{"id":17564,"date":"2011-12-30T18:30:11","date_gmt":"2011-12-30T07:30:11","guid":{"rendered":"https:\/\/billmitchell.org\/blog\/?p=17564"},"modified":"2011-12-30T18:30:11","modified_gmt":"2011-12-30T07:30:11","slug":"whatever-its-either-employment-or-unemployment-buffer-stocks","status":"publish","type":"post","link":"https:\/\/billmitchell.org\/blog\/?p=17564","title":{"rendered":"Whatever – its either employment or unemployment buffer stocks"},"content":{"rendered":"

\t\t\t\tSince I published Wednesday’s blog – MMT is biased towards anti-crony<\/a> – there seems to have been a fair bit of commentary on other sites some bordering on personal attacks (against me). I’ll steer clear of that level of discussion. I also note that John Carney over at CNBC responded with this article – Can the Government Guarantee Everyone a Job?<\/a> – saying that if the notion of employment buffers is a central aspect of Modern Monetary Theory (MMT) then “it would mean that MMT is wrong”. I found his response interesting but essentially a rehearsal of the mainstream errors that arise when you haven’t really come to terms with what MMT is adding to macroeconomic theory. So today’s blog is a supplement to the Wednesday’s blog (and many others) and aims to provide some more context especially to those interested in the evolution of ideas and schools of thought. The point is that whatever else happens we are left with a choice – employment or unemployment buffer stocks. MMT provides the theoretical insights to show that employment buffers are superior whether you like them or not.
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\nMacroeconomics is the part of economics that studies the economy in aggregate. The aggregates that concern us in this area of study are the level (and growth) in production, the rate of aggregate unemployment, and, the level and rate of change in the overall price level.<\/p>\n

A coherent macroeconomic theory will provide consistent insights into how each of these aggregates are determined and change. Many a textbook will say that “Macroeconomics is the study of the behaviour of employment, output and inflation”.<\/p>\n

A macroeconomic model is then the tools that are used to advance that study. No model is complete unless it provides a good understanding of the dynamics of inflation.<\/p>\n

Further, a central idea in economics whether it be microeconomics or macroeconomics is efficiency – getting the best out of what you have available. The concept is extremely loaded and is the focus of many disputes – some more arcane than others. But my profession would be united in saying that developing theories about how efficiency is to be attained at any level is a core activity for an economic theorist.<\/p>\n

At the macroeconomic level, the “efficiency frontier” is normally summarised in terms of full employment. The hot debate that has spanned the years is what do we mean by full employment but it is a fact that full employment is a central focus of macroeconomic theory.<\/p>\n

Considering that issue doesn’t amount to a prescriptive preference – unique to me or other MMT theorists or otherwise. Using our macroeconomic resources to the limit is a key part of all macroeconomic theorists. The debate is what that limit actually is.<\/p>\n

This concern about full employment was embodied in the policy frameworks and definitions of major institutions all around the world in the Post World War 2 period.<\/p>\n

For example, the Reserve Bank Act 1959<\/a> – which established the central bank in Australia in its current guise – outlined (Section 10(2)) the following functions for the RBA Board (excerpt from the actual Act):<\/p>\n

\"\"<\/a><\/p>\n

<\/div>\n

Also note the other functions that were required of the RBA – in addition to full employment. Price stability and the economic prosperity and welfare of the Australian people.<\/p>\n

Again these were considered to be the big theoretical challenges for macroeconomists – how to maintain full employment but at the same time also make that goal consistent with price stability.<\/p>\n

The clear point is that if you achieve that then you will be contributing to the prosperity and welfare of the population by ensuring real output levels are high within an environment of a nominal anchor (inflation control).<\/p>\n

I didn’t invent those goals. They are not left-leaning or right-leaning. They are the core business of macroeconomics.<\/p>\n

The debates over the last centuries have been about how to define those goals and how economic policy parameters can be best tweaked to achieve them.<\/p>\n

Theoretical structures became differentiated by how they constructed those problems within the institutional realities that exist – that is, how we construe the monetary system.<\/p>\n

So, for example, a fixed exchange-rate convertible monetary system faced different challenges and possessed different characteristics to a fiat monetary system. These characteristics, in turn, provided different theoretical insights into how an economy could achieve their macroeconomic goals.<\/p>\n

