Regular readers will know that I have spent quite a lot of time reading the…
Flattening the curve – the Phillips curve that is
I did an extended interview over the weekend and during that interchange it became obvious that when a newcomer encounters the concept of the – Job Guarantee – for the first time, they may only see it in a narrow way, as a job creation program and fail to see it the way that the concept was developed as an integral part of Modern Monetary Theory (MMT). When I started talking about the era in which I had first started thinking about using buffer stocks to maintain full employment, it became obvious that the sort of considerations that went into the concept of the buffer stock employment model (the Job Guarantee) had not been fully appreciated by the interviewer. That is no criticism. It is just an observation and a reflection of how long we have been pushing this MMT barrow. At the moment, all the talk is of ‘flattening the curve’ and that is exactly the function that I saw for the Job Guarantee as I toyed as a young postgraduate student and nascent academic with new ways of thinking about macroeconomics that would fight the Monetarist scourge that was dominating in the late 1970s. It was a different era and the challenges from a economic theory perspective were different. I think it is important to understand this context because, as the interview demonstrated, new ‘light bulbs’ go off when the concept of a Job Guarantee is put within the historical exigencies that were dominating when I came up with the idea. So the Job Guarantee flattened the curve long ago – the Phillips curve and that was, in my view, a highly significant development in the context of macroeconomics and makes MMT very different (in addition to a lot of other aspects). Unfortunately, while we knew how to flatten the curve back then, the Monetarist viral infestation continued and we have suffered the shocking consequences ever since.
As I have explained in the past, when I met Warren Mosler in 1995, he was talking about an Employer of Last Resort policy approach to deliver full employment and price stability and I was talking about a buffer stock employment (BSE) approach to the deliver the same.
That coincidence, which in science is referred to as – multiple discovery – laid the foundation for our life long relationship and the beginnings of the project, which we now call Modern Monetary Theory (MMT).
I have also explained in the past what I was up to in 1978, sitting in a cold lecture theatre at the University of Melbourne doing my fourth-year studies (honours) and taking Agricultural Economics as one of my elective units,
We were studying the Wool Floor Price Scheme introduced by the Australian Government in 1970 to stabilise farm incomes by maintaining an agreed price for wool irrespective of the quantity of wool delivered by the farmers to the market each clip.
Buffer stocks have long been used in agriculture and commodity production.
In November 1970, the Australian Government introduced the Wool Floor Price Scheme. The scheme was relatively simple and worked by the Government establishing a floor price for wool after hearing submissions from the Wool Council of Australia and the Australian Wool Corporation (AWC).
The aim of the system was to stabilise farm incomes and led to an agreed price for wool being paid to the farmers. The Government then stabilised the private at this guaranteed level by using the AWC to purchase stocks of wool in the auction markets if demand was low and selling it if demand was high.
By being prepared to hold “buffer wool stocks” in times of low demand and release them again in times of high demand the government was able to guarantee incomes for the farmers around the stable price.
The contention that ultimately led to the demise of the system was whether the guarantee constituted a reasonable level of output in a time of declining demand. Farmers clearly had an incentive to over-produce wool knowing that the government would buy any excess not demanded by the auction markets.
While I wasn’t all that interested in wool, this was a time when inflation had risen sharply after the OPEC oil crisis and governments were pushing up unemployment via fiscal austerity policies in order to curb it.
It was the time that the Monetarists emerged and started to take over the academy and infiltrate policy circles, first, into central banks and then beyond.
The big question of the day was inflation, or more accurately stagflation – the coincidence of high inflation and high unemployment.
This coincidence had not been thought of in the full employment, Keynesian era, where inflation was largely thought of as a demand-side phenomenon – excessive spending relative to the productive capacity of the economy.
The problem was that the inflation was derived from an ‘imported raw material shock’ (the rapid and sharp rise in the price of oil) and this created a distributional struggle between labour and capital over how the real income loss to the nation would be shared.
Workers resisted real wage cuts and firms resisted margin cuts – they both had ‘price setting’ power to more or less extent – and they used that power to try to force the opposing party to take the real income hit.
So it was a supply-side event (the oil price rise) that had triggered a wage-price spiral that resulted in the inflation.
Governments, wrongly, tightened fiscal and monetary policy, and the result was rising unemployment, which effectively marked the end of the full employment era.
The concept of the Non-Accelerating-Inflation-Rate-of-Unemployment (NAIRU) entered the lexicon as a central organising thought for the Monetarists who claimed there was only one unemployment rate consistent with stable inflation and that governments should just leave the ‘market’ to find that rate and stabilise prices.
Whereas during the full employment era, low unemployment was one of the key policy targets, in this NAIRU-Monetarist era, it became a policy tool.
If unemployment rose sufficiently it would discipline the wage demands of trade unions and create ‘soft’ conditions in the ‘product’ market (where goods and services are sold) such that firms would stop pushing up prices to protect margins.
As some high unemployment rate, the inflation would stop accelerating and stabilise.
That was what was going on in 1978 when I first conceived the idea of a Job Guarantee, although I called it the BSE. I was still calling it the BSE model when I first met Warren but soon after – Bovine spongiform encephalopathy – or mad cow disease became a huge problem in the UK (the EU banned British exports in March 1996), and so I thought I better change the name.
Eventually we (Warren, Randy, myself and others) agreed on the term Job Guarantee, given the term had a lineage in the progressive literature (although not one that was based on buffer stock mechanisms).
But for me, I was doing this thinking at a time that was very different to now or even the last 15 or so years.
So it is important when coming to the MMT literature that one has a historical appreciation of these things.
My thoughts were about finding a way to solve the dreadful unemployment problem of the late 1970s without exacerbating the inflation problem.
And, moreso, to actually come up with a plan that would solve the inflation problem and reduce unemployment back down to the low levels that prevailed before all the dislocation of the 1970s and before the neoliberals (Monetarists) had introduced all this chicanery about natural rates or NAIRUs, and convinced policy makers that they should not try to reduce unemployment using fiscal policy.
The neoliberals convinced governments that they had to use ‘microeconomic’ policies – curbing trade unions, reducing job protections, hacking into wages and other entitlements, and curbing income support schemes for the unemployed – if they wanted a more ‘efficient’ labour market.
The rot had firmly set in.
And as a young student and aspiring academic with a progressive bent, who also hated unemployment, I made it my mission to come up with work that would create a contest in the macroeconomic space in this historical context.
I was trying to think about how the government could use its capacity to maintain employment but stabilise inflation. I wanted to think of ways that governments could preserve employment in cases where it was forced by inflationary circumstances to use its fiscal policy capacity to contract the economy
And at the time, I pursued several different novel paths – buffer stocks, hysteresis – as well as the traditions I had inherited in terms of incomes policies, wage guidelines etc, which had been used with various degrees of success.
But it is important to understand that this was the context in which my thinking on what we think of as the Job Guarantee began.
And that explains why I think of it as a price stability framework rather than a job creation program, an emphasis which many newcomers miss because they haven’t appreciated the context.
So in that vein, the Job Guarantee offered a dynamic adjustment path for governments to avoid the heavy costs of unemployment in the last resort case of having to impose fiscal contraction on an inflating economy.
And so this narrative and the context it was developed in, helps to explain why MMT economists consider policies, such as Universal Basic Income, to be undesirable.
Again this rationale for the critique of UBI is often lost in contemporary debates.
The fixed Job Guarantee wage offer provides the in-built inflation control mechanism.
I introduced the term Buffer Employment Ratio (BER), which is the ratio of Job Guarantee employment to total employment to help us understand the dynamics of the framework.
The BER conditions the overall rate of wage demands. When the BER is high, real wage demands and margin push by firms will be correspondingly lower.
If inflation exceeds the government’s announced target, tighter fiscal and monetary policy would be triggered to increase the BER, which entails workers being shifted from the inflating sector to the fixed price Job Guarantee sector.
Please don’t misunderstand that point. The government might, in the extreme situation, impose austerity on the non-government sector and force firms to shed labour.
Under the NAIRU approach the jobs shed flow into unemployment. Under the Job Guarantee, they flow into the Job Guarantee pool of work.
Ultimately this attenuates the inflation spiral.
So instead of a buffer stock of unemployed being used to discipline the distributional struggle, the Job Guarantee policy achieves this via compositional shifts in employment.
