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Parts One and Two

In the first two parts of this series, I analyzed views on the Job Guarantee (JG) idea offered by Cullen Roche and Peter Cooper in conjunction with a post by John Carney which kicked off an explosion of blogosphere posts and commentaries on the JG. In this post, I'll analyze John's take on the JG. He says:

“There are at least three reasons the Jobs Guarantee cannot work.” it's: “. . . massively inflationary”; “. . . . a bureaucratic nightmare; and “. . . economically stagnating.”

His reasoning, and my interleaved replies from an MMT perspective are below. All my replies assume that the JG would not be “paid for,” but would occur through deficit spending.

Would the JG Be Massively Inflationary?

”While employing the unemployed may not create upward pressure on wages, it dramatically increases demand. The national income is increased by the amount the government pays those laboring in JG jobs.”

Actually, GDP is increased by even more than that, because there would be a fiscal multiplier attached to the JG wages similar to the multiplier associated with unemployment insurance, probably in the neighborhood of 1.6 – 1.7. In addition, unlike UI, JG jobs would carry benefits, including access to Medicare, so one would have to add Medicare-related payments and their multiplier onto the multiplier associated with UI. The fiscal multiplier attached to the initial introduction of the JG is one of the arguments for it, since it would represent increased private sector activity and expanded private sector hiring.

”That income is entirely from newly created money, so the money supply is expanding.
That additional demand is not matched by additional supply, however.”

I think this part of John's argument is really weak. Since the output gap is now between 25 -30% of what our economy is capable of, we can expect business to respond to the new aggregate demand with increases in supply, not with increased prices. This will depend on what people want to buy, of course. But there's no reason to assume that people living on a JG wage will want to buy goods and services that are scarce. If John thinks they will, then he needs to amplify that part of his theory about the impact of the JG.

"The people working in JG jobs are not producing goods that the market needs. Their work product is largely waste. Which means that demand increases without the supply of desired goods increasing. The result: inflation."

We can look at the people in JG jobs as supplying demand that the market needs. How do we know this is true? Because of the huge output gap between our capacity to supply and what we're selling. The idea that supply will not increase, as demand increases only makes sense when our capacity to supply is exhausted. But, of course, we have that gigantic output gap telling us that supply will increase and that inflation is not something we have to worry about until that gap is closed.

But when it is closed, JG inputs to the economy will be largely gone, because nearly all of the JG workers will have been hired back by the private sector, and the Federal payrolls will be reduced to its normal complement plus a maintenance staff for the JG program to safegaurd its capacity to ramp up once again, when the next private sector downturn hits.

Also, on what basis is John claiming that JG work products and services are largely "waste"? Is health care for the old and infirm waste? Is building solar and wind power capacity waste? Is work in public schools waste? Is mentoring children lacking parents waste? Is child crae assistance waste? Is the outcome of cultural projects waste? Is repair of public facilities, infrastructure and public spaces waste? Is training people in new skills waste? Is working on entrepreneurial projects waste? Whether, JG work products are waste or not, depends on whether JG workers produce valued goods and/or services that improve the quality of life for other Americans. It doesn't depend on whether “the market” needs those goods and services in the sense that it judges that a profit can be made by producing and selling them.

The story of the US economy in recent years is the story of market failures. It is the story of pharmaceutical companies failing to produce drugs that would actually make people healthier. It is the story of financial services companies sitting on cash and speculating in a massive international gambling casino, rather than using money in a way that is productive for the economy. It is the story of energy companies failing to invest the money needed to bring the cost of alternative sources of energy down and leaving us dependent on fossil fuels. It is the story of the failure of insurance companies to provide affordable health insurance, and the failure of private health care providers to contain costs.

In short, the track record of the market as a mechanism for assessing and producing value for society has not been good for the past 40 years. It has not been adaptive for society at large. Greed has been bad for the market, because it has led business people to try to overturn its workings, to manage it, and even to control it in certain industries. The truth about the market is that works efficiently when it is free, but no business endeavor that is already established wants it to remain free.

In its own area of endeavor a business wants to manipulate the market, to control it, and to create a managed market. Businesses are not for free markets. They are against Government regulations. They are for their own domination of their own market sectors, without Government regulations impeding that domination.

