If anybody knows David Cameron’s mobile phone number give him a call and tell him that as he scorches the British economy (more bad news about consumer sentiment yesterday) he should also introduce a Job Guarantee as a way of using the workers he declares irrelevant more productively. A Job Guarantee is the perfect accompaniment to a full-blown fiscal austerity program and will not compromise any ideological beliefs except those that say that some people should be unemployed. But how could I advocate this? Doesn’t the Job Guarantee require a demand expansion? Isn’t that the whole point of it? Answer: no! Recommendation: Austerity proponents should adopt a Job Guarantee. Am I mad? Answer: probably but read on …
I remember I was giving a paper in New York in November 1998 at a workshop organised at the New School on employment guarantees. My paper subsequently came out in a book but you can read a Working Paper version – The Job Guarantee Model and the NAIRU – for free if you are interested.
Among the audience was the venerated Harvard economist James Duesenberry who had pioneered the relative income hypothesis as an explanation for consumption. His work riled the likes of Milton Friedman and the Chicago school who considered it to be more like soft sociology and psychology. As a consequence he was a somewhat disregarded. I always had a lot of time for Duesenberry’s work when I was a student. It was clear he was more rounded in perspective than the narrow Chicago ideologues who thought everything was a “free market” or wanting to be. Here is an interesting New York Times article (June 9, 2005) – The Mysterious Disappearance of James Duesenberry – about his work.
During the question time after my paper Duesenberry asked me the following question (not verbatim but from my recall): Why won’t the Job Guarantee be inflationary given that the NAIBER will probably be above the current NAIRU because aggregate demand will be higher?
The NAIBER was a term I invented – Non-Accelerating-Inflation-Buffer-Employment-Rate – to summarise the inflation control mechanism built into the Job Guarantee model. I thought it sounded friendlier than NAIRU (“neighbours” are usually nice you nurture the borders!) whereas the NAIRU (Non-Accelerating-Inflation-Rate-of-Unemployment) sounded harsh and was an construction of mainstream ideology – aiming to suppress workers’ rights etc – anyway.
The Buffer Employment ratio (BER) is the proportion of the labour force employed in the Job Guarantee. I will come back to that soon.
But it was a great question from James Duesenberry (and I felt very honoured that he took my work seriously) – because the question goes to the heart of the difference between unemployment buffer stock mechanisms to maintain price stability (the NAIRU approach) and employment buffer stock systems (the Job Guarantee).
My answer is that the NAIBER would certainly be lower than the NAIRU but that it would also provide a greater inflation restraint. I will come back to that too soon.
Somewhat later (between 2003 and 2005), Randy Wray and I became entangled in an academic dispute with a so-called progressive English economist Malcolm Sawyer who had written a negative piece on the Job Guarantee – Sawyer, M. (2003), ‘Employer of last resort: could it deliver full employment and price stability?,’ Journal of Economic Issues, 37(4), 881-908. If you have access to JSTOR you can get this article HERE.
This led to a reply from Randy and me – ‘In Defense of Employer of Last Resort: A Response to Malcolm Sawyer’, Journal of Economic Issues, 39(1), 235-244. The JSTOR reference is HERE>. You can read an earlier Working Paper version of our paper for free if you are interested. The final published paper is largely based on this version.
Sawyer’s paper was written while he was on study leave in Australia part of which he spent as a guest at my own university. I was personally annoyed (too strong a word for it but ok!) that he didn’t raise the issues that he covered in the paper while he was in my company, preferring to write half-cocked accounts of my work and send it into the published sphere. But that is a minor issue – just one of courtesy really.
More significant, and related was that Sawyer presented an exposition of the “Job Guarantee” based on the way it had been represented by our critics rather than relying on the primary sources – our written (and well published) work. We noted in our reply:
As a result, many of his critiques remain underdeveloped and vague … many of the arguments are related to expositions of ELR that we would not endorse. Indeed, he has relied to an alarming degree on critics of ELR … for statements of the principles of ELR – reflecting a less than satisfactory approach to what we consider to be appropriate scholarship.
The term employer of last resort (ELR) is interchangeable with the term buffer stock employment (BSE) and Job Guarantee (JG). The latter two descriptions of the approach to full employment are found in the work of Mitchell whereas the ELR terminology is used by Wray.