A theoretical approach in macroeconomics then tended to be defined by how it theorised about and understood the options available to an economy. This doesn’t preclude a narrow concentration on one part of the macroeconomy.<\/p>\n

But when it comes to defining a paradigm (school of thought, whatever expression you like to use to describe a body of theory) the way in which it builds theoretical structures to explain these aggregates, their interrelationships and their resolution forms an essential aspect of that approach.<\/p>\n

Whether the defining elements are politically palatable, attainable, or culturally pleasing is irrelevant in theoretical terms. Ideas are not intrinsically popular – which is where the political domain operates. To be elected you have to be popular. Ideas are also not intrinsically time-bound. Some ideas are developed before anyone will accept them as knowledge (in the sense that the theoretical notions are not inconsistent with reality).<\/p>\n

There are examples of this littered throughout the history of knowledge. <\/p>\n

For example, a paper I read a few years ago that I found very interesting. It was by Charles G. Gross (2008) ‘Three before their time: neuroscientists whose ideas were ignored by their contemporaries’, Experimental Brain Research<\/em> – and was about “three examples of neuroscientists whose ideas were ignored by their contemporaries but were accepted as major insights decades or even centuries later”.<\/p>\n

As one of the more contemporary cases, the paper documented the work in the early 1960s by American scientist Joseph Altman<\/a> who started to question the long-held idea that “no new neurons can be added to the adult brain”.<\/p>\n

After being ignored for 30 odd years, his insights were “rediscovered” and the time was right for them to be accepted as the basic knowledge in the area. Neurogenesis is now one of the most significant areas in neuroscience.<\/p>\n

In answer to the question – Why were Altman’s discoveries ignored for almost 30 years? – the paper posits (among other reasons) that:<\/p>\n

\n… the dogma of “no new neurons” was universally held and vigorously defended by the most powerful and leading primate developmental anatomist of his time.\n<\/p><\/blockquote>\n

So whether a particular idea is “ready” for popular consumption is a separate issue to the idea itself and its veracity and where it fits into the body of theory that contains it.<\/p>\n

To put this in context of Modern Monetary Theory (MMT), a brief historical excursion will help. There have been two striking developments in economics over the last thirty years. First, a major theoretical revolution occurred in macroeconomics (from Keynesianism to Monetarism and beyond). Second, unemployment and broader labour underutilisation rates have persisted at high levels. <\/p>\n

These developments can be thought of in terms of the way that macroeconomists have debated the dual concepts of full employment and price stability – which in more modern times was summarised by the Phillips curve literature.<\/p>\n

To advance this discussion, I will choose the Post World War 2 period to reduce time. If you were interested (and most will probably not be) I could write a lot about the earlier (classical-era – C18th) writings on full employment and inflation.<\/p>\n

The debate began long before American economists started contributing to the discussions in various ways, although there is a tendency to think that American ideas dominate economic thinking. These earlier debates formed part of my PhD and comprise Chapter 2 of my 2008 book with Joan Muysken – Full Employment abandoned<\/a>.<\/p>\n

Macroeconomics really emerged during the Great Depression once J.M. Keynes’ General Theory (1936) was published. The macro insights of Keynes had been recognised by others much earlier (for example, Marx) but in terms of the English-speaking world, it was the General Theory that exposed the terminal flaws in the dominant theories of the day.<\/p>\n

The emphasis of macroeconomic policy in the period immediately following the Second World War was to promote full employment. Inflation control was not considered a major issue even though it was one of the stated policy targets of most governments. <\/p>\n

In this period, the memories of the Great Depression still exerted an influence on the constituencies that elected the politicians. The rising influence of Keynes’ group – in theoretical terms – explained that why full employment could be maintained with appropriate use of budget deficits. The large deficits during the prosecution of the war effort effectively ended the Great Depression.<\/p>\n

The employment growth following the Great Depression really only accelerated with the onset of the War. All the orthodox neoclassical remedies that had been tried during the 1930s largely failed.<\/p>\n

Following World War II, the problem that had to be addressed by governments was how to translate the full employed war economy with extensive civil controls and loss of liberty into a fully employed peacetime model.<\/p>\n

