job guarantee

Real resource constraints and fiscal policy design

Published by Anonymous (not verified) on Thu, 21/06/2018 - 8:20am in

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job guarantee

There is an interesting dilemma currently emerging in Australia, which provides an excellent case study on how governments can use fiscal policy effectively and the problems that are likely to arise in that application. At present, the Australian states are engaging in an infrastructure building boom with several large (mostly public sector) projects underway involving improvements to road, ports, water supply, railways, airports and more. I travel a lot and in each of the major cities you see major areas sectioned off as tunnels are being dug and buildings erected. Not all of the projects are desirable (for example, the West Connex freeway project in Sydney has trampled on peoples’ rights) and several prioritise the motor car over public transport. But many of the projects will deliver much better public transport options in the future. On a national accounts level, these projects have helped GDP growth continue as household consumption has moderated and private investment has been consistently weak to negative. But, and this is the point, there have been sporadic reports recounting how Australia is running out of cement, hard rock and concrete and other building materials, which is pushing up costs. This is the real resource constraint that Modern Monetary Theory (MMT) emphasises as the limits to government spending, rather than any concocted financial constraints. If there are indeed shortages of real resources that are essential to infrastructure development then that places a limit on how fast governments can build these public goods. The other point is that as these shortages are emerging, there is still over 15 per cent of our available labour resources that are being unused in one way or another – 714,600 are unemployed, 1,123.9 thousand are underemployed, and participation rates are down so hidden unemployment has risen. So that indicates there is a need for higher deficits while the infrastructure bottlenecks suggest spending constraints are emerging. That is the challenge. Come in policies like the Job Guarantee.

Infrastructure boom yet idle labour

Australia is currently enjoying a major infrastructure spending boom via several large-scale projects in the States and Territories, but also at the Federal level (for example, the National Broadband Network construction).

There is no doubt that one of the major reasons Australia’s GDP growth has been relatively robust in recent years is due to this large public spending commitment.

The first graph shows movements in State Final Demand indexes from the March-quarter 2008 to the March-quarter 2018 (most recent data). The March-quarter 2008 was the peak of the last cycle before the GFC slowdown.

The humps in WA and Northern Territory between 2012 and 2015 relate to the Mining boom (mostly private investment) which is now well and truly over.

But you can also see that in the last few years, there has been an acceleration of State Final Demand nearly across the board, which is mostly down to public spending.

The next graph breaks down the aggregate Final Demand measure into its components and show the overall growth in each expenditure component over the decade from the March-quarter 2008.

You can see the strong growth in public investment over that time (biased to recent years), which has been an important driver of growth in the Australian economy.

Over the same period, household consumption expenditure growth has been moderate and private investment expenditure weak to negative in many states.

But as I have indicated in my labour force briefings – see latest (June 14, 2018) – Australian labour market – weaker in May with tepid employment growth – Australia is still a long way from being ‘fully employed’.

The May 2018 data confirms that:

1. There are 714,600 persons unemployed with an official unemployment rate of 5.4 per cent (1.4 percentage points higher than the pre-GFC low).

2. There are 1,123.9 thousand persons underemployed (working less hours than they desire) which is 8.5 per cent of the labour force.

3. The total labour underutilisation rate (unemployment plus underemployment) is thus 13.9 per cent or 1,838.6 thousand workers.

4. At 65.5 per cent, the labour force participation rate is still below its previous peak (December 2010) of 65.8 per cent. This means that hidden unemployment has risen over that period and if we adjusted the official unemployment rate to include that effect it would be 5.9 per cent rather than 5.4 per cent. Unemployment would be 780.4 thousand rather than 714.6 thousand.

5. Many of those who are unemployed or underemployed are typically low-paid workers, many classified as low-skill.

What this means is that the fiscal deficit is to low relative to the non-government spending and saving behaviour.

There is a need to stimulate labour demand (generate jobs). That is unambiguous. The question is where that increased labour demand should be stimulated.

Resource constraints increasing in Australia’s construction sector

There have been sporadic reports over the last year or so, in response to this infrastructure construction boom, recounting how Australia is running out of cement, hard rock and concrete and other building materials, which is pushing up costs.

Other reports generalise this and suggest that there is a growing shortage of many other productive resources.

For example, on March 19, 2018, there was a report – Growing demand pushing up construction costs – which suggested that:

… the growing demand from the infrastructure sector is creating pressures within the construction industry with personnel, plant and equipment as well as base materials such as cement, steel and aggregates showing a significant increase in cost.

Most of these media flurries were based on the interesting report released in January 2018 by the international construction cost analysis firm, WT Partnership – Construction Market Conditions 2018.

There are large-scale projects, mostly public spread across Australian states at present.

New South Wales and Victoria are leading the charge.

In New South Wales there is “record levels of investment in infrastructure and strong demand for residential, commercial and retail”.

There is on-going “Government investment in projects such as CityLink and Tullamarine freeways, Melbourne Metro Rail, West Gate Tunnel and North East Link in Melbourne” (Victoria), which is transforming the state’s urban transport systems.

In Queensland, the Government is embarking on several major projects (“Cross River Rail, social and affordable housing, and schools”).

Similarly in Western Australia (“significant road, rail, and port projects”), South Australia (“numerous cranes in the city skyline and forecasts growth in various sectors including aged care, student accommodation, defence and education”), Australian Capital Territory (“construction of commercial, retail, housing and aged care”), “Major LNG development and defence projects continue to underpin activity in the Northern Territory” and so on.

This significant level of (mostly public) infrastructure development is:

… pushing up costs of personnel, plant and equipment, and base materials such as aggregates, cement and steel. As resources become more stretched, these pressures create an industry wide challenge.

These trends raise significant issues for the conduct of fiscal policy – its design and implementation.

In this blog post – I wonder what the hell I have been writing all these years (February 12, 2013) – I discussed, in part, the Modern Monetary Theory (MMT) approach to inflation theory.

In our introductory textbook – Modern Monetary Theory and Practice: An Introductory Text – we introduced a simple first blush model of the aggregate supply function (which tells us at what prices firms will supply output).