In our reply we used the term ELR as the unifying terminology because it is the main term used by Sawyer. The MMT academic group has now agreed (by usage) to unify and use the term Job Guarantee, which I think is less confusing. I never liked the term ELR because it has connotations with the central bank’s capacity as a Lender of Last Resort and I thought the responsibility that governments have to provide jobs for anyone who cannot find one is of a different qualitative level than the relations between the central bank and the commercial banks. The provision of jobs is much more than a financial transaction.
Anyway, when you are mounting an academic critique of someone’s ideas it is imperative that you do not rely on secondary sources (particularly hostile secondary accounts) to represent the ideas you are addressing. It is very poor academic practice. I noted in my Letter to Paul Krugman that he was also guilty of that sort of unsatisfactory representation.
In my next letter to another US academic colleague – coming Friday I think – that sort of mis-representation was stark. Their universities should sack them for poor scholarship. Guess who?
Anyway, back to the theme.
Aggregate Demand, Employment, and Inflation
It is very important to understand the macroeconomics of the Job Guarantee program. I read lots of comments on my blog that suggest that these points are not well entrenched in the discussion. So to avoid responding comment-by-comment which is difficult (time) I thought I would write this blog.
To set the pigeons flying – here is a proposition. David Cameron (UK Prime Minister) should immediately implement a Job Guarantee as part of his austerity campaign to cut aggregate demand. He can still pursue the ridiculously harsh fiscal retrenchment to satisfy his ideological fantasies but would get “loose” full employment at the same time.
What? You cannot have a Job Guarantee without expanding aggregate demand. Duesenberry’s question resonates here! Wrong, the introduction of a Job Guarantee does not imply an aggregate demand expansion. Which is not the same thing as saying that an aggregate demand expansion is not desirable in some situation that you would seek to introduce a Job Guarantee.
Malcolm Sawyer wrongly (and repeatedly) claimed that the Job Guarantee increases employment by raising aggregate demand. This is a common error in comprehension (perhaps in the way we explain it!).
The proposition then follows that whatever beneficial results might be achieved by Job Guarantee could just as well be achieved by raising general government spending, lowering taxes, or ‘dropping money from helicopters’.
Sawyer clearly favoured increasing the dole (unemployment benefits) over the development of an Job Guarantee program because he claimed that the Job Guarantee isn’t much more than another name for unemployment.
We need to understand the macroeconomics of the Job Guarantee – aggregate demand effects, aggregate employment and unemployment, and inflation – before we start criticising it – especially when you base that criticism of the work of others who themselves demonstrate they don’t understand the underlying monetary principles involved.
It is easy to dispense with the claim that Job Guarantee is simply a form of Keynesian pump-priming.
A Job Guarantee program offers a basic wage (including a benefits package – sickness and holiday pay, superannuation, child care subsidies etc) to anyone ready and willing to work. It guarantees ‘full employment’ in the sense that anyone who is ready and willing to work at the program compensation rate will be able to obtain a job.
The nominal wage is fixed at some socially-sustainable level although it is subject to erosion in real terms in times of inflation. It is not unlike any nominal aggregate in this respect. It would be periodically (annually) increased to reflect national productivity gains in the economy. Productivity growth provides the room for non-inflation real wage gains. I am very aware of the tricky issues involved in measuring national productivity and applying such measures to individual wage setting across sectors. I did a lot of work in the 1980s for the government of the day on those issues while they were designing and running an incomes policy. But that is a topic for another blog though.
It is important to realise that the Job Guarantee “hires off the bottom” – that means it doesn’t compete with bids for labour from other sectors – there is no bid for unemployed labour. So the Job Guarantee does not in the hiring stage set of an inflationary spiral. Rather, by hiring at a fixed nominal wage it provides the inflation anchor.
The Job Guarantee is thus a buffer stock program – the buffer being employment rather than in the case of the current orthodoxy – the NAIRU – where unemployment is the buffer stock used to moderate prices. In the Job Guarantee, when the private sector downsizes in recession, workers who lose their jobs can find employment in Job Guarantee; in an expansion, workers are hired out of the buffer stock ‘pool’ by the growing private sector.
The size of the buffer stock pool is thus related to the performance of the private sector, plus the employment by the non-Job Guarantee government sector.
