Scottish-born economist - Angus Deaton - recently published his new book - An Immigrant Economist…
You won’t see much debate or coverage of the desirability of making full employment the central goal of economic policy these days. The politicians, infested with neo-liberalism, do not admit they have abandoned full employment as a policy goal. Instead, they lie and wheel out various flawed analyses that try to make out that full employment now occurs at much higher rates of labour underutilisation in the past. Norway tells us that that proposition is a lie. In Australia, the government still tries to suggest that a state where more than 14 per cent of available labour is idle in one way or another represents close to full employment and a justification for fiscal austerity. We believe them because we have been seduced by the lies and our educational systems have downplayed critical scrutiny. But until we cut through the swathe of lies and misinformation we won’t get back to the bountiful state of full employment where not only workers enjoy higher incomes but dignity becomes a priority. Whatever else the liars say, full employment is still a state of very low unemployment and zero underemployment.
In the latest IMF – Concluding Statement of the 2013 Article IV Mission to The United States of America – which is the regular assessment that the IMF makes of member-state economies, the IMF continues to walk the tightrope between its bad austerity persona and its increasingly, pro-stimulus stance.
It clearly blames fiscal deficit reduction attempts both within the US and abroad (“a weak external environment”) for the “tepid growth” in the US over the last year.
In modelling likely political developments in the US it notes that its is assuming the:
… the general government deficit will decline by over 2½ percent, subtracting between 1¼-1¾ percentage points from growth in 2013 … On the fiscal front, the deficit reduction in 2013 has been excessively rapid and ill-designed. In particular, the automatic spending cuts (“sequester”) not only exert a heavy toll on growth in the short term, but the indiscriminate reductions in education, science, and infrastructure spending could also reduce medium-term potential growth.
That sort of narrative was also levelled at the UK recently and so we conclude the IMF is now making the case that it denied for so long – that there can be a fiscal contraction expansion – under present circumstances.
But, from an educational perspective, I thought the following statement was of interest. In cataloging the role of monetary policy at present, the IMF said that:
The prolonged low-interest rate environment could sow the seeds of future financial vulnerabilities as investors and financial institutions aggressively search for yield-despite the increased regulatory and supervisory focus on financial stability risks.
Just wait for the financial press reaction when treasury bond yields, which are currently very low, start to rise because the investment bankers start diversifying in search of higher yields (and higher risk).
We will be flooded with claims that the cost of government spending has risen (it will not have!) and the road to government insolvency is fast reaching its end (the road is infinite – that is, not defined).
On myths that persist, I thought the UK Guardian article (June 12, 2013) – The politics of full employment are the progressive answer to austerity – was interesting.
Regular readers will know that I have devoted my academic career to researching, in a variety of ways, the concept of full employment.
I currently define a full employment state in Australia as being satisfied if:
1. The official unemployment rate is between 2 and 3 per cent, leaning towards the lower edge of the band. So remaining unemployment is of a frictional nature – moving between jobs.
2. There is zero underemployment – that is, no part-time workers signals they desire more hours of work.
3. There is zero hidden unemployment – that is, participation rates are at their peak.
We can debate the qualitative aspects of that quantitative definition, which bears on the quality of jobs defined under Criterion 1 and the lack of skills-based underemployment under Criterion 2.
I think that is an important debate and aspiration. Regular readers will note that I consider “loose” full employment, which is defined as a market-determined outcome supplemented with a Job Guarantee, is the minimum state that a nation should tolerate.
This state does not necessarily eliminate skills-based underemployment (especially during a serious downturn. The extent to which this type of economy (with a Job Guarantee buffer stock) eliminates skills-based underemployment will thus depend on the state of the economic cycle.
At periods of high pressure, there will be very little skills-based underemployment but at other times there will be more. The introduction of a Job Guarantee provides an incentive to employers to upgrade the quality of their job offerings anyway to make sure they can profitably function above the Job Guarantee wage, which would become the wage floor.
Clearly, loose full employment is the minimum state. The currency-issuing government should use its fiscal policy capacity to ensure that it pilots the labour market to achieve high quality employment within the inflation constraint. A high-wage, high productivity economy will provide better jobs (both within the public and private sectors) than a nation that feeds at the bottom of the productivity and wage levels.
That is the context in which I read the UK Guardian article.