It looks like this:

If we assume that the price mark-up that firms use to price their goods and services and money wage rates and labour productivity (and all other unit resource costs) then it reasonable to assume that firms would supply output at a constant price – quoted in their catalogues and honour those prices for some time.

There is a cost to a firm of changing prices regularly and also a possible loss of customer loyalty.

On the horizontal portion of the supply curve, firms in aggregate will supply as much real output (goods and services) as is demanded at the current price level set according to the mark-up rule described above.

The vertical portion of the curve after full employment (Y*) is explained by the fact that the economy exhausts its capacity to expand short-run output due to shortages of labour and capital equipment.

At that point, firms will be trying to outbid each other for the already fully employed labour resources and in doing so would drive money wages up.

Under normal circumstances, economy rarely approach the output level (Y*, which means that for normally encountered utilisation rates the economy typically faces constant costs.

The description of the model in the textbook acknowledged that:

  • If the money wage rate rises, other things equal, the unit cost level rises and the firms would translate this into a price rise via the constant mark-up.
  • If there is growth in labour productivity (LP) as a result of say, increased labour force morale, increased skill levels, more technologically-based production techniques, better management, and the like, then unit costs (W/LP) will fall. This means that the firms can generate the same profit margin at lower prices. The AS function would thus shift downwards by the extent of the decline in unit costs.
  • Variations in the mark-up (m) will cause the price level to change. Increases in industrial concentration, more advertising etc may lead to firms being able to increase the overall profit margin that can be sustained. Tight conditions in the goods and services market, where sales are constrained, may lead firms to reduce the mark-up desired as they all struggle for market share. This could occur as a result of flagging sales and strong trade unions pushing (successfully) for wage increases. Thus to avoid losing market share, the firms may choose to absorb some of the cost rises into the margin.
  • If employment is below full employment and thus Yactual < Y*, which means there is an output gap present, then increases in aggregate demand (spending) which are seen by firms to be permanent will result in an expansion of output without any price increases occurring. If the firms are unsure of the durability of the demand expansion they may resist hiring new workers and utilise increased overtime instead. That is, they initially respond to the increased aggregate spending by increasing hours of work rather than persons employed. The higher costs (as labour productivity falls) are likely to be absorbed in the profit margin because firms desire to maintain their market share overall.

There are thus a lot of behavioural factors to be considered and analysed in each specific situation. MMT incorporates these complications in its approach to inflation.

It acknowledges that bargaining is central to the wage-price bargains but also allows for industrial concentration, regulation etc to influence outcomes. We have incorporated a lot of institutional literature into our approach.

After considering all that, the text explicitly states, that:

There is some debate about when the rising costs might be encountered given that all firms are unlikely to hit full capacity simultaneously. The reverse-L shape simplifies the analysis somewhat by assuming that the capacity constraint is reached by all firms at the same time. In reality, bottlenecks in production are likely to occur in some sectors before others and so cost pressures will begin to mount before the overall full capacity output is reached.

This could be captured in Figure 9.5 by some curvature near Y*, thus eliminating the right-angle. We consider this issue in more detail in Chapter 11 Inflation and Unemployment.

The point is that the reverse-L is only a first simple step into a macroeconomics that is not based on perfectly competitive pricing and the supply curves that arise logically from those assumptions.

We recognise that firms set prices on mark-ups and do not vary prices with variations in demand in the short-run. In this real world context, the reverse-L depiction is a de-conditioning heuristic to steer students away from the continuously upward sloping supply models they get in neo-classical (mainstream) text books.

But MMT clearly acknowledges that in the real world, bottlenecks in certain sectors can arise before full employment is reached, which then conditions the way that fiscal expansion has to be designed and managed.

That is the case that the infrastructure boom in Australia has presented us.

Generalised very spatially-targetted expansion

There is a tendency to think of MMT has a return to Keynesian economics.

For a discussion on the meaning of the term ‘Keynesian’ please read the blog post – Those bad Keynesians are to blame (November 5, 2009).

To complicate matters further the term Post Keynesian is used – largely to distinguish modern progressive (non-Marxist – although that is even contentious) thinking from the earlier classifications of Keynesians.

Some Post Keynesians are fundamentalist Keynesians (see cited blog post for more detail) while others are not.

But almost all Post Keynesians agree that the orthodox unemployment buffer stock approach (NAIRU) to inflation control is costly and unacceptable.

The neo-liberal solution to the resulting unemployment is to pursue supply-side policies (labour market deregulation, welfare state retrenchment, privatisation, and public-private partnerships) to give the economy “room” to expand without cost pressures emerging.

Post Keynesians, in general reject this strategy because the sacrifice ratios (lost output per inflation point lowered) are high and the distributional implications (creation of under class and working poor and loss of essential services) are unsavoury.

However there is no alternative consensus.

Some Post Keynesians, following closely the policy recommendations of Keynes himself advocate what I have termed “generalised expansion” in my academic writing – this is where the government ensures that spending is sufficient to purchase all available output.

In essence, this policy purchases at market prices or provides incentives to profit-seekers to create private employment expansion.

Typically, public and private capital formation is targeted.

This is the situation in Australia with all these large public sector infrastructure projects underway. They are injecting billions of public spending into the economy and purchasing goods and services from the non-government sector at market prices.

As the specific real resource constraints start to emerge, competition for those finite real resources starts to drive their price up.

The government becomes just another bidder for the resources.

This strategy also ignores the role for a buffer employment stock policy, which allows the government to guarantee full employment using automatic stabilisers by purchasing at fixed rather than market prices.

Typically, Post Keynesians advocate generalised fiscal and monetary expansion mediated by incomes policy and controlled investment as a solution to unemployment.

But when the real resource constraints are manifesting in the form of a lack of cement, sand, rocks etc – the essential building materials for large public infrastructure projects – an incomes policy that controls wage demands in the face of labour shortages will not provide a price anchor.

Further (indiscriminate) expansion (competing at market prices) in isolation is unlikely to lead to employment opportunities for the most disadvantaged members of society and does not incorporate an explicit counter-inflation mechanism.

It also fails to address the spatial labour market disparities.

The large-scale public infrastructure projects are mostly in the large urban centres (capital cities) and the central business districts of the same.

