Buffer stocks and price stability – Part 3

I am now using Friday’s blog space to provide draft versions of the Modern Monetary Theory textbook that I am writing with my colleague and friend Randy Wray. We expect to complete the text during 2013 (to be ready in draft form for second semester teaching). Comments are always welcome. Remember this is a textbook aimed at undergraduate students and so the writing will be different from my usual blog free-for-all. Note also that the text I post is just the work I am doing by way of the first draft so the material posted will not represent the complete text. Further it will change once the two of us have edited it.

Chapter 13 – Buffer Stocks and Price Stability

[Continuing from Part 2]

The employment buffer stock approach – which is referred to in the literature as the Job Guarantee (JG) – defines a policy framework where the government operates a buffer stock of jobs to absorb workers who are unable to find employment in the private sector.

Analogous to the central bank’s function of lender of the last resort, the JG functions as a buffer which absorbs all potential employment, at an acceptable minimum wage. In this sense, the government acts as an employer of the last resort.

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.

Under a JG, the government thus provides an unconditional, open-ended job offer at a given wage to anyone who desires to work. Instead of a person becoming unemployed when aggregate demand falls below the level required to maintain full employment, the person would enter the JG workforce.

The JG pool expands (declines) when private sector activity declines (expands). The JG thus fulfills an absorption function, which minimises the costs associated with the flux of the economic activity as aggregate demand fluctuates.

In the event of a decline in aggregate demand, total demand for non-JG labour workers declines according the employment requirements function we defined in Chapter 9. In this situation, the workers who were displaced from their jobs would have an option – accept a JG position or wait for conditions to improve in the non-JG economy.

It is clear that the choice facing workers will be influenced by several factors. First, the government may offer workers the choice between the JG wage and the unemployment benefit, the latter being lower. Second, some workers, especially those in higher-skilled positions, may receive redundancy payments and use these to support themselves through the spell of unemployment. Economists call this response – wait unemployment. Some workers may feel that accepting a low-skill JG job would disadvantage them professionally and thus wait for circumstances to improve.

We assume for the moment that the Job Guarantee policy does not offer an unemployment benefit and that most displaced workers will prefer a JG position over wait unemployment. These assumptions serve to simplify the analysis and relaxing them does not alter the basic dynamics of the system.

When private economic activity picks up, workers would be bid out of the JG pool by employers and the buffer stock of jobs would contract.

The JG wage

Why would workers accept these bids? The “buffer stock” employees would be paid an minimum wage, which would define the level of income necessary for a full-time worker to enjoy an adequate social and material existence.

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.

While it is preferable to avoid disturbing the private sector wage structure when the JG is introduced, a case can be made to offer the JG wage at a level higher than the existing private minimum if it is thought that productivity is too low in the economy.

This is particularly relevant in developing economies where many market-based jobs pay wages that are below the poverty line and provide no incentives for employers to invest in more productive capital or for workers to invest in human capital.

The minimum wage should not be determined by the capacity to pay of the private sector. It should be an expression of the aspiration of the society of the lowest acceptable standard of living. Any private operators who cannot “afford” to pay the minimum should exit the economy

The Government would supplement the JG earnings with a wide range of social wage expenditures, including adequate levels of public education, health, child care, and access to legal aid. Further, the JG policy does not replace conventional use of fiscal policy to achieve social and economic outcomes.

In general, the JG would be accompanied by higher levels of public sector spending on public goods and infrastructure. These supplements would be in addition to the scheme but not essential for the scheme to function effectively.

The JG as an automatic stabiliser

The JG wage thus defines the wage floor for the economy and serves as an automatic stabiliser, similar to the tax system.

Recall that automatic stabilisation refers to the components of the government budget, which rise and fall as the economic cycle fluctuates without there being any explicit change in government spending or tax settings.

They operate to stabilise the economic cycle providing a floor in the fall in aggregate demand during an economic downturn and a ceiling in the demand as the economy grows. At full employment, the automatic stabiliser component of aggregate demand is zero.

Thus, when the economy is in decline, tax revenue falls and welfare payments rise which expands the budget position of the government automatically. The introduction of the JG would have the same counter-cyclical impact. When the economy was faltering, the spending associated with the JG would rise and vice-versa when times were good.

In this regard, the JG is a superior (more powerful) automatic stabiliser than a system of unemployment benefits (under the unemployment buffer stock option) because aggregate demand slumps less and therefore the positive impact on real output is greater than would be the case if the government merely paid unemployment benefits.

Automatic stabilisers have the desirable characteristic of providing immediate, counter-cyclical spending injections (or withdrawals) when private activity fluctuates. They avoid the so-called policy lags which relate to the time delays in the government identifying that a significant shift in private demand has occurred, designing a policy response to that shift, providing appropriate legislation to support an intervention, and then executing the intervention.

In some cases, the time delays can result in the major part of the policy intervention arriving too late and working to destabilise the cycle. For example, if by the time the government has designed and implemented a new discretionary spending injection, the private sector has already resumed trend spending growth, then the impulse of government spending might lead to the economy overheating.

