The enemies from within

A few years ago, a senior federal parliamentarian came to Newcastle one weekend to discuss macroeconomic policy with me. He might have saved the trip given his unwillingness to modify his neo-liberal views, which dominate all sides of politics here (including The Greens). But at one point I said that his party could not keep assuming that the left would remain loyal in the face of continued privatisation proposals and their obsession with achieving bigger budget surpluses than the conservatives. His response was “where else are they going to go” – the ultimate in disdain. The story has overtones on a daily basis when you realise that the so-called and often self-styled “progressive” side of the macroeconomic debate demonstrate their lack of understanding of how the monetary system operates and parade policy proposals that not only undermine any notion of full employment but also concede the main game to the conservatives.

So it is a case of who is the enemy? In a political sense, at least when the conservatives are in you know what you are up against (mostly). But when the so-called Labor Party (founded in Australia as the political arm of the trade union movement) or the Democrats in the US, or British Labour are in power, they talk as if they are friends of the disadvantaged but act to the contrary. It is harder dealing with this when the treason comes from within your own “family”.

My friend Marshall Auerback sent me this nice quotation from a former US President Warren Harding (a Republican):

I have no trouble with my enemies. I can take care of my enemies in a fight. But my friends, my goddamned friends, they’re the ones who keep me walking the floor at nights!

Anyway, my response to these dilemmas is to remain totally non-aligned politically. But I know of many people who struggle with their need to be committed to social change and hence join the Labor Party but then realise they are just supporting and funding the enemy which privatises public assets; purges those on income-support; refuses to provide jobs for the unemployed; fails dismally on climate change; and, generally looks more to the top-end-of-town for their ideas.

I was thinking about this today when I read the latest piece Navigating the Jobs Crisis: Unemployment Solution – Pay People to Work Shorter Hours from Dean Baker who works with the Washington-based Center for Economic and Policy Research. The CEPR claim that:

In order for citizens to effectively exercise their voices in a democracy, they should be informed about the problems and choices that they face. CEPR is committed to presenting issues in an accurate and understandable manner, so that the public is better prepared to choose among the various policy options.

They are considered to be on the left of the debate in the US and a significant voice against the Washington consensus.

Well self-promotion can be deceiving. While they clearly espouse what many progressives would consider to be acceptable, my reading of their work is that their macroeconomic understandings can be reduced back to the mainstream strictures of the government budget constraint (GBC). In other words, as “progressives”, they fall into the deficit dove category.

Deficit doves think that budget deficits are fine as long as you wind them back over the cycle (and offset them with surpluses to average out to zero) and keep the debt ratio in line with the ratio of the real interest rate to output growth. Torturous formulas are provided to students on all of this under the presumption that the government does have a financing constraint but as long as it is cautious things will be fine.

Deficit-doves worry relentlessly about the public debt to GDP ratio because they assume that the “credibility” of the government debt will be compromised and that this (whatever it means) matters. If you said to a deficit-dove that you could run a deficit of say 10 or 15 or 20 per cent of GDP indefinitely or even higher then the dove would have kittens.

They definitely consider there is a limit to the size of the deficit (and public debt) but rarely associate this with the requirement that the government has to match the leakages from the expenditure stream arising from non-government saving. So they do not support indefinite (even large) deficits but fail to admit that this means that they cannot guarantee full employment. In that sense, they abandon one of the basic principles of being progressive – a concern that everyone who wants to work can find it.

They also would never consider advocating to change the voluntary constraints that governments have inherited from the gold standard days which ensures public debt rises $-for-$ with net spending. Why not do away with public debt altogether so then the doves could could stop worrying about it forever? Of-course, in fine neo-liberal tradition, they would then get angsty about inflation.

Anyway, in the spirit of “presenting issues in an accurate and understanding manner” so the public can “choose among the various policy options”, Baker wrote yesterday that:

The unemployment rate is 10.2 percent and virtually certain to rise even higher in the months ahead. Even with the prospect of extended benefits, unemployment is still a crisis for the families affected, as they struggle to pay their mortgage or rent and cover other essential expenses. Millions will end up falling behind, losing their home – in some cases leading to homelessness and/or family break-ups.

So the problem is clear and agreed. Unemployment is the major source of poverty whether it be in a advanced or developing country. It is alienating, soul destroying, extends its costs well beyond the individual and the income losses alone dwarf the costs arising from so-called microeconomic inefficiencies.

The daily loss of GDP involved in not having all available workers doing something productive is mammoth. It is a no-brainer that it is the large economic problem that should be solved in any country.

The closing slide in one of our presentations (Randy Wray and myself) in Kazakhzstan recently had this quote from Keynes (in a pamphlet to support Lloyd George in the 1929 election):

The Conservative belief that there is some law of nature which prevents men from being employed, that it is ‘rash’ to employ men, and that it is financially ‘sound’ to maintain a tenth of the population in idleness is crazily improbable – the sort of thing which no man could believe who had not had his head fuddled with nonsense for years and years.