As regional spaces are hollowed out, how can we be sure that the investment will provide jobs in failing regions?

Upon what basis are the most disadvantaged workers with skills that are unlikely to match those required by new technologies or the large building projects going to be included in the ‘generalised expansion’?

Where is the inflation anchor in this approach – if spending is manifest in purchases at market prices?

An understanding of MMT, allows you to conclude that the State can resolve demand gaps which cause unemployment in two ways:

1. By increasing net spending via purchasing goods and services and/or labour at market prices as explained in the previous paragraphs; and/or

2. By using its currency issuance power to provide a fixed-wage job to all those who are unable to find a job elsewhere.

The employment buffer stock approach is what I termed the Job Guarantee, which is an effective strategy for a fiat-currency issuing government to pursue to ensure that work is available at a liveable wage to all who wish to work but who cannot find market sector employment (including regular public sector).

The government would provide a buffer stock of jobs that are available upon demand.

Crucially, the Job Guarantee differs from a ‘Keynesian generalised expansion’ because it represents the minimum stimulus (the cost of hiring unemployed workers) required to achieve full employment rather than relying on market spending and expenditure multipliers to generate aggregate demand.

The Job Guarantee also provides an inherent inflation anchor missing in the generalised Keynesian approach.

Clearly, and emphatically, a mixture of both options is likely to be optimal although the first option alone is not preferred because it is likely to run up against real resource constraints well before full employment is reached.

The current situation in Australia with the infrastructure boom and cranes everywhere being coincident with more than 15 per cent of our available labour reources unused is the demonstration of that point.

The Job Guarantee approach is juxtaposed with the NAIRU approach which accompanied a regime shift in macroeconomic policy in the 1970s. The NAIRU approach is exemplified by tight monetary policy that targets low inflation, a bias to fiscal austerity and the resulting use of unemployment as a policy tool rather than a target.

The countries that avoided high unemployment in the 1970s maintained an employer of last resort capacity which allowed them to absorbs the fluctuations in demand without significant unemployment consequences.

There is some reason why countries like Japan which has been through hell over the last 20 years or so still has relatively low unemployment.

Further, environmental constraints militate against generalised Keynesian expansion. Higher output levels are required to increase employment, but the composition of output remains a pivotal policy issue.

Job Guarantee jobs would be designed to support local community development and advance environmental sustainability.

Job Guarantee workers could participate in many community-based, socially beneficial activities that have intergenerational payoffs, including urban renewal projects, community and personal care, and environmental schemes such as reforestation, sand dune stabilisation, and river valley and erosion control.

Most of this labour intensive work requires very little capital equipment and training.

While there may be a need for more generalised expansion – to boost public infrastructure investment which enhances the profitability of private sector investment and contributes to aggregate demand and employment – this approach is clearly limited by real resource availability.

Whether there is a capacity to pursue the more general approach is moot. Clearly, the Australian State Governments are reaching the limits of that approach within a price stability framework.

For MMT though, such limits are independent of the need for a Job Guarantee.

Conclusion

While the upgrades to our public transport systems and the re-engineering of our cities is highly desirable and decades overdue, as a policy preference I would prioritise the introduction of a Job Guarantee and ensure it was ccompanied by social wage spending to increase employment in education, health care and the like.

That would absorb idle labour without placing further strains on the construction resources.

A sole reliance on public sector investment in public infrastructure to achieve full employment, also creates considerable economic inflexibility. The ebb and flow of the private sector would not be readily accommodated and an increasing likelihood of inflation would result.

Further and crucially, public investment is unlikely to benefit the most disadvantaged workers in the economy. The Job Guarantee is designed to explicitly provide opportunities for them.

By way of example, during the golden age in Australia (1945-1975) when public capital formation and social wage expenditure was strong, full employment was only achieved because the public sector (implicitly) provided a Job Guarantee for low skilled workers.

This experience is shared across all advanced economies.

The Job Guarantee is thus designed to ensure that the lowest skilled and experienced workers are able to find employment. It does not presume that Job Guarantee jobs will suit all skills. For some skilled workers who become unemployed in a downturn the income loss implied would be significant.

The contention is that a fully employed economy with the Job Guarantee workers paid liveable minimum wages is a significant improvement, when compared to the current unemployment and underemployment bias.

That is enough for today!

(c) Copyright 2018 William Mitchell. All Rights Reserved.

The Job Guarantee and the Economics of Fear: A Response to Robert Samuelson

Published by Anonymous (not verified) on Sat, 26/05/2018 - 12:43am in

The Job Guarantee is finally getting the public debate it deserves and criticism is expected. Building on several decades of research, the Levy Institute’s latest proposal analyzes the program’s economic impact and advances a blueprint for its implementation. Critics have taken note and are (thus far) restating the usual concerns, but with a notably alarmist tone.

The latest, courtesy of the Washington Post’Robert Samuelson, warns that the Job Guarantee would be 1) an expensive big-government takeover, 2) unproductive and impossible to manage, 3) dangerously disruptive to the private sector, and 4) inflationary.

Samuelson wants us to be afraid—very afraid—of big government. But he forgets that we already have big government—one that devotes hundreds of billions of dollars, time, resources, and administrative effort to deal with all the economic and social costs of unemployment, underemployment, and poverty.

Unemployment is already paid for. In this context, the program does not increase the government’s costs—it reduces them—while also cutting costs to households and firms and creating real actual benefits by supporting families, communities, and the economy. As David Dayen points out, whether we can afford the Job Guarantee is not up for debate.

Will the Job Guarantee create impossible-to-manage make-work projects? This is a fear that James Galbraith—a self-proclaimed former skeptic of the Job Guarantee—calls “an admission of impotence and a call for preemptive surrender.” Kate Aronoff recalls that New Deal projects were often derided as boondoggles. Still, they rebuilt communities, the economy, and people’s lives, while leaving a lasting legacy.

The Job Guarantee is subjected to a unique double standard for managerial efficiency. We never hear objections to going to war, “nation building,” or bailing out the financial sector on the grounds that these efforts would be an “administrative nightmare.” And yet our proposal to put our underutilized labor force to productive use, by using much of the existing institutional infrastructure in the nonprofit and state and local government sectors is dismissed as an impossibly difficult task.