That means it can also deal with a supply-shock that generates distributional demands that ultimately cause inflation.
I introduced another technical term (jargon).
The BER that results in stable inflation is called the Non-Accelerating-Inflation-Buffer Employment Ratio (NAIBER). It is a full employment steady state Job Guarantee level, which is dependent on a range of factors including the path of the economy.
I figured that it sounded friendlier than the NAIRU (-: Even in this era of social distancing we usually like our neighbours!
A plausible story to show the dynamics of a JG economy compared to a NAIRU economy would begin with an economy with two labour sub-markets: A (primary) and B (secondary) which broadly correspond to the dual labour market depictions. Prices are set according to mark-ups on unit costs in each sector.
Wage setting in A is contractual and responds in an inverse and lagged fashion to relative wage growth (A/B) and to the wait unemployment level (displaced Sector A workers who think they will be re-employed soon in Sector A).
A government stimulus to this economy increases output and employment in both sectors immediately. Wages are relatively flexible upwards in Sector B and respond immediately.
The compression of the A/B relativity stimulates wage growth in Sector A after a time. Wait unemployment falls due to the rising employment in A but also rises due to the increased probability of getting a job in A. The net effect is unclear.
The total unemployment rate falls after participation effects are absorbed. The wage growth in both sectors may force firms to increase prices, although this will be attenuated somewhat by rising productivity as utilisation increases. A combination of wage-wage and wage-price mechanisms in a soft product market can then drive inflation.
This is a Phillips curve world.
To stop inflation, the government may have to repress demand with tighter fiscal policy.
The higher unemployment brings the real income expectations of workers and firms into line with the available real income and the inflation stabilises – a typical NAIRU story.
Introducing the Job Guarantee policy into the depressed economy puts pressure on Sector B employers to restructure their jobs in order to maintain a workforce. For given productivity levels, the Job Guarantee wage constitutes a floor in the economy’s cost structure. The dynamics of this economy change significantly.
The elimination of all but wait unemployment in Sector A and frictional unemployment does not distort the relative wage structure so that the wage-wage pressures that were prominent previously are now reduced.
The wages of Job Guarantee workers (and hence their spending) represents a modest increment to nominal demand given that the state is typically supporting them on unemployment benefits. It is possible that the rising aggregate demand softens the product market, and demand for labour rises in Sector A.
But there are no new problems faced by employers who wish to hire labour to meet the higher sales levels in this environment. They must pay the going rate, which is still preferable, to appropriately skilled workers, than the JG wage level. The rising demand per se does not invoke inflationary pressures if firms increase capacity utilisation to meet the higher sales volumes.
With respect to the behaviour of workers in Sector A, one might think that the provision of the Job Guarantee will lead to workers quitting bad private employers. It is clear that with a Job Guarantee, wage bargaining is freed from the general threat of unemployment.
However, it is unclear whether this will lead to higher wage demands than otherwise. In professional occupational markets, some wait unemployment will remain. Skilled workers who are laid off are likely to receive payouts that forestall their need to get immediate work.
They have a disincentive to immediately take a Job Guarantee job, which is a low-wage and possibly stigmatised option. Wait unemployment disciplines wage demands in Sector A.
However, demand pressures may eventually exhaust this stock, and wage-price pressures may develop.
A crucial point is that the Job Guarantee does not rely on the government spending at market prices and then exploiting multipliers to achieve full employment which characterises traditional Keynesian pump-priming.
Traditional Keynesian remedies fail to provide an integrated full employment-price anchor policy framework.
In fact, a Keynesian policy agenda would impact more significantly on inflation if it was true that a JG was inflationary as a result of its impacts on demand in the product market.
In 2012, my MMT colleague and friend Randy Wray gave a – Keynote Conference Presentation – was reflecting on the beginnings of MMT and he said (among other things):
And then there was the job guarantee, which I immediately recognized as Minsky’s employer of last resort. I can’t remember what Warren called it but Bill called it BSE, buffer stock employment.
I had never thought of it that way, but Bill’s analogy to commodities price stabilization schemes added an important component that was missing from Minsky: use full employment to stabilize prices. With that we 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.
At the time, most of my academic attention as an honours student and then postgraduate student was focused on the Phillips curve and how it could deliver a mechanism to have full employment and price stability.
And, as Randy so acutely observed, the introduction of a Job Guarantee flattens the Phillips Curve.
In terms of the body of work we now refer to as MMT, this property is one of the distinguishing features of MMT relative to the mainstream New Keynesian and other heterodox approaches.
The Phillips curve has been a major theoretical and policy construct in macroeconomics – it is at the centre of macroeconomic thinking.
For MMT to come up with a means of flattening it so that the government can thus choose – of all the “steady state” unemployment-stable inflation equilibria available – the one that provides a job for all when the private market fails – was elemental.
That is also why when I read so-called MMT activists claiming the Job Guarantee is peripheral (an add on) to MMT, I just realise they don’t know what they are talking about.
I made a short video today (5 minutes or so) to help you visualise what I have been talking about here.
It is a new era now, folks!
Now, the era that all that was going on is very different to now.
The 1991 recession across the globe really purged all the OPEC inflationary forces from the system. Expectations realigned at low inflation and the problem since has been elevated levels of unemployment and underemployment.
So I can understand why people, who encounter the Job Guarantee idea for the first time, think of it as, exclusively, in terms of a job creation scheme to provide jobs when there are recessed times and deflationary forces, if anything, present.
It is natural to ignore the inflation stability mechanisms and to ignore the place in macroeconomic theory that the Job Guarantee concept occupies.
And this is probably why, activists pick and choose aspects of what they refer to as a ‘jobs guarantee’ and introduce all sorts of variations (like hierarchical wage structures, etc), thinking that variety is the spice of life.
And this is why I retort that there is just one Job Guarantee (the MMT version) and as many ‘jobs guarantees’ as you like to think up.
It is also worth thinking about how the change in circumstances influence the way we think about the Job Guarantee as an intervention.
I often read statements from progressive activists that invoke demands for a Job Guarantee when there is an unemployment crisis, as now.
First, the Job Guarantee should not be thought of as a ‘fiscal stimulus’ package in the way injecting funds into say public infrastructure might be.
When Warren and I converged and our two concepts became one, we considered that the Job Guarantee would be a minimum safety net architecture to provide places for the most disadvantaged when there was a need to deflate the economy.
We always thought that in normal times it would be a small, rather ephemeral pool of workers.
We had no problem with the idea that a Job Guarantee job might become a lifetime career for some workers.
It is ideally structured (being within the public sector and infinitely flexible) to cater for workers, for example, with extreme disabilities who may only be able to work on occasions.
But, we didn’t think of it is as first-line stimulus approach in deflationary times, as we need now.
We also constructed is an an unconditional job offer – an infinite demand for labour at a socially inclusive wage. In other words, the pool was open-ended (not subject to ‘fiscal’ constraints) and could go up and down like a yo-yo.
That property introduces challenges in job design for sure but there was no thought of constraining the flows in and out of the Job Guarantee pool.
Second, in that regard, when faced with the sort of problems we are facing now – high unemployment and deflationary pressures – relying on a Job Guarantee may not be the best option.
Further, in dealing with the Green Transition challenges and the displacement that will occur as we reduce the carbon-intensive employment sectors, will require much greater job creation capacity within the public sector than that which the Job Guarantee might typically offer.
I am not saying that the Job Guarantee should not be part of our response at present. I have advocated that endlessly whenever I am interviewed etc.
But it is probably better to expand the public sector right now in terms of career-type positions at higher pay and higher skill designations.
One obvious way to achieve this is to redress some of the folly of the neoliberal years and nationalise various activities.
And abandon the obsession with contracting out, outsourcing and the like.
This would provide a much more coherent response to the crisis than just being content to allow workers who are currently being made redundant by the millions around the world to have a socially-inclusive minimum wage in the Job Guarantee.
The Job Guarantee should be the last resort right now.
We do not need an inflation-fighting mechanism – instead – we need massive and well-paid job creation.
And to understand why I say that you have to go back to the roots of the idea, which emerged in very different times and challenges to now.
That is enough for today!
(c) Copyright 2020 William Mitchell. All Rights Reserved.
