Q&A Japan style – Part 2

This is the second part of a four-part series this week, where I provide some guidance on some key questions about Modern Monetary Theory (MMT) that various parties in Japan have raised with me. I have so far given two presentations in Kyoto and today I am in Tokyo addressing an audience at the Japanese Diet (Parliament) and doing some interviews with the leading media organisations in Japan. Many people have asked me to provide answers to a series of questions about MMT, and, rather than address each person individually (given significant overlap) I think this is the more efficient way to help them to better learn and understand the essentials of MMT and real world nuances that complicate those simple principles. In my presentations I will be addressing these matters. But I thought it would be productive to provide some written analysis so that everyone can advance their MMT understanding. These responses should not be considered definitive and more detail is available via the referenced blog posts that I provide links to. Today, the questions are about the Green New Deal and the Job Guarantee.

Green New Deal and the Job Guarantee

Question:

What is the role of the Job Guarantee in a Green New Deal? How do they square with the fact that big infrastructure projects that might be associated with the GND are not suitable as automatic stabilisers, in the sense that they cannot be abandoned if there is accelerating inflation?

In their eagerness to tie the Green New Deal in with Modern Monetary Theory (MMT), I have read several articles that put the Job Guarantee at the centre of government interventions that will be required.

First, I do not really like the term Green New Deal, particularly in a global sense, given its US-centric antecedents. The Wikipedia page for the – Green New Deal – shows how US-centric the notion has become.

Further, while FDRs New Deal was largely a cyclical program designed to deal with a collapse in non-government spending, the Green New Deal is not about resolving a cyclical shortfall in aggregate spending.

The various components of the New Deal were designed to advance what were referred to as the 3 Rs:

Relief – Measures to help the millions who were unemployed and homeless

Recovery – Policies to rebuild the economy that had suffered due to the Depression

Reform – Legislation and laws to create a fairer society

The reform component was largely in relation to the financial sector, which had created the Depression as a result of its poor performance.

The relief and recovery elements were what macroeconomists refer to as ‘counter-cyclical’ fiscal programs – working to redress non-government spending shortages, which leads firms to lay-off workers.

But the Green New Deal, as conceived, will be a structural program designed to significantly change the patterns of industry output, employment and the consumption patterns of households and firms.

It will have to fundamentally alter the line between government and market responsibility for resource allocation.

And it will require a fundamental reconfiguration of the concept of government putting the government at the centre of the transformations required.

I think that is appropriate because it will bring the responsibility for essential and planned action and the currency-issuing capacity together.

I outline my detailed views of the Green New Deal and MMT in this video presentation from September 23, 2019.

Second, instead of using the term – ‘Green New Deal’ – I prefer to focus on the human agency aspects, given we are talking about the impacts of anthropomorphic behaviour on the natural environment.

In that context, I would rather characterise the necessary transformation as a – Just Transition for the Future (JTF) – because I think if we can bring about meaningful and equitable change in human behaviour, we will solve the climate problems and save the world, as a by product.

This sort of causality chain is what I have in mind:

In the video noted above, I go into some detail of what the components of a Just Transition would look like.

I have been a long standing advocate of the introduction of a ‘Just Transition’ framework to ensure society deals with structural change, especially policy-induced changes, in an effective and equitable manner. We wrote about these issues well before the GND surfaced in the literature.

In this Report – A Just Transition to a Renewable Energy Economy in the Hunter Region, Australia (published 2008) – we demonstrated the major benefits to the Hunter and nearby Wyong regions (in NSW, Australia) from shifting from coal-fired power to a renewable energy economy but emphasised the need for the development of a ‘Just Transition’ framework.

This Just Transition Matrix summarises what I see as the dimensions of such a framework. In the video cited above I go into chapter and verse of what each of the elements involves. See also the further reading blog posts below.

The point is that, in this context, the introduction of a national Job Guarantee, might in fact, be only a small part of a Just Transition framework to deal with climate change.

