This is Part 3 in the mini-series discussing the relative merits of the basic income guarantee proposal and the Job Guarantee proposal. While there is a lot of literature out there on the merits of introducing a basic income guarantee very rarely will you read a detailed account of the macroeconomic implications of such a scheme. It is inescapable that the basic income proposal lacks what I call an inflation anchor. That is, to provide an adequate stipend and generate full employment (ensure there are enough jobs for all who want to work), the basic income guarantee is inherently inflationary and sets in place destructive macroeconomic dynamics which make it unsustainable. To suppress the inherent inflationary bias of the proposal, the stipend has to be so low that the recipients are freed from work but not poverty. The Job Guarantee, by way of contrast, is designed to provide an explicit inflation anchor and allows the government to continuously maintain full employment and provide a decent wage to those who from time to time will be in the Job Guarantee pool. It does not rely on poverty wages or unemployment to maintain price stability. That alone is a fundamental advantage of the Job Guarantee over the basic income guarantee – it is sustainable.
The basic income proposal lacks any coherent inflation control
The basic income proposal addresses income insecurity directly by providing a guaranteed stipend to individuals. It is in the class of policy interventions that Modern Monetary Theory (MMT) authors have referred to as ‘generalised expansion’, in the sense that the government stimulus provided by the stipend will indiscriminantly compete for resources at market prices.
The higher the stipend, the greater the stimulus and the greater is the degree of competition for the real resources for sale at market prices.
We should note that the basic income proponents that adopt neo-liberal stances with respect to government fiscal capacity and fail to understand the nature of the unemployment that motivates their advocacy of the basic income, generally prefer a low stipend – to ease the burden on government spending and reduce the taxation burden on those who ‘pay’ for the scheme (in their logic).
But clearly there are basic income proponents who are motivated by notions of individual freedom and advocate higher stipends. These advocates tend not to even get bogged down in discussions about the causes of unemployment or whether the government is financially constrained.
They may also operate within a functional finance paradigm (consistent with MMT) and thus understand that a currency-issuing government faces no financial constraint.
Their overwhelming motivation begins with a philosophical view that individuals should not have to engage in paid work to elicit support from the income generating capacity of the society. This is a statement of liberty. They bristle if they are called neo-liberals and rightly so.
However, whether the basic income proposals emerge from a neo-liberal frame or not is moot in one important sense. Whatever the motivation for a basic income guarantee the fact remains that the concept lacks any coherent inflation control.
The more neo-liberal oriented proposals that advocate modest stipends with a fiscally-neutral environment would have a relatively small impact on aggregate spending and employment, and even with some redistribution of working hours; high levels of labour underutilisation are likely to persist.
At those stipends, the basic income proposal would not enhance the rights of the most disadvantaged nor provides work for those who desire it (see Cowling, Mitchell and Watts, 2003).
Adrian Little (1998: 131) points out that while the basic income might enable individuals to exist without work:
… it does not provide any firm promises of paid work for those who don’t have a job but who want to contribute their labour to the generation of social wealth.
[Reference: Little, A. (1998) Post-Industrial Socialism – Towards a New Politics of Welfare, Routledge, London.]
However, more profound promise arise if we introduce the basic income guarantee within a functional finance paradigm. This is because the introduction of a basic income guarantee would lock the economy in to an inflationary bias, which when combined with the current ‘independent’ central banks would prevent it from achieving sufficient growth to offer real employment options to the workers (see Mitchell and Watts, 2004: 11).
The higher the stipend, the greater the inflation risk. That risk is seen in a modern monetary economy as being related to the relationship between nominal spending growth (demand) and the capacity of the economy to respond to that demand with increased supply of real goods and services.
Within a functional finance paradigm, the government uses its fiscal capacity to increase overall spending in the economy to avoid mass unemployment. The target is output and employment growth rather than any particular fiscal outcome (in monetary terms).
We understand that mass unemployment arises when the fiscal deficit is inadequate to offset the desire of the non-government sector to save overall.
