Here is Episode 4 in our weekly MMTed Q&A series. There will also be some music for those who like to find some different music. This week we experimented with a different format and further reduced the length.
Questions and Answers 3
This is the third Q&A blog where I try to catch up on all the E-mails (and contact form enquiries) I receive from readers who want to know more about Modern Monetary Theory (MMT) or challenge a view expressed here. It is also a chance to address some of the comments that have been posted in more detail to clarify matters that seem to be causing confusion. So if you send me a query by any of the means above and don’t immediately see a response look out for the blogs under this category (Q&A) because it is likely it will be addressed in some form here. It is virtually impossible to reply to all the E-mails I get although I try to. While I would like to be able to respond to queries immediately I run out of time each day and I am sorry for that.
So in no particular order of receipt or priority.
Do you think that MMT might be compatible with small government and low taxes, or is it inherently biased towards big government and high taxes?
First, no body of economic theory can specify the size of government. Even though the implication of mainstream economic theory is that small government is better none of the macroeconomic models can demonstrate the validity of that proposition.
Second, in that respect Modern Monetary Theory (MMT) is no different. The size of government relative to the non-government sector is essentially a matter of political choice, and historical evolution (which reflects past political choices).
An electorate that prefers more public goods and less private goods will support a larger government relative to one that prefers the opposite mix.
There is some minimum size of government beyond which an economy will not function in any sophisticated way, unless, of-course, you support the lunacy of the ultra-libertarians who think that everything can be privatised as long as property rights are well specified.
The question of taxes is to some extent separate from the political choices relating to the size of government in the overall economy. There are two dimensions to consider when approaching the question of the size of government: (a) the size of its discretionary involvement in economic activity; and (b) the cyclical component.
It is the second dimension which leads to the budget outcome being beyond the direct control of the government, even though discretionary decisions made (the first dimension) condition the extent to which the cyclical components operate. That is, if the discretionary net spending decisions are appropriate then the chances of large output gaps emerging are reduced.
Clearly though, the government is unable to directly control behavioural shifts in private consumption and investment spending and the vagaries of the external sector. This is why the imposition of strict fiscal rules is contrary to logic and responsible fiscal management. If the government is unable to control an outcome why would it make it a policy target?
Further, budget balances reflect overall economic activity. Trying to achieve fiscal outcomes which are contrary to the desires expressed by the non-government sector via its spending and saving behavior is likely to be counter-productive and oppressive. If the non-government sector desires overall to save then the government sector has to run deficits of an equal proportion of GDP or undermine economic growth and cause unemployment.
Please read the deficit suite of blogs – Deficit spending 101 – Part 1 – Deficit spending 101 – Part 2 – Deficit spending 101 – Part 3 – to learn the basics of that proposition.
The real issue is whether the net public spending balance is appropriate in relation to the output gap that emerges over time.
The choice of tax revenue targets is influenced by the assessment of the strength of private spending relative to the real capacity of the economy to absorb growth in aggregate demand, conditioned by overall political views about the size of government intervention (measured at full employment).
The calibration of the “size” of government, given the two dimensions noted above is also important. It is ridiculous to be alarmed by a government deficit that moves from 3 per cent of GDP to 6 per cent of GDP at the same time the non-government saving increases by say 6 per cent and the unemployment rate doubles. Yes, the size of government has increased significantly but that change is driven by the cyclical component – the so-called automatic stabilisers. If measured at full capacity, the size of government (presuming its discretionary policy stance is unchanged) would be unchanged (at 3 per cent).
Please read my blogs – Structural deficits and automatic stabilisers and The dreaded NAIRU is still about! – for more discussion on this point.
We should always recognise that a sovereign government is not taxing to raise revenue but rather condition the state of aggregate demand to ensure that price stability is maintained. This is not to discount other purposes of taxation – for example, to alter resource allocation away from or towards specific activities (such as to discourage pollution or smoking).
If MMT was fully implemented would it always involve some form of the Job Guarantee?
While I changed the wording of this question from that provided by the reader, the confusion reflected in the original text remains.
It doesn’t make much sense to say that MMT is fully or not fully implemented. This is a constant source of confusion among those who start reading our work and think that we are specifying some sort of new order.
There is no new order. For most nations, the New World was established on August 15, 1971 when the US President Nixon went on American TV one Sunday night and announced the US government was withdrawing the gold backing (the convertibility) of the US dollar. Since the Bretton Woods conference in 1944 and up until 1971, the US government had guaranteed convertibility of the US dollar into gold at a fixed parity of US$35 per ounce of gold.
That system was abandoned by the US in 1971 and then variously by other governments as time ensued.
Please read my blog – Gold standard and fixed exchange rates – myths that still prevail – for more discussion of this.
MMT is an evolved set of descriptive, accounting and theoretical propositions that deal with monetary systems where the currency unit is non-convertible and the sovereign government is thus freed from revenue constraints.
Once we understand that a sovereign government is not revenue constrained, then we have to revise our thinking about things like, the purpose of taxation, the issuance of public debt instruments, and the sustainability of budget deficits.
The US economy, the Japanese economy, the UK economy, etc already function in this way and MMT seeks to develop a body of understanding about the nature of this function.
It is particularly important to note that the mainstream economic theory which is taught to students around the world is essentially based on convertible currency systems.
In this regard, most of the essential operations of the monetary system are mis-specified by orthodox macroeconomics, which leads to erroneous conclusions about causality, poorly specified policy proposals, and fundamental confusion about just about everything else.
So the question that is germane is really about the place of a Job Guarantee, or more generally, the place of employment buffer stocks in MMT.
I recently considered that question in detail in two blogs – MMT is biased towards anti-crony and Whatever – its either employment or unemployment buffer stocks.
Those blogs were written to clarify mistakes that were appearing in the so-called MMT blogosphere about the contribution of MMT to macroeconomic theory.
There were those who even went as far as claiming that MMT was not theory but reality and so a “JG theory” was just the unhelpful imposition of some early (leftist) MMT writers which was undermining the validity of MMT. I won’t provide an extensive repetition of the two blogs – they speak for themselves.
But the point to understand is that the idea of a buffer stock approach to the maintenance of price stability is inherent in any macroeconomic theory. Mainstream macroeconomic theory doesn’t express itself in that way. It hides behind so-called “natural” aggregates which, allegedly coincide with price stability.
So we all know about the NAIRU (the alleged “natural” rate of unemployment). Please read the NAIRU blog links to about to learn why this concept is theoretically bereft and relatively useless as a guidance to policy.
The NAIRU-approach to policy, however, is a buffer stock approach – in that, it uses unemployment buffers to discipline the wage and price determination system to ensure price stability.
As I explained in this blog – Modern monetary theory and inflation – Part 1 – that there are two broad ways to control inflation and the use of buffer stocks are involved in each:
- Unemployment buffer stocks: Under a mainstream NAIRU regime (the current orthodoxy), inflation is controlled using tight monetary and fiscal policy, which leads to a buffer stock of unemployment. This is a very costly and unreliable target for policy makers to pursue as a means for inflation proofing.
- Employment buffer stocks: The government exploits the fiscal power embodied in a fiat-currency issuing national government to introduce full employment based on an employment buffer stock approach. The Job Guarantee (JG) model which is central to Modern Monetary Theory (MMT) is an example of an employment buffer stock policy approach.
The point is that MMT allows us to understand that there is an alternative buffer stock approach to price stability. In this context, it deserves to be considered a “new” and unique development, notwithstanding the legacy it owes the past (like all “new” ideas).
And part of that uniqueness relates to the way it brings together characteristics of the currency with the theoretical challenge to maintain macroeconomic efficiency, which for all time has been described in terms of full employment and price stability. Full employment requires that there are enough jobs created in the economy to absorb the available labour supply. Focusing on some politically acceptable (though perhaps high) unemployment rate is incompatible with sustained full employment.
In macroeconomic theory, the so-called Phillips curve occupies a central place – it is “god-like” and represents the relationship between unemployment and inflation. Various theorists have constructed this relationship in different ways and the policy development that followed reflected these differences.
So “Keynesians” believed there was a stable trade-off whereby unemployment would be kept low as long as governments pursued high levels of effective demand. The “cost” would be some finite inflation rate. Economists – worked on designing the “optimal” trade-off between the twin evils – unemployment and inflation.
They overlaid what were called “social preference functions” designed to represent the way the citizens considered the trade-off, with the Phillips curve which was meant to illustrate the actual trade-off. The tangency of these functions became the policy goal and the tools to achieve that goal were provided by the macroeconomic theorists.
This approach was clearly based on a recognition that a buffer stock was present (unemployment) and it was used to maintain price stability.
The NAIRU-era (following Friedman and Phelps’ “natural rate” theories) rejected the trade-off notion and instead argued that the “long-run” Phillips curve was vertical (that is, no trade-off) and governments would only generate inflation by trying to pursue low unemployment rates. This marked the rise of monetary policy and the growing passivity of fiscal policy, in practice.
The early developers of MMT (Wray, Mosler, Bell/Kelton, Fullwiler, myself) – again differentiating MMT from earlier Chartalist and “theories of state money” etc – sought to challenge these natural rate theories of the Phillips curve. We had lots of discussions in the mid-1990s about this issue.
By more correctly specifying the way the monetary system operated post 1971 and the opportunities that currency-sovereignty provided to governments, we were seeking to advance ideas that were anathema to the NAIRU-dominated, government-budget-constraint thinking that were universally held and vigorously defended by the most powerful and leading economists of our time.
One of the essential theoretical components of this work – based on the fundamental understanding of how the currency was in fact a public monopoly where the monopolist could set the price – was to address the major constraints on activist fiscal policy posed by the NAIRU school. That is, we were directly challenging the dominant theoretical orthodoxy by proposing a way to achieve full employment with price stability (that is, without having to create entrenched unemployment).
As my colleague Randy Wray noted in a Keynote Speech last December, our development of the theoretical analysis of employment buffers in contradistinction to unemployment buffers:
… turned the Phillips Curve on its head: unemployment and inflation do not represent a trade-off, rather, full employment and price stability go hand in hand.