This Post Has 76 Comments
“I figured that it sounded friendlier than the NAIRU (-: Even in this era of social distancing we usually like our neighbours!”
Or like Neighbours, which is similarly very Australian 😉
So I have argued, in my ineffectual way, that at the moment, for logistical and time reasons that trying to implement the JG as an emergency response probably wouldn’t be as effective as government just sending checks out to people ASAP. Would I be wrong in thinking this post would support that argument?
Bill, you wrote, “I was trying to think about how the government could use its capacity to maintain employment but stabilise inflation. I wanted to think of ways that governments could preserve employment should [it be] having to use its fiscal policy capacity to contract the economy”.
I added 2 words I think you left out.
NAIRU sounds like an evil planet from which aliens attack life on earth.
Mosler’s price setter analogy also made things clear for me, together with the wool price scheme and Wray’s mention of Minsky.
“But it is probably better to expand the public sector right now in terms of career-type positions at higher pay and higher skill designations.”
Isn’t that better done with a straightforward ‘tax and spend’ approach – largely for political purposes?
Politicians have enough trouble getting their head around the stabilisation process of the Job Guarantee, without trying to extend the dynamics beyond that.
I’m not sure the world is ready for “ban and spend”.
No wonder productivity fell off a cliff….
I keep going back and forth with re-nationalising.
One thing privatising these does is to minimise the number of people employed in those sectors.
From a use of real resources perspective, this might actually be a good thing. It depends on what the jobs shed are replaced with.
My own cynical view on why a JG scheme is hard to introduce was hinted at briefly in Bill’s post – power and wealth. Basically I think a lot of power and wealth that is currently concentrated in a few hands comes from the labour of those “sector B” workers.
How many wage underpayment scandals have been uncovered in the past few years? how many franchisees would people sign up for if there was a JG?
A JG is a threat to business owners in many low wage industries.
Why? because it would not be possible to use the court/regulation system to bog people down in administrative processes to get their fair wage.
They can just quit and get a JG job.
This makes it hard to move from where we are now to where a JG would take us. People benefiting from the situation now will resist.
As Jerry Brown suggests, the world economy now needs emergency measures.
Debates regarding JG, nationalization etc. are best postponed to a later date when things have settled down.
These days the best thinking and insider information is on Fox News.
The vibes from Tucker Carlson, Steve Hilton, Ingraham Angle and Hannity all indicate that Trump is close to announcing a “big decision” during the next few days.
The signs are that President Trump is likely to keep his promise to begin to put America back to work around Easter.
It is unclear how long it will take for the rest of the world to follow.
Watching over the years as things developed, when many progressives first started to read the MMT body of work. There was A lot of push back against the Job guarantee. It was clear for many years they did not understand it was central to MMT. They thought they could cherry pick the bits they liked and drop the parts they didn’t.
What made it even more obvious was when the job guarantee was suddenly named the Green new deal. Then the progressives who were against the job guarantee suddenly supported it. To me that meant they didn’t understand both as the narratives crossed over and clouded the issue.
The number of progressives who then got themselves in a mess about this because as per usual they ended up jumping through neoliberal hoops to try and get their message across. We all know who these characters are. Cherry picking parts of MMT they liked and cherry picking parts of the green new deal they liked and in doing so created something that wouldn’t work.
MMT economists from the US and Bill then had to step in a clean up this mess and point out what they had all missed. That was the main structure that supported all of it.
Hopefully, now when the job guarantee and green new deal are discussed these errors are thing of the past.
Great blog, Bill. It has really helped to deepen my understanding.
Now, I have general question. It comes from today’s statement by the Governor of the Reserve Bank of Australia, which reads:
“The Bank has injected substantial liquidity into the financial system through its daily open market operations to support credit and maintain low funding costs in the economy.”
Could someone please decode “…injected substantial liquidity into the financial system…” Does it simply mean that ‘commercial bank reserves have been increased’?
On the topic of increased commercial bank reserves, I’ve noticed a number of ‘senior’ economics commentators misleadingly characterise it as ‘an injection of money into the (real) economy’, when really, they are just (un-loanable) reserves.
Quentin, I believe it usually is in the form of trading Central Bank reserves for government bonds held by banks. But occasionally central banks will buy privately created assets like mortgage backed securities. Either way these are mainly asset swap operations- although if they buy junk assets like some MBS seemed to be that would seem to be a real monetary injection at least to me. Something like fiscal bailout policy for the wealthy. Well that is just my opinion so don’t bank on it 🙂
“NAIRU sounds like an evil planet from which aliens attack life on earth.”
It actually sounds like Nuaru; where evil Australian governments attack life on earth by letting aliens from elsewhere on the planet fester in appalling refugee camps.
Australian governments certainly don’t treat all their NAIBERS like good friends. : ((
Great educational post, Bill.
Clear up quite a few potential confusions. I often fell into the trap of confusing expanding public sector work in itself as part of the JG and it is this confusion that many Green New Dealers make.
Remembering the price stabilisation aspect is vital and ‘But, we didn’t think of it is as first-line stimulus approach in deflationary times, as we need now.’
I think these areas can easily get confused amongst progressives.
” probably wouldn’t be as effective as government just sending checks out to people ASAP. Would I be wrong in thinking this post would support that argument”
Yes, you would be wrong. Sending cheques to people sends them to the wrong people and only does it once. So you never get any change.
What you need to do is send regular cheques to the people that need it and stop sending them when they don’t.
The Job Guarantee is *instead of* Interest Rate targeting – which tries to do the ebb and flow by getting people to borrow money and pay it back. Hence the current nonsense of “support for businesses to borrow from banks” – like anybody with any sense is going to do that at the moment.
“when really, they are just (un-loanable) reserves.”
Always remember that reserves *are* loans. That’s why they are on the asset side of a bank’s balance sheet.
They are loans *to* the central bank, upon which the central bank pays an interest rate.
The difference is that with these loans the interest rate is set by the customer. It’s like an overdraft where you decide how much you will draw and what you will pay the bank for doing so with no right whatsoever for the bank to call in the loan.
I look forward to studying this post on JG. For the moment though I’d like some help understanding the following from the MMT/endogenous money perspective. I’m leading a discussion tomorrow on bank money creation. This AP news item seems to contradict endogenous money understanding that bank loans generate reserves as needed via Fed accommodation. So reserves do not constrain bank lending. Moreover, reserve account balances “never leave the Fed”–or can they?
Probably a misunderstanding — but one from an authoritative journalistic source.
Thanks for any insights.
[FED] WILL RELAX BANKS’ RESERVE AND BUFFER REQUIREMENTS
The Fed said it has dropped its requirement that banks hold cash equal to 10% of their customers’ deposits, thereby allowing banks to lend that money instead. It also said that banks can use additional cash buffers that were imposed after the 2008 financial crisis for lending. This move addresses complaints from many banks that regulatory limits were inhibiting their ability to lend when credit is in high demand. https://apnews.com/7d62e317d0ca11e265cc79bf5e33ce09
“Yes you would be wrong”. Well Neil you have never been one to sugar coat things even if you are British or English or UKish or whatever you all prefer to describe yourselves as. It’s refreshing really even if I like being told I’m wrong just about as much as anyone doesn’t like it. But I appreciate your opinion as always- Thanks.
“The Job Guarantee is *instead of* Interest Rate targeting – which tries to do the ebb and flow by getting people to borrow money and pay it back. Hence the current nonsense of “support for businesses to borrow from banks” – like anybody with any sense is going to do that at the moment.”
When they do increase the lending rate thinking they will slow things down. Business just pass the increased price of borrowing onto the consumer via higher pricing for their products. Which can be inflationary.
When they swap an interest bearing asset and replace it with a reserve balance and flush the system with reserves. It plays havoc with the leverage ratio. Hence why the FED has just abandoned it. Fed’s rule change–excluding Treasuries and reserves from the leverage ratio calculation was forced on them because whoever is in charge was asleep at the wheel. Should enable greater accumulation/creation of risk assets before the system ground to a halt.
None of us should be surprised at the central banks.
They have just continued with the flawed ideology that commercial banks should be the allocator of skills and real resources not the government. The government should be shrunk and drowned in the bath tub.
It is why those who head the central banks came from you know where.
