When is a job guarantee a Job Guarantee?

In the current edition of the German weekly Magazine Der Spiegel (“The Mirror”) there is an article about a “new idea to keep unemployment down” entitled Germany Mulls ‘Parking’ Unwanted Labor in New State-Funded Firms. The thrust of the proposal is that Germany is now examining a proposal to set up government-funded “transfer companies” for workers who lose their jobs as a means of keeping unemployment in check. A reader wrote to me saying that it sounds a bit like the Job Guarantee that I have been advocating for years! Closer examination suggests that while the Germans are starting to come to terms with how bad their economic situation is, they are still a long way off understanding how to get out of it. In that respect, they share the ignorance with most governments. However, being a Euro zone member, the German government has voluntarily lumbered itself with even more constraints that will make it harder to insulate its people from the ravages of the recession.

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The green shoots of recovery … been looking!

In the last few weeks gardening has entered the macroeconomic discourse again. All over the place – apparently – little green shoots are emerging which bode well for the future. But are there any actual signs? Recent data releases from the US and today’s Index of Economic Activity in Australia suggest that the green shoots are still somewhat subterrainean in inclination. The latest data confirms the message that last week’s Labour Force data sent very loudly – the product and labour markets are now starting to align in a very ugly way and much more fertiliser (organic) is needed in the form of government stimulus …. sorry to repeat it, but, preferably in the form of direct job creation.

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The unemployed cannot find jobs that are not there!

The unemployed cannot find jobs that are not there! I have written about that topic extensively. So today I have been examining what vacancy data is telling us about the labour market. The relationship between unfilled job vacancies and unemployment (the so-called UV ratio) is well entrenched in economics. The UV ratio is a good indicator of the state of the labour market because it tells us (approximately) how many people there are for each unfilled job. Of-course, it understates the degree of slack because it fails to include underemployment. Anyway, you can also determine whether there are significant supply-side issues going on which would require supply-side policies. As you will see in the following graphs – it is all demand side! Which tells us, yet again, that job creation is required.

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On things nautical!

The only nautical analogy that I have carried through my days as a professional economist is the one that apparentely John F. Kennedy coined – A rising tide lifts all boats. It was used by famous American progressive economist Arthur Okun in the 1960s to motivate his research on upgrading benefits of what he called the high pressure economy. It was an aspirational term used to goad national governments into fiscal action to ensure that the economy was always as close to full employment (high pressure) as possible. Accordingly, when the economy is at high pressure, both the strong and the weak prosper. Labour participation is strong, unemployment is at the irreducible minimum, labour productivity is high, wages are high and a number of upgrading effects across social classes and generations occur. Children from disadvantaged families get a chance to transcend poverty and workers who are displaced by global economic changes are able to be re-absorbed into productive work. Direct public sector job creation is a significant part of the national government’s responsibilities in this regard. If the private sector is incapable of providing enough jobs then there is only one sector left, ladies and gentlemen. Today I read of a new nautical analogy and my how times have changed! Its time to debrief again!

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Shorter hours or layoffs?

I did a radio interview on the ABC Drive program this afternoon about different attitudes that Europeans and Americans have to dealing with recession, specifically in terms of the decision to offer shorter hours or use layoffs to trim the labour force as sales decline. While the solidaristic European model is preferred, both call into question what the national government should be doing.

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National budgets are not constrained!

I received a call from a journalist at the Financial Review today asking how the Federal government could afford to run labour market programs given that it might suffer a substantial revenue loss if it cuts back net migration. I told him that irrespective of what happens to net migration and any losses to tax revenue that that might bring (should they cut it back), the Government will always be able to fund any labour market program if it thought that was the best use of its funds. It brings to mind a new theme in this period of turmoil – how can the government keep its programs going while at the same time bailing out all and sundry? Answer: easy, just keep funding them. The national government is not financially constrained and the size of its budget is nothing that can be determined independent of the shortfall of aggregate demand.

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Minimum wages 101

The issue of minimum wage adjustments always invokes a lot of debate and invokes the usual (boring) reactions from employer groups and conservative economists. Their narrative is always the same: you cannot have a minimum wage rise because it will cause unemployment among the low-skill ranks of the workforce. If you believed their logic, then there never would be a minimum wage rise. The reality is that there is no evidence available to support these notions and lots of evidence to refute it. The new problem is that the current Federal government is now aligning with the conservatives and using the same defective logic to oppose any reasonable rise in the minimum wage. Its that time again. Time to debrief.