You have to understand that point to comprehend why MMT introduces the notion of a Job Guarantee as a term to describe a policy approach based on employment buffers.
A complete macroeconomic framework has to address issues relating to full employment and price stability. One might not be very interested in the “Phillips curve” aspects of the theory and prefer to specialise in some component of the MMT approach (perhaps even more practical elements) – such as, study how banks work etc. There is nothing wrong with that – our time and patience is limited after all.
But it still remains that the body of theoretical work now known as MMT does directly and intrinsically address the major macroeconomic debate about the trade-off between inflation and unemployment – which I would add – is still the dominant discussion around town anyway.
And the way MMT does that is intrinsic to the theoretical framework and logically consistent with it. It is crucial to understand that notions of price stability all have some buffer stock underpinning them. As noted above, the mainstream NAIRU theories deploy a buffer stock of unemployment to control price inflation.
The policy question that then arises is whether an unemployment buffer stock approach is superior to an employment buffer stock approach in controlling inflation and maintaining full employment.
In the two blogs I mentioned earlier, I provide chapter and verse as to why an employment buffer stock approach is superior. I won’t repeat those arguments here.
But don’t be misled. Those who reject the employment office stock approach recurse back into mainstream thinking, which uses unemployment as the price anchor. That is, their macroeconomic approach is neo-liberal in flavour, whether they understand how the banking system works or not.
Does MMT require a degree of nationalisation (that is, of banks/ corporations) and strict regulation, or is it compatible with no nationalisation and a more hands-off approach to regulation?
Once again this reflects some confusion about what MMT is. MMT is not a list of requirements but a theoretical, accounting, and descriptive framework for appreciating and explaining the way the monetary system operates.
It also allows us to appreciate more fully cause-and-effect in this system. For example, the mainstream macroeconomics predicted that by now inflation would be a problem and the growth of bank credit would be significant as a consequence of the large transformations in central bank balance sheets during the crisis.
Those who understand MMT would make no such claim because from first principles the orthodox concept of the monetary multiplier is rejected.
Once we understand, for example, the way in which the banking system functions relative to the central bank then we might form the view that nationalisation is a preferable way to maintain financial stability and the growth of credit to the private sector.
However, it is highly plausible that different people (all of whom understand MMT) would arrive at different conclusions about this question. In part, these differences will reflect different value structures (ideologies) held by the individuals. In that sense, MMT is neither left nor right of the political spectrum.
However, an understanding of MMT will lead one to appreciate readily that the banking system is for all intents and purposes a public-private partnership. The government has to use its regulative framework to ensure that financial stability is maintained at all times.
That imposes responsibilities on the central bank to ensure that the payments system is viable each day and it also requires such things as deposit guarantees be put in place (among other requirements).
The MMT literature highlights the fact that the financial system is largely unproductive and this observation then implies that relatively tight regulation of the financial sector is required to ensure that its acts to fulfill public purpose.
Please read the following blogs – Operational design arising from modern monetary theory and Asset bubbles and the conduct of banks – for further discussion.
However, MMT allows us to understand what will happen if the regulatory framework is inappropriate or poorly applied.
Would you say that MMT economists have different political and ideological positions, or are you all more or less the same?
Why don’t you conduct a survey to find out, once you fully specify what a political and ideological position is (-:
In June 2010, Warren Mosler and myself were invited to present an MMT workshop (a “Teach-In”) in Boston. Earlier in 2010, most of the MMT developers (including myself) participated in a Teach-In (see blog – Washington Teach-In Counter Conference – where a relatively diverse audience attended.
The Boston event was quite different, in that, the participants were largely drawn from the financial markets.
During the Q&A, I recall someone suggesting that Warren and I would have quite different political and ideological views and so how could we agree on how the economy worked. This was based on the stereotype of Warren being from an American financial market background with presumably right-wing pretensions and me being the Antipodean academic presumably with left-wing if not outright socialist leanings. Oh, how we stereotype.
The person who asked the question (or rather, put the proposition) was asked to give examples of how Warren and I might have different political and ideological views.
Each time an example was proffered, Warren and I looked at each other and indicated we each agreed with the specific proposition being offered.
So in terms of macroeconomics and policy I don’t detect significant differences among the so-called MMT economists. There may be some differences around the edges about how high the minimum wage should be but even then we all agree it should be set at a socially acceptable level and the private wage structure should then adjust to that and eliminate low productivity-high cost jobs that do not justify paying the going wage.
On matters of social policy, for example, there may be variations but again we should avoid jumping the stereotypical conclusions based upon the fact that some of us are academics and others have a background in the financial markets.
I know of some differences on some matters but they are really our own business and not germane to anything important being discussed in this blog.
Do the main MMT economists have different understandings of what MMT is or of how it could be implemented?
No we all understand what it is and agree on the essential elements.
As to implementation, this question depends on institutional structure and regional specificities which obviously lead to differences in the way policies can be best implemented.
There are some minor variations between the Australian camp (me) and some of the US camp about whether the Job Guarantee would be open to private sector involvement. I think there is enough unmet societal need (personal and environmental care services) that will not be provided for by the private sector to justify a 100 per cent public sector JG. But we all agree the governments should design fiscal policy to ensure that the JG pool will be small.
What do you think was the primary cause of the current crisis?
Please read my blog – The origins of the economic crisis – for more discussion on this point.
To understand the crisis we have to go back a few decades and trace the development of economic thinking and the subsequent policy changes that have occurred since that time.
Up until the OPEC oil shocks which began in the mid-1970s, governments had been committed to maintaining full employment. They manipulated fiscal and monetary policy to achieve that end. There had been a fierce theoretical debate among economists during the 1950s and beyond about the effectiveness of fiscal intervention.
Emerging monetarists such as Milton Friedman were largely opposed to discretionary fiscal policy but their views constituted the minority.
The inflation shock that followed the oil price hikes allowed the monetarist viewpoint to gain ascendancy in the public debate and led to the rejection of activist fiscal policy as the primary policy tool to stabilise spending over the business cycle.
As discussed above, the NAIRU liturgy became the norm with inflation being promoted as the primary evil and unemployment the tool to discipline it. Prior to that, unemployment had been a primary policy target to be minimised.
Governments were also pressured to introduce widespread deregulation of the labour and financial markets and to privatise public enterprises and other activities. This was justified by an appeal to textbook economic models which purported to demonstrate that private markets would self-regulate and optimise wealth accumulation for all of us. So all these terms such as “trickle down”, “The Great Moderation”, “the business cycle is dead”, etc became the nomenclature of the era.
One of the main characteristic manifestations of the deregulation was the suppression of real wages growth and a rising gap between labour productivity and real wages. The gap represents profits and so during the neo-liberal years there was a dramatic redistribution of national income towards capital.
Governments around the world helped this process in a number of ways: privatisation; outsourcing; pernicious welfare-to-work and attacks on trade unions etc.
The problem then was that if the output per unit of labour input (labour productivity) was rising so strongly yet the capacity to purchase (the real wage) was lagging badly behind – how does economic growth which relies on growth in spending sustain itself?
This is especially significant in the context of the increasing fiscal drag coming from the public surpluses which squeezed purchasing power in the private sector since around the mid-1990s in several nations.
In the past, the dilemma of capitalism was that the firms had to keep real wages growing in line with productivity to ensure that the consumptions goods produced were sold. But in the recent period, capital found a new way to accomplish this which allowed for the suppression of real wages and increasing shares of the national income produced to emerge as profits.
Along the way, this munificence also manifested as the ridiculous executive pay deals (especially in the financial sector) that we have read about constantly over the last decade or so.
The trick was found in the rise of “financial engineering” which pushed ever increasing debt onto the household sector. The capitalists found that they could sustain purchasing power and receive a bonus along the way in the form of interest payments. This seemed to be a much better strategy than paying higher real wages.
The household sector, already squeezed for liquidity by the move to build increasing budget surpluses were enticed by the lower interest rates and the vehement marketing strategies of the financial engineers.
The financial planning industry fell prey to the urgency of capital to push as much debt as possible to as many people as possible to ensure the “profit gap” grew and the output was sold. And greed got the better of the industry as they sought to broaden the debt base.
Riskier loans were created and eventually the relationship between capacity to pay and the size of the loan was stretched beyond any reasonable limit. This is the origins of the sub-prime crisis.
The neo-liberal rhetoric pressured governments to turn a blind eye to the fact that large proportions of the domestic mortgage markets were being financed in foreign currencies, thus exposing householders to exchange rate risk. In some countries this has been catastrophic.
Further, the financial markets lost the capacity to correctly price the risk of the products they were creating and fraudulently entered into agreements with ratings agencies to deceive their clients. So the combination of greed and fraud produce a time bomb.
The combination of a hollowing out of the state, an out of control deregulated financial sector, and the rising fragility of non-government balance sheets thus set up the world economy for the crisis.
The Eurozone countries interpreted the neo-liberal charter in even more extreme ways. They stripped member nations of their currency sovereignty and for ideological reasons (desire to minimise the state) deliberately chose not to create the necessary federal fiscal capacity capable of dealing with asymmetric aggregate demand shocks. They also placed severe restrictions on the fiscal latitude of each of the member states (that is, the Stability and Growth Pact).
The trigger then was the American real estate collapse. What followed was entirely predictable and governments failed to insulate the real economies from the financial disaster that unfolded.
The ideological preference towards monetary policy (a characteristic of the neo-liberal rejection of fiscal activism) meant that even though governments, largely, adopted pragmatic positions as aggregate demand collapsed, they were still unwilling to expand fiscal policy appropriately.
So we saw a lot of activity under the guise of quantitative easing, which has had very little stimulatory impact.
The crisis has endured in many countries, and is now getting worse again, because governments have been pressured into introducing pro-cyclical fiscal policies – that is, fiscal austerity.
They are being beguiled by mainstream economists who claim, in the face of overwhelming evidence to the contrary, that the private sector (heavily indebted) would suddenly increases spending to offset the decline in public spending.
That hasn’t happened and will not happen.