We have to understand that the Job Guarantee is not just a job creation program.

In MMT, the Job Guarantee provides macroeconomic stabilisation which is defined in terms of ‘loose’ full employment with price stability.

In normal times, it might not create or sustain many jobs at all.

And, importantly, it might not be part of a fiscal ‘stimulus’ program.

As Randy Wray and I wrote in a paper published in 2005 in the Journal of Economic Issues (Vol 39, No. 1, March) – In Defense of Employer of Last Resort: a response to Malcolm Sawyer:

The ELR approach is not equivalent to pump priming … with the ELR program in place, “loose full employment” is maintained no matter what the level of aggregate demand happens to be …

Importantly, one could envision a deflationary government policy (increased taxes and/or reduced overall spending) accompanying the introduction of ELR to reach and sustain full employment. We do not recommend such a policy (unless there were excessive overall demand), but it shows that Sawyer has mistakenly conflated ELR with Keynesian pump priming.

ELR and Job Guarantee were equivalent terms when we wrote that article. The MMT team now uses Job Guarantee, more or less exclusively.

And those that equate the inherent Just Transition framework with a Job Guarantee thus imply that the Job Guarantee would be central part of that stimulus program.

Which really abstracts from the fact that the Job Guarantee as a macroeconomic stabilisation framework.

In the context, the Job Guarantee will supplement the other policies to ensure there is a jobs safety net at the bottom of the labour market for the most disadvantaged workers.

The Just Transition framework will require governments create significant numbers of skilled and permanent jobs, which are not suited to a buffer stock status.

A Job Guarantee should rather be advocated for as a base case macroeconomic stabilisation framework rather than being tied up in the massive transition that will be required to meet the climate change challenge.

Even if there was no environmental imperative, we would enjoy dramatic gains by substituting an employment buffer stock approach to price stability for the current, very damaging unemployment buffer stock approach.

I would prefer the Job Guarantee to be seen as something desirable and quite separate to the complexity of a Green New Deal implementation.

We need to be careful not to conceive of the Job Guarantee as a panacea for all the labour problems that will arise as we make a Just Transition and we also do not want to try to make the Job Guarantee do ‘too much’, otherwise, we will be disappointed.

Further reading:

1. The Job Guarantee is more than a Green New Deal job creation policy (December 17, 2018).

2. The Green New Deal must wipe out precarious work and underemployment (August 8, 2019).

3. Modest (insipid) Green New Deal proposals miss the point – Part 1 (July 25, 2019).

4. Modest (insipid) Green New Deal proposals miss the point – Part 2 (July 25, 2019).

Question:

The Green New Deal by Ocasio-Cortez, UK Labour or Varoufakis etc. is receiving attention in USA or Europe. What is the theoretical and personal relation between MMTers and proponents of GND?

I cannot comment on the “personal relationships” between the people or groups mentioned.

But, in general, I do not consider the concept of Green New Deal is viable unless there is a simulataneous acceptance that Modern Monetary Theory (MMT) provides a coherent response to the question “How will we pay for it?”, which is at the heart of resistance to the proposals.

The ‘How to pay for’ narratives always serve to derail a coherent discussions about the scope and magnitude of the transformation that will be necessary.

An MMT understanding allows us to dismiss the financial aspects of any likely transformation, and, instead focus on the real resource implications, which is core to MMT analysis.

In this respect, the Green New Deal will involve a massive transformation in real resource usage and, will in my view, require resolution to the most fundamental question of the organisation and ownership of the mode of production.

That is, it is unlikely that the transformation can be successfully completed within a capitalist system given the scope of the government intervention that will be required.

The elements of a Just Transformation framework will challenge the very basis of capitalist organisation that has morphed into a dominance of finance capital over industrial capital.