Some readers might argue that the culprit here is not the fiscal deficit being too small, but, rather, the non-spending by the non-government sector being too large.
However, Modern Monetary Theory (MMT) authors assume that non-government sector spending and saving decisions are based on the individual choice in relation to the opportunities available and the constraints that impinge.
In that sense, arguing that overall non-government saving is too large is tantamount to questioning the motivations of the individuals that have combined to create that outcome. That sort of emphasis would appear to be at odds with the exhaltation of individual freedom that seems to underpin basic income proposals.
At any rate, MMT authors prefer to focus on the responsibility of the currency-issuer to use that capacity to fill the gaps left by indidivual (private) decisions.
Following that logic, if there is mass unemployment, then the solution is for the government to expand its net fiscal impact (spending over taxation) and allow the deficit to rise.
So shifting from a state of mass unemployment to the introduction of a basic income guarantee would require a net government stimulus (that is, an increasing fiscal deficit).
In this regard, the basic income guarantee (funded by an increasing fiscal deficit) constitutes an indiscriminate Keynesian expansion and as it lacks any inbuilt price stabilisation mechanisms, inflationary pressures would result.
Workers who draw income from the production cycle have also added output (via their labour) to that cycle. For a given level of productivity (output per unit of input), the more people that have access to income, spend that income at market prices, but do not add to output (that is, are supported in real terms by the production of others), the greater the inflation risk.
Further, the greater the share of income generated in any period that is received by people who offer nothing in return, the higher the inflation risk.
Under these circumstances, the more people pursue the ‘freedom’ on non-work under the basic income guarantee, the worse the situation becomes because for given productivity, this would mean the supply side of the economoy keeps shrinking, while the demand side remains stable (depending on the level of the stipend).
So we come back to the point that to minimise the inflation risk, the basic income stipend has to be small, which then, in turn, means the scheme hardly addresses the dignity of an independent existence. People have income security but are in poverty.
We can explore this vulnerability further.
If the government increases net spending (its deficit) to fund a generous basic income stipend then the demand for labour rises in response to the higher aggregate spending in the economy. Clearly, labour demand would higher than under a fiscally-neutral introduction of a basic income guarantee.
The real issue is what happens to labour supply.
If the stimulus was wrought via the payment of a generous basic income stipend, then it is reasonable to surmise that total labour supply would decrease.
In other words, the level of employment that coincides with ‘full employment’ where everybody who wants a job can find one is artificially reduced in the presence of the basic income guarantee (if sufficiently generous).
The real resource space available for the stimulus is thus reduced. The more people who took the stipend and withdrew from the labour force, the less real capacity there would be in the economy to respond to nominal spending growth.
With less productive workers available, the stimulus would cause what economists call ‘demand-pull’ inflation. The inflation rate is pulled up by an incompatability of nominal spending relative to productive capacity.
Firms would compete for increasingly fewer workers and drive up wages, which would have the consequence of making the basic income stipend less attractive at the margin.
Some ‘Malibu surfers’ might decide to resume work again. The government might respond by raising taxes and/or reducing government expenditure, which would tend to raise unemployment.
The central bank, under the current regime that governs monetary policy, would also respond by raising interest rates.
The combination of these policy responses would reduce the demand pressure would decline, but to the extent that the inflationary process had assumed a cost-push form (distributional struggle over available real income), wage and price inflation may only decline slowly.
It is thus possible that an unsustainable dynamic could be generated in which there are periodic phases of demand-pull inflation and induced cost-push inflation at low rates of unemployment, followed by contractionary policy and high rates of unemployment.
These economic outcomes are consistent with indiscriminate (generalised) Keynesian policy expansions of the past.
Our conclusion is that the introduction of a basic income guarantee which is designed to also sustain full employment (that is, to give all those who want to work the opportunity) is likely to be highly problematic given the likely inflationary consequences.
The Job Guarantee is consistent with both full employment and price stability
An economy reliant on the basic income guarantee to solve the problems of income insecurity brought about by the tendency of capitalist economies to mass unemployment is inherently inflation.