The crisis represents a fundamental rejection of the neo-liberal vision that self-regulating markets will operate to advance the best interests of all of us. The neo-liberal paradigm fails on every dimension.
Why did so many economists and politicians not see the crisis coming? Was it predictable?
The crisis was entirely predictable although the timing of the collapse was less certain. If you go back into the 1990s and read some of the early MMT literature you will see that we were predicting a financial collapse would occur. At one stage around 2001, I wrote that when the collapse comes it would be a big one.
Some other economists, working in a different theoretical space, also were successful in predicting the crisis.
But the overwhelming majority of my profession were blind to the events that led up to the crisis (as explained above) and were in denial once it became obvious. They also pressured governments to introduce policy changes which ensured that the destructive dynamics of capitalism (noted above) would be magnified and eventually lead to collapse as private balance sheets became untenable.
The reasons are clear – the mainstream macroeconomics teaching programme provides no insights to the dynamics that were emerging as labour and financial markets were being deregulated.
Most of the New Keynesian models didn’t even have a financial sector included. The overwhelming body of theory that students are exposed to in our university systems around the world provides an erroneous representation of our modern monetary system.
Students are taught that self-regulating markets are optimal. These students become policymakers and carry their erroneous learning into their professional lives.
It is no wonder that under the neo-liberal onslaught, government departments and central banks became full of economists who failed to understand how budgets work and how the central bank and the private banking sector interacts. And the rest of it.
At first, the banks were bailed out by governments in one way or another. Was that decision correct?
The collapse of the bank, especially a large bank with a diverse deposit base, threatens the stability of the financial system.
MMT considers financial stability to be a public good. The financial system is linked to the real economy via its credit provision role. Both households and business firms benefit from stable access to credit.
An economy’s financial system is stable if its key financial institutions and markets function ‘normally’. To achieve financial stability: (a) the key financial institutions must be stable and engender confidence that they can meet their contractual obligations without interruption or external assistance; and (b) the key markets are stable and support transactions at prices that reflect fundamental forces. There should be no major short-term fluctuations when there have been no change in fundamentals.
So financial stability requires that financial institutions do not face stresses that might impose economic lossses wider than their own customers and counterparties. Financial stability does not mean that financial institutions cannot fail. Clearly private enterprise carries the risk of insolvency and business failure is part and parcel of the ‘normal’ functioning of the financial system.
Financial stability requires levels of price movement volatility that do not cause widespread economic damage. Prices can and should move to reflect changes in economic fundamentals. Financial instability arises when asset prices significantly depart from levels dictated by economic fundamentals and damage the real sector. Collapses brought on by injudicious speculation that do not affect the real sector or that can be insulated from the real sector by appropriate liquidity provisions are not problematic.
The essential requirements of a stable financial system are:
- Clearly defined property rights.
- Central bank oversight of the payments system.
- Capital adequacy standards for financial institutions.
- Bank depositor protection.
- An institutional lender-of-last resort when private institutions refuse to lend to solvent borrowers in times of liquidity crisis.
- An institution to ameliorate coordination failure among private investors/creditors.
- The provision of exit strategies to insolvent institutions.
Some of these requirements can be provided by private institutions but they fall in the domain of government and its designated agents.
Private goods are traded in markets where buyers and sellers exchange at prices that reflect the margin of their respective interests. At the agreed price, ownership of the good or service transfers from the seller to the buyer. A private good is ‘excludable’ (others cannot enjoy the consumption of it without being party to the transaction) and ‘rival’ (consuming the good or service specific to the transaction, denies other potential consumers its use).
Alternatively, a public good is non-excludable and non-rival in consumption. Private markets fail to provide socially optimal quantities of public goods because there is no private incentive to produce or to purchase them (the free rider problem). To ensure socially optimal provision, public goods must be produced or arranged by collective action or by government.
Financial system stability meets the definition of a public good and is the legitimate responsibility of government.
Please read my blog – The central bank must treat financial stability as a public good – for more discussion on this point.
So in that context, it was legitimate for government to ensure that the bank’s did not collapse by which I largely mean the deposit base. I also distinguish banks from the hedge fund operations.
However, the way that the government intervention was implemented during the crisis was not optimal. I would have allowed all the private banks to collapse and immediately assume public responsibility for their deposit base and ensure the payments system was viable. I would not have allowed the private operators to continue – thus privatising the gains and socialising the losses.
I would have installed new management under public control which would have prevented the resumption of all the high salaries etc.
After the bailout, some Keynesian policies were applied in several countries, was that decision correct? Did it work?
The governments acted responsibly by introducing stimulus packages early in the recession. The major problem was that the size of the stimulus packages in almost all nations was too small relative to the real output gap that had emerged as private spending collapsed.
The governments were pressured by a growing chorus of economists (who crawled back out of their hidey hole after going silent at the onset of the crisis) who claimed we were facing a sovereign debt rather than a private debt crisis. They were just re-asserting the ideological viewpoint that were dominant and caused the crisis in the first place.
Unfortunately, governments fell prey to the large-scale media onslaught of the neo-liberals and withdrew their already inadequate stimulus packages too early.
As to whether the interventions were effective, as the crisis unfolded I tracked the data to see what impacts we could observe. Here is a sequence of blogs that include my assessment. The overwhelming conclusion is that the fiscal policy was very effective contrary to the views of the mainstream macroeconomic models (and their proponents).
Monetary policy was relatively ineffective, while fiscal policy saved the world. Now, with fiscal austerity being the norm, fiscal policy is destroying the world. That is because it is being imposed in a pro-cyclical way and reinforcing the private spending collapse rather than supporting the non-government desire to reduce debt and increase saving.
1. Fiscal stimulus effects … – February 5th, 2009.
2. What else but a fiscal stimulus? – July 1st, 2009.
3. How fiscal policy saved the world – October 9th, 2009.
4. Fiscal policy worked – evidence – May 27th, 2010.
5. Fiscal stimulus and the construction sector – August 25th, 2010.
6. The fiscal stimulus worked but was captured by profits – October 14th, 2010.
7. Tick tock tick tock – the evidence mounts – February 24th, 2011.
8. US fiscal stimulus worked – more evidence – February 28th, 2011
9. Australian industry employment trends and fiscal stimulus – December 16th, 2011.
10. The US is not an example of a fiscal contraction expansion – January 27th, 2012.
11. The lesson for the Europeans is that the US fiscal stimulus worked – February 24th, 2012.
Please read my blogs – Fiscal sustainability 101 – Part 1 – Fiscal sustainability 101 – Part 2 – Fiscal sustainability 101 – Part 3 – for more discussion of responsible fiscal behaviour.
That is all I have time for.
Sorry if your specific question hasn’t been answered yet. I was intending to make this a regular blog and may go back to that plan.
Today, I received a surprise book in the University post – Patty Smith – Just Kids (which I had read on my Kindle) but now have the hard-copy with pictures.
There was a lovely birthday card included with a photo by Picasso and a message, which in addition to a personal note – quoted from the third verse of Patty Smith’s great song People have the Power (from 1988):
The power to dream / to rule
to wrestle the world from fools
it’s decreed the people rule
The book and card were anonymous. Thanks – I really appreciated it. If you identify yourself I will thank you in person.
That is enough for today!
This Post Has 45 Comments
Probably worth pointing out that private sector involvement is probably a non-starter in the European Economic Area. The State Aid rules would likely prevent it – as it would be deemed incompatible with the original common market system.
The financial rules in the EU treaty can generally be worked around, but the freedom of movement rules may be problematic if a member state tried to implement JG on its own.
It would be nice if the JG design could be made compatible with the EU treaty at a member state level. It would make the politics easier.
To my knowledge, Bill Mitchell and Steve Keen do not mention each other’s work. Yet, on my layperson’s reading, there is a lot about their approaches to macro-economics that is similar. Both identify;
1. Private credit growth as a major problem leading to the GFC.
2. Lack of regulation of the finance and speculative sectors as the sources of bubbles and instability.
3. That the standard money multiplier theory is a myth.
4. That private banks can create credit money ahead of government injected liquidity (follows from 3).
More astute students than I could probably name more similarities than I can name quickly.
Neil, While we are (always) hamstrung by Euorpean legislation on state aid, directly engaging the private sector to employ unemployed people would not be a problem as long as we were employing them to provide “Public” services & goods i.e. where there is no competition with the private sector. Replanting a national forest, refurbishing old peoples homes, clearing invasive species (knotweed, Himalyan Balsam etc) from our waterways…All of these things are something the private sector does not want to do, there is no financial incentive. The goverment creates one (a financial incemtive) and stipulates that they must recruit people from the unemployment lines (you could start off with the long term unemployed, then the U25s etc). Cannot see where that clashes with “State aid” legislation?
Just a point I realized while reading this post, particularily Question 1. There is a distinction between size of government and size of government spending that we need to do a better job of articulating.
MMT does not prescribe a large government for effective monetary functioning, but it does prescribe a large government spend (“large” being relative and of course subject to discussion).
The US Social Security system is an example of large government spend without large government, despite critics attempts to paint is as so.
The “large” spend is prescribed in order to maintain overall macro stability and growth; the size (and implied power) of a government is not necessarily an outcome of a large, required spend.
Just as a skinny person can be a big spender, a narrow central government can still exercise its macro monetary responsibilities.
Great blog, Bill. I’m especially intrigued about your writings of late on the JG, which until recently (I’ve been following billyblog for almost 3 years now), I only saw as being made possible by MMT, and not as something at its core. While I can’t yet say that I grasp this as fully as I do other parts of MMT (I use an accounting view — perhaps this is why), it’s pretty obvious that you’re very much onto something here. Keep pounding on this for us “slow learners”. 🙂
@pebird: Exactly. I think when people in the US use the term “big government”, it’s really meant as a epithet directed towards two gov’t actions:
2. Spending on entitlements
The Neo Liberal bias of US politicians and (consequently) the populace means the two are viewed as inextricably (albethey incorrectly) linked – increased gov’t spending leads to increased taxation in order “to pay for” whatever the spend goes toward.