The first major statement addressing this problem came in the form of William Beveridge’s (1944) Full Employment in a Free Society<\/em>. This was consistent with the new Keynesian theoretical orthodoxy of the time, which saw unemployment as a systemic failure (a lack of effective demand) and moved the focus from the ascriptive characteristics of the unemployed themselves and the prevailing wage levels.<\/p>\n

Beveridge (1944, 123-135) said:<\/p>\n

\nThe ultimate responsibility for seeing that outlay as a whole, taking public and private outlay together, is sufficient to set up a demand for all the labour seeking employment, must be taken by the State…\n<\/p><\/blockquote>\n

Macroeconomic theory demonstrated that fiscal and monetary policy instruments could be expected to impact on demand (spending) which in turn would generate a derived demand for workers.<\/p>\n

Further, only the state had the capacity to intervene (with its policy tools) when private demand was insufficient to achieve full employment. <\/p>\n

During this period, the emphasis was on jobs. Beveridge defined full employment as an excess of vacancies at living wages over unemployed persons. <\/p>\n

Again, the late William Vickrey (1993) said:<\/p>\n

\nI define genuine full employment as a situation where there are at least as many job openings as there are persons seeking employment, probably calling for a rate of unemployment, as currently measured, of between 1 and 2 percent.\n<\/p><\/blockquote>\n

These debates – as noted above – permeated the institutions of almost every nation and governments – informed by the macroeconomic theories of the academy set about achieving full employment.<\/p>\n

The post WWII period was marked by governments maintaining levels of demand sufficient to ensure enough jobs were created to meet the demands of the labour force, given labour productivity growth. <\/p>\n

Governments used a range of fiscal and monetary measures to stabilise the economy in the face of fluctuations in private sector spending. Unemployment rates were usually below 2 per cent throughout this period.<\/p>\n

Economists did not think about full employment in this positive way for too long and instead shifted the focus to unemployment. Initially this involved a debate about what constituted the irreducible minimum rate of unemployment.<\/p>\n

But soon the debate became tangled up in models of unemployment and inflation. In the 1950s, economists quickly shifted the focus and debated the magnitude of unemployment associated with full employment based on the notion that if unemployment was too low then inflation would occur.<\/p>\n

This led to the so-called Phillips curve era which was marked by policy makers contriving to achieve a politically acceptable trade-off between inflation and unemployment. <\/p>\n

The Phillips curve is “god-like” in economics and represents the relationship between unemployment and inflation as a smooth inverse curve. The underlying statistics that were used to get that curve (and since) are highly dubious.<\/p>\n

However, in historical terms, fortuitous circumstances combined to keep unemployment low as governments still pursued high levels of effective demand. Policy departments – armed with all sorts of models from theoretical economists – worked on the “optimal” trade-off between the twin evils – unemployment and inflation. They overlaid what were called “social preference functions” designed to represent the way the citizens considered the trade-off, with the Phillips curve which was meant to illustrate the actual trade-off.<\/p>\n

The tangency of these functions became the policy goal and the tools to achieve that goal were provided by the macroeconomic theorists.<\/p>\n

But in the development of “ideas” (in macroeconomics) the focus had clearly changed from generating a given quantity of jobs. At this point, whether it was identified in this way or not, there was a recognition that a buffer stock<\/strong> was present.<\/p>\n

In this case, the theorists were saying a nation can have lower unemployment (reducing the buffer stock of the unemployed) at the price of higher inflation. They argued that by manipulating the buffer stock of the unemployed a society could manipulate wage pressures and profit margin push and hence control inflation. There were major theoretical papers in this era to support this reasoning.<\/p>\n

But it was clear that macroeconomic theory was positing that a buffer stock of unemployment was the way to control inflation. <\/p>\n

So the Keynesian orthodoxy considered real output (income) and employment as being demand-determined in the short-run, with price inflation being explained by a negatively sloped Phillip’s curve (in both the short-run and the long-run).<\/p>\n

Policy-makers were supposed to choose between alternative mixes of unemployment and inflation subject to a socially optimal level of unemployment and inflation. <\/p>\n