In the past 40 years big business has been very successful at regulating wages in the labor market in a way that benefits them. So, the truth is that the market has largely been a mechanism for seeing to it that the financial benefits of productivity gains largely go to a very small percentage of Americans and an emerging global elite. It hasn't been a mechanism that has increased the real wealth of most Americans by very much over that period.

Will the JG Be A Bureaucratic Nightmare?

John arrives at this conclusion by pointing out that there are 13.5 million people unemployed in the US today, and that an effort to employ all of them would make the JG huge, and implies that the Government couldn't employ all those people without a huge bureaucracy. He claims that:

The JG is a creature of happier times and smaller economies. Bill Mitchell explains that he thought up the idea while he was a student at the University of Melbourne. The total employed population of Australia is only about 11.5 million. Australia currently has an unemployment rate of around 5.3 percent, which translates into 635,800 jobless people. In other words, a jobs guarantee in Australia might be workable. But it doesn't scale to fit the United States.

OK, first John isn't estimating the scale of the problem in a reliable way. It's off the top of his head based on U3 unemployment numbers. To do a better projection you have to recognize, first, that, since dis-employment is at about 28 million, about 25 million full-time jobs are needed to get the unemployment rate down to 2%, which is the MMT full employment goal. In other words, there's an unemployment problem much bigger than 13.5 million to handle. On the other hand, not all of this is necessarily a problem for the JG to handle.

MMT proposals for the JG usually occur in the context of $700 Billion worth of additional deficit spending in full payroll tax cuts for employees and employers, and State Revenue Sharing of $1,000 per person, with a fiscal multiplier of perhaps 1.3 that would kick in before the JG funds really started to flow. It's likely that this deficit spending would cut back the full time unemployed to about 6.5 million, but still leave an additional 8 million part-time employees looking for full-time jobs.

Then, as the JG jobs kicked in after 3 months of ramp-up time at a multiplier of 1.6 – 1.7, private sector hiring would start to accelerate. I think this would make the initial size of the JG problem more like 5 million rather than 13 million. But, please note, I'm not presenting this estimate as anything more than a guess.

Obviously we need some good modeling on this to estimate the dynamics over time and the interactions between different components of the MMT program in ramping up demand and the private sector response. What is clear is that John Carney's estimate of the necessary size of the JG program isn't thought through and is perhaps double or triple its likely actual peak size.

Also, as the JG demand began to hit, it's likely that we'd get a private sector response to it in the form of increased supply and hiring of full time workers within six months. We might very well have a JG program down to less than 500,000 employees within 9 months of the date the JG begins hiring.

In short, I see the JG as a permanent program with a temporary peak size of about 5 million, very quickly falling to 500,000 and eventually to less than a 100,000. If the Federal Government enlists the help of non-profits, State and local Governments to staff it up to the necessary short-term peak, and then  relies on individual JG workers and the private sector to staff it down by hiring willing workers away, I don't see the creation of a large permanent Federal bureaucracy coming out of this. John's notion of a bureaucratic nightmare is way overblown, and we certainly can't accept the mere assertion that this would be the result as plausible.

Will the JG Lead to Economic Stagnation?

John also says:

Unemployment encourages those who went into trades that turn out to lack adequate demand to give up those trades and seek another. This is economically productive because it brings stagnate resources—people who can do things no one will pay for—out of stagnation.

The Jobs Guarantee would eliminate this process. The government would buy the labor of people who hold skills not demanded by the market, preventing those people from seeking out new skills. Stagnant human capital would just continue to stagnate.

This argument would be a much stronger one if we weren't in the midst of a balance sheet recession. In this downturn, people may be unemployed because their companies had sales problems due to decreased demand. Their skills may be very much needed by the market as the balance sheet recession eases and then ends. Also, in this particular recession, those in the building industry have experienced a crash. There's no reason to believe that when housing recovers and building starts again that their skills will not be needed. The same, of course, applies to the auto industry and related businesses in its supply chain.

The question of which jobs, and in what quantity, would be coming back in the wake of an MMT anti-recession job creation program is unanswered. But there's no reason to believe that a disproportionate number of people who lost their jobs have obsolete skills and would be unemployable as the recession ends. We need some numbers to see to what extent this is a JG problem. Insofar as it's not a problem, it would simply give the otherwise unemployed a wider range of skills to draw on.

