{"id":13025,"date":"2011-01-05T17:13:23","date_gmt":"2011-01-05T06:13:23","guid":{"rendered":"https:\/\/billmitchell.org\/blog\/?p=13025"},"modified":"2011-01-05T17:13:23","modified_gmt":"2011-01-05T06:13:23","slug":"employment-guarantees-are-better-than-income-guarantees","status":"publish","type":"post","link":"https:\/\/billmitchell.org\/blog\/?p=13025","title":{"rendered":"Employment guarantees are better than income guarantees"},"content":{"rendered":"

\t\t\t\tA debate in development economics concerns the role of cash transfers to alleviate poverty. This was reprised again in the New York Times article (January 3, 2011) – Beat Back Poverty, Pay the Poor<\/a> – which I hopefully began reading with employment creation schemes in mind. I was wrong. The article was about the growing number of anti-poverty programs in the developing world, particularly in the left-leaning Latin American nations, based on conditional cash transfers. There is no doubt that these programs have been very successful within their narrow ambit. They also are used by some progressives to argue for an extension of them into what is known as a Basic Income Guarantee (BIG). For reasons that are outlined in this blog I prefer employment guarantees as the primary way to attack poverty. I think the progressives who advocate BIGs are giving too much ground to the conservatives.
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\nThe NYT article describes an anti-poverty program in Brazil. It notes that “Parts of Brazil look like southern California. Parts of it look like Haiti. Many countries display great wealth side by side with great poverty. But until recently, Brazil was the most unequal country in the world.” But on a positive front it notes that “Brazil’s level of economic inequality is dropping at a faster rate than that of almost any other country”.<\/p>\n

Interestingly, the writer notes that with on current trends the income distribution in Brazil will be less unequal than the (growing) inequality in the US. I will write a separate blog about inequality another day. In this blog – The origins of the economic crisis<\/a> – I note that one of the underlying causes of the current crisis was the growing inequality in incomes in the advanced nations created, in part, by legislative support for real wages growth to lag behind productivity growth.<\/p>\n

The redistribution of national income to capital (away from labour) created two separate dynamics: (a) it provided the real income for the growing financial sector to speculate with; and (b) it created a need for credit by the household sector to maintain strong consumption growth as the real wage lagged. It meant that with tighter fiscal policy positions being driven by neo-liberal fervour, economic growth was continued (temporarily as we saw) via the growing indebtedness of the non-government sector.<\/p>\n

So the growing income inequality in the advanced world is an interesting topic in its own right and an examining of the causal factors helps us to understand: (a) some of the more insidious facets of the increasing dominance of neo liberalism, and; (b) the underlying dimensions of the current crisis.<\/p>\n

You might also like to consider the series of articles<\/a> in the Slate Magazine which analyse income inequality in the United States. They are very interesting.<\/p>\n

Back to Brazil. The NYT articles brings attention to “a single social program that is now transforming how countries all over the world help their poor”.<\/p>\n

The specific Brazilian program in question is the – Bolsa Familia<\/a> – which is a conditional cash transfer system<\/a> based on the family unit and is modelled on a common design that many countries are now employing.<\/p>\n

The conditionality is targetted on aspects of the development process that the government feels is essential – such as children’s attendance at school or health clinics, parental education in areas such as nutrition and health care. The payments are usually given to woman as a paternalistic gesture – because woman tend to provide food and lodging for their children instead of gambling or drinking the proceeds (as men have a tendency to do).<\/p>\n

The aims of such programs are inter-temporal – to alleviate poverty now (that is, reduce financial hardship immediately) but to also set in place a dynamic that influence the choices the poor make with respect to the future of their children (in particular, with respect to education and human capital augmentation).<\/p>\n

So the program provides resources so that the next generation will be better able (via improved nutrition, health and education) to cope with a labour market that has locked their parents out of income earning opportunities.<\/p>\n

I have some sympathy with this approach as I will explain but I also caution against a view that poverty is a “supply-side” or “deficient-skills” issue. There is also a significant demand-side issue which manifests in the form of a need for real wages growth and adequate employment opportunities being available. The approach taken to development by the large international agencies like the World Bank and the IMF is typically to eschew demand-side initiatives and focus on fiscal austerity.<\/p>\n

By undermining employment creation, fiscal austerity initiatives also damage the potential for supply-side initiatives. Please read my blogs – Bad luck if you are poor!<\/a> and There is no positive role for the IMF in its current guise<\/a> – for more discussion on this point.<\/p>\n

In terms of the South American conditional cash programs, the BBC ran a two-part series in August 2009 called Cash in Hand<\/em> which was very interesting and well-made although I didn’t agree with some of the economic analysis that underpinned the program.<\/p>\n