Significantly, the concept of full employment gave way to the rate of unemployment that was politically acceptable in the light of some accompanying inflation rate. Full employment was no longer debated in terms of a number of jobs but a buffer stock of unemployed.<\/p>\n

The next major “development” (if you can call some retrograde a development) was in fact a paradigm shift – the rise in importance of the Natural Rate Hypothesis.<\/p>\n

The concept of full employment, in the sense outlined above, lost meaning with development of the so-called expectations-augmented Phillips curve of Friedman (1968) and Phelps (1967, 1968). <\/p>\n

This model spearheaded the resurgence of pre-Keynesian macroeconomic thinking in the form of Monetarism. The embedded Natural Rate Hypothesis (NRH) outlined a natural rate of unemployment (NRU), where the inflation-unemployment trade-off was allegedly a trade-off between unemployment and unexpected inflation. <\/p>\n

As workers gained more information the trade-off vanishes. At this point there is only one unemployment rate consistent with stable inflation – the Natural Rate.<\/p>\n

Friedman (1968: 60) stated, “There is no long-run, stable trade-off between inflation and unemployment.”<\/p>\n

These developments represented a major theoretical break from the previous versions of the Phillips curve. The pre-Monetarist Phillips curve models were based on a disequilibrium notion of the relationship between inflation and unemployment in that they modelled the adjustment of prices and wages to some labour market imbalance between supply and demand.<\/p>\n

So rising excess supply in the labour market (that is, rising unemployment) caused the adjustment of prices to slow. The causality was from quantities to prices – that is, from the labour market disequilibrium to the price adjustment function. If unemployment is too low, the labour market will hot up and inflation will result.<\/p>\n

There was also no presumption that full employment is inevitable or a tendency of a capitalist monetary economy.<\/p>\n

The Friedman-Phelps story and the later developments under the rubric of rational expectations and the New Classical School are, instead, based on a market clearing relation and the causality is reversed.<\/p>\n

So the natural tendency is for the economy to be at the natural rate (which they define as the full employment level) and at that state, unemployment is considered to be voluntary and the outcome of optimising choices by individuals between work (bad) and leisure (good).<\/p>\n

Any deviations from this optimal level of unemployment are caused by errors in price expectations. The causality is thus reversed. If price inflation is stable then the economy will be at the natural level because all expectations of inflation are consistent with actual inflation.<\/p>\n

Deviations are alleged to occur if the government tries to reduce unemployment below the natural rate by expanding demand (that is, behaving as in the past). This drives up prices but if workers temporarily confuse a rising in their money wages with a real wage rise they might supply more hours. On the other hand, firms knowing better that both prices and money wages have risen, will hire these extra workers because they also know the real wage has fallen.<\/p>\n

So you might get temporary deviations from the natural rate but once workers find out the truth and withdraw their labour again back to a lower level consistent with the actual real wage (the price of leisure) then the economy reverts back to the natural rate of unemployment (and output) but has higher inflation.<\/p>\n

Thus, in the natural rate world of Friedman and Phelps, the central bank can promote variations in the unemployment rate by introducing unforeseen changes in inflation, a temporary capacity allowed due to expectational inertia on behalf of the workers. <\/p>\n

There is no theory in the natural rate hypothesis that changes in the unemployment rate cause changes in inflation. <\/p>\n

Full employment is assumed to prevail (with unemployment at the natural rate) unless there are errors in interpreting price signals. The tendency is always to restore full employment by market mechanisms. There is no discretionary role for aggregate demand management.<\/p>\n

This new thinking became dominant in the early to mid-1970s although it lacked any empirical support. As its dominance rose, any Keynesian remedies proposed to reduce unemployment were met with derision from the bulk of the profession who had embraced the NRH and its policy implications.<\/p>\n

The NRH was now the characterisation of full employment and it was asserted that the economy would always tend back to a given NRU, no matter what had happened to the economy over the course of time. Time and the path the economy traced through time were thus irrelevant. <\/p>\n

In the NRH, there is no discretionary role for aggregate demand management and only microeconomic changes can reduce the natural rate of unemployment. Accordingly, the policy debate became increasingly concentrated on deregulation, privatisation, and reductions in the provisions of the Welfare State with tight monetary and fiscal regimes instituted. High unemployment persisted. The fact that quits were strongly pro-cyclical made the natural rate hypothesis untenable.<\/p>\n