These elements will include:

• Social and economic equity.
• Well-paying and secure jobs for everyone who wants to work.
• First-class education and training, health and aged care.
• Government take back control of natural monopolies, strategic public assets etc.
• Community resilience and well-being for all regions.
• Stable and ethical financial system.
• 1st-class public infrastructure – transport, communications, utilities, etc
• Sustainable energy security.
• Meaningful and sustainable climate action.

So widespread nationalisation of what were once public utilities, elimination of most speculative financial activity, revamped education and training systems focused on societal well-being rather than feeding private profit, elimination of the precariat labour, elimination of speculative behaviour in energy production and the big carbon producers, and more.

MMT economists may differ about the specifics of these elements – in terms of importance and design features – but are at one with the view that the discussions should never be about the financial capacity of government to pursue and implement them.

We are united in eschewing the involvement of the financial markets in ‘funding’ the transformation, which many Green New Deal advocates think is an essential step towards viability.

Some of the groups mentioned in the Question fall into this trap, which is based on an erroneous understanding of the capacities of the currency-issuing government.

Question:

The merit of the Job Guarantee Program (JGP) is that the number of workers and hence the amount of fiscal expenditure under this program reduces automatically with economic expansion. But what kind of public works can be easily retracted without creating continuity problems? Is it possible to regulate the economic fluctuations automatically with a Job Guarantee?

In this 2008 Report – Creating effective local labour markets: a new framework for regional employment policy – we set out to provide a comprehensive and practical framework for motivating discussions about implementing the Job Guarantee.

It is clearly set out within the institutional structure of Australian government but the principles we established generalise.

This CofFEE Policy Report develops a new framework for the design of regional employment policy. It emphasises increased public sector infrastructure spending, the implementation of a National Skills Development framework and the introduction of a national Job Guarantee.

Our proposed new integrated policy framework will provide more effective ways to assist disadvantaged individuals into employment and advance sustainable solutions to persistent unemployment across regional Australia.

As one aspect of that framework, we proposed a – Job Guarantee – whereby the government operates a buffer stock of jobs to absorb workers who are unable to find employment elsewhere – whether that be in the private sector or the regular public sector.

The pool expands (declines) when private sector activity declines (expands).

The JG fulfills this absorption function to minimise the costs associated with the flux of the economy.

So the government continuously absorbs into employment, workers displaced from the private sector.

The “buffer stock” employees would be paid the minimum wage, which defines a wage floor for the economy. Government employment and spending automatically increases (decreases) as jobs are lost (gained) in the private sector.

It is clear that this overall aim has implications over the economic cycle and the cyclical nature of Job Guarantee jobs presents an operational design challenge for the administration of such a scheme and the design of the Job Guarantee jobs.

Job Guarantee jobs would have to be productive yet amenable to being created and destroyed in line with the movements of the private economic cycle.

To avoid disturbing private sector wage structure and to ensure the JG is consistent with stable inflation, the JG wage rate is best set at the minimum wage level.

The JG wage may be set higher to facilitate an industry policy function.

The minimum wage should not be determined by the capacity to pay of the private sector. It should be an expression of the aspiration of the society of the lowest acceptable standard of living.

Any private operators who cannot “afford” to pay the minimum should exit the economy.

The question though is questioning how a ‘buffer stock’ can operate effectively and be driven by the private economic cycle, yet still be logistically possible to organise into effective work effort.

While challenging this is not an impossible requirement for public policy to meet. The private sector does not have a monopoly on being able to mobilise a diverse range of resources and successfully complete thousands of tasks within a tight and complex schedule.

Note also that the private sector scheduling is in some sense much less flexible because it cannot afford to “inventory” workers who are (temporarily) unneeded.

Job Guarantee can employ workers even before precise tasks are assigned, helping to smooth transitions.

The cyclical nature of the jobs suggests that in designing the appropriate Job Guarantee jobs the buffer stock should be split into two components:

• A core component that represents the ‘average’ buffer stock over the typical business cycle given government policy settings, trend private spending growth, and a mismatch of labor force characteristics and employer preference.
• A transitory component that fluctuates around the core as private demand ebbs and flows.