The fixed wage offer that defines the JG policy also serves to stabilise the growth rate in money wages in the economy and thus provides a nominal anchor against inflation.

Advanced material: Buffer stocks in Agriculture

Buffer stocks have long been used in agriculture and commodity production. The JG bears many similarities (and a significant difference) with agricultural price support buffer stock schemes that governments have regularly used to stabilise prices and incomes in the agricultural sector.

For example, in November 1970, the Australian Government introduced the Wool Floor Price Scheme. The scheme was relatively simple and worked by the Government establishing a floor price for wool after hearing submissions from the Wool Council of Australia and the Australian Wool Corporation (AWC).

The aim of the system was to stabilise farm incomes and led to an agreed price for wool being paid to the farmers. The Government then stabilised the private at this guaranteed level by using the AWC to purchase stocks of wool in the auction markets if demand was low and selling it if demand was high.

By being prepared to hold “buffer wool stocks” in times of low demand and release them again in times of high demand the government was able to guarantee incomes for the farmers around the stable price.

The contention that ultimately led to the demise of the system was whether the guarantee constituted a reasonable level of output in a time of declining demand. Farmers clearly had an incentive to over-produce wool knowing that the government would buy any excess not demanded by the auction markets.

The JG approach is also based on the maintenance of a variable buffer stock of jobs in line with fluctuations in private demand. However, the weaknesses of the agricultural scheme do no apply to a JG.

First, if there is a price guarantee below the prevailing market price (the JG wage) and a buffer stock of working hours constructed to absorb the excess supply at the current market price, then a form of full employment can be generated without tinkering with the price structure.

Second, the incentives to over-production in commodity buffer stock systems do not apply to maintaining a labour buffer stock as no one is concerned that employed workers would have more children than unemployed workers.

Benjamin Graham wrote in the 1930s about the idea of stabilising prices and standards of living by surplus storage. He documents how a government might deal with surplus production in the economy (GET EXACT REFERENCE):

State may deal with actual or threatened surplus in one of four ways: (a) by preventing it; (b) by destroying it; (c) by “dumping” it; or (d) by conserving it.

In the context of an excess supply of labour, governments now tend to choose the dumping strategy via the unemployment buffer stock approach (the NAIRU). However, it is less wasteful to use the conservation approach, which is reflected in the JG framework.

Graham (1937: 34) noted:

The first conclusion is that wherever surplus has been conserved primarily for future use the plan has been sensible and successful, unless marred by glaring errors of administration. The second conclusion is that when the surplus has been acquired and held primarily for future sale the plan has been vulnerable to adverse developments …

This distinction is important when we conceive of the way employment buffer stock models might work in practice. The Australian Wool Scheme was an example of storage for future sale and was not motivated to help the consumer of wool but the producer.

The JG policy is an example of storage for use where the “reserve is established to meet a future need which experience has taught us is likely to develop” (Graham, 1937: 35).

Inflation control and the JG

While introducing a public sector job creation capacity to the economy, the JG is better thought of as a macroeconomic policy framework designed to ensure that full employment and price stability is maintained over the private sector economic cycle.

The JG jobs would ‘hire off the bottom’, in the sense that minimum wages are not in competition with the market-sector wage structure. By not competing with the private market, the JG would avoid the inflationary tendencies of old-fashioned Keynesianism, which attempted to maintain full capacity utilisation by ‘hiring off the top’ (that is, making purchases at market prices and competing for resources with all other demand elements).

What are the mechanics of inflation control under a JG? In Chapter 12, we examined the way in which incompatible claims over the available real income could cause wage-price pressures to escalate into an inflationary episode as the claimants (labour and capital) attempted to defend their real income shares.

In an unemployment buffer stock system the approach to price control uses unemployment to discipline wage demands by workers and to soften the product market to discourage profit-margin push by firms as a means of curbing wage-price pressures and maintaining stable inflation.

The JG approach stands in contradistinction to the NAIRU approach. When the level of private sector activity is such that wage-price pressures forms as the precursor to an inflationary episode, the government manipulates fiscal and monetary policy settings (preferably fiscal policy) to reduce the level of private sector demand.

Labour is then transferred from the inflating private sector to the “fixed wage” JG sector, which would eventually the inflation pressures. The can be no inflationary pressures arising from a policy that sees the Government offering a fixed wage to any labour that is unwanted by other employers.

The JG involves the Government “buying labour off the bottom” rather than competing in the market for labour. By definition, the unemployed have no market price because there is no market demand for their services. The JG just offers a wage to anyone who wants it and places no market pressure on wages.

WE WILL CONTINUE THIS NEXT WEEK

THE REST OF THIS MATERIAL WILL BE FAMILIAR – BUT I WILL COMPLETE IT NEXT WEEK FOR THE SAKE OF OUR DRAFT WHICH IS GETTING CLOSER TO COMPLETION NOW.