The claim that the Job Guarantee is unproductive misses another basic point: unemployment is inherently unproductive. What is the productivity of an unemployed person and her family struggling to make ends meet, compared to her productivity when she is employed in a public service job with decent pay?

Environmental renewal and restoration, clean up of blighted communities, enrichment programs for children, care for the elderly, and jobs for artists and musicians are unproductive under some definitions—those that treat only work that produces output for sale as productive. We disagree. Employing previously unemployed or underemployed people is inherently more productive than the current model of unemployment and neglect.

Critics think the program will face large skill and geographical mismatches, but ignore the fact that communities with the highest levels of unemployment also have the greatest social needs. The Job Guarantee puts the two together. It “takes the contract to the worker” and “takes workers as they are.” We have provided many examples of such projects that fulfill community needs, are labor intensive, and can employ even the least skilled among us.

But according to Samuelson, the Job Guarantee is dangerous for another reason: workers outside the program who realize that the Job Guarantee offers decent pay, healthcare, and childcare to its employees will stage a “political rebellion.”  This—he supposes—is a much scarier scenario than having millions of workers earning poverty-level wages, without health coverage or affordable childcare.

Which brings us to the fear of disrupting “business as usual” in the private sector. Yes, we want to disrupt business models that can only be successful if they pay poverty-level wages without the benefits that are common in all of the developed countries. In the IT world, “disruptions” are hailed as progressive and innovative. The Job Guarantee is the policy innovation that secures a true antipoverty wage floor for all—one that firms must meet.

And if none of the above scares you, critics want you to fear the program’s inflationary effects that are supposed to result from raising the program’s wage to $15 per hour by 2022. That would establish an effective national minimum wage—raising it from the current abysmal $7.50 an hour to $15 per hour. As wages rise, it is true that that the price level will probably increase as employers adjust to higher labor costs.

But Samuelson, like others, confuses a key issue: a one-time increase in the price level is not inflation (i.e., a continuous rise in the price level). Our model finds negligible inflationary impact from the program and we stress its key anti-cyclical feature: the program shrinks in expansions—i.e., it is a dampening force on inflation.

So let’s recap. What should we fear more: a world in which unemployment and depressed wages are the norm, or one with an employment safety-net and living wages for all?

Samuelson may think the Job Guarantee is a “loony economic agenda.” Thankfully, the architects of the New Deal reforms or the Civil Rights legislation did not think this way. Americans are tired of being told what can and cannot be done. They demand bold action and a majority supports the program. The Job Guarantee is a first step toward completing the Roosevelt revolution and securing Roosevelt’s economic bill of rights.

The Job Guarantee and the Economics of Fear: A Response to Robert Samuelson

Published by Anonymous (not verified) on Sat, 26/05/2018 - 12:43am in

The Job Guarantee is finally getting the public debate it deserves and criticism is expected. Building on several decades of research, the Levy Institute’s latest proposal analyzes the program’s economic impact and advances a blueprint for its implementation. Critics have taken note and are (thus far) restating the usual concerns, but with a notably alarmist tone.

The latest, courtesy of the Washington Post’Robert Samuelson, warns that the Job Guarantee would be 1) an expensive big-government takeover, 2) unproductive and impossible to manage, 3) dangerously disruptive to the private sector, and 4) inflationary.

Samuelson wants us to be afraid—very afraid—of big government. But he forgets that we already have big government—one that devotes hundreds of billions of dollars, time, resources, and administrative effort to deal with all the economic and social costs of unemployment, underemployment, and poverty.

Unemployment is already paid for. In this context, the program does not increase the government’s costs—it reduces them—while also cutting costs to households and firms and creating real actual benefits by supporting families, communities, and the economy. As David Dayen points out, whether we can afford the Job Guarantee is not up for debate.

Will the Job Guarantee create impossible-to-manage make-work projects? This is a fear that James Galbraith—a self-proclaimed former skeptic of the Job Guarantee—calls “an admission of impotence and a call for preemptive surrender.” Kate Aronoff recalls that New Deal projects were often derided as boondoggles. Still, they rebuilt communities, the economy, and people’s lives, while leaving a lasting legacy.

The Job Guarantee is subjected to a unique double standard for managerial efficiency. We never hear objections to going to war, “nation building,” or bailing out the financial sector on the grounds that these efforts would be an “administrative nightmare.” And yet our proposal to put our underutilized labor force to productive use, by using much of the existing institutional infrastructure in the nonprofit and state and local government sectors is dismissed as an impossibly difficult task.

The claim that the Job Guarantee is unproductive misses another basic point: unemployment is inherently unproductive. What is the productivity of an unemployed person and her family struggling to make ends meet, compared to her productivity when she is employed in a public service job with decent pay?

Environmental renewal and restoration, clean up of blighted communities, enrichment programs for children, care for the elderly, and jobs for artists and musicians are unproductive under some definitions—those that treat only work that produces output for sale as productive. We disagree. Employing previously unemployed or underemployed people is inherently more productive than the current model of unemployment and neglect.

Critics think the program will face large skill and geographical mismatches, but ignore the fact that communities with the highest levels of unemployment also have the greatest social needs. The Job Guarantee puts the two together. It “takes the contract to the worker” and “takes workers as they are.” We have provided many examples of such projects that fulfill community needs, are labor intensive, and can employ even the least skilled among us.

But according to Samuelson, the Job Guarantee is dangerous for another reason: workers outside the program who realize that the Job Guarantee offers decent pay, healthcare, and childcare to its employees will stage a “political rebellion.”  This—he supposes—is a much scarier scenario than having millions of workers earning poverty-level wages, without health coverage or affordable childcare.

Which brings us to the fear of disrupting “business as usual” in the private sector. Yes, we want to disrupt business models that can only be successful if they pay poverty-level wages without the benefits that are common in all of the developed countries. In the IT world, “disruptions” are hailed as progressive and innovative. The Job Guarantee is the policy innovation that secures a true antipoverty wage floor for all—one that firms must meet.

