetables change at the supermarket?”
What you’re forgetting is that the lack of machines in this area is a direct consequence of the ability to operate it with near slave labour conditions. Once you get away from that the machines will start to look more attractive. When you watch an agricultural system operating in a modern country, it is stunning how much is still done by hand.
Its all the same argument that was advanced when the minimum wage was introduced. I didn’t notice the world end then either.
Alex “The overwhelming problem that I foresee with a job guarantee is a potentially large change in the relative prices of goods within the economy”-
-I’ve thought that a JG would have a very very different effect on this when compared to a citizens dividend system (where everyone got a flat pay out irrespective of what they earned on top). To my mind a citizens dividend system would enable people to do “very low quality” jobs if they themselves wanted to for the extra money or for other reasons. So instead of the UK shipping plastic waste to India so that it could be sorted for recycling (or simply sending it to landfill); people could sort it here if they considered it a good thing to do. High risk of failure tech start up companies or pure science research could be other beneficiaries. Mac Donald’s may have a harder time competing with independent food joints or home cooking but is that such a tragedy? (However I have worked in Mac Donalds as a holiday job and loved it 🙂 ). Much of the work that needs doing and is left undone in developed countries is care for elderly or children. I think it is vastly preferable for family and neighbours to be able to afford the time to do this or for people who liked the work to be able to offer a private service at low cost because a citizens dividend was covering much of the living costs of both the workers and the elderly people themselves. The JG alternative would be to have unsuited and possible reluctant conscripts looking after very vulnerable people. That sounds like a recipe for massive administration headaches and endless mishaps.
As far as I can see what a lot of people don’t like about low paid work is the being bossed about rather than the work. I’m scared that a JG system would result in people being just as down-trodden as the current pointless-job/risk-of-unemployment system.
Neil Wilson “What you’re forgetting is that the lack of machines in this area is a direct consequence of the ability to operate it with near slave labour conditions. Once you get away from that the machines will start to look more attractive. When you watch an agricultural system operating in a modern country, it is stunning how much is still done by hand.”
-There was a TV program about whether the work done in the UK by migrants could be done by UK unemployed people. It featured a potato packing plant in Lincoln where every employee (100s) on the shop floor was from eastern europe or Portugal. The owner was asked whether if it were not for migrants would he employ UK people. He said no, he would buy a machine to pack the potatoes.
Further to my comment about the potato packing, the key thing is that the migrant workers were being paid the minimum wage, well above the UK dole. The issue was that the owner believed migrants worked harder than UK workers. The issue was that UK workers were considered too lazy and slow. To my mind it is all an issue of empowerment and motivation. If people are working because they want to then good work gets done.
Moi: “IMO, minimum wages would be better pegged to mean income, not median wages. We do want compression in income, don’t we?”
MamMoTh: “minimum wages do not guarantee compression of incomes. this never happened. you’ll need maximum wage as well, or a progressive enough income tax that has a similar effect.”
Assume the worst: One person makes a great deal of money, MX, and everybody else makes the minimum wage income, MW. The average income is (MX + n*MW)/(n+1). Say that MW is pegged to 1/2 the average income. Then a little algebra will tell us that MW = MX/(n+2). Any increase in the maximum income, MX, will lead to a proportional increase in the minimum income.
Notice that pegging the minimum wage to the median wage does not have this effect. 🙂
stone: “As far as I can see what a lot of people don’t like about low paid work is the being bossed about rather than the work.”
Important point. Low level managers are generally bad managers, IMX. They are given the power without the training.
stone @ 21:05 replied to me, “Is there a case to be made for low wage low consumption lifestyles if people are content with them?”
Probably! My comments only attempted to understand the secondary macroeconomic effects of the scenarios I posed, and related things such as whether they might pose political/distributional challenges, not to judge how society should value those scenarios.
(Apologies if others addressed this, I haven’t yet been able to keep up reading this thread… hopefully later).
Min, my point is that whatever you set the nominal minimum wage to, in the long run the price level of the economy will adjust in such a way that the maximum wage will increase accordingly and there will be no real effect to the increase of the minimum wage.
Chasing a median or average wage will only lead to runaway inflation. The only was I see to compress incomes is to cap the high ones through taxation.
MamMoTh: “Min, my point is that whatever you set the nominal minimum wage to, in the long run the price level of the economy will adjust in such a way that the maximum wage will increase accordingly and there will be no real effect to the increase of the minimum wage.”
In the extreme example I gave there is no effect to the increase in the maximum income. As to whether there is any chasing, that depends upon human psychology, which is not really predictable. Chasing is much more probable without a peg, because the peg guarantees the futility of chasing.
Perhaps this is clearer. With a peg, only one side is doing the chasing. 🙂