It never ceases to puzzle me as to why people in a country as large as the US think they warrant a “small” government. It’s as if they are longing for the days of “Little House on The Prairie”.
If the government is willing to put up money, then that is all the incentive the private sector needs. In the uk, the conservative government seems to be aiming for a syphon economy where no public expenditure can escape private sector rent.
“More astute students than I could probably name more similarities than I can name quickly”
I noticed a similarity in the accounting /double entry approach for financial assets.
Keen’s inclusion of the Govt sector in the youtube model that Neil highlighted a couple of months ago, combined with doubleentry for households, businesses, and banks all combined in a zero row sum transaction record presents a really effective view of the MMT Net financial assetsconcept that I think may be important in bringing accountants/bookkeepers on board.
It’s all rehashing Godley’s work but I think it might present better
The extent and alacrity with which you respond to our comments is astounding. Just keep doing what you are doing. Always great stuff.
Prof Mitchell, thanks for this re-exposition on the JG, but could you clarify the mechanism that ensures workers automatically leave the JG job in an expanding economy without pricing out a lot of the smaller businesses who now have to pay a lot higher to attract workers to the private sector? I ask because as I understand it, you propose the JG to permanently guarantee a job at a set wage to anyone looking for a job. I understand the need for a jobs program now, when the rest of the economy is contracting/hoarding/deleveraging/correcting. But when the JG gets the economy starting, companies will hire again. If more than a sufficient few businesses get started, the economy overheats, and results in higher inflation. We then get to the mechanism, as I currently understand it, that makes MMT claim that a JG program can also be a price stability program. Paired with tax and interest rate policy, inflation can be slain without increasing unemployment, by increasing rates and taxes, so companies scale back operations and lay people off, or businesses close, so more people go back to the lower paying JG job. Am I misunderstanding this, or is there something else in the mechanism I’m still missing? It seems that for permanent JG to work, the private sector has to stay only up to a certain size, beyond this, the government starts squashing them to ensure price stability.
The comparisons of permanent JG and no permanent JG in my mind are: In a JG-less economy in recession, labour demand can be at 80%, while in a booming economy, it will be at 100%. In a permanently-fixed JG economy, labour demand during recession will be at 100%, while during a boom, it will be at 130%. Inflation-fighting taxation will be a lot harsher in the JG economy with 130% labour demand than in an economy with only 100% labour demand. Government will have to kill more private sector companies when it is trying to get that 30% excess demand back to 100% than when it’s trying to get 100% down to 96%. It seems the need to kill more businesses will be much lower if the JG was instead preemptively scaled down by government when the economy starts growing.
” directly engaging the private sector to employ unemployed people would not be a problem as long as we were employing them to provide “Public” services & goods”
In which case why not cut out the middleman and do it directly, or via ‘non-profit’ third sector social enterprises?
There is no magic in the private sector. Outsourcing ‘efficiencies’ are largely mythical.
“without pricing out a lot of the smaller businesses who now have to pay a lot higher to attract workers to the private sector”
All they have to do is offer a living wage and conditions of work better than the JG job and people will move. If the ‘efficiency’ theory of the private sector against the other sectors is correct then that will be trivial.
What JG does is set them in perfect competition. There are always more jobs than people, and the competition eliminates the sub-standard jobs – as it should.
Why would ‘efficient’ businesses fear competition from a scheme with a statutorily fixed price and fixed conditions?
If they can’t handle the competition, what social right have they to profit? What social right have they to exist?
People are not there to provide the needs of business. Business is there to provide the needs of the people.
Neil, but the JG is already proposed to offer the living wage, so all business that can only offer up to the living wage get priced out. I’m assuming here a perfectly competitive economy where small businesses are already priced at the margin.
And, let’s take this”one-off” price level boost as a given, and suppose that the economy does brighten up sometime and more businesses want to get started. Since the government is already putting a demand floor to wages, any heating up in the private sector results in demand shooting above 100% for labour. This means significantly more inflation in wages than if the JG had been deliberately ended by government on the upswing. That means the government has to step back in to ensure price stability, which means much of that private sector boom would have to be eliminated. That’s my understanding, and that’s the concern I have yet to see addressed.
. . . could you clarify the mechanism that ensures workers automatically leave the JG job in an expanding economy without pricing out a lot of the smaller businesses who now have to pay a lot higher to attract workers to the private sector? As Neil explains, they don’t have to pay a lot higher, just marginally higher, to attract workers. The disappearance of low-paying, perhaps illegal under minimum wage laws, sub living wage jobs is a desirable feature, not a bug. And this phenomenon will simply not exist to the extent minimum wage laws already exist & are enforced. If there is nobody on the Job Guarantee, if the wage is too low, like today’s wage of zero, then of course there will be no effects of the JG & no elimination of horrible jobs. But this is not a good thing. And remember, the increased demand caused by the increased JG stimulus ( & increased efficiency caused by their work) benefits the marginal small business too, particularly so.
. . . any heating up in the private sector results in demand shooting above 100% for labour. This means significantly more inflation in wages than if the JG had been deliberately ended by government on the upswing. Rogue, you’re missing the main automatic stabilizer buffer stock mechanism. No, demand doesn’t shoot above 100% until after the JG pool shrinks to zero. The JG is not deliberately ended by government. It is automatically ended by the most productive JG workers leaving for wages higher than the fixed JG wage. And so government spending, government stimulus automatically decreases. Automatic demand (& thus price) stabilization, disinflation. It’s full employment, but “loose” full employment, not a tight job market with bottlenecks all over the place as you would get from old fashioned, “Keynesian” “Star Wars”, top-down, investment-led stimulus. And as the JGers do work, it attacks inflation at the supply side too.
Tax increase, fiscal, monetary etc non-automatic mechanisms may only kick in, be applied later. In your picture, they’re kicking in before the JG automatic stabilization. You’re describing the current reality, with an effective JG wage, for many purposes an effective minimum wage, of zero, with no JG pool. Not a full employment JG economy with a maybe-small but real JG pool created by a reasonably high base wage. True, a JG economy government may have to use such tools, forcing a recession & simultaneously curing it, forcibly shrinking the (relative) size of the private sector, increasing the JG pool size, to make it more effective. But “The government starts squashing them to ensure price stability” is what we have now. In all likelihood, there will be less, maybe infinitesimal, squashing in a JG economy. Wray & Mitchell, very, very conservatively, academically, more or less say, “no more squashing than now”.
Finally, MMT & the JG have had enormous testing in the real world. The whole worldwide full employment Keynesian (Kaleckian) full employment era can be considered a test, with some nations employment policies closer to a JG than others. When gubmints tried to achieve full employment, they succeeded. And inflation was no higher then, while real growth & progress was. The effects you worry about were not seen. No instant destruction of small businesses. That sector might not grow as much as others, but that is not the same thing.
Wrote a longer response to you on such questions some time ago, not sure where I posted it, or if I did. I’ll see if I can dig it up.
Some guy, as i said, the JG doesnt just price out businesses that pay below living standards, since JG as proposed will offer the living wage, all business that can only offer up to the living wage potentially get priced out. They have to offer more to get people more than indifferent to getting the JG. But that’s not the main concern here.
The JG is not automatically ended by JG workers leaving for the private sector. That kind of magical thinking is no different than believing that increasing money supply automatically increases its velocity. No, the JG ends only by private sector bidding up wages so as to attract workers away from the JG. If this happens by more than a sufficient level, there could be higher inflation than is acceptable. The JG, as presented, will not stand idly by. The JG will try to get prices back to the government’s stated level by getting people back into the lower wage JG, and away from the private sector. How, by all means that wil make it less profitable for business to thrive – taxation, interest rate policy, whatever. This is what I meant when I say a permanently fixed JG economy replaces a buffer stock of unemployed with a buffer stock of failed small businesses. Large companies may weather this price stabilization drive by shedding workers, but smaler businesses will close completely.
In my scenario, this doesn’t kick in before the stabilization, it kicks in anytime the private sector expands by more than a certain level. And it won;t take much private expansion to kick in price expansion, If a permanent JG keeps labour demand at 100%, any private sector increase over a certain point will kick labour demand above 100%, and drive wages and resulting prices higher, the higher above this certain level, the quicker prices will rise, because the only way new firms attract workers is to drive them ever higher above not only what the JG pays, but above what the first few firms to hire are already paying.
Prof. Mitchell, it would be helpful to add gere that i’m not against the JG as a countercyclical policy, but using it as a price stability mechanism means that 1) it seeks to keep private sector only up to a certain level, and 2) with onset of inflation, its price stability mandate kills a lot of new private sector growth just when it’s gaining momentum.
As far as I know, there has been no testing of JG on a significant scale, perhaps only in certain areas where there really is no interest from private sector to invest. In which case, we really need a JG of some sort in that area. But it cannot be enacted on a similar scale, and permanently, in urban centers where private sector already tends to congregate. It will only end up squashing the grassroots initiative, and the JG will eventually become an alternative economy unto itself, not a bridge for when private sector is weak.
The JG is not automatically ended by JG workers leaving for the private sector. That kind of magical thinking is no different than believing that increasing money supply automatically increases its velocity. What magical thinking? My experience is that when you leave a job, they stop paying you. And it this is true whether you quit or are fired. What is the difference between all the JG workers leaving for the private sector because there is a boom, and the JG being ended by the government because there is a boom. Nothing, except the automaticity of the JG acts quicker, more responsively. It’s magical thinking to think there is a difference. The JG fixed wage buffer stock concept incorporates your suggestion that the JG should end. There was not much immediate effect to ending the WPA during WWII, because the war spending had already largely ended it.
No, the JG ends only by private sector bidding up wages so as to attract workers away from the JG.Why else would they leave? Of course we agree on this. Who disagrees? The point is that there is some resistance to inflationary spirals caused by the JG pool itself, just as there is by the existence of massive unemployment, by the reserve army of the unemployed. Would you say “unemployment is automatically ended by unemployed workers getting (private sector) jobs” is magical thinking? Or is it a tautology?