If the government doesn’t create it, who will create the spending power? The answer was the banks.Let the banks create all the money and charge interest instead of the government creating money by spending it. The banks will create their own credit to let investors buy these assets and run them as rent-extracting monopolies. Government run deficits hurt banking profits.
“Yes, you would be wrong. Sending cheques to people sends them to the wrong people and only does it once. So you never get any change.
What you need to do is send regular cheques to the people that need it and stop sending them when they don’t.”
I think this actually should be done…………temporarily, until a clearer picture of who needs what can be sorted out.
Millions of people are losing jobs right now and require financial support quickly. But the Australian government has made it clear that it intends to use the existing system only. A problem is that the existing system is not fit for purpose under normal circumstances and was certainly never designed to cope with an amount of sudden demand even remotely the size of this one. So sending millions of suddenly unemployed people the financial support they need to survive through the existing system of formally assessing each individual’s circumstances is taking time – time which those who were in lower-paid employment especially do not have (unless you ask Attorney General Christian Porter, who was insisting less than six weeks ago that casual workers should all have large pools of savings to draw on).
So it seems strange to me that while our neo-liberal government was able to use the power of modern computing to come up with the infamous “Robodebt” scheme which rapidly served hundreds of thousands of false debts on our most vulnerable – why can’t they just run the system in reverse to put money into all bank accounts in Australia very quickly? Or at least everyone who has applied for assistence, instead of making them wait for their application to be processed – many may not have the means to last that long. Who cares if some ends up going to dead people or rich people, we can worry about that later as long as the people who actually do need it get it quickly. Call it “Robocredit” or “Robostimulus” or whatever you like.
Just as a very temporary measure to get money quickly into the hands of those who need it.
As a sole trader, my income has evaporated. But I am one of the lucky ones in that my wife is in an experienced senior role in essential government service delivery and will not be made redundant – we can just scrape by on her wage. I gave up trying to apply for the various support payments because the system was in a state of continual collapse under the load. I made the decision to garnish a small amount of my superannuation, knowing that I have enough to do so without destroying my retirement and that I won’t take anyone’s place in the queue for financial support. But I still will have been waiting six weeks with zero income by the time there’s even a possibility of being able to speak to anyone about it.
An emergency is an emergency – act immediately and fine-tune later.
What is crystal clear here in Australia is the ruling oligarchy do not want to make any long-term changes, once the lockdown phase ends. They may offer a limited stimulus but “the government cannot borrow more as our grandchildren would be saddled with our debt”. If the COAL-ition with the help of sold-off Labor manage to pull this off, a deep recession will follow and the housing bubble will burst.
When we have double-digit unemployment and high number of personal insolvencies (as mortgage loans are full recourse), it may be possible to start organising people who will demand “bread and work”. An entirely new political structure may be required or it can be reassembled based on certain already existing organisations. But the shock in Australia may not be deep enough especially if Morrison allows for a temporary thaw like in 1956 in the Soviet Union and the whole thing may fizzle out and dissipate like the “Occupy Wall Street” movement. I am even more sceptical about the US. Something viable may finally emerge in Italy or Spain.
People in Australia have been conditioned to avoid any mass movements and I am also not sure about the migrants. In a different society things may work differently, I remember how quickly things went forward in 1980 in Poland during the August’s strike. It took a few weeks to organise an entirely new social movement which at its peak had 10 million members. It was seeded by only a few intellectuals but the tradition of mass resistance was still strong after the experience of Home Army in 1939-45. However the “Solidarity” movement has been eventually hijacked by the Catholic Church and the liberals, with tacit help from the communist secret services (it is claimed that Lech Wałęsa was manipulated by them). Social-democrats and reformists, who wanted to reform socialism. were thoroughly weeded out. These factory workers who fought for their rights in 1980 were the most disadvantages social group in 1990-1991 and we went straight from worshipping misinterpreted Marx and Lenin to following the revelations of Milton Friedman and Friedrich Hayek.
However there are a few individuals here who still know how to organise people but now it’s not the time.
The question of “the right of work” is here since 1848. While Job Guarantee is a brilliant economic idea, it remains to be seen whether the usual group of people manage to poison and subvert it using the usual means – or that we move forward on this, when the time is right. This would be a great achievement.
Great clip and article.
More of these clips please!
Surely in one, no doubt incorrect, sense shifting workers from the private sector to the “no specific role” public sector = the dole with higher benefits. The new public sector workers will spend the income and this will boost output but overall output might still fall because the new Govt employees are not doing gap increasing stuff and so overall productivity falls. Shows how ignorant I am. Good blog by the way I’m reading a lot.
Thanks for this Bill. It is exactly what we need to hear now.
That video is awesome by the way. =)
Bill, when does what I actually am observing and experiencing economically cross over from anecdotal type things to evidence an economist like you- a good economist- would consider relevant economic data? I know this is off topic but man have I seen a hit to my income and since I am also a small landlord- a hit to my tenants’ income which is no doubt going to further affect my income while not at all reducing any of my costs of providing housing. And then I have friends and family in other lines of work telling me their experience. And none of them seem to be doing better although some can telecommute to work or whatever, so they still might be getting their salaries.
I guess the question is if personal experience is ever relevant.
The Phillips curve video has cleared up my understanding of how the Job Guarantee buffer stock actually works. However, one thing that came out in this article was how callous the system we live under is, and even the Job Guarantee model could be. “If inflation exceeds the government’s announced target, tighter fiscal and monetary policy would be triggered to increase the BER, which entails workers being shifted from the inflating sector to the fixed price Job Guarantee sector.”
While the Job Guarantee buffer stock ensures full-time employment, albeit at a basic wage, and this is probably much better than being unemployed, it would I daresay still be devastating for someone with a well-paid job with the associate expenses such a job enabled, to be faced with a being put on the basic wage in an effort to lower the rate of inflation.
The Job Guarantee makes sense as a temporary measure during the crisis. Here is my question: if you nationalise a bunch of sectors (as you suggest) aren’t you creating conditions for a slow recovery and slow long-term growth?
Dear Risto EJ (at 2020/04/08 at 16:00)
Thanks for your comment and input and thanks again for hosting me on that wet, dark morning in Helsinki in February. I hope all your staff are staying clear of the medical problems.
1. I see the Job Guarantee as a minimum safety net for any society. It is up to the rest of us to keep the pool of jobs small by spending. If we don’t want it to be large then we can make sure there are plenty of jobs in the wider economy. But it is much better than unemployment and for some workers a chance to have on-going, stable, and meaningful jobs.
2. On the nationalisation question.
(a) As happened during the GFC in several countries, the state did nationalise many firms and sectors because they were uneconomic remaining in the private sector and would have become insolvent. They were exposed as being poorly managed, in some cases exhibiting criminal conduct (many banks etc) and if allowed to go broke would have damaged the rest of us.
(b) The same thing is happening now although the cause of the problem is the collapse in demand.
(c) Many essential service sectors have demonstrated how poorly they function as for-profit operations in many countries. Transport in the UK, energy and water in Australia, the health care system in the US, etc etc.
These sectors have delivered poor service reliability at inflated costs when chasing profit and end up being bailed out by the state when they fail.
The overwhelming evidence is that ‘ownership’ does not determine efficiency or innovation. A state-owned enterprise can be very effective if properly regulated and administered but does not have the moral hazard problems that we have observed time and again with many of the privatised essential services.
So I don’t think the recovery will be slower or long-term growth impaired if we allow those type of services to move back in to the public sector as enterprises serving the people rather than profit.
In fact, if say broadband was nationalised and made free, that would spawn a massive number of innovative private operations, leveraging off the high quality public infrastructure. I can think of education, health and other sectors that would be energised.
That should be an attractive prospect for your way of thinking.
No-one is talking about a Stalinist, authoritative regime.
ps And I still hope the Northern Light Summit will get together (virtually at this stage) this year.
Ok, I’m going to bite.
There is a significant problem with the “high skill, high wage” concept. Who says it is high skill and who says it deserves a higher wage? Commercially in a depression you would just pay the maintenance wage whoever you hired, because there is no alternative bid to drive up the price. Higher wages are transfers from the majority, and have to be justified in some way. “But credentials” isn’t justification if we’re to
For me that is one of the key mechanisms of the Job Guarantee price stability process – that undeserved higher wages are eliminated by market forces. Operations that pay too much for people can be allowed to die quickly and those people lose their higher wage, take a loss and transfer down to the maintenance wage. Inflation is avoided.