But suppose that 1-2 million people now dis-employed were unemployable in the market when the economy recovered, then who ever said that the JG program would not contain training programs for helping people to acquire new skills. MMT writers have been very clear that the JG would contain such a component. If it's managed well in collaboration with business sectors that need those skills, then those people who lost their jobs due to skill obsolescence would be able to join the private sector again.

Let's Go beyond Talking Points

To the MMT claim that a JG can bring and maintain full employment, John Carney replies: it's: “. . . massively inflationary”; “. . . . a bureaucratic nightmare; and “. . . economically stagnating.” I hope I've shown here that all three risks are overblown, and aren't yet really beyond the stage of talking points. Fundamentally, John's objections seem to follow a script from Austrian economics, echoing Schumpeter and Hayek, while claiming favorability to MMT. Of course, pointing this out doesn't speak to the validity of his points, but it does suggest that he hasn't yet really internalized the full MMT perspective.

He offers these as three risks of the JG program, but in arguing for them he provides no thinking acknowledging that we're in a balance sheet recession where many people are unemployed because demand has collapsed, rather than due to skill obsolescence. He also assumes a likely size for the JG program without considering or thinking through its MMT context. For him, it's just: since we have 13.5 million U3 unemployed, the JG program will employ them all, conveniently forgetting the other elements in the MMT anti-recession program, and the dynamics of its two other legs, which would reduce the need for JG employment and the size of the program.

Finally, his failing to recognize that we're in a balance sheet recession and have a huge output gap indicates that in claiming that there will be “massive inflation” as a result of the deficit spending on the JG, he hasn't thought through the really basic insight that there won't be demand-pull inflation until we've reached full employment and that by that time JG spending will be greatly reduced and won't be a factor in causing any such inflation.

John Carney has written a new post, in addition to the one I've critiqued here. In my next post in this series, I'll critique that one, as well.

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Comment Preferences

  •  Some of the argument needs tweaking (1+ / 0-)
    Recommended by:
    Letsgetitdone

    The response to

    Unemployment encourages those who went into trades that turn out to lack adequate demand to give up those trades and seek another. This is economically productive because it brings stagnate resources—people who can do things no one will pay for—out of stagnation.

    that we are in a balance sheet recession needs work. There are many, like Stiglitz, that believe free trade and automation destroying jobs came first and the debt issues as a result. Your response here kind of indicates you think it was debt that drove the jobs away. I think JG has to go hand in hand with trade restrictions. It's okay to employ those that are out of work from automation through JG but less so those that are out of work from free trade.
    •  What? (0+ / 0-)

      I'm afraid I don't understand the implications your drawing from Stieglitz's beliefs. Please explain!

      •  Will try (0+ / 0-)

        Read here. If Stieglitz is right then a lot of America's economic issues are a result of not being able to find productive work for Americans. The term balance sheet recession has the opposite connotation - that there is plenty of productive work and we just lack financing to get it started.

        The question of which jobs, and in what quantity, would be coming back in the wake of an MMT anti-recession job creation program is unanswered. But there's no reason to believe that a disproportionate number of people who lost their jobs have obsolete skills and would be unemployable as the recession ends.

        There is every reason to believe exactly the opposite about what you claim about obsolete skills. See for instance my post about the number employed in the financial and construction industries.

        So unless JG has an ultrasound industrial policy behind it, the claim that workers will be encouraged to continue in stagnated industries is plausible. Put another way if the only thing driving forward the development of an industrial policy is unemployment then no unemployment might mean no industrial policy.

  •  Two quibbles. (1+ / 0-)
    Recommended by:
    Letsgetitdone

    That’s a thoughtful article on JG above, but I disagree on a couple of points.

    1.“The fiscal multiplier attached to the initial introduction of the JG is one of the arguments for it…”. I don’t agree. Raising aggregate demand is easy. There’s a variety of ways to do it. So the fact that JG raises AD is not a merit in JG.

    The real merit, or potential merit in JG is that it improves the inflation / unemployment trade off, and I think that (at least potentially) it does.