And if none of the above scares you, critics want you to fear the program’s inflationary effects that are supposed to result from raising the program’s wage to $15 per hour by 2022. That would establish an effective national minimum wage—raising it from the current abysmal $7.50 an hour to $15 per hour. As wages rise, it is true that that the price level will probably increase as employers adjust to higher labor costs.

But Samuelson, like others, confuses a key issue: a one-time increase in the price level is not inflation (i.e., a continuous rise in the price level). Our model finds negligible inflationary impact from the program and we stress its key anti-cyclical feature: the program shrinks in expansions—i.e., it is a dampening force on inflation.

So let’s recap. What should we fear more: a world in which unemployment and depressed wages are the norm, or one with an employment safety-net and living wages for all?

Samuelson may think the Job Guarantee is a “loony economic agenda.” Thankfully, the architects of the New Deal reforms or the Civil Rights legislation did not think this way. Americans are tired of being told what can and cannot be done. They demand bold action and a majority supports the program. The Job Guarantee is a first step toward completing the Roosevelt revolution and securing Roosevelt’s economic bill of rights.

Timor-Leste – challenges for the new government – Part 3

Published by Anonymous (not verified) on Thu, 24/05/2018 - 1:41pm in

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job guarantee

This is Part 3 (and final) of my mini-series analysing some of the challenges that the newly elected majority government in Timor-Leste faces. In Part 2, I discussed the progress of the Strategic Development Plan and the challenges ahead in terms of poverty, unemployment, and other indicators relating to the development process. In Part 2, I focused more on the currency debate – documenting how the IMF and World Bank had infused its ideological stance into the currency arrangements that Timor-Leste set out with as a new nation. I made the case for currency sovereignty which would require Timor-Leste to scrap the US dollar, convert the Petroleum Fund into its stock of foreign exchange reserves, and to run an independent monetary policy with flexible exchange rates, mediated with the capacity to use capital controls where appropriate. In this final discussion I consider specific policy options that are required to exploit what is known as the ‘demographic dividend’ where the age-structure of the nation generates a plunging dependency ratio. To exploit that dividend, which historically delivers massive development boosts to nations, the shifting demographics have to be accompanied by high levels of employment. That should be policy priority No.1.

Previous Parts:

1. Timor-Leste – challenges for the new government – Part 1

2. Timor-Leste – challenges for the new government – Part 2

The ‘Demographic Dividend’

The median age in Timor-Leste is just 17.4 years which according to the UNDP’s – Timor-Leste National Human Development Report 2018:

… makes Timor-Leste the 15th youngest in the world, behind only Afghanistan and a group of African nations. The population below age 35 accounts for 74 percent of the total population.

In Timor-Leste, 40 per cent of the population are under 15.

Compare that to Australia where just 19 per cent are under 15 and the median age is somewhere between 35 and 39 years of age. The population below the age of 35 accounts for 46 per cent of the Australian population

At present, the dependency ratio is Timor-Leste is 82 – that is, for “every 100 persons of working age must support 82 individuals who are not of working age, in addition to supporting themselves”.

In Australia, the dependency ratio is currently around 54 and nearby Asian nations much lower.

With such a high dependency ratio, the UNDP says that Timor-Leste is “currently experiencing a much larger economic burden than the populations of its neighbours.

But demography changes and before long, the youth of Timor-Leste will be flooding into the Working Age Population and the dependency ratio will plummet for some decades as these young entrants work their way through working age.

The UNDP observe that this “shifting age structure of the population of Timor-Leste in recent years has finally brought policy options to a crossroads”.

By which they mean that economic development can exploit what is known as a – demographic dividend – which can harness very favourable dependency ratios – in this case when “the share of the working-age population (15 to 64) is larger than the non-working-age share of the population (14 and younger, and 65 and older)”.

There is a huge difference between a nation with a high dependency ratio due to an ageing population and one with a high ratio due to a very young population. The future profile of those two cases is very different.

In the former case, the task is to increase productivity of the existing workforce to ensure that the older workers can have access to first-class health care and pensions once they retire.

Timor-Leste is in the latter case and its task is to ensure that the young people are well-educated, receive appropriate training (apprenticeships etc) and, most importantly, have jobs to go to once their schooling is completed to ensure the school-to-work transition is effective.

The UNDP estimate that in the Asia-Pacific region, the demographic dividend:

… accounted for about 42 percent of the economic growth in developed countries and 39 percent in developing countries.

Significant, that is.

Given the demographic trend in Timor-Leste “a demographic window of opportunity will open for Timor-Leste in the next three … [or] … four decades.”

But it doesn’t happen automatically. And it doesn’t happen through a blind observance of the ‘free market’.

It requires a strong state with coherent plans and a currency capacity to support them.

The requirements of this virtuous situation are that the youth and soon to be workers and then young workers have:

1. Access to quality education.

2. Sound nutrition and child health care.

3. Jobs, jobs and more jobs to move into and become productive.

4. Supportive public infrastructure.

And the time is now.

Claims that Timor-Leste must run smaller deficits and spend less overall run counter to that urgency.

The urgency of a employment creation

It is obvious that the development process requires substantial investment in education. The gestation period from infancy to workforce is a generation and that requires sustained public sector support.

The challenges facing Timor-Leste in developing a knowledge-based society through investments in education are well summarised in the latest UNDP Report (cited above).

The UNDP note that “public investment in knowledge-producing services”:

… ensures accessibility to opportunities among all individuals at the earliest stages of life and throughout the life cycle.

There are two problems.

First, even though there has been significant progress in the development of and participation in the education system in Timor-Leste (both general schooling and technical and vocational education and training (TVET)), the level of expenditure consistent with its Strategic Development Plan (SDP) is less than half that which is required.

The UNDP conclude that:

To implement this vision, however, the Government would have to more than double public investment in education, including substantial investment in teacher training, high-quality education facilities and appropriate teacher employment. This National HDR suggests that the Government draw on international best practice and con- sider allocating 25 percent of the budget to education and training to ensure access to quality education among young women and men. This would enhance meaningful human capability.