That is how obvious the problem is. Fortunately there is an easy solution … unemployment is due to a lack of jobs! More jobs are required. If the private sector cannot produce enough then there is only one sector left ladies and gentleman who can do the trick!

When you are wavering from this understanding, get your kids (or some kids) to read you the Parable of 100 dogs and 95 bones again. That will bring it back into reality.

But Dean has another solution:

Fortunately, there is an easy and quick way to begin to get these unemployed workers back to work. It involves paying workers to work shorter hours. The mechanism can take the form of a tax credit to employers. The government can give them a tax credit of up to $3,000 to shorten their workers’ hours while leaving their pay unchanged. The reduction in hours can take the form of paid sick days, paid family leave, shorter workweeks or longer vacations. The employer can choose the method that is best for her workers and the workplace.

If take-home pay is left unchanged as a result of the credit, then demand should be left unchanged. If workers are putting in fewer hours and demand is unchanged, then employers will need to hire more workers.

This logic is as simple as it gets. The process is also quick and cheap. In principle, the government can go this route to save jobs at a cost of a bit more than $20,000 per job – far less than the cost per job saved through the stimulus package.

I blinked once, then twice when I read this … but then remembered the source. It is case of the “progressive” not getting to the nub of the problem.

Where does one start with that proposal? Well first, what exactly is the cause of mass unemployment? The initial reason firms are laying off workers is because they cannot sell the goods and services that are being produced. Employment is a function of aggregate demand, a point that even Baker implicitly acknowledges (“demand should be left unchanged”). Firms will only employ if there is demand for their output.

So this proposal doesn’t aim to increase demand. Why not given it informs us it is as “simple as it gets”?. More on that later.

Instead of increasing demand, the proposal aims to hold demand constant but have more workers producing the same amount of output. It is a $US3,000 subsidy to the bosses to shuffle more workers over the same production level.

Both Baker and Krugman (see below) cite Germany as an example of how work-sharing has helped keep the unemployment rate below the US levels. In this blog – Shorter hours or layoffs? – I consider the German case and reject it as an option although it is a better option than laying off workers. But the comparison between Germany and the US is fraught given the radically different welfare support levels in place in each nation. US has no safety net at all.

But on first blush, the work-sharing plan attempts to share the burden of deficient aggregate demand between workers which might be seen as reasonable. But it is not a solution to mass unemployment.

The same logic underlying the CEPR proposal was used by the French when they brought in a statutory 35-hour working week in February 2000. It was seen as a way of “spreading the work” and reducing their persistently high unemployment rates. The logic they used in the lead-up debate was almost identical to Baker’s logic here.

The facts that emerged were that employers did not hire new workers in any great quantity and unemployment remained largely unchanged (as a consequence of this move). The evidence is that the workers who kept their jobs enjoyed longer weekends which created a real estate and sports-centre cum golf boom in the 100km radius of Paris (for example). But the bosses just increased intensity of work and so 5 days work was performed in 4 days.

So the plan to spread the work failed. I imagine Baker will say that to get the subsidy the firm has to shuffle the hours. But what incentive is there for the firms to do that if it not going to sell more goods and services and may add to their labour costs?

Second, there are also many within-firm issues which add costs. In all but the lowest skill jobs, the act of hiring is costly. Further, workers are not perfect substitutes and so work-sharing can be difficult to organise. The inflexibility it introduces when a matching worker is not available increase employer costs. The administrative burden of adding to the payroll etc add costs. There are also spatial (regional) matching issues. So where is the incentive for the employer?

Third, workers have other commitments/obligations which are not necessarily as flexible – such as child care arrangements. If the boss can tell the worker to take a holiday (employer chooses remember) this might not align with these other responsibilities. While flexibility for the worker in terms of hours might seem like a good idea, in many cases it becomes a poisoned chalice.

Fourth, according to the CEPR proposal the so-called flexibility in the proposal is all at the behest of the employer! SHE gets to decide how the worker will be rationed off into idleness.

Fifth, and most important, the proposal is designed to “save” the government money. This is a government that issues the currency and last time I checked it did not have an inflation problem to deal with. It doesn’t need to “save” money by which Baker means to spend less than it might. The basic problem confronting the US economy is that there is not enough spending overall.

Given the private sector doesn’t want to spend at present – and you cannot blame them for that given the appalling state of their balance sheets and the very unsteady housing market – there is a danger that demand will drop further unless the government adds to its stimulus packages.

As an aside, I read overnight the following news:

… a staggering 22 percent of all mortgages in the state of Florida are non-current … [which means] … that are either delinquent or in some stage of foreclosure; perhaps more troubling is the fact that 10.4 percent of home loans in Florida are in foreclosure.