So the Phillips curve trade-off was considered to be void. In the long-run (not defined) the dominant macroeconomic theory now said there was no trade-off.<\/p>\n

The natural rate morphed in to the concept of the non-accelerating inflation rate of unemployment (NAIRU). Franco Modigliani and Lucas Papademos pioneered this terminology in 1975.<\/p>\n

Lucas Papademos is now the unelected Prime Minister of Greece!<\/p>\n

Their approach was in the Phillips mould in the sense that movements in the unemployment rate from some steady-state rate (defined in terms of the rate at which inflation was stable) would promote opposite movements in inflation. <\/p>\n

Modigliani and Papademos (1975: 142) said a NAIRU existed, “such that, as long as unemployment is above it, inflation can be expected to decline”.<\/p>\n

Various theoretical structures support this conclusion. It can arise in a simple excess demand model where wage pressure builds as the labour market tightens and the firms pass the rising costs on in the form of higher inflation. Marxist-inspired models where inflation arises due to incompatible claims on existing real income were also developed within this framework.<\/p>\n

Whatever theoretical construct is used to underpin the model the conclusion from each is simple: there is only one cyclically-invariant unemployment rate associated with stable price inflation. The NAIRU concept has dominated macroeconomic policy making in most OECD countries since the late 1970s and the “fight-inflation-first” strategies have exacted a harsh toll in the form of persistently high unemployment and broader labour underutilisation. Under the sway of the NAIRU, policy makers around the World abandoned the pursuit of full employment as initially conceived.<\/p>\n

While the theoretical additions of the NAIRU-NRH economists changed the way economists thought about policy choices this dominant theoretical model (the NAIRU) was still based on a “buffer stock” of unemployed being the essential component for price stability.<\/p>\n

They defined full employment in terms of this buffer stock of unemployment. If you read this literature you will quickly realise that the neo-liberals define full employment as being the NAIRU which is divorced from any notion that there has to be enough jobs available to meet the desires of the available labour force. <\/p>\n

So in one small change in taxonomy governments have been able to turn their failure to provide enough jobs into a success – well we are at full employment now because we are at the NAIRU.<\/p>\n

There have been various theoretical challenges to this concept. I have devoted most of my academic career to researching and developing theory and practice to challenge what I consider to be a wasteful concept – the permanent maintenance of a buffer stock of unemployed to achieve price stability.<\/p>\n

I won’t go into the body of literature that has exposed the theoretical and empirical flaws of the NAIRU concept. Please read my blog – The dreaded NAIRU is still about!<\/a> and Lies, damned lies, and statistics<\/a> – for more discussion on this point (which overlaps some of this discussion).<\/p>\n

Even Franco Modigliani, who introduced the term NAIRU to the economics profession (Modigliani and Papademos, 1975), had cause for reflection in his later years. For example, in 2000 (‘Europe’s Economic Problems’, Carpe Oeconomiam Papers in Economics, 3rd Monetary and Finance Lecture<\/em>, Freiburg, April 6) he said (page 3):<\/p>\n

\nUnemployment is primarily due to lack of aggregate demand. This is mainly the outcome of erroneous macroeconomic policies… [the decisions of Central Banks] … inspired by an obsessive fear of inflation, … coupled with a benign neglect for unemployment … have resulted in systematically over tight monetary policy decisions, apparently based on an objectionable use of the so-called NAIRU approach. The contractive effects of these policies have been reinforced by common, very tight fiscal policies (emphasis in original)\n<\/p><\/blockquote>\n

Enter Modern Modern Theory (MMT) which like all “theoretical” approaches builds on past knowledge and work. It draws on a range of influences as I noted in my blog the other day – MMT is biased towards anti-crony<\/a>. It is thus part of a long tradition which opposes an exclusive reliance on the free market and considers that aggregate demand has to be regulated by government intervention.<\/p>\n