The JG, as presented, will not stand idly by. The JG will try to get prices back to the government’s stated level by getting people back into the lower wage JG, and away from the private sector. No, the JG won’t do this. It’s a fixed wage. It WILL stand idly by. As long as there is a decent size JG, there will be a wage stabilization effect. A big JG pool exercises downward pressure on wages and prices. It’s the other government action, the squashing sort we now use to control inflation by forcing unemployment, which might not stand idly by.
As Wray says in his book, p. 185: “We would prefer to rely on the automatic fluctuations of the ELR pool to stabilize demand & prices; however, we emphasize that the traditional macroeconomic stabilization tools will still be available if desired.” They are separate things, which should not be conflated.
In my scenario, this doesn’t kick in before the stabilization, it kicks in anytime the private sector expands by more than a certain level. The existence of “more than a certain level” is exactly what I am saying. With a JG, you get a space of “more than a certain level” before you get tough, with non-inflationary full employment. Without it, you get a space of “more than a certain level” without full employment. Which is stupid, a massive wealth destruction. The JG isn’t magic – it will not by itself cure all inflation in all economies for all time. But at first MMT & the JG will work like magic. Just as a way to feel tremendously better fast is to stop drinking poison. The poison prescribed by the nonsensical quackery of mainstream economics.
Frankly, I find the idea that full employment will tend to destroy small businesses amazing. It will bolster grassroots initiative, not squash it. I’d put my money where my mouth is, and expand my marginal, legal, small business if a JG were instituted, and be happy to buy Roguecorps that thought it would be bad for small businesses, at fire sale prices. Cf Marshall Auerback’s paper emphasizing that the WPA not only fought unemployment directly, but boosted private sector employment even more. “Indeed, rather than “distorting” the private market, the improvement in aggregate demand brought about by the provision of workfare programs, created positive feedback loops in the private sector.” Time For a New “New Deal” Nothing succeeds like success!
On the postwar era experience. From Bill’s Full employment abandoned:shifting sands and policy failures
However, while both private and public employment growth was relatively strong during the Post War period up until the mid 1970s, the major reason that the economy was able to sustain full employment was that it maintained a buffer of jobs that were always available, and which provided easy employment access to the least skilled workers in the labour force. …
Importantly, the economies that avoided the plunge into high unemployment in the 1970s maintained what Ormerod (1994: 203) has described as a ‘…sector of the economy which effectively functions as an employer of last resort, which absorbs the shocks which occur from time to time, and more generally makes employment available to the less skilled, the less qualified.’ “ Japan, Austria, Norway, and Switzerland are mentioned as such. Did the small businesses there collapse in droves?
“any private sector increase over a certain point will kick labour demand above 100%, and drive wages and resulting prices higher,”
Yes, and you get the same with an unemployed buffer stock – but a lot earlier because the buffer stock is not hire ready and therefore doesn’t provide the same macro-discipline in the opposite direction (it is riskier to hire an unemployed person than hire away an employed person).
But you don’t get to that certain point by teleportation. There is a journey from where we are now to get there.
By focussing on the point of exhaustion, you are neglecting the benefits on the journey to the point of exhaustion. And you are assuming that it is good economic design to allow demand so high that the buffer pool exhausts.
The JG operates in several ways.
Initially it is a aggregate demand stabilisation device that ensures nobody drops below a certain level. So you get a counter cyclical buffering effect.
Once you have that in place, then you probably need to tweak taxes/govt spending to fully accommodate non-government savings.
At the same time it eliminates bad jobs – due to the competition. That clears out the private (and public!) sector dross making space. Think of it like a slum clearance programme for housing.
Now with demand restored things start to recover and the hiring away from JG begins in earnest.
As things tighten JG starts to anchor wages – because the staff on it are hire ready and provide a substitute for those already employed. So the employed don’t bid wages. It is at this point that an unemployed buffer stock (which is the only alternative) would run out of power and you would start to see real demand side inflation.
So when the anchor effects of JG kick in the unemployed buffer stock economic design is already raising taxes/interest rates to squash demand.
JG allows you to carry on, from 4% unemployed to about 2% buffered on JG before you have to take the same measures to cool aggregate demand.
So in reality, because JG can hold a higher level of aggregate demand stable than an unemployed buffer stock, there are more private sector positions with JG than without – and at a better profit margin because those private sector positions are not competing with domestic sweat shops undercutting with poor terms and conditions.
“This is what I meant when I say a permanently fixed JG economy replaces a buffer stock of unemployed with a buffer stock of failed small businesses.”
It doesn’t. As I point out above, the JG holds a higher level of aggregate demand than an unemployed buffer stock. So in unemployed world the small businesses would never have started in the first place.
But even if it did, are you honestly suggesting that you are happy to have real people living in drain pipes in Vegas and dumpster diving just as long as businesses are protected?
Putting the survival of mere businesses higher than the quality of human life strikes me as very odd. Businesses are there to serve the needs of the people, not the other way around.
some guy, when you leave a job yes, they stop paying you. But you only leave a job when someone bids up your wage. When the economy is not in recession, and the government is still there adding to labour demand, there will be more bidding up. The difference therefore “between JG workers leaving for the private sector because there is a boom, and the JG being ended by the government because there is a boom” – is that there will be less bidding up when the government ends JG after average wages rise a certain percentage above JG level.
You’re only thinking of it in the first phase. Yes, in the first phase, the JG increases aggregate demand, and therefore, more businesses will want to start. But after the economy passes “a certain level”, you know that the government will want to get people going back to the JG in the name of price stability. Hence, if you’re one who starts your business once the economy passes this level, you’re going to have to think again, because government will be expected to tighten (not by dropping the JG, but by making it more expensive to maintain a small business). Because the government keeps this floor on labour demand even during the boom times, when the economy gets booming, the boom acceleration will be much faster than if the government withdraws its additional demand instead. So again, if you’re a businessman, you’ll likely obsess about where this “certain level’ is at.
Neil:”As things tighten JG starts to anchor wages – because the staff on it are hire ready and provide a substitute for those already employed. So the employed don’t bid wages.”
Why would gainfully employed JG workers be an anchoring substitute FOR private sector workers? I’m assuming here that the JG will pay a living standard. So I see it the other way around – the JG becomes a substitute TO private sector employment. So yes, you’re right. JG eliminates bad jobs with crappy wages due to competition. But during a strong expansion, when more businesses are expanding and therefore hiring, the excess demand the JG maintains for workers makes labour scarcer, and therefore businesses will need to bid up higher to attract people. The more people a firm needs, the higher the labour clearing price for the firm. The higher the clearing price, either less firms start, or high inflation ensues.
“are you honestly suggesting that you are happy to have real people living in drain pipes in Vegas and dumpster diving just as long as businesses are protected?”
This is a cop out. I’m asking for how JG will be managed when the economy is already booming. Don’t keep bringing back the discussion to the current unemployment. As is said, what I have concerns about is proposing a permanently fixed JG program, not the jG itself.
rogue: “This is a cop out. I’m asking for how JG will be managed when the economy is already booming. Don’t keep bringing back the discussion to the current unemployment. As is said, what I have concerns about is proposing a permanently fixed JG program, not the jG itself.”
Who is copping out here? Sounds to me like you are copping out to your neoliberal tendencies.
The point is that the JG is not managed along the business cycle. It remains a permanent offer at a set wage-benefit package. The management comes from the replacement of monetary policy cum buffer of unemployed with fiscal policy cum buffer of employed-price anchor. The control mechanism runs through maintaining effective demand as close as possible to the full employment budget by adjustment of fiscal policy chiefly through automatic stabilization. The JG is for mopping up the residual unemployment policy leaves and providing a price anchor. Monetary policy has shown how it is incapable of getting unemployment rate down to anything like actual unemployment, and MMT doesn’t claim that fiscal policy alone can either. Therefore the MMT JG is added to resolve the residual unemployment due to policy imprecision, and the wage-benefit package is fixed to provide and anchor.
The MMT JG is part of a macro policy solution to the issue of resolving the intractable trifecta of production, employment, and price stability that has thus far eluded economists and policy makers even though it is part of the Fed’s congressional mandate.
As Bill and other MMT economists have often said, the choice is between a buffer of employed or unemployed, and also of some price anchor,such as a convertible monetary system (return to gold) or a imposing balanced budget requirement, which two other options presently on the table in the US.
If you don’t like the MMT JG as part of a macro policy solution based chiefly on fiscal, what macro policy solution do you suggest and what do you suggest doing about a buffer and price anchor. Or are you one of the people that think that government should just butt out and let the invisible hand of the market take its course? There are always trade offs among different economic alternatives. Let’s tear and compare solutions.
“If you don’t like the MMT JG as part of a macro policy solution based chiefly on fiscal, what macro policy solution do you suggest and what do you suggest doing about a buffer and price anchor. Or are you one of the people that think that government should just butt out and let the invisible hand of the market take its course? There are always trade offs among different economic alternatives. Let’s tear and compare solutions.”
Tom, the stock I could think of using as buffer is the JG itself. In times of higher inflation, the JG is what adjusts, either in price (wage) or quantity of its workers. During a private sector expansion over-all wages don’t rise as fast, and hence, the boom can probably stay for longer, and the fiscal tightening needed to contain it not as harsh. I don’t have suggestions on price anchor, why change what we use now. Call me neoliberal if that’s what this makes me to you, but the permanently fixed JG has a tradeoff, as you acknowledge, and the tradeoff can just be as damaging economically as a buffer stock of unemployed. Less people may venture into private business creation and may end up relying more on government for many things. i’m not new to blogging and you can check that i’m not ‘one of the people that think that government should just butt out’, but i’m not one to go the other extreme. I will be persuaded otherwise if my notion of the JG as having a buffer stock of many failed businesses is proven wrong, but i remain unconvinced of arguments otherwise.
“and the tradeoff can just be as damaging economically as a buffer stock of unemployed.”
How can having an economy running at 98% capacity rather than 96% capacity be worse?
Remember that for the US that 2% represents about three million people. Sacrificing the livelihoods of enough people to practically fill Los Angeles simply because the public/private split might be slightly different suggests a serious distortion of priorities.