When aggregate demand is high, the size of the Job Guarantee pool is relatively small; when aggregate demand is low, the size of the pool is larger. However, with the Job Guarantee program in place, “full employment” – anyone who is ready and willing to work at the program compensation rate will be able to obtain a job – is maintained no matter what the level of aggregate demand happens to be.
Hence by advice to David Cameron – have your cake and eat it mate! Introduce a Job Guarantee immediately – you can keep cutting to your heart’s content – you will also have a huge workforce (much more productive than otherwise) to put to use in community development, personal care services, environmental care etc. Win-win!
While I am being flippant (note Americans!) – this point is not without significance. The Job Guarantee does not have to imply a big government footprint. You can cut the hell out of public services if you like and still have a Job Guarantee as a preferable way of dealing with the mess you create by pursuing fiscal austerity.
The Job Guarantee is not a “left-wing” “socialist” construct no matter the political preferences of those who have developed it over time.
The point is that the Job Guarantee creates a “loose” full employment a term which has relevance when we address its price stability properties. Indeed, government “demand management” (fiscal and monetary policy) can manipulate the size of the Job Guarantee pool through counter-cyclical pump-priming.
Malcolm Sawyer chose to misrepresent this when he claimed (2003: page 884) that the:
ELR scheme seeks to remove demand-deficient unemployment through the provision of required aggregate demand, albeit that this demand is focused on ELR jobs.
This would be a common perception. If mass unemployment is the manifestation of deficient aggregate demand then a job creation program that reduces the unemployment must do it via a resolution of that demand deficiency – that is, by stimulating aggregate demand.
The logic sounds intuitive but is in fact wrong.
The Job Guarantee does not maintain “full employment” by pumping aggregate demand (spending). One could envision a government policy that deflated aggregate demand (by raising taxes and cutting spending) – the David Cameron Austerity program! – even as it phased-in the Job Guarantee to achieve full employment.
Now before you wonder if I am supporting fiscal austerity at a time when there is mass unemployment let me say that I do not recommend such a policy. In general, I would like to see the Job Guarantee introduced and operating as a very small steady-state employment pool inclusive to the most disadvantaged workers in the labour force. At times, as private spending fluctuates the pool would expand but I think it would be a waste to unnecessarily create a large Job Guarantee pool to satisfy ideological views about the size of government.
I am personally in favour of large government focused on education, health, personal care and environmental care services with a major de-emphasis on military and policy spending. But that is not a view that is compulsory to have in order to support the view that an employment buffer stock (the Job Guarantee) is the best approach to price stability.
The point is that those like Malcolm Sawyer who claim that the Job Guarantee works via pump-priming have fundamentally misunderstood the operation of the Job Guarantee program.
Critics then rightly argue that Job Guarantee workers will need some capital and materials, and some supervision and other office/management support. Hence, total Job Guarantee spending will be higher than the sum of wages spent on Job Guarantee workers. For this reason, aggregate demand will increase by more than the Job Guarantee wage bill, and this will fuel additional inflationary pressures.
This was the point that James Duesenberry made although he was not a critic of the idea. The NAIRU after all is defined conceptually as a “level of demand” where inflation is stable (although the demand level is implied).
So if the Job Guarantee workers are receiving higher wages than the income support payment associated with unemployment (which would be desirable) and these “extra” costs are required to put the workers into action, then won’t aggregate demand rise?
First, the implementation of Job Guarantee would allow some reduction of current spending (resources currently absorbed in running unemployment programs would be shifted to the employment program). An entire industry within and outside of government has grown to manage the persistently high unemployment that nations have endured over the last three decades or more.
Some of that industry would be redirected (the bureaucracy) to manage the Job Guarantee and some of the private activity (case management under privatised labour market services) which is largely parasitic would vanish (good riddance!).
Second, if there is a net spending increase that would otherwise lead to excessive aggregate demand – measured against the inflation constraint which is the real capacity of the economy to continue to respond to nominal demand impulses with extra output – then the government can raise taxes or cut non-Job Guarantee spending to achieve the desired level of aggregate demand.
Hence, there need not be any increase to aggregate demand upon implementation of the Job Guarantee program if such is not desired.
The reality is that in times of mass unemployment – economies are usually a significant distance (measured by idle capacity) from the inflation constraint and so this issue would not arise. But in saying that we are conceptually separating the introduction of the Job Guarantee from demand expansion. They are separate policy choices and one the former not imply the latter.