    2. Re your support for the popular idea that JG should incorporate training, there is a problem here. JG people need to continue to search for regular employment while on JG and to be immediately available for such employment (otherwise aggregate labour supply to the regular jobs market is constrained, which is inflationary). But that clashes with the characteristics of nearly every worthwhile training course: such courses last for a SPECIFIC period and lead to a marketable paper qualification. I.e. attending a training course for a SPECIFIC period clashes with being instantly available for a regular job (unless the course involves evening classes).

    Prof. Malcolm Sawyer (amongst others) tumbled to this point in his paper on JG (see under the heading “ELR, Underemployment and Unemployment” towards the end of his paper here:

    http://www.jstor.org/...

    The following bit of research done in Switzerland found that the benefits of training associated with JG type schemes were not spectacular. Title of paper: “A microeconometric evaluation of active labour market policy in Switzerland” by Michael Gerfin and others. You’ll find it by Googling.

    •  Quible of the quible (0+ / 0-)

      "Raising aggregate demand is easy. There’s a variety of ways to do it. So the fact that JG raises AD is not a merit in JG."  
      Isn't there better and worst ways for the fed. govt. to spend to raise AD?  For example, wars raise AG, but there is the issue of all the dead bodies building up.  Or, money can be spent on 'job creators' (i.e. tax cuts for the top 1%), but a lot of that goes to their speculative portfolios of oil and commodities that drive prices up for the rest of  us or into asset inflation that gives us things like dot.com and housing bubbles.  Maybe there is some merit to getting the AG directly from the those currently unemployed that from other means?

    •  Quibbles (0+ / 0-)
      1.“The fiscal multiplier attached to the initial introduction of the JG is one of the arguments for it…”. I don’t agree. Raising aggregate demand is easy. There’s a variety of ways to do it. So the fact that JG raises AD is not a merit in JG.

      The real merit, or potential merit in JG is that it improves the inflation / unemployment trade off, and I think that (at least potentially) it does.

      It may not be a merit of JG alone, but nevertheless it is one way to raise AD. In addition, it places demand specifically in the hands of those who lack it and who will be likely to use the money they get to raise sales. Since lack of sales is the most immediate reason why private sector employers won't hire, JG is a particularly effective way of raising AD, and its multiplier is likely to be at the top end as AD initiatives go. That was certainly true for the Jefes profram in Argentina.

      2. Re your support for the popular idea that JG should incorporate training, there is a problem here. JG people need to continue to search for regular employment while on JG and to be immediately available for such employment (otherwise aggregate labour supply to the regular jobs market is constrained, which is inflationary). But that clashes with the characteristics of nearly every worthwhile training course: such courses last for a SPECIFIC period and lead to a marketable paper qualification. I.e. attending a training course for a SPECIFIC period clashes with being instantly available for a regular job (unless the course involves evening classes).

      The devil, as always, is in the details. JG training can be structured to consume limited amounts of time over a period of time; so that time is left for work on projects fulfilling public purpose, for looking for private sector employment, and for training.

      Training is needed as a hedge against the possibility that a person's skills don't fit the market anymore. But if the JG program lifts demand so that the private sector is hiring again, then those those whose skills fit the market will get new jobs with a decreasing amount of effort as the new demand kicks in. At that point they can discontinue their training and take that private sector job that's a better deal than the JG job. And If the training programs in the JG are well-designed, then those whose old skills don't fit will acquire new skills that do, and they, eventually will get hired in the private sector as well.

      Things won't work exactly as just outlined, since nothing is perfect; but for the JG to work, things only have to work as outlined above in a statistical preponderance of cases.

      Thanks for the links you've provided to Sawyer and Gerfin. I believe Bill and Randy have answered Sawyer convincingly here. As for Gerfin et. al I'll research that; but I'm immediately skeptical of ". . . JG type schemes." Either it's a JG or it's not! If not, I doubt that the empirical research by Gerfin et al. is a real test of the JG hypothesis that training can be effective in a JG context.

    •  Falling for the Great Education Myth? (0+ / 0-)

      I wonder if the small benefit of the training had more to do with the fact that lack of education is a much smaller reason for unemployment than we're led to believe, rather than a failure per se of training in a JG program.

      Our Dime: Understanding the Federal Budget

      by Dustin Mineau on Sun Jan 08, 2012 at 02:50:14 PM PST

      [ Parent ]

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