Case Study: Britain and the 1976 IMF Loan

[NOTE: We are putting this Case Study into the book as it marks an important historical point in the full employment debate and the rise of monetarism]

COMING NEXT

Conclusion

NEXT WEEK I WILL ADVANCE THE BRITISH-IMF CASE STUDY. I HAVE A MASSIVE COLLECTION OF DOCUMENTS AND OLD SCANS THAT I HAVE COLLECTED OVER THE YEARS ABOUT THIS INCIDENT INCLUDING THE EXCELLENT BRITISH TREASURY FREEDOM OF INFORMATION REQUEST DOCUMENT SET.

WE WILL TALK ABOUT THIS NEXT WEEK.

Saturday Quiz

The Saturday Quiz will be back again tomorrow. It will be of an appropriate order of difficulty (-:

That is enough for today!

(c) Copyright 2013 Bill Mitchell. All Rights Reserved.

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    23 Responses to Buffer stocks and price stability – Part 3

    1. Neil Wilson says:

      Unless I’ve missed it, and that’s always a possibility, I don’t think you’ve defined precisely what you mean by full employment and how that differs from how others see full employment (particularly those who go on about NAIRUs).

      In other words we see people on the JG buffer as in employment, but others do not – for example because they are not engaged in or directly supporting the private sector output process.

      The magic of the JG is that it takes the existing buffer stock as it stands and just makes everybody on it employed by fiat decree. That will cause a ‘portfolio reconfiguration’ in the labour market, but doesn’t affect the price stabilising function of the buffer. In fact it improves that function.

      So we may bring a private sector expansion to a halt at about the same point as you do with a NAIRU calculation (if we were being ridiculously extra cautious over demand inflation), but there would still be genuine full employment because of the JG.

      So:

      Genuine Full employment = Standard Full Employment + Employment on JG

    2. Senexx says:

      Was pointed out to me the other day how we used to store hay for next season – a buffer if you like – but now we sell it near immediately to make a buck and with the rural sector allegedly in decline again, there’s likely to be a shortage.

      On the JG, at least if implemented in Australia it can’t really get more neoliberalised as we more or less have the neoliberal JG with our workfare work for the dole, though the “wage” is abysmal and not nearly enough to support oneself on.

      Its one of the reasons I want to revisit the Jobs Compact and see what information I can find out about Working Nation (which I believe had a less neoliberal JG in it but then Howard became PM and it got short shrift)

    3. “Any private operators who cannot “afford” to pay the minimum should exit the economy.” But it’s OK for a public sector employer to create jobs where output is “less than the minimum”?

      That of course raises the question as to how one measures the output of public sector jobs. Certainly the idea that because a public sector employee is paid $X therefor their output is $X is nonsense.

      The way to value the output of the public sector is thus. The only reason we have a public sector is that it’s what the electorate votes for at election time. I.e. if the electorate might vote to have the economy split X:Y between public and private sectors. But if that’s what people vote for, and one creates just public sector JG jobs (rather than public and private sector JG jobs) then those extra public sector jobs are ipso facto relatively unproductive compared to private sector jobs. That’s not my opinion or yours: it’s the opinion of the electorate.

      So to repeat my question: why is it OK for the public sector to create jobs where output is below the minimum wage (or whatever), but not for the private sector to do likewise?

      “JG is a superior (more powerful) automatic stabiliser than a system of unemployment benefits..” If that’s because JG comes with better non-wage benefits than unemployment plus unemployment benefit, then there is a problem. It’s that if JG is relatively attractive because of generous non-wage benefits, then the RELATIVE ATTRACTIONS of regular work is reduced.

      That reduces job search efforts, i.e. aggregate labour supply is reduced. And assuming regular employment is at the maximum that is possible without inflation becoming excessive, then aggregate demand will have to be reduced. And that in turn means that JG jobs are being created at least to some extent AT THE EXPENSE OF regular jobs. That doesn’t totally scupper JG of course, but creating JG jobs at the expense of regular jobs is not exactly the object of the exercise.

      “The fixed wage offer that defines the JG policy also serves to stabilise the growth rate in money wages in the economy and thus provides a nominal anchor against inflation.” I’m baffled as to what the relevance of the “fixed wage” element of JG is. If an employer is tempted to bid up the price of a particular type of labour, why does the fact that potential job applicants are doing “fixed wage” JG work rather than being unemployed dissuade the employer from bidding up the price of the labour?

      There is of course the point that JG maintains work habits. But that is a separate point from the “fixed wage” point. Plus JG can include training. But then training is available (or can be made available) to the employed and unemployed and JG people. So the training point is irrelevant.

      Buffer stock in agriculture section . . . one of the main purposes of a buffer stock is to put a floor under the price of something. But that function is already performed by minimum wage laws. JG adds nothing. I just don’t see the relevance of the buffer stock point.

    4. Neil Wilson says:

      “But it’s OK for a public sector employer to create jobs where output is “less than the minimum”?

      The public sector employer is paying the same wage as the private sector employer. There is no difference between the two.

      Your view of output is clouded by your own beliefs about value. But those are not necessarily the views of everybody else.

      If somebody does something in return for resources and the majority of people around them consider that acceptable for those resources, then that is acceptable.