How does a public operation “die quickly” if it pays too high a wage and there is no tax to turn that higher wage into a simple transfer?
The other mechanism in the Job Guarantee is the “no compete” promise. The JG will not bid above the wage, and if it is operating in an area where the private sector wants to move in it will vacate the space (so if the JG is running a cafe, and a private one opens up, the private operation can ask for the JG to stop running in competition). “Crowding out” is avoided.
A full public sector job makes no such promise. Arguably it is what defines such a job. It is supposed to crowd out. How is such crowding out to be managed?
Public operations are no more of a panacea than private operations. Both have downsides both operationally and politically. Any move towards ‘higher wage’ jobs will inevitably bring out charges of “jobs for the boys” and “gold plated pensions”, and there isn’t really a coherent critique of the private sector operations to show the waste competitive structures exhibit (covering the cost of failed competitive tenders, sufficient aggregate headroom to absorb the failures required to make the whole thing work, and not just diversity of supply but control over supply being the ones that spring to mind. The latter being very much to the fore at the moment).
The justification for more public sector workers of the traditional variety is going to have to be better explained. From where I’m sat it is still too weak and open to the usual attacks.
I’m not sure the public sector should pay any more than it has to to get the resources it requires. And if competition does work then the JG should level the private sector wage structure as well – since we can increase competitive pressure once we no longer care about private sector jobs.
One thing that should be brought back into the public sector here is systems development. The Civil Services used to employ its own systems and software engineers. It is a major user of large custom IT systems and has been royally screwed by the big outsourcers. They are good jobs too.
Neil Wilson @19:20,
I have to say I don’t really understand your argument here. Today just looking out my window at the public sector workers going past my house doing their jobs- well I think they deserve wages above what Job Guarantee wage which would be the basic minimum wage that should reflect our aspirations as a society or at least Bill says something like that.
So let’s see- today is garbage day where city workers come pick up our garbage and haul it away. Often in miserable weather conditions. And arguably at this time an especially dangerous job as far as their own health. And really quite unpleasant under the best of circumstances, and physically difficult also. And while maybe it doesn’t take an extraordinary amount of skill- I have no problems that they get paid a wage well above minimum.
And then there is the firetrucks going by with workers in them with fair amounts of training in emergency medical care and who are expected to risk their lives in attempts to save others. And the ambulances bringing sick to the hospital- well trained and educated crews also doing a very risky job right now. And the police who to be honest I have many criticisms of- but god forbid they worked for private sector companies that wanted to compete in that market. I have no problem with paying full time public employees a premium.
But perhaps I just misunderstand your comment and maybe you could elaborate.
“It is ideally structured (being within the public sector and infinitely flexible) to cater for workers, for example, with extreme disabilities who may only be able to work spasmodically.”
Bill I’m guessing you meant ‘sporadically’ rather than ‘spasmodically’. I’m sure some people with extreme disabilities may experience uncontrollable spasms while working, but I’m equally sure that’s not the mental image you meant to allude to! 🙂
So the MMT job guarantee developed historically to flatten an imaginary curve to deal with
a specific historic period of stagflation generated by the quadrupling of oil prices, which the
imaginary curve was not trying to model.
I do hope a job buffer stock would work as an effective inflation control and not compete with
other onerous minimum wage jobs but i will believe when I see it.
If the government took the same approach to flattening the epidemic curve, as it does to flattening the Phillips curve, it would take those infected out to the back paddock and shoot them.
That’s why they have to act like the Phillips curve has no validity via their vacuous NAIRU. So they can cover up their savage approach to the unemployed in the context of managing inflation.
@Robert Brown 15:59
I am thinking the trade-off moves from the current system of throwing a segment of your population onto the economic scrapheap, and also expanding the segment of your workforce who are in insecure work, and exacerbating social ills and social divisions… to the trade-off where you spread the economic hit across more of your workforce, but catch the bottom rung in a relatively nice safety net. And this is worst-case-scenario moments, as in current pandemic scenario. Hopefully you could shrink your JG pool to a few percent.
Since reading this post a couple of days ago on flattening the curve, my mind keeps going back to the statement –
“If inflation exceeds the government’s announced target, tighter fiscal and monetary policy would be triggered to increase the BER, which entails workers being shifted from the inflating sector to the fixed price Job Guarantee sector.”
I have a couple of concerns with this statement. Firstly it assumes the Phillips Curve is an accurate construct and that employment and inflation are always linked. But Japan which is often quoted has had both low inflation and low unemployment.
But let’s assume the Phillips Curve is an accurate description of the inflation/unemployment relationship and that the Job Guarantee program would work as an inflationary stabilizing mechanism to flatten the Phillips Curve, and that is necessary to move workers, be they skilled or unskilled, out of private-sector employment pool into the Job Guarantee pool so as to not exceed the government’s announced inflationary target. Is it done by tax increases or interest rate adjustments to ensure firms can perhaps no longer complete and therefore have to lay off workers just so the inflation targets can be met? If this is not the case how does the system work? This to me is a very crucial point. Without a thorough explanation of this and the consequences it entails, it is very hard to see how the system would effectively work.
Anna, “That’s why they have to act like the Phillips curve has no validity via their vacuous NAIRU. ”
I had got it the other way round. I think that regulation via the Philips Curve, and NAIRU, are part of the same set of ideas. Using the Philips Curve, people argue that employment and inflation rise and fall together. So since there are intolerably high rates of inflation, therefore there are also intolerably high rates of employment. The NAIRU is the unemployment rate that goes with that threshold intolerable employment rate that they tell us exists. I think bill has pointed out that NAIRU is always an estimate, and when we look at those estimates, they usually turn out to be the observed rate of unemployment, minus just a little bit. So things are always pretty good, they say, although there could be room for improvement.
I haven’t seen “no compete” written into Job Guarantee policy before. The general idea has been that minimum-wage jobs should not be the modal jobs, and if someone wants to open a cafe across the street from a JG Cafe, they can pay higher wages, and attract all the JG Cafe’s staff.
It’s pervasive, and I can sort of understand, this attitude that “We can’t trust the government”. With all The Government’s power we can’t trust it not to out-compete our businesses. We can’t trust it not to steal all our property. We can’t trust it not to lock us up till whenever, with all The Government’s power. But then, we can’t even live. Without having our own dependable claims on the state, we have nothing. When the state is made up of private self-interested players, we probably have it even worse that with The Government.
Bill, I remember you saying that while you were in Japan ‘everyone’ asked you, “What should the Gov. do to create inflation of 2.5%?” IIRC, you had no good answer.
On another site where I’m pushing MMT, a guy asked me ‘what sets the value of the currency’ if it isn’t backed by gold?
My answer was — internally the value is set by what the Gov. pays where it buys stuff.
So therefore, the answer for the Japanese questioners should be “Just pay 5% to 7% more for everything the Gov. buys for a year and see what happens.” [My proposed numbers may be too high.]
Anne wrote, “That’s why they have to act like the Phillips curve has no validity via their vacuous NAIRU. So they can cover up their savage approach to the unemployed in the context of managing inflation.”
I don’t think ‘they’ are *saying* the Phillips curve has no validity. It is more subtle. They say TINA applies to the Phillips Curve and then use crazy curve fitting to show that it is valid. Curve fitting is massaging the data to fit the desired conclusion. Here they ‘calculate the NAIRU *in a back box* and always come out with the result that it is just a little more than the current Unemployment Rate.
Robert Brown wrote, “Since reading this post a couple of days ago on flattening the curve, my mind keeps going back to the statement -”
and quoted Bill who wrote, “”If inflation exceeds the government’s announced target, tighter fiscal and monetary policy would be triggered to increase the BER, which entails workers being shifted from the inflating sector to the fixed price Job Guarantee sector.”
I also don’t like the moral message of this. To force some part of the Private sector employees onto the JG system is making mostly just those people suffer to control the inflation.
Would it not be morally better to take some cash from everyone with a higher tax, so everyone suffers some?
That is use general tax increase on everyone or a targeted tax on who is bidding up the prices on those things that are in short supply (if these people are fairly well off).
kevin harding wrote, “I do hope a job buffer stock would work as an effective inflation control and not compete with
other onerous minimum wage jobs but i will believe when I see it.”