In its – State Budget 2017 Book 1 – which provided a summary of the fiscal position for 2017, the then Government proposed to spend 16.1 per cent of its recurrent expenditure and 0.8 per cent of its infrastructure fund on Education.

Clearly not enough given the challenge the nation faces.

This is well below the accepted international benchmarks. Health expenditure which complements educational investments is also very low.

The Government has prioritised expenditure on large physical infrastructure at the expense of human development. That distribution should be reprioritised.

At present, capacities such as the ability to read in either of the two official languages (Portuguese or Tetun) is low. The World Bank found that “that 70 percent of first grade students in Timor-Leste were unable to read a single word of a simple text passage randomly selected in either of the country’s official languages” (Source).

The adult literacy rate is around 58.4 per cent.

The UNDP also notes the “gender gap” in education in Timor-Leste, which undermines the long-term effectiveness of the educational investments.

Women, for example, are “are only half as likely as men to find work” and achieve high standard educational outcomes.

A nation can not develop by excluding half its population from the productive talent pool.

The second problem is that expanding investment in education and training is not a sufficient condition for reaping the returns that the ‘demographic dividend’ holds out.

At present, the capacity to transition from that schooling or the TVET sector into formal sector employment is extremely limited.

The UNDP Report notes that:

There is a widespread expectation among school-leavers that their education should lead to jobs in the formal sector. However, this is not the case even among graduates of … TVET.

Investment in education and training can only generate returns if there are jobs to follow. While it was appropriate to prioritise the development of Timor-Leste’s education and training system, the priority now, as graduates emerge from that system, is for the Government to prioritise job creation.

The UNDP Report cited above notes that:

The lack of jobs has been a perennial issue in Timor-Leste. Timorese youth currently have extremely limited opportunities for formal employment.

There is a scant private sector labour market – about 5 per cent of the total employment.

In my past field work in disadvantaged regions (and countries), I have come up against government and multilateral institution (such as the IMF) officials who tell me that providing public work just undermines the development of the private sector labour market.

The problem is that when there is no private sector activity, the public labour market is the labour market. And the task is not to deny that or to restrain the development of that but to make sure the public employment is effective and provides the kernel for crowding-in private investment and activity.

The main occupation in Timor-Leste is agriculture – around 60-65 per cent of people are engaged in that sector, predominantly in a subsistance status. The services sector deploys about 39.8 per cent of the workforce.

There is also a large proportion of the population that is classified under ILO labour force framework classifications as being inactive (around 45 per cent) – so they are studying or tending homes.

A productive route for the Government to follow would be to start creating opportunities to the agricultural sector to add value to their activities without compromising the capacity of the people to feed themselves or destroy the relatively well-developed land tenure arrangements.

The IMF and World Bank export-led obsession, which transforms subsistence agriculture into cash crops for export, has not been a productive way to go. When markets get flooded with over-supplies and prices drop below levels required to repay loans, the farmers are caught out – they are insolvent yet have undermined the subsistence basis of their activities.

Timor-Leste is like many developing nations – the majority of its population are engaged in subsistence activities in the so-called informal sector.

So it is hard to actually estimate the extent of unemployment or underemployment and the official estimates are relatively meaningless when trying to assess the extent to which labour resources are both available and idle.

The official labour force data will grossly underestimate the extent of labour underutilisation.

The 2016 Human Development Report published by the UNDP estimates the Employment to Population ratio for Timor-Leste was 39.3 per cent and the labour force participation rate was 41.3 per cent.

Modern Monetary Theory (MMT) tells us that the reason there is mass unemployment in less developing countries is the same as there is mass unemployment in advanced economies. There are plenty of jobs to do in both types of economies. There is no shortage of work!

In fact, in nations such as Timor-Leste there is an abundance of labour intensive work that can be done to improve the public amenity and infrastructure.

Some of that work could be directed at creating an import-competing capacity to reduce the dependence on imported goods and services, particularly food.

The problem is not a lack of jobs but a shortage of paid work.

The solution is to fund the work that needs to be done in all economies. If a nation has idle labour then that means there is not enough employment-creating funding being injected into the spending system.

As a starting point, the Timor-Leste government should take responsibility for providing work to all those who desire to earn a wage.

There is a generational aspect to that.

On the one hand, the adult population are mostly uneducated, with high rates of illiteracy. They have been agricultural labourers ekeing out a meagre existence.

Creating paid work opportunities for that cohort requires thousands of low-skill jobs to be created which will add value to their local communities and their agricultural pursuits.

On the other hand, the youth are increasingly being engaged within the education system, notwithstanding the continued problems with language etc.

They need to have confidence that the years of study will be rewarded with job opportunities in the formal sector.

In a nation that issues its own currency, the capacity to take responsibility for both challenges is clear.

In the case of Timor-Leste, which uses the US dollar things are less straightforward, which is why I believe the two most urgent challenges facing the government are:

1. Introduce a national currency.

2. Use it to exploit the ‘demography dividend’ through much larger job creation efforts and investments that are rich in employment leverage.

A good starting point would be for the Government to introduce an unconditional and universal employment guarantee.

But at things stand, even without its own currency, Timor-Leste is very different to a poor country that has few real resources to exploit.

Timor-Leste, for the time being has oil and gas resources, which have been exploited and the returns accumulated in the Petroleum Fund – some $US16,799 million by the end of 2017.

This fund gives the government an immense capacity to fast-track infrastructure, health, education, training and employment development.

All of which are the essential building blocks to sustainable economic development.

We will consider the Petroleum Fund presently.

But in saying the Timor-Leste government has to take responsibility we also have to consider what sort of spending is best to advance that responsibility.

The political divide that was evident in the recent election campaign is exemplified by diverse views on where the government should spend the Petroleum revenue.

On the one hand, the current approach has been to invest in large-scale infrastructure projects – such as the South Coast highway project (Tasi Mane) and the Zonas Especiais de Economia Social de Mercadu de Timor-Leste (ZEESM) in the Oecussi region.

The Tasi Mane project has absorbed billions of dollars in public outlays and was designed to capture more of the outcomes of the Petroleum industry for the domestic economy.

It aims to build a new industrial zone (in three clusters) on the south-west coast to foster further petroleum development.