      If people vote for a JG then they consider what the JG asks people to do in return for payment to be acceptable recompense. That is the end of the matter – until the next election.

    5. Neil Wilson says:

      “And assuming regular employment is at the maximum that is possible without inflation becoming excessive”

      But it isn’t. So your argument falls apart on the presumption.

      Fundamentally starving a section of the population (suppressing effective demand in that section) so that private sector expansion and demand in another section of the population can be bigger is immoral and unsupportable. There is a base set of resources everybody needs, and then we build from that in a ‘bubble up’ fashion.

    6. Neil,

      Can you read?

      The reason I ask is because you say “The public sector employer is paying the same wage as the private sector employer. There is no difference between the two.” – implying presumably that because the wage is the same, therefor output must be the same.

      I specifically dealt with that point above. That is (as should be blindingly obvious), the fact that two people are paid the same does not mean their output is the same.

      “Your view of output is clouded by your own beliefs about value. But those are not necessarily the views of everybody else.” No: the reasons I set out above as to how to value output are not “my own beliefs”: they are reasons widely adhered to in economics. You’d have recognised that if you had studied economics.

      “If people vote for a JG then they consider what the JG asks people to do in return for payment to be acceptable recompense.” Hilarious. When did we last have referendum on JG in the UK? Please remind me. Is there a referendum coming up on this subject? I’m all ears.

      Of course there is the fact that the Tory’s Work Programme was presumably in their manifesto, and the electorate voted in a Tory led government, which proves (according to your logic) that WP is great. Personally I think that’s a daft reason for saying WP is great because WP would have taken up an minute portion of the Tory’s manifesto, and not one in ten thousand voters would have paid any attention to it.

      ““And assuming regular employment is at the maximum that is possible without inflation becoming excessive” But it isn’t. So your argument falls apart on the presumption.”

      Nope. Wrong again.

      There is actually a stage in my argument there which I thought was sufficiently obvious that it didn’t need stating. But obviously I overestimated the intelligence of some readers, so I’ll set out the argument in more detail. Here goes.

      If aggregate labour supply is reduced and unemployment is ABOVE the level at which inflation kicks in in a serious way, then unemployment can be reduced simply by raising aggregate demand, and indeed that’s the best way to do it.

      Put another way, JG really comes into its own at the point where employment cannot be raised by a straight rise in aggregate demand.

      In other words, the central or crucial role for JG, the really useful role it has to play, is to deal with unemployment where “regular employment is at the maximum that is possible without inflation becoming excessive” (quoting my above comment).

      So (and repeating the argument in my above comment) on that assumption, i.e. assuming that employment is at the maximum that is possible without inflation becoming excessive, then a reduction in aggregate labour supply (i.e. a reduction in job search efforts) will necessitate a reduction in aggregate demand, which in turn will mean that JG jobs are created to some extent at the expense of regular jobs.

    7. Will Kanaley says:

      I think a JG system has a lot of interesting potential but given the number of people who would likely participate, what would they actually do for useful work that would not be significant competition for existing private employers?
      My experience in industry has been that the vast majority of people want to be successful, contribute, and play by the rules. However, human nature being what it is, there are some (perhaps 0.5% to 2%) that are inclined to persistently try and find a way to beat the system and take unfair advantage. Do you envision a way to fire these individuals from a JG system? If so, what becomes of them? Are they eligible for welfare benefits?

    8. Neil Wilson says:

      “Can you read?”

      I can. You keep making the same point and the same mistaken view. I’ve tried several ways of getting you to see where you are going wrong, but you’re filtering them every time.

      Reading your posts has become increasingly like reading a copy of the Watchtower. And increasing ad hominem.

      “I set out above as to how to value output are not “my own beliefs”: they are reasons widely adhered to in economics. You’d have recognised that if you had studied economics.”

      I can do little more than quote Philip Pilkington in response to this manifest appeal to authority:

      The entire idea of value is completely metaphysical and absurd. Economists, neoclassical and otherwise, search out a theory of value because then they can know what is Good for people. It’s a search for a timeless moral truth. This is not only anti-rational, this, I believe, is a strongly authoritarian quest and has all sorts of real-world manifestations. It also accounts for the self-assuredness of marginalists in the face of enormous theoretical and empirical evidence that their theories are false.

      ” which in turn will mean that JG jobs are created to some extent at the expense of regular jobs.”

      So?

      What it means is that the production system is now asked to produce bread for the poor rather than cake for the rich.

      What you are arguing is that the system should not produce enough bread for the poor. It should ensure that the rich have cake instead.

      Your arguments always start “assume were full – if we’re full then somebody is going to have to give something up to allow these poor people to eat. And that’s not right”.

      That’s no argument.

      Job Guarantee *will* eliminate private sector jobs that cannot pay the going rate. That is what it is designed to do – weed the garden and let the strong survive – stopping the undercutting and halting the race to the bottom.

      But, cleverly because it gives people work to do, it reduces the hiring risk cost to businesses and generates publicly available output – in contrast to the unemployment buffer – and in contrast to substandard private sector engagement. That assists those that remain to move forward.