The series, in two parts was made by One Planet Pictures<\/a> and you can view then from the following links – Part 1<\/a> – Part 2<\/a>.<\/p>\n

Further, here is a PBS link to a video – Plan to Beat Poverty With Cash for Choices<\/a> – about the Mexican version of the program which is called Oportunidades, and has become the model for other nations. Oportunidades impacts on around one-third of the Mexican population and scales the grant to the children’s educational participation.<\/p>\n

The World Bank<\/a> notes that the Brazilian program:<\/p>\n

\n… reaches 12.7 million families (or nearly 50 million people) and is among the most effective social protection programs in the world, having helped raise approximately 20 million people out of poverty between 2003 and 2009 and well as significantly reducing income inequality.\n<\/p><\/blockquote>\n

The World Bank reports that “Between 2003 and 2009, poverty … has fallen from 22 percent of the population to 7 percent”. That is certainly an excellent result (even if the poverty lines being used – PPP $US2 per day – are very low).<\/p>\n

The program has also been used as a safety net device to “mitigate the impact of the food and oil prices increases, and more recently of the global crisis and economic downturn.”<\/p>\n

Many critics of such programs always focus on the possibility of corruption (money not spent properly) etc. The NYT article notes that the programs have not only reduced poverty but are also reducing income inequality. The article also notes that:<\/p>\n

\nFor skeptics who believe that social programs never work in poor countries and that most of what’s spent on them gets stolen, conditional cash transfer programs offer a convincing rebuttal. Here are programs that help the people who most need help, and do so with very little waste, corruption or political interference. Even tiny, one-village programs that succeed this well are cause for celebration. To do this on the scale that Mexico and Brazil have achieved is astounding.\n<\/p><\/blockquote>\n

The moralists always criticise these type of programs because they consider them paternalistic interventions to free choice. In most microeconomics textbooks you will find some discussion about the “optimality” of cash transfers versus in-kind (or conditional) transfers. The mainstream economists usually conclude that unconditional cash transfers are “best” because they allow “free choice”.<\/p>\n

The reality is that when confronted with a starving child it is always better to give them “food” than give their father money to drink or gamble away! Children do not have “free choice”. I could write a whole blog about this sort of debate.<\/p>\n

Further, the results from these programs are a powerful testament of how active fiscal policy initiatives can be targetted to improve public purpose – which in these nations is prioritised to alleviating extreme poverty.<\/p>\n

I note that these nations are very “open” to trade and currency fluctuations but still the fiscal initiatives that are domestically-targetted can be very effective.<\/p>\n

While there are positive features of these programs I prefer an alternative approach to poverty alleviation. I did some work for the ILO in South Africa in between 2007-2008 study evaluating the South African Expanded Public Works Program<\/a> and providing guidance on how to improve the program and create a functional minimum wage framework.<\/p>\n

This program employed 1 million people in its first 5 years and has more ambitious targets in the second five year period. Many of the recommendations I made in my report were included in the second five-year plan. <\/p>\n

I cover some of the issues drawn from that international experience in these blogs – The real World Cup<\/a> – Employment guarantees in vogue – well not really<\/a> – Employment guarantees in developing countries<\/a>.<\/p>\n

The South African government has typically favoured cash transfers as a major poverty alleviation strategy. The EPWP which is a targetted public works program is an additional job creation strategy that aims to provide some income support to households.<\/p>\n

I concluded that the EPWP was a very effective means of reducing poverty and the vast majority of the participants were able to cross the poverty line while they were in receipt of the income. The problem with the scheme was that it was not demand-determined. It was supply-rationed which reflected the fiscal conservatism of the South African government, heavily under the sway of the IMF.<\/p>\n

I recommended that the scheme be expanded into a full-blown Job Guarantee<\/a> and that the minimum wage be set at a level that supports an inclusive social lifestyle for the recipient.<\/p>\n

What is a Job Guarantee<\/strong><\/p>\n

The basis of the proposal is that the sovereign government unconditionally offers a public sector job at the minimum wage to anyone willing and able to work, thereby establishing and maintaining a buffer stock of employed workers. This buffer stock expands (declines) when private sector activity declines (expands), much like today’s unemployed buffer stocks, but potentially with considerably more liquidity if properly maintained.<\/p>\n

The sovereign government is thus offering to purchase a resource for which there is currently no market price – a zero bid input. In this sense, it expands its spending not by competing with other resource users but by utilising an unemployed resource. We call this spending on a price rule rather than a quantity rule. <\/p>\n