In part, this is a recognition of the unique characteristics that the government has as the issuer of the currency under monopoly conditions. I have written extensively about that for many years as have my colleagues. A good place to start is with the suite of blogs – Deficit spending 101 – Part 1<\/a> – Deficit spending 101 – Part 2<\/a> – Deficit spending 101 – Part 3<\/a>.<\/p>\n

But MMT deserves to be considered a “new” and unique development, notwithstanding the legacy it owes the past (like all “new” ideas). And part of that uniqueness relates to the way it brings together characteristics of the currency with the theoretical challenge to maintain macroeconomic efficiency, which for all time has been described in terms of full employment and price stability.<\/p>\n

As we have learned the way that the efficiency point – that is, how full employment has been defined – has varied over as the different schools of thought have emerged and competed for dominance in the battle of ideas. But the characterisation of “efficiency” in broad terms has been a common element in the history of macroeconomic thought.<\/p>\n

The early developers of MMT – again differentiating MMT from earlier Chartalist and “theories of state money” etc – spent a lot of time batting the ideas around ourselves – so much that we became staunch lifelong friends as well as colleagues.<\/p>\n

I think the keynote speech<\/a> at the CofFEE Conference earlier this month, my colleague Randy Wray where he traced the development of the ideas that now are referred to MMT and which dominate this blog and other blogs, provides an excellent historical account of how things started for MMT – who was involved and where the ideas came from.<\/p>\n

It documents some of the academic papers and books since the 1990s that were the result of our individual and joint work, long before the popularity of the World Wide Web and blogs. Our audiences then were academic conferences, public forums and meetings, academic papers and Op Ed articles – in other words, a fairly limited space to throw these ideas around.<\/p>\n

Also like Joseph Altman the concepts we were advancing were the anathema to the NAIRU-dominated, government-budget-constraint thinking that were “universally held and vigorously defended by the most powerful and leading” economists of our time.<\/p>\n

One of the essential theoretical components of this work – was that used the fundamental monetary insights drawn from an understanding of how the currency was in fact a public monopoly where the monopolist could set the price to address the major constraints on activist fiscal policy posed by the NAIRU-NRH school.<\/p>\n

That is, it directly challenged the dominant orthodoxy by proposing a way to achieve full employment with price stability. As Randy Wray noted in the speech referred to earlier MMT, in part, “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”.<\/p>\n

As I noted in the introduction, a complete macroeconomic framework has to address these issues. A theory of banking is not a macroeconomic theory. A theory of “state money” is not a macroeconomic theory in the way that that term is understood. Components are components of a whole.<\/p>\n

One might not be very interested in the “Phillips curve” aspects of the theory and prefer to specialise in some component of the theory – such as, study how bank work etc. There is nothing wrong with that – our time and patience is limited after all.<\/p>\n

But it still remains that the body of theoretical work now known as MMT does directly and intrinsically address the major macroeconomic debate about the trade-off between inflation and unemployment – which I would add – is still the dominant discussion around town anyway.<\/p>\n

And the way MMT does that is intrinsic to the theoretical framework and logically consistent with it. It is crucial to understand that notions of price stability all have some buffer stock underpinning them. As noted above, the mainstream NAIRU theories deploy a buffer stock of unemployment to control price inflation.<\/p>\n

Moralists might find this to be objectionable. I do! But that is a separate discussion of values.<\/p>\n

As I noted in the blog – MMT is biased towards anti-crony<\/a> – the theoretical offering that MMT provides – independent of whether its developers or anyone else likes or dislikes unemployment – is that if we are concerned about efficiency and price stability then there is a superior buffer stock available to a public currency issuing monopoly.<\/p>\n

That is, if we really understand the way the currency works and the way the labour market works then we can have both full employment and price stability by using an employment buffer stock rather than an unemployed buffer stock.<\/p>\n

Now you might still understand MMT and dislike the idea of an employment buffer stock. But then you would advocate less superior, more illiquid buffers compromising unemployment. You would not be able to argue from a theoretical perspective that you had challenged the mainstream claim that unemployment buffer stocks were TINA.<\/p>\n

MMT can argue that because of the integration of a Job Guarantee into its macroeconomic framework.<\/p>\n

Then you have a direct route into the current policy debate. The governments think that large deficits are bad so they spend on a quantity rule<\/strong> – that is, allocate $x billiion – which they think is politically acceptable. It may not bear any relation to what is required to address the existing spending gap.<\/p>\n