Even though the introduction of a basic income guarantee can engineer a state of full employment if the fiscal stimulus associated with its introduction is sufficient, it does so by promoting an artificial reduction in the supply of labour and the resulting shrinkage in the productive capacity of the economy renders such a nation vulnerable to accelerating inflation.
In other words, an economy built on a basic income guarantee does not have the capacity to deliver both sustained full employment and price stability.
In contradistinction, the Job Guarantee approach is a far superior way to sustain full employment with price stability in the face of private spending fluctuations.
The initial observation is that the Job Guarantee is designed on the basis of an explicit recognition that a sovereign government is never revenue constrained because it is the monopoly issuer of the currency.
Starting from that point conditions the narrative that can be developed to support the introduction of the policy. It frees the proponents from arcane debates about whether the government can ‘afford’ the scheme,
Falling into these neo-liberal debates about fiscal sustainability typically leads proponents of a basic income guarantee to propose a system that only offers poverty-level stipends – to allay attacks that the government will not be able to ‘fund’ the program.
The Job Guarantee is a simple concept with far-reaching consequences. It involves the government making an unconditional job offer to anyone who is willing to work at a socially-acceptable minimum wage and who cannot find work elsewhere.
This creates a buffer stock of paid jobs, which expands (declines) when private sector activity declines (expands).
To avoid disturbing private sector wage structure and to ensure the Job Guarantee is consistent with stable inflation, the Job Guarantee wage rate is set at the minimum wage level, defined to ensure the worker is not socially excluded.
The minimum wage should be an expression of the aspiration of the society of the lowest acceptable material standard of living. Similar considerations would determine the appropriate basic income stipend although the capacity of the government to maintain such a stipend without inflation is limited at best.
Since the Job Guarantee wage is open to everyone, it becomes the national minimum wage. Job Guarantee workers would enjoy stable incomes, and their increased spending would boost confidence throughout the economy and underpin a private-spending recovery.
By maintaining a buffer stock of employment, the Job Guarantee operates under what economists terms ‘a fixed price/floating quantity rule’.
That means that the government’s unconditional job offer is at a fixed wage (fixed price rule) and the buffer stock of jobs fluctuates in accordance with the strength of non-government sector spending (a floating quantity).
Given the Job Guarantee hires at a fixed price in exchange for hours of work and does not compete with private sector wages, employment redistributions between the private sector and the buffer stock can always be achieved to stabilise any wage inflation in the non-Job Guarantee sector.
The government purchases the labour of Job Guarantee workers off the ‘bottom’ of the non-government wage distribution. By definition there is no non-government sector demand for the idle resources (unemployment).
Once the scheme is in operation, the anti-inflation mechanisms are easy to understand. If there are inflationary pressures developing in the non-government sector as it reaches full capacity, the government would manipulate fiscal and monetary policy settings to constrain non-government sector spending to prevent the economy overheating.
This would see labour being transferred from the inflating non-government sector to the ‘fixed wage’ Job Guarantee sector and eventually this would resolve the inflation pressures.
Clearly, when unemployment is high this situation will not arise. In general, there cannot be inflationary pressures arising from a policy that sees the government offering a fixed wage to any labour that is unwanted by other employers (see Mitchell and Muysken, 2008).
The Job Guarantee buffer stock is a qualitatively superior inflation fighting pool than the unemployed buffer stock. Some disagree by arguing that workers may consider the Job Guarantee to be a better option than unemployment.
Without the threat of unemployment, wage bargaining workers then may have less incentive to moderate their wage demands notwithstanding the likely disciplining role of wait unemployment in skilled labour markets.
But Job Guarantee workers will retain higher levels of skill than those who are forced to succumb to lengthy spells of unemployment.
The Job Guaranteeworkers would thus constitute a more credible threat to the current non-government sector employees than those who languish in the unemployment pool. When wage pressures mount, an employer would be more likely to exercise resistance if she could hire from the fixed-price Job Guarantee pool.