      There is a point at which profit making business ceases to be a morally supportable structure. That point is when it fails to pay the full cost of labour.

      That is the line in the sand. Don’t pay, don’t get.

      At that point the public superstructure should take the idle labour and produce public goods and services that will encourage a new set of private sector businesses to arise and start competing with the existing businesses that have failed to create sufficient well-paid employment and opportunity.

      Hence my point about the Job Guarantee labour being used to improved the fertility of the medium in which business grow.

      Supporting sub-standard businesses is re-enforcing the status quo – bad business constantly trying to drive labour costs lower when we need to be going to other way.

      Not good enough in my book.

    9. Gentlemen!

      Bill has been very explicit.. .. . The JG offers a FLOOR on which workers can build their lives.

      The JG does not promise to offer jobs to rocket scientists, does not promise to end unemployment, does not promise to ensure “efficiency”, all it does is offer anyone who wants a job, a job, period.

      All the counter arguments miss the point. If everyone who wants a job, can get a job, then the remainder, either
      don’t want to work, or can’t work. But once a nation gets to that point, it is possible, in ways, not possible now, to
      know how large a portion of the population falls into this category. Perhaps we will find it filled with young mothers, who can’t find day care for their toddlers, or elderly ladies who prefer playing bridge, or young people who prefer backpacking around the world, whatever.

      Also, if everyone who wants a job, can get one, private employers will find it necessary to bid higher than the JG level to attract employees. They will have to offer benefits, a larger salary, on the job training, whatever it takes to get enough employees to fulfil their ambitions. They won’t be so easily able to discriminate against the bankrupt, those living under bridges, those greatly in debt, those with criminal records, those who are muslim, black, blue, red, yellow, agnostic, female, homosexual, and so on.

      The implied assumption Ralph carries into any discussion is that the market, and only the market knows what is right, and efficient. Hogwash! The market doesn’t deal with 400 ppm CO2 in the atmosphere, which will go shortly to 500 ppm ( 0.5% ), which will kill all life in the oceans, which will lead to a drop in O2 levels in the atmosphere, which will kill us all. The market is mob hysteria unified. It is not magic, it provides no leadership, and it should not be worshipped as Ralph does… I can see him now, on his knees, worshipping the market, while the
      little man admonishes him to “don’t look behind the curtain!”

      INDY

    10. larry says:

      My quotes were removed by the system. Here it is again with Quotes restored.

      Ralph,

      ‘why is it OK for the public sector to create jobs where output is below the minimum wage (or whatever), but not for the private sector to do likewise?’

      It is not only OK but essential that government take up the slack, as the private sector has an income ceiling and government doesn’t. If the private sector isn’t doing something for whatever reason, then only the government can ensure that the service, whatever it might be, is carried out.

      ‘the fact that two people are paid the same does not mean their output is the same”

      Ralph, no one says this. If you have public bin men and private bin men, then their output is comparable. If you have public and private grass cutters, their output is comparable. But how can you compare the output of the grass cutters and that of the bin men? It is impossible except by making ridiculously arbitrary assumptions in order to force them to be comparable. Say, by assigning arbitrary utilities as is done in some areas of microeconomics, a technique borrowed from game theory. But game theory is a normative theory of games, not an empirical theory of how people actually play, though it has been found to have some applications in animal behavior studies. You don’t need to study economics to understand this. In fact, such study might feed you so much bullshit that you become incapable of understanding this sort of thing, say by reading Mankiw’s macroeconomics textbook.

      Saying that if the electorate voted for X, the electorate want X begs the question whether the electorate understood what they were voting for. This lack of understanding is not because they are stupid but most likely because the politicians and their spin doctors lied about what the issues being considered actually were. This also assumes that the electoral system is optimal, which is far from the truth. It is suboptimal at the very least.

    11. Neil Wilson says:

      “what would they actually do for useful work that would not be significant competition for existing private employers?”

      Off the top of my head:

      – repairing potholes in roads.
      – burying overhead electricity cables so they don’t blow down in winter.
      – transcribing library and museum documents to make them suitable for computerised searching.
      – writing open source software (yeah!)
      – opening the doors and saying good morning with a smile to anybody visiting council offices, libraries and other public buildings.
      – clearing culverts to prevent flooding
      – Graffiti removal
      – The obligatory litter clearing
      – Removal of ivy and debris from church graveyards.
      – Restoration and clearing of public pathways and other rights of way
      – Painting, cleaning and perhaps just having a chat in retirement and nursing homes.
      – Work in voluntary agencies, churches, charity shops and community groups.
      – Supplied to the armed forces to act as a civil engineering corp. The armed forces are very good at setting up, executing and stripping down temporary projects.

      You see we already have experience of how to create the jobs in place. Because it is how the Court’s community service orders are dealt with by the probation services.

    12. Dr Oprisko claims “The implied assumption Ralph carries into any discussion is that the market, and only the market knows what is right, and efficient.”