Currently, governments tend to spend on quantity rules – so they plan a budget deficit of a certain size and allocate program budgets to match. This is a flawed approach because it relies on them being able to exactly predict the spending gap that the deficit needs to fill. The likelihood of under-spending and leaving labour resources unemployed is high under this approach.<\/p>\n

It is far better to have some leeway in the budget where the spending gap is closed with a employment guarantee – which means that the government would always be able to create “loose” full employment (buying labour at zero bid rather than competing in the market for it) and the deficit would be whatever it had to be – that is, exactly the right size relative to GDP.<\/p>\n

So the JG fulfils an absorption function to minimise the real costs currently associated with the flux of the private sector. When private sector employment declines, public sector employment will automatically react and increase its payrolls. The nation always remains fully employed, with only the mix between private and public sector employment fluctuating as it responds to the spending decisions of the private sector. Since the JG wage is open to everyone, it will functionally become the national minimum wage.<\/p>\n

While it is easy to characterise the JG as purely a public sector job creation strategy, it is important to appreciate that it is actually a macroeconomic policy framework designed to deliver full employment and price stability based on the principle of buffer stocks where job creation and destruction is but one component.<\/p>\n

There is no question that advanced countries could fairly quickly introduce this type of scheme. Most have sovereign governments that have no difficulty creating a demand for their currency. Most have elaborate taxation, welfare and other administrative procedures which allow government to engage with their populations. Most have systems of checks and balances which do not prevent corruption but tend to make it harder to become entrenched.<\/p>\n

A government that is not sovereign in its currency may not have the fiscal capacity to run a JG system without raising revenue first. So a state government in a federal system could clearly administer and operationalise an employment guarantee but would have to “finance” it with revenue. A national government which issues its own currency does not face these revenue constraints.<\/p>\n

The question then is whether this a Job Guarantee could provide a solution to the massive income insecurity arising from chronic unemployment in developing countries which may not have the same degree of fiscal sovereignty or institutional machinery capable of administering such a program.<\/p>\n

A Job Guarantee in developing countries<\/strong><\/p>\n

There are particular challenges with a small developing nation introducing a Job Guarantee. <\/p>\n

First, the so-called “formal sector” may be relatively small so that most production and employment is located in the informal sector where wages and conditions are likely to be highly variable and unregulated.<\/p>\n

Second, the country may only produce a small range of commodities and rely on imports for a large number of other types of goods. In many situations, these imports are luxury goods which do not increase the welfare of the general population. These sort of countries also rely on a very narrow range of exports to generate foreign exchange. In these cases, rising GDP and incomes can quickly push up imports and place the exchange rate under pressure. This problem is exacerbated if the exchange rate is linked (pegged) to another currency (often the former coloniser) or if the currency has been wiped out by so-called “dollarisation”.<\/p>\n

Third, the administrative capacity of the national government might be quite limited and domestic infrastructure might be inadequate to allow any significant increase in productive capacity.<\/p>\n

Under these circumstances, introducing a Job Guarantee at the minimum wage operating in the formal sector will generate significant flows of labour out of the informal sector. This would, in turn, increase wage incomes substantially and boost demand for consumption generally but also imports of goods and services (so-called “luxury” goods) which were previously too expensive for the workers.<\/p>\n

The result would be that the balance of trade would deteriorate and foreign reserves would be depleted quickly. These reserves are necessary if the central bank is to maintain the exchange rate parity (as note above – these countries often have a fixed exchange rate system). The exchange rate would thus begin to depreciate and this pushes up import prices. If left unchecked, a full blow exchange rate crisis occurs and this usually becomes a broader domestic crisis as the government is forced to cut back aggregate demand to check imports.<\/p>\n

That is the worst-case scenario that critics of the Job Guarantee present in relation to developing countries.<\/p>\n

So what is the answer?<\/p>\n

First, as the economy develops, the minimum wage paid would have to be closer to the average paid in the informal sector to reduce the progam impacts on aggregate demand. To ensure an effective policy attack on poverty is in place, the Job Guarantee could then be supplemented with a range of social wage items provided on an “in-kind” basis. The government could offer domestically-produced food (not imported), clothing, housing and other services such as child care, aged care, public health, education and transport to JG workers to supplement their wage income.<\/p>\n

Second, the JG workers could be employed on projects that provided many of these domestically-produced goods and services which would minimise the impact on the public budget and the trade balance.<\/p>\n

So taken together, these design features and supplementary policies would improve the trade-off between growth in real incomes and the trade balance.<\/p>\n