Further, if the government was to pay market wages to Job Guarantee workers this would undermine the in-built counter-inflation mechanism and the full employment policy would be equivalent to an indiscriminate (generalised) Keynesian expansion.
So the fundamental difference in relation to inflation between the basic income proposal and the Job Guarantee is that the former spends on a quantity rule (the stimulus competes with other market prices) while the latter spends on a price rule (spending is in the form of a fixed price offer to idle resources with no market bid).
The Job Guarantee thus provides the government with an inflation control mechanism, while avoiding the massive costs of unemployment.
The basic income proposal can only reduce the inflation risk by paying a low stipend and suppressing overall spending in the economy by maintaining mass unemployment.
As soon as the basic income stipend rises sufficiently to become broadly attractive, the labour supply contraction sets off forces that lead to accelerating inflation.
The Job Guarantee represents a minimum spending approach to full employment. But, importantly, it does not replace conventional use of fiscal policy to achieve social and economic outcomes.
The government would supplement the Job Guarantee wage with a wide range of social wage expenditures, including adequate levels of public education, health, child care, and access to legal aid.
Further, the provision of large-scale public infrastructure remains crucial and the introduction of the Job Guarantee does not undermine the capacity of the government to pursue these projects.
While it is easy to characterise the Job Guarantee as purely a public sector job creation strategy designed to reduce income insecurity, 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.
It is thus a macroeconomic stability framework rather than an ad hoc crisis response.
The Job Guarantee also provides the economy with a powerful ‘automatic stabiliser’, a characteristic missing from the basic income guarantee concept.
Government employment and spending automatically increases (decreases) as jobs are lost (gained) in the non-government sector.
The Job Guarantee thus fulfils an absorption function to minimise the employment and income losses currently associated with the flux of non-government sector spending.
When non-government sector employment declines, public sector employment will automatically react and increase its payrolls.
The nation always remains fully employed, with only the mix between non-government and public sector employment fluctuating as it responds to the spending decisions of the non-government sector.
The Job Guarantee maintains what is referred to as ‘loose’ full employment because the government offers to purchase labour for which there is no current market demand.
The increased government spending does not compete with other resource users. The Job Guarantee thus recruits labour ‘off the bottom of the market’ in contradistinction to general government spending, which involves the government competing with other purchasers for resources including labour.
By not competing with the non-government market for resources, the Job Guarantee avoids the inflationary tendencies of traditional Keynesian pump-priming, which attempts to maintain full capacity utilisation by ‘hiring off the top’, that is, competing for resources at market prices and relying on so-called spending multipliers to generate extra jobs necessary to achieve full employment.
The latter approach fails to provide an integrated full employment-price anchor policy framework. As we have seen, the basic income guarantee proposal is in this class of interventions and is thus inferior to the Job Guarantee.
The only question facing the Job Guarantee is whether there is enough real capacity in the economy (available resources and output space) for the extra government spending.
The existence of idle workers is strong evidence that there is non-inflationary scope to spend. Further, the government knows when it has spent enough. Under the Job Guarantee, the last person who seeks a job on any particular day defines how much government spending is required to ensure there are enough jobs available.
It is also true that because it would be impossible to run a Job Guarantee matching all the skills to jobs the employment buffer stock comprises ‘loose’ full employment in the sense that there would some skills-based underemployment existing when the pool was large.
In better times, as the Job Guarantee pool shrank, and was predominantly occupied by workers who would typically be the last employed by any private firm (if ever), the gap between ‘loose’ and ‘true’ would be around zero.
In Part 4, we move on to discuss the second machine age, coercion and transformational capacities of the Job Guarantee.
That should do it.
The series so far
This is a further part of a series I am writing as background to my next book on globalisation and the capacities of the nation-state. More instalments will come as the research process unfolds.
The series so far:
The blogs in these series should be considered working notes rather than self-contained topics. Ultimately, they will be edited into the final manuscript of my next book due later in 2016.
That is enough for today!
(c) Copyright 2016 William Mitchell. All Rights Reserved.