      Dr Oprisko: I suggest you re-read what I wrote above. I SPECIFICALLY SAID that if the electorate votes to have GDP split between private and public sector in the ratio X:Y, that’s OK by me. That is, (just to make it clear), the public sector is not governed by market forces. I’m quite OK with a portion of the economy not being governed by market forces. I’m quite happy with a public sector: even a large public sector, if that’s what the electorate votes for. Got it?

      Thankyou also for your amazing revelation that the market doesn’t deal with externalities, like CO2 emissions. Anyone who has got past Chapter one of an introductory economics text book knows that.

      Lary,

      “If the private sector isn’t doing something for whatever reason, then only the government can ensure that the service, whatever it might be, is carried out.” Did I say anything that suggested that if the private sector is not carrying out some vital service (like law enforcement) that the public SHOULD NOT perform the relevant service?

      Your second paragraph (starting “Ralph, no one says this”) is one of the more intelligent paragraphs on this thread. Here’s my answer.

      What is “ridiculously arbitrary” about the assumption I made above that if the electorate votes to have GDP split between public and private sector in some given ratio, that the electorate is voting for what the electorate thinks will maximise the satisfaction the electorate gets from scarce resources?

      Put another way, I didn’t (as you suggest) ascribe “arbitrary utilities” to anything: I’m in favour of letting customers (in a free market) decide what products they think yield the most utility. And as to how to determine the size of the public sector (and what the public sector spends money on), I’m happy to leave that to the electorate. Are you opposed to giving consumers freedom of choice? Or are you opposed to democracy?

      I mean, are you suggesting that the electorate votes for what the electorate thinks will make them most miserable or something? If the electorate votes for more spending on health, it strikes me that more spending on health is what the electorate wants. Or have I missed something?

      In your paragraph which starts “Saying that if..” you point out that the electorate is far from 100% qualified to make the decisions it actually makes. Well I think most of us have worked that out. I.e. democracy is a daft system. All that can be said for it is that it is better than the alternative, which is dictatorship.

      [BILL: EDITED OUT PERSONAL ABUSE WITH RESPECT TO DR OPRISKO – I DON’T WANT THAT SORT OF REPARTEE ON MY BLOG – LEAVE THAT TO THE RIGHT-WING FANATIC SITES PLEASE. PLEASE NOTE I ALSO DELETED THE ENTIRE COMMENT BY DR OPRISKO GIVEN IT WAS ALSO PERSONALLY ABUSIVE]

    13. CharlesJ says:

      Neil
      Add to your list:
      -maintaining gardens and odd jobs for the elderly or disabled
      -walking dogs etc for the elderly or disabled

      I think that someone in the MMT community should build a list of possible jobs.

    14. bill says:

      Dear CharlesJ

      You offered this advice:

      I think that someone in the MMT community should build a list of possible jobs.

      You might read more widely – especially the academic work. Several of us have done detailed analysis of the type of jobs.

      For example, http://e1.newcastle.edu.au/coffee/pubs/reports/2008/CofFEE_JA/CofFEE_JA_final_report_November_2008.pdf

      We have thought about this deeply (as well as most of the other criticisms that I are raised by those coming into the topic of employment guarantees). I first proposed a JG in 1978 as a student. That is a long time to be thinking about a concept – meaning it is not as if the idea emerged in the current crisis.

      best wishes
      bill

    15. larry says:

      Ralph, no you didn’t directly mention utilities, but something akin to it was implied in your contention that different types of job outputs could be compared. One that is used by microeconomists is the utility function about which there is some controversy. But since it is in use, I mentioned it, as it is a way of comparing apples and oranges, which I think is what you were engaged in.

      I didn’t say anything about the mental qualities of the electorate. If anything I give them the benefit of the doubt. but in the electoral system as it is currently designed, the access to relevant information for making a “rational” electoral decision is asymmetric, with the public the loser in this situation. Of course, there is the internet, but that contains no gatekeeper and no easily accessible method for distinguishing the relevant from the irrelevant. And in elections, the issues are often so distorted by the candidates and dissembling is so rife that it would be difficult for a genius sometimes to separate the wheat from the chaff.

    16. The Dork of Cork. says:

      The private banks who control our societies value the time value of money above all thing – but there is a time value to labour and physical capital assets also…….(i.e.the real physical world outside London)

      Spain must drive itself into surplus yet it cannot employ labour to reduce external inputs as all labour is too costly in Europe as it reduces profits so therefore it is most efficient to reduce labour.
      It must simply switch off its real systems.
      This functioning tramway has had no activity for two years now as there is simply no tokens to pay people !

      http://www.youtube.com/watch?v=KzHnXoD7Gjk&feature=player_embedded

      Both sov debt and deposits reside on each side of private banks balance sheets.
      Pure fiat is however just fiat and thats it baby.
      The chain of command is clearly seen now , with banks right at the top of the food chain.

      Go figure – its easy.
      Me thinks a fiat king is needed don’t you think ?…….maybe not

    17. Adam (ak) says:

      Ralph,

      The question “But it’s OK for a public sector employer to create jobs where output is “less than the minimum”?” should be answered along the lines based on philosophical theory of value and possibly human psychology rather then by micro-bending the economic theory along the lines of externalities; there might indeed be cases when people are paid less than the exchange value of their output.