The economic cycle fluctuations of employment are not nearly as large as people would like to believe. We have estimated that the total fluctuation between peak and trough in the Job Guarantee pool would perhaps be in the range of 25 per cent of the pool.

So there will be a fairly steady core of workers always in the pool. Nothing like from zero in a boom to millions in a recession.

Modelling can provide a guide to the ‘steady-state’ jobs that would be initially offered under the Job Guarantee scheme.

Administrators would then prioritise work allocations from a broad array of community enhancing activities. In this way, it is unlikely that any important function or service would be terminated abruptly, due to a lack of buffer stock workers, when the private demand for labour rises.

Thus, the design and nature of Job Guarantee jobs would reflect the underlying notion of a buffer stock.

This stock would, in turn, have a ‘steady-state’ or core component determined by government macroeconomic policy settings, and a transitory component determined by the vagaries of private spending.

In the short-term, the buffer stock would fluctuate with private sector activity and workers would move between the two sectors as demand changes.

Longer-term changes in the size of the average buffer stock would reflect discrete changes in government policy.

It is in this context that we argued for the existence of a stable core, which might change slowly and predictably as government policy settings change, and which would allow Job Guarantee administrators to more easily allocate workers to jobs.

Many of these core jobs would be more or less permanent. More ephemeral Job Guarantee activities could then be designed to ‘switch on’ when private demand declined below trend.

These activities would not be used to deliver outputs that might be required on an ongoing basis, but would still advance community welfare.

For example, Job Guarantee jobs in a particular region might be used to provide regular shopping or gardening services for the frail aged, to support the desire of many older persons to remain in their own homes.

It would not be sensible to make the provision of these services transitory or variable, and they would thus be provided from the core buffer.

Clearly, these services could be reassigned to become ‘mainline public sector’ work if a political shift in thinking occurred.

The structure of these jobs and the remuneration paid would however not be altered as a consequence of this political shift. Other ‘off-the-shelf’ projects would be undertaken or completed only when the Job Guarantee pool expanded sufficiently.

In the 2008 Research Report I cited at the outset of this answer, I noted that we sought to develop an inventory of jobs that satisfy several principles (see below).

These jobs would be accessible to the lowest skilled workers, generate benefits by way of meeting unmet demand for community development, personal care and/or environmental care services and more.

We sought detailed information from local governments on the type of jobs they could supervise that satisfied these criteria, including supervision and capital equipment costs and other relevant factors.

The local governments surveys revealed a myriad of community- and environmentally-based projects that could be completed if federal funds were forthcoming.

The JG workers would contribute in many socially useful activities including urban renewal projects and other environmental and construction schemes (reforestation, sand dune stabilisation, river valley erosion control, and the like), personal assistance to pensioners, and other community schemes.

For example, creative artists could contribute to public education as peripatetic performers.

The buffer stock of labour would however be a fluctuating work force (as private sector activity ebbed and flowed).

The design of the jobs and functions would have to reflect this.

Projects or functions requiring critical mass might face difficulties as the private sector expanded, and it would not be sensible to use only JG employees in functions considered essential.

Thus in the creation of JG employment, it can be expected that the stock of standard public sector jobs, which is identified with conventional Keynesian fiscal policy, would expand, reflecting the political decision that these were essential activities.

The exercise we carried to build an inventory of suitable jobs – both core and transitory – was specific to Australia – our institutional structures, cultures and specific community and environmental care needs.

The methodology, however, can be easily implemented elsewhere to create culturally- and institutionally specific job inventories to guide the introduction of the JG in any nation.

Further Reading:

1. When is a job guarantee a Job Guarantee? (April 17, 2009).

Conclusion

To be continued in Part 3.

That is enough for today!

(c) Copyright 2019 William Mitchell. All Rights Reserved.