Businesses fail all the time. Get over it.
Thanks for the response, rogue. I realize that you are one the good guys, based on following your blog, and we’ve tangled on this before, so I already know your position. I just wanted you to say clearly where you stand on the BSE and price anchor and how you would handle it.
From your answer, you seem OK with using what we are already doing about price stability, namely, using monetary policy to target the inflation rate and a buffer stock of employed as a tool IAW a Taylor rule, along with automatic stabilization in increase effective demand through larger deficits. But you would add to a JG at a certain level of UE and curtail it on correction, I assume according to some rule, instead of using a fixed JG wage as a floor wage-price anchor.
However, that still leaves a sizable amount of resources idle as a general rule, or else resolves the issue through wage suppression, that is, by letting the wage floor sink as a matter of policy. You seem to see that as necessary to maintain private sector wage competitiveness, which is needed to optimize productivity, and that the MMT JG would detract from this. Have I got this right? If I do, I would call that having “neoliberal tendencies.” 🙂
This is significant since you are not the only one making this kind of objection. It underlies the MMR objection, as well as John Carney’s, as I understand them, although they would not introduce any kind of JG at all and just let wages correct and demand fall, again as I understand them as presented in outline so far.
Tom, yes, you’re correct about my position so far, unless I can be proven wrong on the permanent JG having a buffer stock of failed businesses. Yes, we’ve discussed this before and I know from our results there is an acceptable middle ground, that is practical both politically and pragmatically, in terms of having a JG and not destroying incentive for private initiative in the process.
People like Neil also need to get over it about the permanent JG as panacea to solving all unemployment. 96%, 98%, 100%, whatever, is guaranteeing a job to the last 2% unemployable, whatever the overall economic condition, worth making the economy less progressive for the other 98%? If there’s a JG during a recession, then everyone who can hold a job should be able to get a job. But when the private sector is expanding, then the JG should be wound down as a matter of policy, not merely as a passive result of people leaving for higher private sector wages.
Keeping the JG in such an expansionary environment risks the JG becoming a negotiating ploy for smart workers who know how to use the system, to extract higher wages than they can otherwise. And remember that we’re already talking about a JG program that pays the living wage, so the STARTING POINT for the private sector is to offer higher than this living wage. This means there’s less room for the private sector expansion before it turns into an inflationary environment that would then need to be curtailed by government.
When the economy is not in recession, and the government is still there adding to labour demand, there will be more bidding up. The difference therefore “between JG workers leaving for the private sector because there is a boom, and the JG being ended by the government because there is a boom” – is that there will be less bidding up when the government ends JG after average wages rise a certain percentage above JG level. Again, the idea that there is a difference is extraordinary, incomprehensible. As the JG workers leave, by that token there will be less bidding up by the smaller JG. A JG ended because everybody left is exactly the same as a JG ended by government dictate, because the government’s dictate is to end the JG exactly as everyone leaves. Ending WPA had effects only after the war, when unemployment returned to above levels seen when it was ended. Throughout, it appears you have some different understanding of what the JG is than is intended and commonly understood. The JG incorporates by design valid objections to other employment programs, which you may have in mind, in order that they do not apply to it.
You’re only thinking of it in the first phase. You’re ignoring the first phase. Which depending on other polices & real world events may be the only phase. Look at the inflation level after the war, and especially in countries that maintained some sort of buffer stock employment, like Japan, Austria, Norway, and Switzerland. A decent approximation to the JG. Call that the acceptable level of inflation. Then we have a rough empirical demonstration, that with that inflation tolerance, the “first phase” can last for decades, through many shallow business cycles, from the war, to the 70s turning point and beyond. Not only did these countries have full employment – they did not have to pay for with it by small business failures (the reverse: mainstream quackonomists are always telling Japan to shrink their “inefficient” small business sector) nor by excess inflation.
Hence, if you’re one who starts your business once the economy passes this level, you’re going to have to think again, because government will be expected to tighten (not by dropping the JG, but by making it more expensive to maintain a small business). Because the government keeps this floor on labour demand even during the boom times, when the economy gets booming, the boom acceleration will be much faster than if the government withdraws its additional demand instead. It does withdraw it, again, there is no difference. If you think that a big JG would accelerate booms “much faster”, the automatic withdrawal by that same token would slow them much faster. You can’t have it both ways.
So again, if you’re a businessman, you’ll likely obsess about where this “certain level’ is at.What this amounts to saying is that small businesses which are marginal at the height of a boom, are marginal and may fail. This is tautological. The obstacle to their profitability is not the (puny-to-nonexistent) JG, but the real world, the real productivity of the economy, the fact that the particular business is very shaky. And that is what any businessman would obsess about – tending his own garden, not fortunetelling about the economy.
Less people may venture into private business creation and may end up relying more on government for many things. In all likelihood, 99.9+%, more people will venture into private business, because the penalties for failure will not be so draconian. Lerner emphasized this as a benefit of functional finance full employment, long ago. The fact that more might fail is the only valid concern I can see. But so what? They wouldn’t have been ventured to if times were not so good, courtesy of full employment, and more would succeed, enriching everyone. You can’t have more successes without more failures. Please, please sell me Roguecorp at a fire-sale price when a JG is instituted!
Tom, the stock I could think of using as buffer is the JG itself. In times of higher inflation, the JG is what adjusts, either in price (wage) or quantity of its workers. Again, that’s what the JG proposes. That is the JG, fixed price, floating quantity idea. If you don’t understand that the JG proposal is for the JG to quantity-adjust, you don’t understand the JG.
I will be persuaded otherwise if my notion of the JG as having a buffer stock of many failed businesses is proven wrong, but I remain unconvinced of arguments otherwise. You first have to have an argument FOR this notion based on the actual JG proposal, other than “marginal businesses are marginal”.
Some guy..Calgacus, is that you? You come by so many names on the net. Here are some responses.
“As the JG workers leave, by that token there will be less bidding up by the smaller JG.”
I’ve laid out the reason for the bidding several times. Pls read them again.
“Look at the inflation level after the war, and especially in countries that maintained some sort of buffer stock employment, like Japan, Austria, Norway, and Switzerland”
“Not only did these countries have full employment – they did not have to pay for with it by small business failures”
There can be several reasons if you are right in your assertion that these economies do not pay with small business failures.
1. Privately owned business growth never grew too fast, or beyond a certain percentage of the economy, so the government has never had to slow it down in the name of price stability.
2. The government simply mandates the transfer of people to the JG and never resorts to increased taxation or interest rates to slow down the private sector
3. The government indirectly supports the businesses adversely affected by increased taxation, so while it incentivizes the workers to leave the private sector, it does not cause extreme hardship on the business owner.
I don’t think no. 2 or 3 are part of the proposed JG mechanism, and no. 3 can be gamed.
“If you think that a big JG would accelerate booms “much faster”, the automatic withdrawal by that same token would slow them much faster.”
I’ve laid out the reason for the bidding several times. Pls read them again.
“What this amounts to saying is that small businesses which are marginal at the height of a boom, are marginal and may fail. This is tautological.”
In your comment, you said “A JG ended because everybody left”. That would be my example of tautological. In every level of economy, there are businesses at the margin. They’re never made equally.
“more people will venture into private business, because the penalties for failure will not be so draconian.”
You’ve obviously never used up all you life savings, plus borrowed more from others, in order to start a business. Penalties for failure are never easy.
“Please, please sell me Roguecorp at a fire-sale price when a JG is instituted!”
Why would I sell you anything to you at firesale prices? In fact, I’ll start a business, just for the purpose of selling to you at a profit just before the government is expected to tighten. How about that? Give me your contact if ever my country or yours ever adopts the JG and I can sign you to a commitment contract. Don’t worry, the penalties for failure will not be so draconian.
Dunno, rogue, looks to me like your major objection to a permanent JG is that it can be gamed and some marginal business will be forced to either cut their profit margin or go out out of business, I suppose due to competition from more efficient firms. That kind of objection is typical instead of addressing the issue as Bill framed it – buffer of employed or buffer of unemployed; price anchor as a fixed wage or NAIRU, which acts on price (wage) by increasing quantity (unemployment).
Your position seem to involve permanent acceptance of idle resources in the form of a few percentage points in the unemployment rate.
The MMT contention is that macroeconomic efficiency is assessed in terms of full employment and price stability, and a theory that outlines a policy stance with minimal unemployment and minimal price instability is to be preferred on those criteria. These are also criteria for assessing policy effectiveness, too, imposed for political reasons, since every politician in a liberal democracy knows that these are criteria the public uses to in choosing whom to vote for.
So in the final analysis it seems to me to boil down to which macro theory formulates the most effective and efficient economic policy based on these criteria, along with production and productivity. And who is going to argue that idling human resources as a general rule optimizes production and productivity?
Bill, this was a great post. Thanks for writing it up. I vote for more Question posts. They are very helpful in clarifying basic issues and concepts.
“is guaranteeing a job to the last 2% unemployable, whatever the overall economic condition, worth making the economy less progressive for the other 98%? ”
It’s not just guaranteeing a job. It’s guaranteeing a livelihood – that they can exist.
To fail to guarantee them a livelihood is cruel and as today’s MMP points out “… we should never let the cruelest people in our society dictate public policy.”
Three million people are not going to go away. So what compensation level are they to receive instead, and given that you are at maximum capacity who is going to pay that to these people for doing nothing rather than something?
It would need to be at the living wage level for doing nothing of course. Otherwise it is an attempt to eliminate them via starvation and poverty.
It’s interesting that people who like to consider themselves in the “center” always have as their constant concern that policy will swing too far to the left in a time of economic downturn. My observation is that the conservatives have won the propaganda and framing wars so that only conservative policies are considered, whether in good times or bad. As an example, in the U.S. in the mid-nineties the new Republican congress along with an all too willing Pres. Clinton passed a restrictive and punitive welfare law even though the U.S. already had the stingiest welfare provision in the civilized world. Now those were the heady times when it was being trumpeted from all quarters that “the business cycle was dead” and we could look forward to endless prosperity and “peace dividends” that rendered public provision unnecessary. Privatization and deregulation became the new rage. In only a few years the U.S. economy was in recession but the kneejerk lurch to the left was not forthcoming. The same can certainly be said of the present crisis.