Many of the banks are still in a state of fragility and without the huge public bailout they would be history. So there is still a lot of pain in the US to be worked through before the sun starts shining again.

So the US is an economy that desperately needs more aggregate demand. The only constraint on employment is the lack of spending and there is no financial constraint that exists in a fiat monetary system that prevents the government from eliminating that demand deficiency.

There are millions of workers idle so inflation does not appear to be on the radar at present should the government increase demand to such a level that firms want to employ them again because they can sell the output created.

Unfortunately, Paul Krugman in his recent (November 12, 2009) article Free to Lose seems to be lending support for this compliance although he understands that the US economy needs more deficit spending.

He said in terms of “New-Deal-style employment programs”:

… Perhaps such a thing is politically impossible now – Glenn Beck would describe anything like the Works Progress Administration as a plan to recruit pro-Obama brownshirts – but we should note, for the record, that at their peak, the W.P.A. and the Civilian Conservation Corps employed millions of Americans, at relatively low cost to the budget.

For Americans (and all of us) I suggest you have a look at this marvellous resource archive which documents the projects that were completed under the New Deal. It might alter your perception of the productive potential of public sector job creation schemes.

I wonder though, how high unemployment has to go and how many mortgage foreclosures have to be finalised before it becomes “politically possible” in the US.

Anyway, Krugman then says that:

Alternatively, or in addition, we could have policies that support private-sector employment. Such policies could range from labor rules that discourage firing to financial incentives for companies that either add workers or reduce hours to avoid layoffs …

Just to be clear, I believe that a large enough conventional stimulus would do the trick. But since that doesn’t seem to be in the cards, we need to talk about cheaper alternatives that address the job problem directly. Should we introduce an employment tax credit, like the one proposed by the Economic Policy Institute? Should we introduce the German-style job-sharing subsidy proposed by the Center for Economic Policy Research? Both are worthy of consideration.

I agree (as above) that a higher deficit is desperately required in the US. But whether it will “do the trick” by which I take to mean generate full employment and price stability is highly doubtful. It is unlikely that a generalised expansion will be capable of restoring full employment before bottlenecks in particular segments of the labour and product markets are encountered – the bottlenecks engendering inflationary pressures.

In Australia, for example, the private sector even when it was humming along at a good clip never created enough jobs to match the preferences of the labour force for hours of work. During the full employment era (1945-1975), the rest of the jobs were created by the career public service and an implicit employment guarantee within the public sector.

There were always a buffer of jobs available within the public sector which were accessible to the most disadvantaged workers.

Unemployment is also very unequally distributed across the regional space. This makes it much harder to rely on generalised expansion. For example, at present Australia has come out of the downturn relatively unscathed (compared to other nations such as the US).

But the latest Small Area Labour Market data shows that areas in Sydney’s west such as South-West Blacktown (western Sydney) has an unemployment rate 14.0 per cent (latest data is for March 2009); Fairfield East 12 per cent; while the wealth north shore suburb of Woollahra enjoys 1.7 per cent unemployment.

In western NSW, where I am doing some work at the moment for the Indigenous community there, Brewarrina has 15.1 per cent unemployment (and that is understated). In the south Brisbane suburbs of Kingston and Woodridge unemployment has reached 17.1 and 17.0 per cent respectively.

So a major regional disparity that has to be addressed. If you examine the regional labour market data from the US Bureau of Labor Statistics you will see similar disparities. Generalised expansion just cannot get into these “hot spots” of unemployment in a reliable, inflation-free manner.

That is why we advocate employment guarantees. The easiest and most inclusive way to eliminate unemployment, assuming that the US Government was truly wanting to achieve that goal, would be to achieve this is to introduce a Job Guarantee.

The limit of the guarantee and the last dollar that would have to be spent would be determined by the last unemployed worker who came through the Job Guarantee door wanting to work. A down-to-the-last-dollar automatic stabiliser you might say which eliminates all the complaints made by the mainstream about fiscal policy inefficiencies arising from timing lags.

The US government and any national government can always afford to introduce this sort of program. Shuffling workers around a highly constrained volume of working hours is not a progressive solution. It is a compliant surrender to the failure of the US government to realise its fiscal responsibilities.

Krugman’s claim that employment guarantees are “politically impossible” is also a surrender. Indeed, if there wasn’t enough deficit-phobes out there, the US Government, itself, has helped foster the misperceptions of its lack of fiscal capacity.

For example, when President Obama told a health summit in March that the US government would run out of money he was ratifying all the flawed mainstream textbook analysis that has generated this impossibility.

In one small phrase he did more damage to an informed understanding of the way the modern monetary system operates than all the Austrian-school libertarian squawking does in a year.

For the CEPR not to challenge that mis-perception makes them part of the problem. But then deficit-doves are part of the problem.

Tonight: I am talking about MMT at Politics in the Pub at the Station Hotel in Hamilton. Come along if you are nearby and join the discussion.