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The US detox lunancy

The US Government has come up with its latest plan to solve the financial crisis which has now well and truly become a real (GDP and employment) crisis. While the initial reaction from the financial markets is generally favourable (and why wouldn’t it be), if you appraise it from the perspective of modern monetary theory and impose an equity bias then you conclude: (a) it will represent a major redistribution of nominal wealth to the already wealthy; and (b) it probably won’t help reduce unemployment because it is not tackling the real problem.

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G20 – we should all be worried

Put People First group are running a grass roots campaign for all of us to send a message to the G20 about their priorities. The campaign symbol is the megaphone logo appearing below. Their campaign will culminate in a march in central London on March 28, 2009 to push a case for jobs, justice and climate. I am not associated with this group but I share their priorities, even if I might see them in different terms. Anyway, this is the first of my messages to the G20. In summary: they need to learn how the economy actually operates and then they would use their fiscal policy capacity to ensure everyone has a job in a sustainable economy.

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Social security insolvency 101

Many readers have asked me to explain why social security and pension schemes run by national governments can never become insolvent. Some have heard me commenting on the radio recently about this. In the current recession, where automatic stabilisers are pushing the budget back into deficit to dampen the fall in aggregate demand there are now renewed cries that social security funds around the World are likely to become insolvent. There are the familiar howls that all the “debt” that is being built up as governments go into deficits (mostly because they have been dragged into them by the cycle) will require huge future tax burdens that will undermine the capacity of governments to deliver adequate social security and health care systems. I think its time to de-brief again. The short answer to these claims is: sovereign governments can always fund social security in their own currency. Always, always, and even always.

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The role of journalists …

Senior journalists often do more harm than good when they write about technical issues that they clearly do not understand. In many cases, they rely on the technical knowledge of their favourite economist or the flavour of the month economist and they are not skilled enough to know when their “economist” is also talking rubbish.

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Be careful what we wish for …

The global recession is presenting a new dilemma for the first world which will have significant impacts long after growth has returned. We saw in recent years that the price of oil rose sharply as the demand of energy from emerging nations skyrocketed. While we clearly have a short-term incentive at least for China to redirect its economic energies into domestic growth to give our export sectors a boost there will be implications of this that we might not have bargained for. Do we really want an extra 1 billion or more people to be as rich as us? It is a case of being careful what you wish for …

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Deficit spending 101 – Part 3

This is Part 3 in Deficits 101, which is a series I am writing to help explain why we should not fear deficits. In this blog we consider the impacts on fiscal deficits on the banking system to dispel the recurring myths that deficits increase the borrowing requirements of government and that they drive interest rates up. The two arguments are related. The important conclusions are: (a) deficits introduce dynamics which put downward pressure on interest rates; and (b) debt issuance by government does not “finance” its spending. Rather debt is issued to support monetary policy which is expressed as the desire by the RBA to maintain a target interest rate.

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Deficit spending 101 – Part 1

A lot of people E-mail and ask me to explain why we should not be worried about deficits and why they do not have to be financed by debt (even if the government does typically increase its debt when it goes into deficit). So in the coming weeks I will write some blogs to explain these tricky things. First, I will explain how deficits occur and how they impact on the economy. In particular, we have to disabuse ourselves of the notion that when governments deficit spend they automatically have to borrow which then places pressure on the money markets (which have limited funds available for lending) and the rising interest rates squeeze private investment spending which is productive. This chain of argument is nonsensical and is easily dismissed. So this is Deficits 101. Next time I will detail the reason why the central bank issues bonds (government debt).

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Germany attacks its unemployed!

Australia is not alone in mistreating our disadvantaged and unemployed citizens. As a portent of things to come in Australia after July 2005, tough new labour market reforms came into law in Germany on January 1. The Hartz IU reforms received a bit of European press in the last few days. I read two stories over the last few days, one in the German paper Bild am Sonntag (BamS) under the heading – Hartz-IV-Chaos! Kann ich meine Stütze bar abholen? – and another from the French daily Le Monde that provided some useful insights into the how a country that refuses to provide enough work for its citizens turns on the same.

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