The Oecussi special zone project (ZEESM) is also absorbing large outlays and focuses on tourism (big Chinese constructed hotel etc) at the expense of local development. Indeed, several small settlements were bulldozed to make way for roads and the hotel.

I understand the politics that led the Timor-Leste government to take the decision to spend billions on these huge projects. To some extent they were pigeon-holed by outside pressure (IMF etc).

But the reality is that while the Petroleum industry has generated significant revenue flows for the State, it is not well linked into the industrial structure of the economy and does not provide the sort of employment creation that will be necessary to exploit the ‘demographic dividend’ or to provide work for older underemployed adult workers in the agricultural sector.

Large-scale projects also include the large outlays on the new airport and the container port. These are also not large employment and skill-development generators.

So apart from the issues with land clearances, the destruction of local cultures, and other social costs that these projects have generated, the fact is they do not employ enough locals or provide effective skill development. The projects are dominated by foreign interests.

Critics within Timor-Leste have noted that these funds allocated to the large projects might have been better spent invigorating local agricultural production to better insulate the nation from its imported food dependency or investing in an improved regional and rural road network to make it easier for remote farmers to market their produce.

They argue that continuing to spend billions on the Petroleum industry, with uncertain multiplier effects back into the local economy (employment, skill development, etc), diverts funds from non-oil activities that would allow Timor-Leste to diversify its economy and set it up for the long-term when its natural resource wealth is depleted.

There is considerable truth in those claims.

Which is why I would develop and introduce a Job Guarantee as a matter of priority.

It is clear that skill levels vary and in Timor-Leste there is a paucity of skilled labour. Does this mean that large-scale public works programs such as road building etc are unsuitable?

Not at all. It just means that the public works programs have to be designed in ways that are inclusive to the least-skilled workers and are highly labour intensive.

My work in South Africa (in relation to the Expanded Public Works Program which employed more than a million workers in the first five years of operation) taught me that large-scale public works initiatives can be very successful in alleviating poverty and improving intergenerational opportunities for families (adults get work, children perform better at school).

They are difficult to organise and never ‘perfect’ but they add productive value to the communities and the people that participate in the work.

The other thing that this experience taught me is that there are many ways in which a particular goal can be addressed.

My interaction with civil engineers in South Africa was illustrative. The bureaucrats – engineers who had been educated in the US or Britain were horrified that labour-intensive road building methods were advocated. They wanted the best-practice methods commonly used in the most advanced nations, which end up employed hardly anyone per km of road laid.

After all, they were educated in the advanced techniques.

The scientific research though shows that the two methods of road building both produce first-class surfaces that are durable and effective.

But for these sorts of programs to be successful, they have to be flexible and scale the employment reach to suit the circumstances. So the labour-intensive methods employ more and can be inclusive for the lowest skill workers but they still produce excellent roads.

There are many more examples like this one that I could relate.

Piecemeal and small-scale employment programs based on some limited international development aid might create a few jobs here and there.

But what Timor-Leste needs are tens of thousands of jobs to be created in the first instance and the decentralised institutional structure developed to support this development.

There is thus two issues. The micro one of building the capacity to run a large-scale employment guarantee. There are good models available to guide such a process.

The second issue is the macroeconomic problem and the debate in Timor-Leste is yet to get beyond the IMF-type obsessions.

The only way that nation such as Timor-Leste are going to move into the middle-income cohort of nations and be able to successfully create enough jobs for their rapidly growing populations is for them to abandon these nonsensical neoliberal concepts of ‘fiscal space’ and appreciate that the space for government spending is defined by the real resources the government can bring into productive use without creating accelerating inflation.

Fiscal rules, such as the ESI in Timor-Leste, constrain the capacity of the nation to grow and to put in place structures that allow the nation to exploit is ‘demography dividend’.

Once it is understood that the Timor-Leste could use its own currency to bring thousands of workers into the formal, paid economy and put in place structures that are capable of supporting the creation and administration of millions of public jobs, then development will accelerate.

A growing local market will start to attracts private sector activity.

The Dual-sector model developed by West Indian development economist W. Arthur Lewis in the 1950s remains relevant in these cases.

Lewis conjectured that developing nations have a surplus of unproductive agricultural labour which can be released to other sectors (manufacturing in his case) without any loss of food production.

The subsistence sector is a low productivity sector because it is labour intensive and when labour is attracted (or motivated by policy shifts) out of agriculture to higher productivity pursuits, there is no loss of output in the agricultural sector as the underemployment falls.

The Minimum Wage issue

The statutory minimum wage in Timor-Leste is $US115 a month (or about $US3.75 per day). It was last adjusted on June 22, 2012.

Under the terms of the Labour Code n.4/2012 (established February 21, 2012), the minimum wage was meant to be reviewed two years after it became operational. It has been stuck at the 2012 level.

In real terms that minimum wage level has dropped to around $US89 per month in 2018 or $US2.90 per day.

The following graph shows the current nominal minimum wage (green) and its real equivalent as inflation has eroded its purchasing power since 2012.

77.7 per cent of those in employment are considered to be working poor at the PPP$US3.10 a day benchmark.

Local aid workers believe that the minimum wage it should be raised to more than $US200 (Source):

The introduction of a Job Guarantee – an unconditional job offer at a socially inclusive wage to anyone who desires paid work but cannot find it – would define the minimum wage for Timor-Leste.

Careful consideration is required to determine its level. But it makes no sense to set the minimum wage at a level that maintains working poverty and creates incentives for low productivity, private sector development at the same low wages.

It is clear that the statutory minimum wage in TL has to rise significantly if the nation is to achieve the development goals set out in its SDP.

Fiscal sustainability and currency sovereignty revisited

I will prepare more detailed estimates of the investments needed to create a functional and effective Job Guarantee program in Timor-Leste once I have access to better (more refined and granular) data.

Further, I will prepare more detailed estimates of the likely fiscal parameters – Petroleum Fund depletion, growth in domestic revenue etc as better data emerges.

It is difficult to be specific given the variations in the official data that is produced in various publications (Government fiscal statements, central bank statements, IMF, UNDP, World Bank, etc).