But it remains that we would want the JG workers to have greater command over income and we would also expect some of the capital required to support the program (tools etc) will be imported. This requires some forward planning by the Government. It could directly link imported material and tools required for the program to export earnings (that is, controlling imports). It could also link them to international aid. So regular international aid to poor countries could be used to maintain a Job Guarantee. However, the local government should never used funds “borrowed” from the international agencies for this purpose unless there is clear evidence that the JG will directly stimulate exports (and provide the currency to pay back the loans).<\/p>\n

Further, the aim of the JG in these circumstances is to be as labour intensive as possible in the first instance to provide as many employment opportunities as is possible. So the capital required will be minimised while the nation is adjusting to higher levels of employment.<\/p>\n

But this doesn’t mean the JG would produce nothing of value. A well targetted program would engage the JG workforce in large public infrastructure projects such as road construction and water management (drainage etc), which would directly increase the nation’s export capacity by reducing the costs of private business and providing an attractive investment environment.<\/p>\n

So as long as the program is phased in carefully and the activities planned to enhance the productive capacity of the nation, the Job Guarantee approach can be successful. A phased-in approach also provides time for the government to also build its capacity to run the scheme on a “learning by doing” basis.<\/p>\n

Many development economists, who have a concern for poverty argue that providing a basic guaranteed income is better in developing countries than providing a Job Guarantee schemes because the scale of the problem is too large. The argument is that in high unemployment countries where there is already a high wage sector defended by vested interests, the introduction of an employment guarantee based on public works projects would be unsustainable.<\/p>\n

This is a common argument made by development economists against employment guarantees as a solution to poverty arising from mass unemployment.<\/p>\n

However, notwithstanding the points I have made above, these criticisms are typically based on notions of financial unsustainability underpinned by a government budget constraint. Clearly, the same sort of arguments are used in advanced countries by neo-liberals. But a thorough understanding of how the modern monetary system operates will show you that these orthodox neo-liberal notions of fiscal unsustainability are without foundation.<\/p>\n

Apart from the points made above, there is nothing intrinsically different in a developing economy that maintains sovereignty of its own currency that would prevent the introduction of a JG, particularly when such economies lack adequate social and economic infrastructure. There are political, ideological and perhaps administrative issues that need to be confronted but these are common to all development policy suggestions.<\/p>\n

Some people might argue that these governments have problems collecting taxes and therefore their currency is not sovereign. Well in many developing countries, there is an alternative currency used by the citizenry to ease transactions. But they still have to meet their tax obligations in the sovereign currency and thus it still is demanded and traded. This is the case even in Zimbabwe!<\/p>\n

However, if no-one uses the currency of issue and no taxes are paid then the government isn’t sovereign. But it will not be able to do anything in this situation much less introduce a Job Guarantee. I am hard pressed to think of a country in this situation. I know of many where dual currencies mix inside the country but none where there is no demand for the currency of issue.<\/p>\n

The most typical case of currency impotence is dollarisation. There the government has no fiscal indepedence and would be advised to work out ways to reduce and eliminate the dollar currency from its country over time.<\/p>\n

Minimum wages and cash transfers<\/strong><\/p>\n

In my work on South Africa, I noted that setting a minimum wage that will provide a buffer against poverty is complicated by the fact that household size and composition varies across the population. This problem bedevils efforts to set poverty lines because there are considerable differences in household consumption due to these composition differences that complicate meaningful comparisons.<\/p>\n

Poverty line studies seek to construct a “normalised” household consumption unit based on per capita estimates or in more advanced studies “equivalence units”. <\/p>\n

The relevance of household size and composition for minimum wage setting is less than clear cut. The question at issue relates to the extent to which we want the wage distribution to reflect the overall income distribution aspirations of the government.<\/p>\n

I considered it would become too unwieldy to build adjustments for family size and age composition into the EPWP minimum wage determination framework. Instead I thought that poverty line measures should be equivalised where possible (and achievable) and the social grants (cash transfer) system used through family assistance grants to supplement the EPWP wage.<\/p>\n

So I recommended that the role of the EPWP minimum wage was to ensure that the worker receives enough resources to escape poverty and that the role of the social wage (cash transfer) as supplementing the EPWP wage to ensure the worker’s family escapes poverty. The social wage clearly also has a broader role to play outside of the EPWP policy framework.<\/p>\n

I recommended a scaling up of the social wage to ensure that essential public services such as education, health and aged care and the like are provided in adequate supply. This public goods approach to services reduces the need for households to have private income. This is where the debate on conditionality becomes relevant where the cash transfer is delivered to individuals.<\/p>\n

In general, I think the cash transfers should be targetted to ensure children are protected. I reject the mainstream economics notion that “the individual knows best”. In a family situation, the application of this assertion is fraught, especially in very poor communities.<\/p>\n