The writer, Gavin Kelly considers that the notion of full employment should not be seen as the natural preserve of the Labour party in the UK (or elsewhere) and that the notion of:
Full employment is not fantasy economics, but debate is squashed by economic complacency and fatalism …
The UK Guardian article delves into history and reminds us that in the UK the same circumstances that are apparent now (untrusted Labour leadership, insecure Conservative backbenchers sensing electoral defeat, “a recession-wearied public agitated about welfare bills and a stubbornly high deficit, and a welfare secretary seeking to focus public debate on the alleged failings of claimants” were operating 20 years ago
Gavin Kelly says that:
These familiar circumstances confronted the last mid-term Conservative chancellor two decades ago. Ken Clarke’s response – to the surprise of many – was to remake the argument for full employment and a strong welfare state as key pillars of a properly functioning market economy. How times change.
The point is that while it is “in Labour’s genes to believe this issue is its own”, previous Conservative politicians have “insisted that Tory manifestos be committed to maintaining full employment as the ‘first aim of a Conservative government'”
The reason no one talks about full employment now is according to the Guardian article due to “the troubling mix of economic complacency and fatalism that dominates much of today’s economic discourse”.
Apparently, Brits are complacent because “the UK jobs market has performed better than many predicted with unemployment rising less than expected given the fall in output”.
Really? At least the article notes the “2.5 million unemployed and 3 million under-employed” and points out that when politicians (all over the world” make statements such as they have overseen a “record numbers of jobs” created they also fail to emphasise the increase in the “adult population” over the same period.
Of-course the labour market is bigger in most nations now – but good performance is about ensuring employment growth absorbs the population growth – that is, the employment-population ratio does not fall.
In Britain the employment-population ratio has plunged since the 1970s, when the nation last enjoyed full employment.
Here is a graph produced by the – St Louis Fred Data showing the British employment to population ratio since the early 1970s.
It is fair to say that the nation never really recovered from the Thatcher assault on full employment.
The Guardian article also notes that eliminating large employment gaps not only helps the unemployed gain work but also helps improve the fortunes of those currently employed:
… those with jobs desperately need it too. In the post collective-bargaining era, a tight jobs market – where employers chase applicants as much as the other way around – is the best wages policy available to low and middle earners.
Which makes you wonder why the neo-liberals have been able to divide and conquer the workers into two broad groups – the robust workers and the lazy unemployed.
How have they done that? – Ignorance fuelled by misinformation. See below.
The Guardian claim that there is a “fatalistic mindset” in Britain based on the belief:
… that the UK is afflicted with such intractable problems that to cast ahead to the possibility of full employment is to indulge in fantasy economics.
That is, neo-liberalism is TINA. Margaret Thatcher lives on.
Inasmuch people perceive TINA, the problem is a lack of political leadership and an unquestioning willingness of lazy politicians to accept the flawed mainstream economics doctrines.
The Guardian does acknowledge that the “the policy environment is shifting”.
The IMF introduction is evidence of that. The doomsayers are running out of credibility even among those that might have believed their lies five years ago and never bothered to, for example, think of what has been going down in Japan for 20 years or more.
We are seeing that “only the economically paranoid would discern inflationary risk emerging from our labour market any time soon” and that interest rates are not going through the roof despite the on-going deficits.
I would put the “complacency/fatalism” in different words. There is a systematic conspiracy among the elites to prevent governments from pursuing full employment. The elites comprising the captains of industry and the establishment politicians who feed off the largesse provided through the lobbyists working from the captains hate full employment.
Why? Because it shares the real income around more equitably and shifts the balance of power back to the majority.
So their approach is two-fold:
First, they lie by suggesting that they all love full employment but that the level of labour slack which now defines full employment has risen – due to this and that.
Please read my blog – The dreaded NAIRU is still about! – for more discussion on this point.
Second, they drown the populace in a swathe of mis-information to reinforce the lie. So all the austerity myths:
- The government has run out of money.
- Deficits will drive up interest rates.
- Deficits will cause hyperinflation.
- Deficits will rack up unsustainable debts on our grandchildren.
- Bond markets will punish governments who run continuous deficits.
- Deficits undermine growth because the private sector thwarts their intent by increasing saving to pay for higher implied taxes in the future.
- Direct job creation creates unreal jobs that are worthless.
- A Job Guarantee would undermine the capacity of private employers to attract labour and drive down productivity.
- ETC, the list goes on.