MMT shows you how it is far better to conduct of fiscal policy by spending on a price rule<\/strong>. That is, the government just has to fix the price and “buy” whatever is available at that price to ensure price stability. But what is the price the government would be fixing?<\/p>\n

Answer: the price it offers labour to enter the employment buffer stock – that is, the JG wage.<\/p>\n

If you dispense with that part of the theoretical structure then you have limited capacity to challenge the orthodoxy.<\/p>\n

Sure you can tell the mainstream that the government is not revenue-constrained and give them chapter and verse about monetary operations etc. And you would be correct. But then when they ask you how you achieve full employment under this model, what are you going to say?<\/p>\n

MMT gives the powerful theoretical response to that question – when a government spends on a price rule (via an employment buffer stock) it can achieve full employment and price stability.<\/p>\n

We have always referred to this full employment state as “loose” full employment.<\/p>\n

In the face of wage-price pressures, the JG approach maintains inflation control by choking aggregate demand and inducing slack in the non-buffer stock sector. The slack does not reveal itself as unemployment, and in that sense the JG may be referred to as a “loose” full employment. <\/p>\n

We have written extensively about the likelihood that an employment buffer stock will also only solve time-based underemployment but will not eliminate skills-based underemployment.<\/p>\n

That is, some workers for short periods will be the JG pool but have high level skills that are beyond those required to do most JG jobs. These workers may choose what economists call “wait unemployment”.<\/p>\n

In professional occupational markets, it is likely that 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 JG job, which is a low-wage and possibly stigmatized option. Wait unemployment disciplines wage demands in the skilled sectors of the economy.<\/p>\n

The point is that these workers would always have the option to take a JG job.<\/p>\n

But because it would be impossible to run a JG matching all the skills to jobs the employment buffer stock comprises “loose” full employment. We differentiate that from true full employment although in better times the gap between “loose” and “true” would be around zero.<\/p>\n

I wont go into all the advantages of using an employment buffer stock over an unemployed buffer stock. They are many. Please read my blogs under the – Job Guarantee<\/a> – for more discussion on this point. If you want deeper, more technical discussions you can read our academic work – search for Mosler, Wray, Bell (Kelton), Fullwiler, Tcherneva, Forstater and Mitchell as authors.<\/p>\n

So in a fiat monetary system, price stability is maximised using employment buffers rather than unemployment buffers.<\/p>\n

That insight is an essential part of the body of work that has become known as MMT and is an essential part of the understanding of how monetary systems operate and deliver macroeconomic outcomes.<\/p>\n

There are those who might consider that the MMT proposal that national governments should first bolt down the nominal anchor via an employment buffer stock amounts to a disagreement with Post Keynesian policies of public infrastructure investment, which I referred to as “generalised expansion” in Wednesday’s blog.<\/p>\n

Some might even think that the proposal to introduce an employment buffer stock amounts to a preference for “small government” in the Hayekian tradition.<\/p>\n

None of these views would be correct.<\/p>\n

What we argue is that to turn the Phillips curve on its head – and thus thwart the use of unemployment to control inflation – you need a different nominal anchor. Generalised expansion does not provide that.<\/p>\n

Once you have that anchor in place then your ideological preferences will determine what other public spending you might entertain within the capacity of the economy to embrace further nominal demand expansion.<\/p>\n

As I have said in the past I favour strong public sectors with lots of investment in first-class infrastructure to advance the prosperity and well-being of the citizens. Others, who consider MMT to be a valuable contribution (that is, get it) may have different preferences.<\/p>\n

My JG pool would be small (but sufficient for the purpose as a nominal anchor) others might have a larger JG pool and less public sector spending elsewhere.<\/p>\n

But the essential point is that independent of our preferences with respect to the size of government we would maintain an effective and highly liquid employment buffer.<\/p>\n

Conclusion<\/strong><\/p>\n

In terms of the Job Guarantee – my ideological preference is not to have such a capacity. I would prefer everyone to be gainfully employed doing what they love and earning the best wages they could.<\/p>\n