Bill has said many times that it is the automatic stabilizers which have saved the U.S. after the GFC, but they could have been much more effective if they had not previously been neutered in the flush of optimism engendered by the last “boom.” If the J.G. is a good piece of a more comprehensive counter-cyclical policy what is wrong with making it robust enough to weather a crisis but flexible enough to find its proper level during a boom? In recent years we have seen a much greater tendency to legislate too far to the right when optimism is high and to not see those decisions being undone when one would expect the pendulum to swing the other way.
I think FDR’s WPA had it right. No more than 30 hours a week (when the work week was 50 hr/wk) and no more than one person per family. The 30 hours was for the prevailing wage for the type of work being performed. See Questions and Answers on the WPA – Works Progress Administraion – 1939 – WPA Employment, Wages and Hours
This should address some of the concerns of Rogue. This allowed the spouse and the worker to look for work in the private sector. 3 days a week of work would allow a person four days to look for work in the private sector, or supplement his/her income (and this I believe was allowed.)
Not versed in these matters, but it seems to me there are plenty of businesses that will feel the pinch from a minimum wage JG, even Mickey d. Tough, they need to do something to keep their employees or go out of business. The idea as I understand is full employment, not some nice way to keep your uncle in business, no matter how good a fellow he is or how small his business is. One would hope that those versed in these matters would not allow runaway inflation before they put the brakes on. But there is no guarantee against idiocy. Still not reason enough to endure unemployment.
There may be some smart fellow trying to game the system but he best be careful or he will make the JG his permanent home, as someone else will take the better paying job. Finally, it seems to me that what Bill has created, Bill can modify to fit the problem.
So from what I have read, give it a go. We have nothing to lose. But unemployment to end and more chickens in everyone’s pot.
Clonal, that might be a compromise. How I see JG is as a full-time job at the start, when the private sector is weak. This gets scaled down, perhaps in a mechanism similar to your example, when government sees that private sector hiring is already leading to average newly-hired private sector wages rising at say, 20% above the JG. The declining income from the JG should encourage the last JG holdouts to transfer to the private sector, and alleviate the wage bidding there.
crosspost of my comment at Mike Norman Economics on this:
I think that arguments by rogue, John Carney, etc., have merit in that there are always trade-offs in economics. To think that one can design a perfect system with no trade-offs and opportunity cost involved in choice is unrealistic. A solution should also not be attacked as imperfect for that reason, too. The question is what the trade-offs are and how different solutions handle them.
In my view, the greatest argument against capitalism comes from Marxians, that is, capitalism treats labor as a commodity and therefore workers as less than human. This is the source of alienation of workers form their human nature, which has brad and deep implications, spiritually, psychologically, socially, politically, and economically. We now think of Marx as an economist. That is wrong. Marx never considered himself an economist but rather a philosopher specializing in social philosophy. He was educated in philosophy and received his degree in it. Only later, when Marx cam to see the relevance of economics, did he read in it and employ it in his argument on behalf of worker freedom.
The essence of Marxian thought is Hegel’s master-slave dialectic. Marxians show how capitalism’s commodification of workers not only makes them unfree, but also requires it to discipline wages. The point of truly anarcho-socialist thinking is to free workers from this bondage to the necessity of optimizing return on capital as essentially profit off the back of labor due to wage discipline. Workers cannot be permitted to gain leverage in capturing profit share.
The reality is that as productivity increases, workers are not “working harder” but technology is replacing the need for them. With technological advance, more and more workers become dispensable, which disciplines the wage-power of the workers that get hired and increases competition for jobs.
So instead of increasing distributed leisure, productivity increases lead to income and wealth inequality and less and less freedom for workers in aggregate.
The only entity capable of rectifying this imbalance is government. If government does not pick up the slack, more and more workers will fall through the cracks. The purpose of the JG is not only to pick up the slack, however, but also to give every worker the an alternative wage offer, thereby increasing worker freedom.
Of course, capitalists do not like this arrangement, or any other socialists program or institution, because this undermines the basic premise of capitalism that capital is to be served by the social, political and economic system in order to maximize growth in terms of production, and productivity in terms of resource efficiency, and profit margin as owners’ share – which they are argue is not only most efficient and effective, but also just in that owner’s contribution is really the only aspect of production that doesn’t come from mere resource use and organization. It’s the standard trickle down theory that all boats are rising when capital is served.
Workers as human persons? Corporations are persons. Freedom? The Bill of Rights applies to corporations. Legal equity. Property rights trump human rights.
So again, look at the trade-offs and figure the opportunity cost.
@ Rogue: I’ve laid out the reason for the bidding several times. Pls read them again. Nobody disagrees that there will be bidding effects. But the point of the JG is that it will bid wages both up & down. You miss the downward effect, and exaggerate the upward effect, particularly with the idea that there is some visible difference between the JG automatically quantity-adjusting, shrinking and disappearing & the government ending it.
As you ask Neil: Why would gainfully employed JG workers be an anchoring substitute FOR private sector workers? I’m assuming here that the JG will pay a living standard. So I see it the other way around – the JG becomes a substitute TO private sector employment.
“Substitute FOR”: Here is how Wray puts it, p.132: ” … some ratcheting upward of individual wages after the ELR policy is adopted is possible. However, just as workers have the alternative of BPSE, so do employers have the opportunity of hiring from the BPSE pool. This is the primary ‘price stabilization’ feature of the ELR programme. If the wage demands of workers in the private sector exceed by too great a margin the employer’s calculations of their productivity, the alternative is to obtain BPSE workers at a mark-up over the BPSW. … The ELR pool will operate as a ‘buffer stock’, and just as a buffer stock of any commodity can be used to stabilize its price, the government’s labour ‘buffer stock’ will help to stabilize the price of non-BPSE labour to the extent that workers in the ELR pool are substitutes for non-BPSE labour.”
“substitute TO”: It’s a substitute to private sector UNemployment, because the government has forced unemployment to exist. In all likelihood, private sector employment will be higher, not lower, and the JG buffer stock will be smaller than the reserve army of the unemployed.
“is guaranteeing a job to the last 2% unemployable, whatever the overall economic condition, worth making the economy less progressive for the other 98%? “ There is no logical, empirical or historical reason to think that employing all ready, willing & able workers at constructive tasks would make the economy less progressive [productive?] for the other 98%. It’s the kind of weird objects-fall-up, heating-water-makes-it-freeze, belief that can only come from being fuddled by nonsense for years. Other people working does not make you poorer. It makes you richer. The only reason these people are not employed is because the state has decided to unemploy them, abetted by mainstream quackonomics which has destroyed the superior understanding of economics common decades ago.
Why would I sell you anything to you at firesale prices? Unfounded belief that a JG would particularly hurt small businesses, rather than benefit them, would lead you to undervalue small businesses when a JG was instituted. The fire (inflation, tightening) you would foresee would not occur.
Wray considers what is roughly your objection: p.179: “It is possible, of course, that our analysis is flawed…What if ELR turns out to be more inflationary than the current arrangement? That is, what if the reserve army of the unemployed really is more effective as a buffer stock than the ELR proves to be? …If the ELR pool is not as effective in stabilizing wages as unemployment has been, then the number of workers in the pool will have to be greater than the number of unemployed in order to have the same wage dampening effect. If 6 million unemployed are required for price stability, then perhaps 8 million ELR workers will be required. ..is it better to have, say 6 million unemployed or 8 million employed in ELR? .. We believe the answer to the first question is obvious… ”
These 2 million who would be otherwise employed in the “private” sector, in small businesses perhaps would represent what you call the buffer stock of failed small businesses. I agree with Wray & with Neil above that it is a small price to pay. And again, this possibility, that there is any price to pay, seems utterly unrealistic to me. A JG would be less inflationary than a buffer stock of the unemployed. In the USA, for any reasonable wage, I would wager my life that it would be much less inflationary. It is hard to imagine more inflationary, less efficient uses of government money than the USA’s mulitfarious welfare-for-the-rich, trickle down schemes, which a JG would quickly combat, by ending colossal wastes of human and other resources, of the unemployed and those already employed.
@ recent comments: I agree with David & have to disagree with Clonal & with Tom a bit. KISS. No compromises. No reason to differentially shorten or restrict JG workweeks. Rogue’s inflationary effects of a JG are chimeras. Minimum wage businesses won’t suffer. Never forget what anybody in business worries the most about – demand for his product, customers. The JG will produce a hell of a lot more customers with the money to buy the small business’s products. A small business boom, as Lerner envisioned (somewhere in his Economics of Employment) not a bust.
Contra Tom, there are NOT always trade-offs in economics. In terms of universal human morality, anything that anyone could publicly claim as a goal, there are no trade-offs with a JG, with establishing MMT proposals. Only vampire squids making everyone else worse off might suffer, probably only relatively, not absolutely. There are no real tradeoffs from stopping drinking poison, from stopping stabbing yourself in the eye, from stopping human sacrifice at the pyramids of Wall Street by today’s mainstream Aztec economics. But this Hegel junkie couldn’t agree more with the relevance of Hegel, Marx & the master-slave dialectic. MMT is (worldly) philosophy. Hegel got the last from Aristotle – if we paid Greece using today’s intellectual property rights scheme, it would be the richest country on earth). For as Hegel said, “the rational has no opposite”.
Some guy, since I’ve already made my points on a lot of your objections, I’ll just focus on this:
“just as workers have the alternative of BPSE, so do employers have the opportunity of hiring from the BPSE pool. This is the primary ‘price stabilization’ feature of the ELR programme. If the wage demands of workers in the private sector exceed by too great a margin the employer’s calculations of their productivity, the alternative is to obtain BPSE workers at a mark-up over the BPSW. … The ELR pool will operate as a ‘buffer stock’, and just as a buffer stock of any commodity can be used to stabilize its price, the government’s labour ‘buffer stock’ will help to stabilize the price of non-BPSE labour to the extent that workers in the ELR pool are substitutes for non-BPSE labour.”