Please read my blog – What causes mass unemployment? – for more discussion on this point.
So the Job Guarantee isn’t Keynesian pump-priming? Answer: definitely not.
The Job Guarantee policy differs from the Keynesian pump-priming favored by Malcolm Sawyer and most progressives because it represents the minimum stimulus (the cost of hiring unemployed workers) to achieve full employment, rather than relying on market spending and multipliers.
The Job Guarantee policy also provides an inherent inflation anchor missing in the generalised Keynesian approach. Sawyer’s misunderstanding in this respect has probably led to his confusion on the issue of inflation. Implementation of a Job Guarantee program can be undertaken while pursuing deflationary fiscal contraction, or while pursuing inflationary pump-priming.
Hence, unlike conventional “Keynesian” policy, full employment can be achieved without the inflationary pressures that might arise from demand stimulus.
So while Sawyer and others always fear that demand stimulus necessarily generates inflationary pressures this cannot be a relevant discussion in relation to the Job Guarantee proposal. The Job Guarantee achieves full employment without regard to the level of aggregate demand and whatever pressures on price levels that result from effective demand.
The relevant question is whether the Job Guarantee, itself, has unambiguous impacts on price levels or rates of change apart from the issue of aggregate demand.
The main principle is simple: a buffer stock sets a floor price and cannot pressure prices that are above the floor. Setting of the compensation floor can cause one-off changes, if, for example, it is set above the lowest prevailing wage (perhaps the legislated minimum wage).
However, it could also cause one-off wage and price decreases if it replaces a higher minimum wage and “welfare” package.
In general, I advocate setting the Job Guarantee wage at the a realistic minimum wage (not a poverty wage) so that the workers and their families can enjoy an socially inclusive life with income security. If that wage is above the current minimum private wage then that just indicates that the private firms should not be in business offering below the socially acceptable wage levels.
Many people worry that the Job Guarantee compensation package would be more appealing than the benefits now received by the jobless (unemployment compensation, welfare, Medicaid, and so on). Hence, once Job Guarantee is implemented, workers will become more belligerent, demanding higher wages in non-Job Guarantee jobs because if they were fired they would then receive the preferred Job Guarantee compensation and not the ‘jobless compensation’ they would have received previously.
This is a fair point, relying on the assumption that workers could be indifferent between working for compensation and being idle and collecting hand-outs of similar value.
There is evidence that suggest that people prefer work over ‘leisure’ even at the same rate of compensation. In any case, even if the Job Guarantee compensation is set substantially higher than the current welfare support levels, this would only cause a one-off adjustment of non-Job Guarantee labor compensation to restore indifference. That is not inflation as normally defined.
Malcolm Sawyer and others use the ugly old NAIRU argument that should unemployment fall below some natural level, inflation will accelerate. He claims that the NAIRU under Job Guarantee (which I renamed as the NAIBER as above) could be higher than the current NAIRU.
Sawyer wrongly attributes this to the higher level of aggregate demand that he believes would be maintained with Job Guarantee in place. But, of-course, aggregate demand might be lower with Job Guarantee – or higher.
Is the NAIBER higher than the NAIRU? The question has its roots in the belief that a particular level of demand slack curbs the inflationary process in a NAIRU-world.
As I have outlined here, the Job Guarantee can be implemented without raising aggregate demand. However, for the sake of argument, let’s assume that the Job Guarantee is added to the current expenditure system, holding taxes and non-Job Guarantee public spending constant.
In that case, the introduction of a Job Guarantee does increase aggregate demand – probably with a multiplier effect above the level of spending on the Job Guarantee program.
I wrote a paper in 1998 – The Job Guarantee Model and the NAIRU – free version HERE – which showed that a macroeconomic system with an embedded Job Guarantee can tolerate higher aggregate demand without inflation.
While there has been a lot of disagreement on what the investment outlay would be in different countries to introduce a Job Guarantee (net of the saving) the point is moot. Who cares, the Job Guarantee is not about demand stimulation.
However, it is clear that if we introduce a Job Guarantee, other things equal, the initial level of Job Guarantee employment will deliver a higher demand level than inherited under the NAIRU economy. A neo-liberal (and many progressives such as Malcolm Sawyer) immediately wants to know why replacing unemployment with (higher paying) employment ceteris paribus is not inflationary given it ostensibly disturbs the balance set by the NAIRU.