IIRC, the JG is intended to in the very beginning raise the min. wage a lot. Make it a “socially inclusive” wage. It is clearly understood that this will be a shock to the economy. I have never seen any MMTer address how this is not going to be a problem for some small businesses, or how the Gov. will tided them over until the economy adjusts.
After a couple of years, the new min. wage will be just above the JG wage. All businesses that can’t pay that in the new more affluent economy will have gone out of business (Bill says he doesn’t care at all). [Recent research has shown that in American cities where the min. wage is raised the small business do better because they have more customers with more money. They often hire more workers.]
I don’t think that our MMTers think that the local govs. that control the local JG system are going to let the JG system compete with local businesses.
Steve American @11:08, That is probably what Bill means- you either reduce government spending, or increase taxes and either way that will slow the economy and reduce private sector spending causing some people to lose their jobs and get shifted to the Job Guarantee job. It isn’t like the government is going to select certain ones to lose their jobs- it is just what happens when the economy slows.
Steve, Kevin Harding did say that, didn’t he?
It’s generally required that a proper business should pay the cost for its inputs, or else it’s not viable. If a wood-products business can’t pay the price of its wood, people don’t have much patience for it. It’s like it’s only labor that has to give special favors to businesses that can’t afford the cost.
I’ve been pondering why bill would say that the JG is an inseparable part of MMT (I had gone along thinking that the comprehensive, accurate, description of all the processes around fiat money were enough.)
I’m coming to think that maybe it’s because a General Theory of the economy *has to* have a theory of employment so as to even pretend to call itself general. Neoclassical theory has tricked us, perhaps, because the essence of its employment theory is to say as little about employment as it can possibly get away with. There’s said to be a buffer stock of potential workers, and in lean times, workers can be discarded into that stock, while in fat times, potential workers can be drawn from the stock and employed. The theory refuses to admit that these P.W.s are people. It refuses to discuss the principle that if you don’t work, you don’t eat, and it refuses to see the real-world possibility that when you draw from the pool at the start of fat times, you draw out a load of starved corpses. That’s a lot to ignore.
So the MMT theory of employment is the Job Guarantee. It admits all the facts about human workers that the neoclassical theory leaves out. People who have been fooled by the neoclassical theory see this and complain that the JG theory is too complicated, too heavyweight, too intrusive, or whatever we see in the complaints they come here with. But by keeping a buffer stock of employment (an impersonal commodity that’s suited to leaving on the shelf till it’s needed) we avoid leaving actual people on the shelf, friends and neighbors among them, and we provide healthy living for everyone, despite the chaotic cycles and jumps, and tumbles in the market.
We will still have the problem with the hard-line Marxists who hate maintaining the national market as a decentralized source of decisions, and who hate any force given to the rule “if you don’t work, you don’t eat.” That has to be a separate argument.
Sunday, April 12, 2020 at 12:57
Steve, Kevin Harding did say that, didn’t he?”
Me, could please elaborate on what “that you were referring to there?
I said a few things and I don’t know which you are referring to there.
I’m no expert. I always say that, and I mean it.
However, is it true that in an economy (in a nation with an MMT understanding and a JG program in place for a few years) where inflation is starting to take off, that suddenly taxing everyone a little more would always make a comp. lay workers off. Why would a comp. cut production (which is a result of laying off workers) when they can sell all the comp. can produce? Are you saying that there would be a conspiracy of all comps. to cut production to create a shortage so that they can charge more?
The inflation is being caused because the comp. can’t increase its production because it can’t buy some critical *real resource* because all of that resource is already being used by someone. Or if it does pay more for that resource then it must charge more for its product after the comp. makes it. In the 1st case there is more money to buy the limited amount of stuff so the price rises, or in the 2nd case the prices rises because the cost of making it rises.
So, where am I going wrong here?
My reply just above at 13:38 should have also been in reply to Jerry Brown.
Steve, I believe the MMT idea of inflation is that in certain times there becomes excess demand for production that producers can’t meet and that then they are able to raise their prices. Now the same thing can happen in a situation where supplies of inputs to production are reduced for whatever reason also- and I think that is the more serious case. So the responsible government will need to reduce excess demand and one way that can be done is by reducing government spending or by raising taxes. In the supply shortage case the government might want to try to increase supply also but that is not always possible very quickly- we are seeing this with ventilators and hospital beds and even masks and stuff in the US right now. But there are enormous social pressures on suppliers to not raise their prices in the middle of some tragedy if only because we would probably lynch them afterwards.
Back to the subject- when government reduces demand by taxing more or spending less then production companies find that they cannot in fact sell all of their products and either cut prices or reduce output by laying off labor. Which is when you get more people on the JG.
If you think back to the oil crisis many of the producing countries actually did form a cartel and conspired to reduce production to raise prices- and that worked for them pretty well for quite some time and caused some pretty severe inflation in oil importing countries. So you can’t rule that possibility out either.
Thanks for your reply.
You wrote, “Back to the subject- when government reduces demand by taxing more or spending less then **production companies find that they cannot in fact sell all of their products** and either cut prices or reduce output by laying off labor. Which is when you get more people on the JG.”
What I’m thinking is that the case you outline above between the paired stars (**) is a case where the Gov. raised taxes too much. Maybe way too much. If an all knowing Gov. raises taxes just the right amount then the comp. could still sell all it was producing and not be able to sell any more because there was not any excess cash in the economy looking to be spent on *something*.
To me this is the most moral goal of the Gov., to get it just right.
Of course this is hard to do in practice, especially when it is functionally a committee making the decisions.
But further, I would ask that the economic system be such that the powerless are *not* the ones being asked to take a ht for the team. I would ask that the owners of the biggest comp. in the nation be the ones who take the hit for the team. They should be asked to suffer when the Gov. gets it wrong. But, then this is another pie in the sky request on my part.
Also, what Gov. spending is being cut when inflation starts? It isn’t JG spending that will go up, not down, if the economy slows. It seems to me that it would mostly be spending on infrastructure. And here the comp. would have to lay off workers if its contracts were slowed. Now, if this is so then reducing Gov. spending is focusing the pain on those laid off. Where I would rather see it spread out on almost everyone with a small tax increase. This seems more moral to me.
Again, where am I going wrong?
Steve, there are some sectors of the private sector economy that are more subject to demand fluctuations than others. I’ve been in one of them for most of my life- I do carpentry/ home improvement/ construction as a small business. When people have money they generally want to improve their homes remodel their kitchens, or bathrooms, build decks, things like that. When they don’t or are concerned they might not have income in the near future- well, they put that off. Right now just one customer has called me in a month (a local bar that is closed until whenever but figures its a good time to do repairs), although that probably is also because of general health concerns I think. Who wants workers in their house unless you have some major emergency?
Business cycles aren’t going away- they depend on the private sector’s choices between optimism and fear. Good government policy with strong automatic stabilizers probably can modulate them. But there are no real great easy answers for inflation- but the JG would provide a fairly compassionate route versus what we have at present. Just my opinion of course.
“I haven’t seen “no compete” written into Job Guarantee policy before”.
Me neither; so far as I’m concerned it came as a bolt from the blue.
Of course that may just reveal my much less than comprehensive acquaintance with the MMT academic literature.
Or did it perhaps just spring unannounced from Neil’s fertile brain? It would be good to know.
Meanwhile my position is the same as yours:-
“…if someone wants to open a cafe across the street from a JG Cafe, they can pay higher wages, and attract all the JG Cafe’s staff”.
That seems to me to have the virtue of being no more than ordinary down-to-earth commonsense.
Robert, the only thing I can think is that Neil was saying the Job Guarantee would not raise wages in an attempt to compete to keep workers on its payroll. But I didn’t understand the comment either and after asking have received no response. So I discount it.
“Again, where am I going wrong?”
In my opinion, in insisting upon making this first and foremost a moral question, when it’s actually about the deployment of real resources.
There’s only a given quantum of such in an economy at any given juncture, available to be purchased with the currency of issue. Demand-push inflation (which you are concerned with) arises classically when demand for goods and services exceeds their (domestic) supply. So the government needs to act to choke-off the excess demand.
Taking labour as the particular resource under discussion, there’s no way to do that that doesn’t entail some people losing their jobs. Apart from cutting real wages of course – and all experience shows that that’s a non-starter. The jobs lost will be in sectors where customer demand is affected first.
