The title is my current working title for a book I am finalising over the next few months on the Eurozone. If all goes well (and it should) it will be published in both Italian and English by very well-known publishers. The publication date for the Italian edition is tentatively late April to early May 2014.
You can access the entire sequence of blogs in this series through the – Euro book Category.
I cannot guarantee the sequence of daily additions will make sense overall because at times I will go back and fill in bits (that I needed library access or whatever for). But you should be able to pick up the thread over time although the full edited version will only be available in the final book (obviously).
Part III – Options for Europe
Chapter 19 Employment guarantees
Upon hearing of the 2013 announcement to allocate 8 billion Euros to combat youth unemployment in the Eurozone, the Finnish Prime Minister Jyrki Katainen said:
“It’s a lot of money, but of course everybody must understand that the main responsibility lies in the hands of governments, and the tools must be used or taken at the national level. European solutions can partially help, but it is not the main story.”
In his 1987 Ely Lecture to the American Economics Association, Princeton economist Alan Blinder described the failure to provide productive employment for all those willing and able to work as one of the “major weaknesses of market capitalism”. He argued that the failure had been “shamefully debilitating” since the mid 1970s, and that the associated costs make “reducing high unemployment a political, economic and moral challenge of the highest order” (Blinder, 1989: 139). In 2013, Blinder told an audience in the US that there was still an “emergency, “five years after the worst … we have this titanic loss of output … something we number crunching economists tend to emphasize. But more regular people care more about the misery that the unemployed have to endure.” (Blinder, 2013: 1). The solution? Blinder said we “can hire people directly into government jobs … try to induce businesses to hire more … The point is, we can still do these things” (p.4). The following year, Alan Blinder wrote that Reaganomics, the precursor to what we now put under the banner of ‘fiscal austerity’, “marked the beginning of the federal government’s conversion from fighting poverty to fighting the poor (and the middle class)” (Blinder, 2014). Blinder is no particular champion of the poor and remains locked in the world of mainstream economics. But as a more moderate member of that fraternity he can see the blight of unemployment; knows that government can do something about it by spending more and/or taxing less; and that governments have attacked the unemployed and the poor rather than use their capacities to reduce their distress.
Blinder’s 1987 challenge to the economics profession in the US remains acutely relevant to all of us today, and never moreso than for the euro-zone Member States, which have deliberately forced millions of worker into joblessness while bowing to the gods of price stability and concocted notions of fiscal responsibility, or should we say, rectitude. The dominant Monetarist economic orthodoxy since the mid-1970s intersected with the long-standing Franco-German enmity (and histrionics) to create a policy space in the euro-zone, which deliberately and persistently constrained their economies under the pretext that the role of policy is to, first and foremost, maintain price stability. There was a widespread belief that economies prosper if deficits are low and prices are stable. The reality missing from this was that movements in deficits, sometimes substantial, are required to maintain prosperity and will only violate price stability when certain, rarely found circumstances are in place.
A government has two broad choices
A central idea in economics 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 economists of all persuasions are united in saying that developing theories about how efficiency is to be attained at any level is a core activity of their profession. At the macroeconomic level, the so-called ‘efficiency frontier’, the point where the economy is deemed to be efficient requires that all productive resources are fully engaged. In more simple terms – full employment – everyone can find a job who wants one. The hot debate that has spanned the years is what was meant by full employment but it is a fact that full employment is a central focus of macroeconomic theory, whether you adhere to a conservative ‘free market’ approach or prefer a more progressive policy interventionist approach, which considers governments have intrinsic responsibilities to ensure the conditions for full employment are present. 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.
The government has two broad ways to maintain price stability and the use of ‘buffer stocks’ are involved in each even if the public might not recognise that nor the politicians dare admit to it. A buffer stock is a fancy term to describe a fluctuating quantity of some stored thing that can be used to stabilise prices. In the agricultural context, the Australian government used to buy wool when it was being oversupplied to the market to ensure the price remained within an agreed limit. The consequence was that they amassed large stock piles of wool in good seasons – a ‘buffer stock’ of wool, which they kept in large wool stores spread around the nation. When the season was poor and there was a shortage of wool supplied to the market relative to the demand for it, the government would release wool from its stores into the market to keep the price stable. The buffer stock of wool held by the government would thus fluctuate up and down according to the vagaries of price demand and supply, but the price would remain more or less constant. The scheme was designed to stabilise incomes for wool growers in Australia. The general principle where a commodity can be stored if in surplus production or released from store if in shortage in order to stabilise prices and preserve incomes is well known (Graham, 1937).