In South Africa, it is without doubt that over the last 10 years, the dramatic increase in provision of social grants in South Africa, which have targeted the poor and disadvantaged has been an effective strategy to reduce the burden of poverty.<\/p>\n

The data is compelling in this respect especially with respect to child support assistance which is spread across foster care, care dependency and child support grants.<\/p>\n

The rationale for the extension of the cash transfers system in poor nations is that a large proportion of the population falls outside the economic mainstream, and given their poor employment probabilities, they are often unlikely to gain from economic growth and new employment opportunities.<\/p>\n

For this portion of society, cash grants are an important source of income. Rapid expansion of the social security net between 2000 and 2006 has undoubtedly had a large impact on poverty in the developing world.<\/p>\n

But in general, I reject this approach to poverty alleviation – and consider employment guarantees rather than income guarantees to be a more effective solution.<\/p>\n

Basic income guarantees as a solution to poverty<\/strong><\/p>\n

Many researchers and policy commentators seize on this type of data as the basis of their advocacy for the introduction of a Basic Income Guarantee (BIG) as the primary policy weapon against poverty. They highlight the fact that there is a lack of employment alternatives available to citizens in poor nations and that the cash grants have demonstrated an ability to reduce poverty in that country. In that vein, the introduction of a BIG would seem to be an easy way to eliminate poverty.<\/p>\n

The provision of an unconditional BIG, set at a ‘liveable’ level and payable to all citizens, is advocated by a number of public policy theorists as a means of addressing income security. Most BIG proponents believe that full employment is now unattainable – which I consider to be an unnecessary concession to the mainstream NAIRU mythology. The problem is that BIG are a major progressive policy position. In general, conservatives do not support any form of government guarantee.<\/p>\n

I have always argued that BIG is palliative at best. I consider advocacy of BIGs as being a major failing of the progressives to provide a viable alternative to mainstream fiscal austerity and “free market” approaches to economic development. Advocacy of BIG is based, in my view, on a failure both to construct the problem of income insecurity appropriately and to understand the options that a government which issues its own currency has available to maintain full employment.<\/p>\n

I argue that there are no economic constraints in poor nations such as South Africa to achieving full employment. Only ideological and political constraints exist. In fact, each policy response (BIG or JG) requires that the same ideological and political barriers, relating to philosophical notions of citizenship and individual rights, be confronted and overcome. But when compared to a full-scale public sector employment program, the BIG is a second-rate option and is inherently inflationary.<\/p>\n

The existence and persistence of unemployment and the link to income insecurity is generally recognised by BIG advocates but the former is rarely explained. An exception, is leading BIG advocate Phillipe Van Parijs (a Belgian) who presents both an explanation of unemployment and a related model of BIG financing. <\/p>\n

Drawing from orthodox neoclassical economic theory, Van Parijs considers that unemployment arises because wage rigidities impede atomistic competition and prevent the labour market from clearing. Various explanations for the wage rigidities include trade union power, minimum wage legislation, and bargaining processes, which generate efficiency wages (insider-outsider arrangements). So unemployment is caused by the departure from competitive equilibrium rather than any macroeconomic failure (that is, aggregate demand deficiency)<\/p>\n

Van Parijs then proposed a rather bizarre, and very neo-liberal solution in terms of a redistribution of the ‘property right’ represented by the alleged existence of ’employment rents’, associated with scarce jobs. He said that we should give each person “a tradable entitlement to an equal share of the jobs that are available at any point in time.<\/p>\n

Accordingly, BIG payments can be “financed” by taxing workers who enjoy “employment rents”. He said that:<\/p>\n

\n… these rents are given by the difference between the income (and other advantages) the employed derive from their jobs, and the (lower) income they would need to get if the market were to clear. In a situation of persistent massive unemployment, there is no doubt that the sum total of these rents would greatly swell the amount available for financing the grant.\n<\/p><\/blockquote>\n

He claims that in this way, a BIG enables workers to live a decent, if modest, life without paid employment. Van Parijs concludes that the claim that Malibu surfers are living off others is a serious misrepresentation because they live off:<\/p>\n

\n… their share, or less than their share, of rents which would otherwise be monopolized by those who hold a rich society’s productive jobs …\n<\/p><\/blockquote>\n

But the implicit full employment concept that the BIG advocates construct is unacceptable, because it is engineered through an artificial withdrawal of the available labour supply, so that some of the unemployed are reclassified as not in the labour force. There are insurmountable problems with this representation of income insecurity and the BIG financing model.<\/p>\n

The following points can be made:<\/p>\n