But my understanding of fiat monetary systems tells me that unless we have firm price controls (which inevitably fail) and\/or total state control then fluctuations in private investment will generate inflationary pressures if the government is to use its fiscal capacity to maintain full employment at all times.<\/p>\n

I accept the macroeconomic concepts of full employment and price stability as being desirable goals and the way for the economy to achieve public purpose – advance the prosperity and well-being of its citizens.<\/p>\n

So based on the body of work that has become known as MMT we understand that a buffer stock of some sort will be used to ensure inflation control. The question becomes what is the “best” buffer stock to employ. MMT demonstrates clearly that it is the employment buffer option that is superior.<\/p>\n

Further, no-one owns a school of thought. My work is my work and I respect the work of my other colleagues and enjoy learning from them. It is clear that there is a strong consensus among the “1990s” MMT clan. What others think and write about in their own spaces is for them to argue and justify.<\/p>\n

If you want to propose a coherent body of macroeconomic thought then you have to address the key questions of full employment and price stability.<\/p>\n

Within that, there is always a moving feast of ideas. But which buffer stock one proposes in terms of the history of macroeconomic ideas over the last 80 years or so certainly reflects which school of thought one’s ideas are associated with.<\/p>\n

Finally, it is far-fetched to suggest that a JG is a descent into socialist or communist state control. Is the massive and expanding US military a sign that the US is heading down the socialist road? Is the entire public service workforce and example of socialist domination?<\/p>\n

The introduction of the JG alters no property relations although it might just allow some very disadvantaged workers to keep the title to their own home in bad times! Further, the JG would be a buffer stock that the private sector would have total control over. If they didn’t like it they could simply eliminate it. How? Increase spending and expand private employment.<\/p>\n

I have never heard of a socialist state where the expansion of private spending eliminates it.<\/p>\n

Saturday Quiz<\/strong><\/p>\n

Tomorrow, you will get your last chance at the big 5\/5 for 2011. Yes the End of the Year Saturday Quiz will be back – as undergraduate as ever. I hope it is a bit of fun for all as well as a challenge.<\/p>\n

And … happy new year<\/strong> to everyone – I trust we all become happier although I doubt that will happen given the contribution that my profession is playing – for example – Greek economic crisis turns tragic for children abandoned by their families<\/a>.<\/p>\n

That is enough for today!\t\t<\/p>\n","protected":false},"excerpt":{"rendered":"

Since I published Wednesday’s blog – MMT is biased towards anti-crony – there seems to have been a fair bit of commentary on other sites some bordering on personal attacks (against me). I’ll steer clear of that level of discussion. I also note that John Carney over at CNBC responded with this article – Can…<\/p>\n","protected":false},"author":1,"featured_media":0,"comment_status":"open","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"_jetpack_memberships_contains_paid_content":false,"footnotes":""},"categories":[14,32],"tags":[],"class_list":["post-17564","post","type-post","status-publish","format-standard","hentry","category-debriefing-101","category-job-guarantee","entry","no-media"],"jetpack_featured_media_url":"","jetpack_sharing_enabled":true,"_links":{"self":[{"href":"https:\/\/billmitchell.org\/blog\/index.php?rest_route=\/wp\/v2\/posts\/17564","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/billmitchell.org\/blog\/index.php?rest_route=\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/billmitchell.org\/blog\/index.php?rest_route=\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/billmitchell.org\/blog\/index.php?rest_route=\/wp\/v2\/users\/1"}],"replies":[{"embeddable":true,"href":"https:\/\/billmitchell.org\/blog\/index.php?rest_route=%2Fwp%2Fv2%2Fcomments&post=17564"}],"version-history":[{"count":0,"href":"https:\/\/billmitchell.org\/blog\/index.php?rest_route=\/wp\/v2\/posts\/17564\/revisions"}],"wp:attachment":[{"href":"https:\/\/billmitchell.org\/blog\/index.php?rest_route=%2Fwp%2Fv2%2Fmedia&parent=17564"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/billmitchell.org\/blog\/index.php?rest_route=%2Fwp%2Fv2%2Fcategories&post=17564"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/billmitchell.org\/blog\/index.php?rest_route=%2Fwp%2Fv2%2Ftags&post=17564"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}