In general terms, the two broad ‘buffer stock’ approaches that a government can use are:
- Unemployment buffer stocks: inflation is controlled using a combination of tight monetary policy and/or fiscal austerity, which creates a buffer stock of unemployment. The unemployment dampens wage demands and the accompanying subdued sales reduce the capacity of firms to push up prices. Deliberately creating unemployment to reduce inflationary pressures is a very costly and unreliable approach. This is the current mainstream approach employed in the euro-zone and elsewhere and is extremely costly.
- Employment buffer stocks: The government makes an unconditional offer of employment at a socially acceptable minimum wage to anyone who cannot find a job, thereby creating a buffer stock of jobs. The jobs pool would fluctuate according to how strong the rest of the economy was. The Job Guarantee (JG) approach is an example of an employment buffer stock policy approach (Mitchell, 1998).
How do each of these approaches work and what are the costs and benefits of each?
Unemployment buffer stocks and price stability
Since Monetarism usurped the policy dominance of Keynesianism in the late 1970s, unemployment rates have persisted at the highest levels known in the Post World War II period as governments abandoned full employment as a policy goal and concentrated on price stability. In the current crisis, unemployment rates have sky-rocketed in most countries as governments have imposed even more fiscal austerity. Thus the mainstream approach to price stability, which dominates policy practice around the world is to generate buffer stocks of unemployment. Given the massive costs that are associated with mass unemployment it is reasonable to ask whether this is the best way to maintain price stability?
The modern policy framework is in contradistinction to the practice of governments in the Post World War II period to the mid-1970s which sought to maintain levels of spending in the economy using a range of fiscal and monetary measures that were sufficient to ensure that full employment was achieved. Continuous fiscal deficits were common and the idea that a government should pursue some preconceived fiscal balance irrespective of what that might mean for the level of unemployment was alien. Unemployment rates were at very low levels throughout this period.
Our earlier discussion on the so-called ‘Great Moderation’, emphasised how politicians increasingly came under the hold of the Monetarist free market ideology, which asserted that there is no discretionary role for government fiscal policy to regulate total spending. The neo-liberals believe, instead, that unemployment is a structural problem arising mostly because individuals are not motivated enough to seek work or are subsidised to halt job search by excessively generous income support measures provided by government. Accordingly, the policy debate became increasingly concentrated since the late 1970s on deregulation of financial and labour markets (particularly job protection and trade union involvement), privatisation, and reductions in welfare support. Macroeconomic policy became concentrated on using interest rates to control spending with a bias towards excessively high rates supported by fiscal austerity. Unemployment shifted from being a policy target (to keep it consistently low), which defined the full employment period, to being a policy tool, which governments would deliberately manipulated to suppress price pressures.
High unemployment suppresses price pressures because the fear of losing a job discourages workers from seeking higher wages. Further, with recessed spending on goods and services, firms have reduced ability to push up prices. Taken together, the rising unemployment keeps a lid on inflation. Several nations also introduced extensive labour market deregulation, which spawned new forms of labour underutilisation, which made it harder for workers to secure wage rises. For example, the Hartz reforms in Germany in the early 2000s introduced low-wage ‘mini-jobs’. More generally, underemployment – the state where a person is working part-time job desires longer hours – has joined unemployment as a major problem as economies generate ever increasing numbers of low quality, casualised jobs in response to the lack of overall spending.
However, central bankers do not characterise their approach in this way. Instead, it is claimed that full employment follows naturally from the maintenance of price stability even though this approach to price stability requires the maintenance of an unemployed buffer stock. In other words, they say that when price stability is achieved, the resulting unemployment rate constitutes full employment even if that rate is high. The high unemployment then is dismissed as being structural, with the additional assertion, that if governments try to reduce it with increased deficit spending, they will only generate accelerating inflation. The evidence is not consistent with this view. The big jumps in unemployment always occur when there is a major recession. No changes in the so-called structural influences cited by neo-liberals to explain high unemployment are coincident with the rising unemployment. It is also clear that whenever economic growth picks up, firms start hiring and unemployment drops. It is also evident that some nations (such as the US and Australia), which sustained strong rates of employment growth in the pre-GFC period drove unemployment down well below the ‘estimated’ full employment levels provided by economists while inflation also fell and remained low. The ad hoc response from the neo-liberals was that the ‘full employment’ level had shifted down but there was no convincing ‘structural’ explanation for that shift.