      Just think about programs helping disabled people – these are less controversial than the JG. Is this OK or is this “bending the immutable rules”?

      I think that prof Mitchell is right and all the people have a MORAL right to decently paid employment. You may disagree with that thesis but then please state your views openly – that you believe that some people should be denied that right because of whatever (they may have blue eyes or pimples or…) Not that the market denies them that right – we all know that.

      What has been shown by prof Mitchell as an economist is that retrofitting the Job Guarantee infrastructure to the existing economic system is possible and will yield additional benefits. That’s it.

      I strongly disagree with the following quote directed at Neil:
      ‘Your view of output is clouded by your own beliefs about value. But those are not necessarily the views of everybody else.” No: the reasons I set out above as to how to value output are not “my own beliefs”: they are reasons widely adhered to in economics. You’d have recognised that if you had studied economics.’

      One would have recognised if had studied advanced maths and physics that an n-dimensional system cannot be described in less than n dimensions without losing critical information. Let’s think about a particle, one can measure its position along the x-axis and its momentum along the axis perpendicular to x-axis, without breaching the uncertainty principle. I am constantly bewildered by the attempts to build an one-dimensional model of human society – one where the only measure of value is monetary exchange value. (I probably know why – then the “maximisation” of the goal function is possible) No mention of the other aspects of human well-being, no mention of ethical values, no mention of the environment. This is how the “neo-liberal social values” are sneaked in. It is not only morally repugnant, it is also ignorant. Not to mention that even in the one-dimensional world, the “invisible hand of free market” miserably fails to allocate the resources in the optimal way…

      (One may say that I don’t understand the boundaries between sciences, that economics only describes activities related to producing material value. It is not me – why is then this pseudo-science used to design the human society around the so-called “free markets”? It is not about optimisation of the flow of IP packets in a network or allocating trucks to carry packages from the point A to point B.)

      Since when “doing business” sanctifies everything? We have a new “sacrum” and “profanum”. In my private life I can be irrational time-to-time, I can even love (or hate) some people, but when it comes to “economic” activities I must be “rational” that is believe that the only legitimate aim is the maximisation of momentary monetary exchange value. Personally I don’t really care about the maximisation of marginal utility value or wealth hoarding, I am not a cyborg.

      It is profoundly sad that so few so-called “progressives” and “modernists” dare to speak against the new (or rather very old) cult, the idiotic idolatry of neoclassical economic theory. Where is prof Dawkins’ atheism (the rejection of irrational beliefs) when it comes to faith in miracles brought about by material gods of “progress” and “liberty”? Why don’t the New Atheists reject the faith in The Market in the same way the rant against the old Prophets? The old mass-religion may be naive and not well fitting the modern society but the “new” one (the worship of the “invisible hand”) is far worse – it does immense damage to the very fabric of the human society.

      I am very far away from Christianity especially from Catholic faith. I am deeply ashamed that among the “celebrities” or “authorities” or whatever we call that group of people, only the new Pope (and a few other senior religious figures belonging to Judaism and Islam) speak openly and in clear language against the “neoclassical” economics as the new-old cult.

      What the Pope is doing is in my opinion very significant. He may reproduce in the “West proper” the success of Karol Wojtyla (John Paul II) in bringing Christianity back from the graveyard of ideas to the limelight of public life in Poland and Eastern Europe.

      See the speech delivered by the Pope on the 16th of May to Ambassadors (the transcript is on the Vatican site)

      “Certain pathologies are increasing, with their psychological consequences; fear and desperation grip the hearts of many people, even in the so-called rich countries; the joy of life is diminishing; indecency and violence are on the rise; poverty is becoming more and more evident. People have to struggle to live and, frequently, to live in an undignified way. One cause of this situation, in my opinion, is in the our relationship with money, and our acceptance of its power over ourselves and our society. Consequently the financial crisis which we are experiencing makes us forget that its ultimate origin is to be found in a profound human crisis. In the denial of the primacy of human beings! We have created new idols. The worship of the golden calf of old (cf. Ex 32:15-34) has found a new and heartless image in the cult of money and the dictatorship of an economy which is faceless and lacking any truly humane goal.

      The worldwide financial and economic crisis seems to highlight their distortions and above all the gravely deficient human perspective, which reduces man to one of his needs alone, namely, consumption. Worse yet, human beings themselves are nowadays considered as consumer goods which can be used and thrown away. We have started a throw-away culture. This tendency is seen on the level of individuals and whole societies; and it is being promoted! In circumstances like these, solidarity, which is the treasure of the poor, is often considered counterproductive, opposed to the logic of finance and the economy. While the income of a minority is increasing exponentially, that of the majority is crumbling. This imbalance results from ideologies which uphold the absolute autonomy of markets and financial speculation, and thus deny the right of control to States, which are themselves charged with providing for the common good. A new, invisible and at times virtual, tyranny is established, one which unilaterally and irremediably imposes its own laws and rules. Moreover, indebtedness and credit distance countries from their real economy and citizens from their real buying power. Added to this, as if it were needed, is widespread corruption and selfish fiscal evasion which have taken on worldwide dimensions. The will to power and of possession has become limitless.