No business can fire workers in order to get cheaper workers from the JG, that’s illegal. Not even if employers are pissed off that workrs are asking for higher wages, they can’t just replace them. Neither can their workers just ask for higher wages, not unless they either see that the economy is improving, or their company is increasing its profitability.
If the overall economy is indeed improving, then there will be wage inflation, because many businesses will be hiring workers, not just one or two. And as I said, if there’s a JG blanket demand for everyone, then the more workers needed by private businesses, the higher wages will go.
Now if it’s only their specific company that’s increasing profitability, then that company is likely increasing the wages of its best workers on its own accord. Many well-run companies will seek to reward those that work hard to make them successful, and so not lose them to other companies. So if this company’s wages are going higher than other companies, then other workers will want to join it too, whether they’re from the JG or other companies. The JG doesn’t really buffer down any wage for anyone, unless the overall economy is not improving, or a specific company is not improving.
“If the ELR pool is not as effective in stabilizing wages as unemployment has been, then the number of workers in the pool will have to be greater than the number of unemployed in order to have the same wage dampening effect. If 6 million unemployed are required for price stability, then perhaps 8 million ELR workers will be required. ..is it better to have, say 6 million unemployed or 8 million employed in ELR? .. We believe the answer to the first question is obvious… ”
This statement reinforces my point about the business killing effect of a JG program that also has a price stability mandate.
Some Guy, the trade-offs are in terms of opportunity cost. When there is no trade-off, then the indifference level is the same. As far as your example, go there is a trade-off in, for example, preventing a person from intentionally harming themselves voluntarily, where the state impinges upon individual freedom in the name of a social good or protecting individuals from themselves. This is one of the basic bones of contention between libertarians and authoritarians, for example, and a lot of economic issues involve these kinds of “moral” trade-offs, as we see daily in the political debate among various factions that see opportunity cost differently.
From what I see of the debate over the JG the trade-off is economic in that there are perceived winners and losers, while the decision criteria appealed to are often also moral in addition to economic. Untangling positive and normative at this level is often impossible, since each side sees its moral position as the most rational. Of course, at times a moral argument is mounted in defense of what is essentially an interest, so parties with different interests disagree. Seems to me that the economic and moral, positive and normative are pretty bound up together here, which accounts for a lot of the heat in the discussion.
“No business can fire workers in order to get cheaper workers from the JG, that’s illegal. Not even if employers are pissed off that workrs are asking for higher wages, they can’t just replace them. Neither can their workers just ask for higher wages, not unless they either see that the economy is improving, or their company is increasing its profitability.”
Classic case of thinking in individual business terms rather than aggregate.
You might not be able to but your competition can hire cheaper workers to do the same job and nick your trade. Which then leads to lay offs.
Once both sides realise that you don’t get the push or the pull from either side. It’s the same disciplining mechanism that allows the unemployed buffer to work or the ‘shift production abroad’ process to work.
“You might not be able to but your competition can hire cheaper workers to do the same job and nick your trade. Which then leads to lay offs.”
“It’s the same disciplining mechanism that allows the unemployed buffer to work or the ‘shift production abroad’ process to work.”
This assumes that would be competitors are able to get their workers from the JG at cheaper than the first business. So for as long as there are cheaper workers to be had who can do the job, there will be less wage inflation, whether a business does it or his competitor.
What difference does this make when more businesses now need more workers, and not everyone in the JG is willing to transfer from the JG? No one in the JG is being compelled to leave, and if keeping the JG job is not conditional on considering private sector offers being floated, businesses end up bidding more, to entice more JG holdouts. Or end up poaching each other’s workers, and to keep their own workers, they bid up more.
At the low end of private sector demand, not having the JG works against workers. But at the other end, when private business demand is healthy, having the JG now works against private businesses.
“This assumes that would be competitors are able to get their workers from the JG at cheaper than the first business”
Which they will because the original business wages have been bid up making space. JG workers come in having been bid up slightly less. Original business goes bust due to lack of demand putting workers back on the JG.
Rinse and repeat until people get the message that bidding up wages loses you your job. Wages in all markets at the low level stabilise at or close to the gap required to entice people away from JG. That gap represents the monetary value of the distaste of the job in question compared to the social defined minimum JG standard
Pricing of labour is then exactly as it should be in a free and fair market when both sides have the option to say ‘no deal’
“Original business goes bust due to lack of demand putting workers back on the JG. Rinse and repeat until people get the message that bidding up wages loses you your job.”
Which also teaches workers that it’s probably worth it to just stay in the JG because wages cannot really go much higher by transferring to private. Who needs the extra hassle of joining private sector with, as Prof Wray calls it “a cruel boss who enjoys watching workers suffer” whereas the JG “takes workers as they are, with no income, training, experience, or level of educational attainment restrictions. It is non-invidious: all races, genders, sexual preferences, political ideologies, and ages, jobs are provided where workers are-they do not have to move to take a job, and commutes to work should be reasonable. Reasonable work schedules will be provided for those who prefer to work part-time, all full-time workers receive the same wage and benefit package”.
Businesses also learn their lesson and not bother anymore. Not trying to be an ass here but just pointing out that that argument goes both ways.
“Businesses also learn their lesson and not bother anymore. Not trying to be an ass here but just pointing out that that argument goes both ways.”
(i) good for those businesses to get out of the way. Businesses are a result of the economic system, not the point of it – which is full employment and price stability in the MMT view.
(ii) You’ve never been an entrepreneur if you believe that.
“(i) good for those businesses to get out of the way. Businesses are a result of the economic system, not the point of it – which is full employment and price stability in the MMT view.”
Glad we sorted that out. Are all of these Neil’s hope for this program? Full employment, price stability, and for businesses to get out of the way?
“(ii) You’ve never been an entrepreneur if you believe that.”
Really? Thanks for clarifying that to me. I never would have guessed. Anyway, let me allow you to go back to your business which I’m sure you hire a lot of people for.
“and for businesses to get out of the way?”
ie the ones that are crap.
Which is what competition is supposed to do isn’t it?
As Randy Wray puts it: “Many private firms face a problem: how can we get someone to take this crappy job, earning wages so low no one can live on them, with a cruel boss who enjoys watching workers suffer? Their solution: let’s get rid of the social safety net so that the only alternative is starvation. Of course that will be the proffered remedy from the employer side. It is the public’s duty to force employers to improve pay and working conditions. Supporters of the JG do not need to downplay this aspect of the program. Yes, the JG and MMT are inherently progressive. Firms will have to shape up or go out of business. That is progress.”
Some guy, since I’ve already made my points on a lot of your objections,
Of course I disagree on the internal consistency, coherence, strength or relevance of these points.
No business can fire workers in order to get cheaper workers from the JG, that’s illegal. Not even if employers are pissed off that workers are asking for higher wages, they can’t just replace them. Illegal? Where? More so in some places than others. But formal legalities, such as they are, have had very little effect or enforcement in the last three decades in the USA. In any case, you seem to agree with Neil’s further arguments, and so with the main point of JG/Buffer Stock disinflationary effect: So for as long as there are cheaper workers to be had who can do the job, there will be less wage inflation, whether a business does it or his competitor.
Next What difference does this make when more businesses now need more workers, and not everyone in the JG is willing to transfer from the JG? Of course there is no difference when nobody is willing to transfer. When the JG pool is zero, or reduced to people who won’t leave (and are thus like any other government worker) it has no effect, inflationary or disinflationary. There needs to be a real JG for it to have any effect. But how does this argue against its disinflationary effect when there is an appreciable JG pool? As long as there are workers willing to transfer out, it does disinflate, with disinflationary effect decreasing as the workers leave, down to zero when the pool is zero. And you did seem to agree with this in the response to Neil.
But at the other end, when private business demand is healthy, having the JG now works against private businesses. You’re comparing it here to nothing, not to an unemployed buffer stock, not a valid procedure IMHO. If it is less inflationary than a reserve army of the unemployed, it works against private businesses less than not having a JG. What is working against private businesses is not the JG, but reality. Real constraints =>inflation with excess demand=> tightening=>bad for (small) businesses. The disinflationary JG =>less inflation=> less tightening => better for (small) businesses. Grosso modo, that’s those 4 countries for many decades, a bit more grosso, that’s the whole world during the postwar full employment era. Lerner’s expectation was proved correct, what functional finance / Keynesian / MMT policies were applied were good for (small) businesses, for entrepreneurship, for scientific & technological innovation & everyone and thing else. And neoliberalism / high unemployment has had the exact reverse effect.
Not trying to be an ass here but just pointing out that that argument goes both ways.Our whole effort here is to point this out. Everyone agrees on the wage & working condition floor levels provided by the JG. It’s the going the other way – that the JG can exert downward pressure on wages & prices that this was all about.
Which also teaches workers that it’s probably worth it to just stay in the JG because wages cannot really go much higher by transferring to private. The truth of this depends on the JG wage & the true differences in worker productivity and the way the economy develops. With a low JG wage, like today’s US minimum wage, there is great incentive. And what would be wrong with more people staying in the JG? They are doing real work, adding to aggregate supply. If they willingly do (increasingly) productive work for low pay, they are benefiting everyone else. Especially the private sector, especially the small businesses living off the dandy new HPM, the bigger deficit that the JGers are spending.
Tom, my examples were not meant to be understood as individual choices. The “loss” & “losers” are comparable to countries & people who would have wanted slaves for the pure pleasure of enslaving, whipping, caging & torturing, even if they would be a materially better off homo economicus in a free society. I meant that not having a JG is an insanity comparable to sometimes legalizing poisoning reservoirs, or teaching people they must cut out an eye to rid themselves of demons. Sure, poison & knife manufacturers might suffer. That’s about it. Especially, as logic & evidence indicates, Rogue is wrong, and the JG is less inflationary than unemployment, and a thus a boon to small business. How could private businesses be said to suffer if they make up a greater fraction of the economy?