The only reasonable explanation was that increased total spending created more sales and gave firms an incentive to increase employment. One of the few economists to understand that was MIT academic Michael Piore (1979: 10) who said:
Presumably, there is an irreducible residual level of unemployment composed of people who don’t want to work, who are moving between jobs, or who are unqualified. If there is in fact some such residual level of unemployment, it is not one we have encountered in the United States. Never in the post war period has the government been unsuccessful when it has made a sustained effort to reduce unemployment.
It is clear that the experience of OECD nations since 1975 suggests that deflationary policies, including fiscal austerity, are effective in bringing inflation down but impose huge costs on the economy generally, and on certain demographic groups specifically, which are rarely computed or addressed. The empirical evidence is clear that most OECD economies have not provided enough jobs since the mid-1970s and the conduct of monetary policy has contributed to the malaise. Central banks around the world have forced the unemployed to engage in an involuntary fight against inflation and the fiscal authorities in many cases have further worsened the situation with austerity.
The tolerance of high levels of unemployment is a relatively recent phenomena and reflects the dominance of the neo-liberal ideology. But this tolerance comes without a clear understanding of the magnitude of costs that it imposes on specific individuals and society in general, that include:
- loss of current output and income;
- social exclusion and the loss of freedom;
- skill loss;
- psychological harm;
- ill health and reduced life expectancy;
- loss of motivation;
- the undermining of human relations and family life;
- racial and gender inequality; and
- loss of social values and responsibility.
These losses are massive and while the unemployed and their families are certainly aware of them, the remainder of the society are less aware. For example, we might notice rising crime rates in our neighbourhoods but do not associate it with unemployment. In part, this is because neo-liberalism has changed the way we think about unemployment. In the past we understood clearly that it arose as a result of a shortage of jobs. In recent decades, we have been conditioned by a relentless government statements and a largely, co-opted media to perceive unemployment as an individual problem. The upshot is that we are lulled into accepting the popularised narrative that the unemployed are lazy; have poor work attitudes; refuse to invest in appropriate skills; are subject to disincentives arising from misguided government welfare support, and all the rest of the arguments that mainstream uses to obfuscate the social and economic problem.
Further, there is evidence that the ‘quality’ of the unemployed buffer stock (defined in terms of its capacity to discipline price pressures) deteriorates over time. Condition and liquidity are the keys. Just as soggy rotting wool is useless in a wool price stabilisation scheme, labour resources should be nurtured as human capital constitutes the essential investment in future growth and prosperity. It is clear that the more employable are the unemployed the better the price anchor will function. There is overwhelming evidence that long-term unemployment generates costs far in excess of the lost output that is sacrificed every day the economy is away from full employment. The skill losses and deterioration in personal health and related circumstances associated with long-term unemployment undermine the quality of the buffer stock and require higher and higher levels of unemployment to be created to maintain the same downward pressure of prices.
For these reasons, it is difficult to argue in cost-benefit terms that this approach could possibly be a superior way to maintain price stability. This is especially so when we realise that the currency-issuing government has the power to ensure a high quality price anchor is in place (an employment buffer stock approach) and that continuous involvement in paid-work provides returns in the form of improved physical and mental health, more stable labour market behaviour, reduced burdens on the criminal justice system, more coherent family histories and useful output, if well managed. It is also the case the training in a paid-work environment is more effective than contextually isolated training schemes, which have become the fashion under the active labour market programs pursued by governments in all countries over the last two decades.
Employment buffer stocks and price stability
UK Job Guarantee proposals
European Youth Guarantee
TO COME[THIS MATERIAL WILL BE COMPLETED ON MONDAY. THEN I HAVE ONE CHAPTER TO COMPLETE AND AN INTRODUCTION – I HOPE TO FINISH WITHIN 10 DAYS]
This list will be progressively compiled.
Graham, B. (1937) Storage and Stability: A Modern Ever-normal Granary, New York, McGraw Hill.
Piore, M.J. (1979) Unemployment and inflation, institutionalist and structuralist views, White Plains: M.E. Sharpe, Inc.
(c) Copyright 2014 Bill Mitchell. All Rights Reserved.