      Concealed behind this attitude is a rejection of ethics, a rejection of God. Ethics, like solidarity, is a nuisance! It is regarded as counterproductive: as something too human, because it relativizes money and power; as a threat, because it rejects manipulation and subjection of people: because ethics leads to God, who is situated outside the categories of the market. God is thought to be unmanageable by these financiers, economists and politicians, God is unmanageable, even dangerous, because he calls man to his full realization and to independence from any kind of slavery.”

    18. Will Kanaley says:

      My intent was not to focus so much on what things participants in a JG could do. I agree the list is large. I was trying to sort out in my mind if these things could be done through private companies. Filling potholes, for example, requires some equipment, material and management. Might it be more efficient to hire a private company to do this instead of duplicating some of the above assets and then the company would hire workers to get it done or maybe the JG workers are assigned to a company for these projects. It is unclear to me how this would best work in actual practice. It seems to me that creating a new government operation to compete with existing private companies could be a troubling issue.

    19. Hi Adam,

      I don’t understand your first two paragraphs. Re your third para, what makes you think I’m opposed to the idea that “all people have a MORAL right to decently paid employment”? I said nothing to that effect, or at least certainly didn’t intend to say anything that gave that impression. I’m actually IN FAVOUR of JG, though the way I’d run it is a bit different to the way Bill proposes. In particular I’d extend it to the private sector, whereas Bill wants it confined to the public sector. Bill has never spelled out his reasons for wanting to do that, far as I know.

      Re your paragraph starting “One would have..”, you drag the “uncertainty principle” in to the argument. Is that Heisenberg’s uncertainty principle? If so, this is a VERY DIFFERENT take on the JG argument to anything that’s appeared till now.

      I’m not an expert on relatively, nuclear physics or anything of that sort, so cannot comment. Also, if you think the uncertainly principle is of relevance, you’ll need to write a full length paper explaining why, because I image most readers of your comment will be baffled by your “uncertainty principle” point.

      Incidentally, if you want some VERY DETAILED reasons from me as to why I think extending JG to the private sector makes sense, see here:

      http://mpra.ub.uni-muenchen.de/19094/

      Next, you say “I am constantly bewildered by the attempts to build a one-dimensional model of human society – one where the only measure of value is monetary exchange value.” What makes you think that I or anyone else favours such a system? Along with 99% of the population, I’m in favour of a significant proportion of GDP being allocated to the PUBLIC SECTOR. That’s a sector where no money exchanges hands at the point of delivery: e.g. patients consulting doctors under the UK’s National Health Service do not pay at the point of delivery.

    20. Neil Wilson says:

      “Might it be more efficient to hire a private company to do this instead of duplicating some of the above assets”

      It’s not. You assume one private company. That is a monopoly.

      So there has to be several private companies – all with equipment. All needing to go through a tendering process, some of which they will lose and have to add that cost to the bids they are successful in. That is inefficient.

      The idea of the private sector being always more efficient and that their profit share is only derived from this efficiency is a marginalist fallacy.

      In any rational analysis the state should be the most effective way of getting anything done. It has no cost of funds and can command what assets it requires – dictating the price by virtue of its taxing capacity. A pure efficient bureaucracy would then deploy those assets with optimum allocation.

      The problem is that a pure efficient bureaucracy is impossible to create – because we have humans involved that need something more than that and can’t operate like well oiled machines.

      So public/private tension is always trading off the duplication of assets, the cost of capital and the cost of bids failed against the entropy inefficiency that builds up in any large organisation – particularly public bodies because they are long lived.

      What amuses me is when outsourcers get large and develop the same entropy that you get in public bodies. Yet they still get awarded contracts at ever inflating prices.

      Don’t forget that JG is a dynamic process. The buffer should only be large enough to act as an anchor to the economic system, a price stabiliser to the rest of the jobs market and a countercyclical demand management function. Projects come into being, pay people money and then it is the spending of the money by those people that determines which private sector companies flourish and which die off. That increases hiring causing the JG projects to be shelved.

      The JG is more like the fire service or the armed forces. During a boom it shrinks back into tickover. During a bust it has to scale up to cope with the flood of refugees.

    21. The Dork of Cork. says:

      Ireland vs Ireland

      Whats the difference ?

      5 years.

      http://trueeconomics.blogspot.ie/2013/05/1752013-ireland-v-iceland-2013.html

    22. kevin harding says:

      the jobs listed which are examples of the good work to be done under the JG
      all seem to me to be work which is far more useful for the public purpose than
      most low paid private sector work.[cold calling for example]
      why would an economic system that generally put the well being of the broad masses
      as it main goal would not want to undertake that work regardless of the ability of the private sector
      to be able to afford[extract profits and large salaries for the management] to employ people to
      undertake work of less benefit for society?

    23. Vilhelmo says:

      “That of course raises the question as to how one measures the output of public sector jobs.”
      One of the main purposes of the public sector is to lower the economy’s overall cost of doing business.

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