Moral issues only become involved downstream from there. Enter:- the JG.
Or am I missing something?
“Robert, the only thing I can think is that Neil was saying the Job Guarantee would not raise wages in an attempt to compete to keep workers on its payroll”.
Yes I think your interpretation is correct. To state “The other mechanism in the Job Guarantee is the “no compete” promise” Is just an alternative way of saying that the JG wage is immovable (other than when periodically reviewed to stay in step) and universal.
But I still think that Neil goes one step too far (into the realm of unreality) when he says:-
“…if it is operating in an area where the private sector wants to move in it will vacate the space (so if the JG is running a cafe, and a private one opens up, the private operation can ask for the JG to stop running in competition)”.
In the real world, I would expect that the mechanism would always operate in the way predicated by Mel. But admittedly these are only (relatively trivial) details not fundamentals.
Business cycles aren’t going away- they depend on the private sector’s choices between optimism and fear. Good government policy with strong automatic stabilizers probably can modulate them. But there are no real great easy answers for inflation- but the JG would provide a fairly compassionate route versus what we have at present. Just my opinion of course.”
I’m no expert.
However, there has not been a nation with an MMT understanding and a JG program anywhere since the world went off the gold standard. The business as I understand it was always caused by private debt. Banks would lending the Boom time and not stop when the boom should end. The bank had no incentive to stop making loans as the nation neared the point where the people could not make their next payment. So, the GDP and spending would be inflated by the new loans and when some people had to stop borrowing that caused the GDP to grow less so banks would cut back on lending, and so the GDP would drop more. This would cause comp. to lay people off as demand dropped because the GDP growth had ended when new loans stopped being included in the the GDP. This would trigger the start of the Bank Panic or Recession/Depression.
. . . After most nations have an MMT understanding and a JG program then things may be different. The Gov. or Central Bank *may* be able with rules and regulations to slowly stop bank lending before the peak is reached. This *may* massively modulate the business cycle. The nation should want to break the business cycle. Who knows if it can?
. . . OTOH, the business cycle *may* be seen as a feature and not as a bug by the elites, and then all the above may not happen.
Job Guarantee is not going to run a cafe that competes with private cafes . Maybe a food center for the people who can’t afford food or a ‘soup kitchen’ as we call it here for the very poor. At least not in the US. But a Job Guarantee will almost automatically raise the minimum wage to the JG wage that we set. And some businesses depending on low wage labor will fail because their business model is inadequate at the higher wage. Well that’s too bad for them is my outlook. And their workers will have better wages until private employers figure out how to make a profit while paying above the JG wage. So be it- some things would cost more- but we would be a far better society for it.
“The business as I understand it was … ” should be “The business [cycle] as I understand it was …”
“Banks would lending the Boom…” should be “Banks would lend [in] the Boom …”
Sorry, I should proof read before I click “Post Comment”.
Steve at 19:46,
I don’t know Steve. If you haven’t read Michal Kalecki you really should.
None of this is going to be easy. My favorite presidential candidate in my life got crushed by what I consider a concerted action by the ‘elites’ in the party that supposedly represents working people.
I just don’t know except that it isn’t going to be easy.
My favorite presidential candidate of my life won and then turned on a dime and became a Neo-libertarian before I ever heard of MMT. His name is B. Obama.
As for easy. Yes, breaking down the group think of the minds of most western nations is not going to be easy.
However, if it has been accomplished, then we are in uncharted territory. In that case it maybe very easy to end the business cycle. OTOH, it may not be possible. Who knows?
However, it is my firm and certain belief that if there are people alive in 2100 they will live in a society and culture that you and I can’t even imagine now. This change will as great as the one between 1000AD and now. And it will not take 1000 years but just 80.
What I most dislike about UBI is the disincentive to work. I had a conversation a few days ago with my 2 lodgers who have no dependants. They are so resentful of people on benefits who don’t work. It sort of makes me feel that the JG should be compulsory, on the basis that these would be ‘good jobs’. The issue really is how do you protect children from feckless parents.
Steve_American, Sunday, April 12, 2020 at 13:21
Sorry, just words mostly. It was your reply that brought Kevin Harding’s comment to my attention. Would have been more courteous to rely to him. My first point, that real businesses pay for their inputs came out of your “All businesses that can’t pay that in the new more affluent economy will have gone out of business “, so I dropped my comment there.
One thing I find peculiar about the JG is that to me, it is a policy choice. There is nothing in MMT from what I can tell that “breaks” for an economy without a JG. That MMT can be used to predict current economic phenomena is a case in point.
The fact that Bill regularly says MMT is a “lens” and not a political movement seems to not hold water when he also says that a JG is an essential part of it. Apologies if this is not accurate and I have misquoted.
It seems to me that Bill has it in his mind that a JG should be implemented, and that it is better than current interest rate targeting (another policy). He has looked at it from many different angles, but it is still a political decision whether to have one or not.
Perhaps quotes like “The time for MMT has arrived” that you see now are more about saying “The time for a Job Guarantee has arrived”. That Bill almost always talks about JG in his posts means that MMT=JG in some minds.
It seems a JG could also work well with many other neo liberal ideas. For example, work choices would probably do better, because this policy works better for “class A” labour.
In terms of the idea, I think “selling” a JG is better done by not appealing to the “bleeding heart” types, but instead by focusing on the benefits to business. The key one I can see is that they are getting a larger pool of “work ready” people to choose from. This means businesses don’t need to take a chance on long term unemployed (ie long term unemployed could transition to private sector through the JG scheme). The other benefit is that business can fire people with less moral issues, because they know the person can get a minimum wage job the second they’re out the door. Employees know this as well.
One interesting thing would be what ends up happening to the genuine “bludgers” who don’t want to work under a JG? ie
My first thought would be that there wouldn’t be any unemployment benefit, rather the JG replaces it. The other thing replaced is the minimum wage – this would be the JG wage. There is also no need to enforce a minimum wage, provided the JG was well advertised and everyone knew about it. It would also likely provide minimum “conditions” as well. For instance, it might be tough for the private sector to get a weekend or night time work force if the JG offers a 9-5 mon-fri job. Same with whatever leave entitlements are offered.
I would also be interested in understanding how firing someone from a JG job would work – wouldn’t they just reapply? How do you stop a JG from becoming a “back door” route to a UBI?
I also think that a JG scheme would also present a massive amount of high skilled jobs to coordinate everything. It would also easily be the largest “employer” in the country, something like 2 million people to start with (based on rough pre covid unemployed + marginally attached). You need a lot of people to manage a workforce this large, and it will be a powerful force in the economy. Where will those people come from? Could a JG scheme be competing with the defence force for these skills?
This need for sophisticated planning is particularly true if the government wants the private sector to lead and the public sector to “fill the gaps” (this is generally what govt in Aus leans towards, govt get out of the way).
Introducing the scheme would be a large injection – 2million at min wage is around $75 billion. This is on a similar scale to the stimulus being proposed for covid 19. But then again 2 million people whose labour not being utilised is arguably a disaster on a similar scale.
Another interesting thought I had – under an economy with JG scheme a trade deficit and desire for domestic savings, what happens if the govt tries to “balance the budget”? Wouldn’t this result in a steady transfer of workers from elsewhere into the JG scheme as AD declines?
It wouldn’t shock me that this outcome could be sold as “see, a JG is bad! they are stealing private sector jobs!”.
“There is nothing in MMT from what I can tell that “breaks” for an economy without a JG.”
You get stagflation and failure. That’s what caused the problem in the 1970s – trying to do things via discretionary spending and via private employment. You end up propping up failing operations because “what about the jobs”, and failure cannot be allowed to clean up mistakes.
I’d recommend reading the prologue of “Full Employment in a Free Society” where the inflation impact of pump priming starts to become apparent and why.
The JG is the stabilisation process that allows mistakes to fail and fail quickly.
vote for pedro wrote,
“Another interesting thought I had – under an economy with JG scheme a trade deficit and desire for domestic savings, what happens if the govt tries to “balance the budget”? Wouldn’t this result in a steady transfer of workers from elsewhere into the JG scheme as AD declines?