Sawyer expressed this in the following way (2003: page 898):
… the level of unemployment achieved could be below a supply-side-determined inflation barrier … the NAIRU.
The negation of this proposition relies on an understanding of how the Job Guarantee buffer stock works. First, the buffer stock is now specified in jobs rather than unemployment – so the concept of a NAIRU-buffer stock is abandoned.
Second, the ELR creates ‘loose’ full employment. The ELR workers comprise a credible threat to the current private sector employees because they represent a fixed-price stock of skilled labour from which employers can recruit. In an inflationary episode, business is more likely to resist wage demands from its existing workforce to achieve cost control if it has the option of hiring out of the ELR pool.
In this way, longer term planning with cost control is achievable. So in this sense, the inflation restraint exerted via the NAIBER is likely to be more effective than using a NAIRU strategy.
Most economists think that the jobless are more effective as a threat than Job Guarantee workers are in holding down wage inflation. Yet they offers no argument as to why the unemployed and those out-of-the-labor-force are equivalent in the eyes of employers to employed workers, who are already demonstrating their availability to work and offering a work history to potential employers.
Inflationary pressures may arise, for example, if private investment becomes very strong. When inflationary pressures do appear, if government does choose to deflate demand to fight it (this is not my preferred policy recommendation, but it is a possible response), it will increase the size of the Job Guarantee buffer stock, inflation-fighting, pool.
Since Job Guarantee workers are a better inflation-fighting force than are the jobless, the necessary adjustment to demand will almost certainly be smaller with the Job Guarantee in place.
If government decides not to deflate demand, the Job Guarantee pool still allows the economy to operate with higher aggregate demand and lower inflation pressures, although inflation can still result. Hence the NAIBER is actually below the NAIRU in the sense that employment can be higher before the inflation barrier is reached.
So the Job Guarantee stands in stark contrast to the standard ‘Keynesian’ approach advocated by many Post Keynesian economics (such as Sawyer). The latter see the solution to unemployment in closing the demand gap (deficient effective demand) by increasing net spending via purchasing goods and services and/or labour at market prices.
If there are wage-price pressures in the economy then this approach will inject considerably more nominal demand into the economy in pursuit of higher employment levels than would be the case under the Job Guarantee. The Job Guarantee exploits the power of the State as the currency issuer to provide a fixed-wage job to all those who are unable to find a job in the private sector. The government thus provides a buffer stock of jobs that are available upon demand. The resulting net spending is the minimum required to restore full employment, as defined above.
It should now be clear that Job Guarantee does not operate like any other ‘Keynesian’ fiscal policy, nor like a Monetarist ‘money drop’.
It achieves full employment not by raising aggregate demand, but rather by offering jobs at a basic compensation rate to all who are ready and willing to work.
Aggregate demand may rise as an incidental consequence – or it may fall if Job Guarantee is implemented with budget tightening. Unlike a ‘money drop’, it requires that participants work for their compensation.
Unlike ‘pump-priming’, it achieves full employment with what can be described as ‘loose’ labor markets because it ‘hires off the bottom’. It does not seek to employ any specific number of workers nor does it seek specific skills; most importantly, it does not chase wages upward – it never competes with higher and rising private sector wage offers.
This is the primary reason that full employment can be achieved without setting off inflation, and at any level of aggregate demand. Full employment is then sustained through time with a buffer stock of employable labour.
I feel a letter is coming on soon to one of my US colleagues – probably Friday. Any guesses yet?
S&P declare themselves irrelevant – again
I think S&P must be struggling with ADHD and they need treatment – poor dears. Imagine always wanting to be the centre of attention when you are basically irrelevant to everything. I recommend that the legislative authorities in each nation that S&P locate declare them illegal.
You can also read Randy Wray’s comment in the New York Times (April 18, 2011) on the S&Ps decision to change their outlook on US government debt.-
Plain idiocy – and remember that the US Senate Permanent Subcommittee on Investigations released it long-awaited Report last week – Wall Street and the Financial Crisis: Anatomy of a Financial Collapse – that demonstrated the endemic corruption in the ratings industry and showed how the ratings agencies were in no small part responsible for the financial crisis. Why haven’t some of their executives been sent to prison?
Incidentally, this US Senate Sub-Committee was once chaired by Joe McCarthy.
That is enough for today!