We are continually being drawn towards conclusions that unemployment is not really a problem because people choose to remain jobless. The culprit is singled as the income support system which subsidises those choices. Or depending on the day of the week, the other culprit is excessive real wages. Or then, on another day, it might be hiring and firing protections. ETC.
That if the labour market was deregulated and the income support system abandoned then we would quickly eliminate unemployment. Put people on the margin of starvation and they will work out of desperation.
We see that approach in the poorest nations where families scavenge through rubbish and sewerage heaps for the barest scraps of food. That is what desperation and a lack of jobs ends up leading to.
And meanwhile, there is mass (preventable) disease and high rates of infant mortality. The market working at its best.
The Guardian article says that “(g)etting back on the path towards full employment” will require a major shift in policy – and are:
… likely to involve an expansionary macro-policy tempered by measures that puncture potential asset bubbles; a revamped childcare system that makes it worthwhile for both parents to work; and tax reform that makes hiring labour more attractive and sitting on cash piles less so.
It will require an abandonment of the neo-liberal mindset – a return to collectivism and a fundamental shift in the balance of power towards workers again.
Cutting through all that cant and misinformation, the concept of full employment is simple – create enough jobs and working hours to satisfy the preferences of the available labour force.
That might put some upward pressure on wages – so the “captains of industry” who have been waxing fat on the massive redistribution of real income to profits under the neo-liberal era will have to be told that things have changed. That workers are going to, once again, enjoy their share of productivity growth.
That is the first return to normality that is required. The neo-liberal period, which has systematically suppressed the capacity of workers to gain real wages growth in line with labour productivity growth, was atypical and unsustainable. That has to change.
It might lead to higher imports and cause the exchange rate to depreciate a little, which means that elites will pay more for their imported luxury cars than they do right now and face more expensive ski trips to the Alps. Tut tut! What a shame that would be.
It might lead to private employers having to restructure their workplaces to ensure they can produce at higher levels of productivity to meet the wages that would be required to attract labour out of the Job Guarantee pool in times of expanding investment. That would be a national disgrace, no!
Think about Norway. From its – Labour Force Survey – we note that it currently has an unemployment rate of 3.7 per cent and largely resisted the great recession.
For example, juxtapose all the austerity rhetoric that we read these days in British government narratives (Budget Papers, OBR documents etc) with this commentary that appeared in the recent Norwegian Statistics publication (April 30, 2013) – Economic Survey 1/2013 – (Chapter on Cyclical developments in Norway 1-2013).
This is an English version of the quarterly business cycle report from Statistics Norway. “It includes an analysis of recent trends in the Norwegian economy and a forecast two-three years ahead”.
Box 5 on Page 20-21 analyses “The importance of immigration for the functioning of the Norwegian economy”. The analysis estimates the economic benefits that arise:
… where investments in public administration increase equivalent to 1 per cent of the mainland GDP each year.
The analysis is based on “two versions of Statistics Norway›s macro-econometric model, KVARTS”. The first assumes that immigration is inversely affected by the level of unemployment while the second assumes that immigration is invariant to the “changes in the Norwegian economy”.
The overall modelling concludes that:
Higher public investments lead to an increase in demand for labour regardless. The pressure on the labour market therefore increases and unemployment falls. Higher employment and wages lead to an increase in demand from households, and the higher level of domestic activity also contributes to an increase in industry investments. From the second year onwards, mainland GDP increases by more than the initial impulse
This is very realistic modelling – it has strong public expenditure multipliers which crowd-in private economic activity.
The IMF models, recall, that were used to justify the austerity programs assumed exactly the opposite. At least the IMF now have admitted they were wrong on this.
I will leave it to you to read the results of the simulations, which are all credible.
The point is that this sort of analysis is eschewed in the rubbish that the OBR and its likes produce to support the austerity machine.
The difference we can see easily – Norway is much closer to full employment than nearly anywhere else.
And need I add my appalled vote to those who would dismantle the Greek government forthwith for their decision (presumably supported by the EC and the IMF) to close its public broadcasting services down.
What goes on in the mind of these maniacs – they are not even subtle about their attempts to purge democracy – of which, information is an essential aspect. The problem is that Stalin and Hitler and others who are less obvious than these tyrants and who live in the West, didn’t have the Internet to deal with.
We know more things now, more quickly and more of us learn of things than in the past.
That is enough for today!
(c) Copyright 2013 Bill Mitchell. All Rights Reserved.