It wouldn’t shock me that this outcome could be sold as “see, a JG is bad! they are stealing private sector jobs!”. …”/q
I’m no expert, however, we already have seen this experiment done in the EU since the GFC/2008.
In the EU the nations were forced to keep their deficits low.
They didn’t get Stagflation, they just got stagnation and very high unemployment. Most of the nations as a result had stagnation. Only the lucky few that could export more than they import did just OK, not good and not terrible, just OK.
My layman’s theory is that the American Stagflation of the 70s was caused wholly by the Fed, raising interest rates many times to try to stop the un-stoppable rise in prices that followed OPEC being successful in raising oil prices x4.
For me an MMT understanding would have had the Fed. lower interest rates or otherwise see that money was fed into the economy to offset the money flowing out to OPEC. What the Fed. did was stupid.
as a non economist I make no economic judgement on this piece.
However as a part time farmer I am interested in how you start with the example of the wool floor price scheme, which if I interpret you correctly, ultimately failed. Maybe I didnt understand but your piece suggests that the job guarantee is designed to provide a floor for the employment market in the same way as a price scheme might support an agricultural commodity (buying and selling – or moving employment in and out of the different job pools as prices or inflation varies..). If so can we reverse the argument and ask how you would apply MMT to support agricultural commodities – how would a modern wool market floor price work?
“I also think that a JG scheme would also present a massive amount of high skilled jobs to coordinate everything.”
Why do you think that? The current UK Universal Credit system has a “work coach” whose job it is to check that you are working 35 hours a week looking for jobs that systemically cannot exist.
So in the UK we practically have a Job Guarantee and the “skilled people” engaged in it are already running the system. What we’re short of is a proper rate for the job, and the choice to choose that form of working., and a set of job options outside the pointless default job.
Everybody on the Job Guarantee is essentially a “paid volunteer”. Therefore they become available to any operation outside the private sector who needs a set of volunteers – from local government to church groups. They do the co-ordinating based upon whatever “nice to have” thing they want to get done.
Keeping the pointless job – required to attend a central location every day and spend the day looking for private work that cannot exist – could be retained. And that’s how “getting sacked” from other JG positions would work, if a democratic area believes that a “carrot and stick” approach is required.
And if you refuse to turn up for the default job, then you simply don’t get paid. The state washes its hands at that point. Anybody who believe people who refuse to work, despite being physically and mentally capable of doing so, should be maintained can contribute to the charities necessary to maintain such people. Having the state do that for such people has no majority political support anywhere.
I have no problem with a job guarantee. Just the assertion it would be an alternative inflation buffer
to a made up curve.There is no mathematical relationship between inflation and unemployment.
You cannot flatten something that does not exist.
@ james leitch
In their Bard College paper:- Working Paper No. 864 “Maximizing Price Stability in a Monetary Economy”, Warren Mosler (one of the original founders of what subsequently became known as MMT) and co-author Damiano P. Silipo take as axiomatic that any fiat monetary system, such as all are nowadays, relies ultimately upon adoption of *something* (barley, precious metal, unemployed workers, etc, etc) as a buffer-stock the price set for which by the monetary authority (eg by theTemple in ancient Babylon, by a government nowadays, by “the market” by default, …) determines through relativity all other prices.
As we know, the buffer-stock today is unemployed workers – implicitly chosen to be such by all our governments by their abandonment during the ‘seventies of full employment as a – if not *the over-riding* – goal of macroeconomic policy and their dependency on the Philips curve and/or NAIRU to set the volume of that buffer-stock.
Prices of agricultural commodities would presumably be set on that basis along with all other goods and services.
However, note the caveat. Mosler and Silipo are careful to exclude “shocks outside the control of the central bank” (eg the oil-price shock) from the scope of what they postulate as being govermed by relativity to the chosen-buffer-stock price. So I presume that that would exclude price-setting on a wide range of agricultural products sourced partly or wholly from abroad (hence outside the control of the national CB).
I don’t think that answers your question, other than by inference:- I’m inferring (rightly or wrongly) that MMT would regard price-setting in regard to all such *imported* commodities (which of course wool wasn’t/isn’t, in Australia!) as outside its scope – given that caveat.
Sure, I totally get that a JG makes sense. My point is that a JG is a policy choice, and not a part of the theory. It may be an “optimal choice” under the theory, but it is still a political choice. Similar to a firm operating below it’s “production frontier” – it’s still a choice required to move from “sub optimal” to “optimal”. There is no invisible hand, people need to take action to make things happen.
Your comment about “stagflation and failure” is a value judgement. In principle, a government can decide this is the outcome it wants (e.g. perhaps US govt thought stagflation would affect rest of the world worse that it would be affected, or that US would recover faster, so it improves it’s competitive advantage over other nations). Though failure of what exactly? society still exists, government still exists, the world keeps spinning, etc, etc. Just that there were “better” political choices available that governments didn’t use, either by choice or lack of knowledge. On many measures, society is worse off, and on many others it is better off.
@ vote for pedro
“Sure, I totally get that a JG makes sense. My point is that a JG is a policy choice, and not a part of the theory”.
I think the border between the two is crossed where MMT adopts “(loose) full employment with price stability” as its operational raison d’être. As I understand the intellectual basis for the position Bill takes it is – in my terms – that a theory devoid of any machinery for its application – while it may be captivating – isn’t of much if any practical utility. To merely formulate MMT *as theory* is just a clever piece of intellectual gymnastics – until you take the further step of operationalising it.
That’s when the JG clicks into place – as the bit of the machinery which reconciles “full” employment with control over inflation. It (the JG) and the theory can’t be kept in separate watertight compartments and still have any useful function in the real world. Equally, in the real (political) world MMT without the JG is wide-open to the charge of being (hyper-)inflationary – as demonstrated by all the nonsense spouted by self-interested ill-wishers portraying it as leading inexorably to Weimar and Zimbabwe.
I must disagree. Isn’t the point of mmt that there is a price anchor? in the past it was gold right? Why does it need to be anchored to employment? For example, couldn’t another price anchor be the price of a given amount of land?
I think one could use mmt to figure out what the pros and cons of each anchor would be. That is the value of the theory.
“My point is that a JG is a policy choice, and not a part of the theory.”
It is part of the theory. 100% part of the theory. It replaces interest rate targeting as the primary stabilisation mechanism, and anchors the currency to something real – an hour of unskilled labour.
It’s only MMT if it has a Job Guarantee.
If you reject the Job Guarantee you’re doing some other economic theory. Not this one. One that won’t work in practice.
“For example, couldn’t another price anchor be the price of a given amount of land?”
No. Land is a stock, not a flow.
So, are you saying that when money was anchored to gold (a stock) that MMT is useless for making predictions in that time period?
What about over the last few decades where no economies have a job guarantee – is MMT useless for making predictions about this time?
I think not!
Further, if MMT requires a job guarantee to be a useful theory, then why does Bill object that people are saying recently “we should move to MMT”?
“It’s only MMT if it has a Job Guarantee”. (Neil Wilson)
Believe, or be excommunicated!
Can anyone play this game? “Bags I be be Pontiff”?
OK, I’ll have a go:-
Money is a social construct – a product of human society. And human society is an (extremely) complex system.
MMT seeks to explain the inner workings of our monetary system, which no one ever designed; it just developed spontaneously. MMT does not explore or propound the laws of nature: MMT is itself a human construct, an abstraction from a far more complex reality.
The JG is not implicit in the basic explanatory formulations of MMT. But (as will any stock-flow-consistent model) MMT’s model of the economy postulates buffer-stocks. It posits that a monetary system demands the existence of a buffer-stock to act as a price-anchor.
The labour-market in a modern monetary economy entails the existence of a buffer-stock of people willing to work who at any given time for any one of a number of reasons are unemployed.
A JG (if there is one) employs them in jobs for which the working of the economy do not themselves manifest any need (but which might or might not nevertheless serve a desired social purpose). In so doing it sets a floor-price (an hourly wage plus basic benefits) for labour in that economy.
Absent a JG there is no state-determined floor-price for labour. (Instead the modern state provides income support – but no jobs – so that (as an absolute minimum) nobody starves).
The JG is not an integral component of MMT’s fundamental exposition of the inner workings of a the monetary system. It grows out of the understanding which that exposition makes available; and is a conscious choice of a better alternative as buffer-stock than any which if left to its own devices the labour-market will default-to.