There is considerable uncertainty about when the oil and gas reserves will be exhausted and the rates of return that can be generated on the existing (very large) $US16 odd billion Petroleum Fund.

In the now defunct 126-page – State Budget 2017 Book 1 – there is a confusing array of estimates of the likely dynamics of the Petroleum Fund over the next 10 years.

But while there is considerable uncertainty even within the Government’s own fiscal statements, it is clear that the ‘front-loading’ development policy that the Government has pursued in the context of declining oil revenues will see the Petroleum Fund depleted in the not too distant future.

Some estimates place this date at 2032 while the La’o Hamutuk organisation “estimates that the Petroleum Fund could be empty by 2027” and that “Austerity starts in 2027” (Source).

Whatever the reality of these competing estimates, the conclusion is that by failing to introduce its own currency the Government will deplete its Petroleum Fund sooner rather than later.

The idea that the nation will switch at some point in the next 10-15 years to ‘austerity’ is highly problematic and is based on the assumption that it continues to use the US dollar.

By introducing its own currency now, the Government can use the US dollar revenue it is still generating (and the stock in the Petroleum Fund) for imports and bring idle resources into productive use domestically using its own currency.

That is a much more sustainable path to follow than trying to balance the extensive needs for human development against running out of US dollars in the Petroleum Fund.

The so-called “front loading policy” that the Government has deployed to fast track its Strategic Development Plan (SDP) involves:

… a tax policy seeking to invest withn the country an amount exceeding the estimated sustainable revenue of the Petroleum Fund in order to set the conditions for diversifying the non-petroleum economy.

Basically, it means the government has been spending more from the Petroleum Fund than the IMF considered would maintain its capital (the so-called estimated sustainable revenue (ESI) or the profits the nation receives from investing the Fund) and that means the Fund will deplete earlier than otherwise, leaving Timor-Leste with limited capacity to generate the currency it uses – the US dollar.

I explained the setting up and operation of Timor-Leste’s Petroleum Fund including the concept of the ESI in this blog post – Timor-Leste – beyond the IMF/World Bank yoke (November 20, 2012).

The ESI essentially is an assessment of the return on the Petroleum Fund investment and varies with oil price shifts and shifts in other financial asset prices.

In Timor-Leste’s context, all the notions of fiscal space that the IMF and UNDP wheel out are moot.

Constraining the notion of solvency to the balance in a foreign-currency denominated sovereign fund and claiming this limits what the government can do to bring idle resources into productive use is a typical neoliberal stunt.

The case in general is explained in this series of blog posts – Fiscal sustainability 101 – Part 1Fiscal sustainability 101 – Part 2Fiscal sustainability 101 – Part 3.

For Timor-Leste, the idea of fiscal sustainability tied to the Petroleum Fund in Timor-Leste becomes inapplicable if the government has its own currency.

Clearly, if the government uses a foreign currency (in this case, the US dollar) and relies on exporting a commodity in US dollars for its tax base then it can run out of spending capacity should the exported resource deplete.

But, fiscal sustainability with its own currency (which it can never run out of) becomes tied to what can be purchased with that currency that is available for sale.

With the ridiculously high unemployment rate in Timor-Leste one would have to argue that these workers would not accept a new currency in return for work to maintain a position that the Timor-Leste government has limited capacity to spend its own currency.

Clearly, once the government imposes all tax liabilities in the local currency then it would not take long for people to start demanding it.

There are hundreds of developing countries that do have currency sovereignty which means they can enforce tax liabilities in the currency that the government issues. It doesn’t matter if other currencies are also in use in those countries, which is common.

For example, the USD will often be in use in a LDC alongside the local currency and be preferred by residents in their trading activities. But, typically, the residents still have to get local currency to pay their taxes. That means the government of issue has the capacity to spend in that currency.

So the point is that as long as there are real resources available for use in a less developing country, the government can purchase them using its currency power and bring them back into productive use.

The are hundreds of thousands of people in Timor-Leste who are unemployed or underemployed in the informal sector.

They are real resources which have no ‘market demand’ for their services. The government of Timor-Leste could easily purchase these services with the local currency without placing pressure on labour costs in the country.

Conclusion

The Timor-Leste is encouraged to:

1. Introduce its own currency immediately.

2. Announce an unconditional, decentralised employment guarantee at a living minimum wage once they have put in place the administrative capacity to manage such a program.

3. Invest much more in education and health.

4. Divest investments in the oil and gas spaces.

Sydney Event – Friday, May 25, 2018

Tomorrow evening, I will be speaking at an event in Sydney about our recent book – Reclaiming the State: A Progressive Vision of Sovereignty for a Post-Neoliberal World (Pluto Books, 2017).

The event starts at 18:00 and will run until 20:00.

The location is (appropriately :-)):

The Mitchell Theatre

Mechanics’ School of Arts, 280 Pitt St, Sydney

The event is organised by Rethinking Economics Australasia

Admission $20 ($15 concession). I am receiving no speaking fee. The entry charge is going to the organisers to defray costs.

That is enough for today!

(c) Copyright 2012 Bill Mitchell. All Rights Reserved.

Framing a Job Guarantee

Published by Anonymous (not verified) on Thu, 03/05/2018 - 10:11am in

By J.D. ALT Note: This essay was first posted on realprogressivesusa.com Now that progressive leaders (Bernie Sanders, Kirsten Gillibrand and Corey Booker) have placed a proposed “Job Guarantee” program onto the mainstream political stage, it is essential they begin explaining … Continue reading →

The post Framing a Job Guarantee appeared first on New Economic Perspectives.


On the Costs of Doing Without a Job Guarantee

Published by Anonymous (not verified) on Wed, 02/05/2018 - 6:04am in

Pavlina Tcherneva — who, along with L. Randall Wray, Flavia Dantas, Scott Fullwiler, and Stephanie Kelton, authored this report estimating the economic impact of a job guarantee proposal (the Public Service Employment program) — was interviewed by Bloomberg’s Joe Weisenthal and Julia Chatterley about the purposes and costs of the plan.

This recently released policy note by L. Randall Wray also takes on some of the criticisms raised by the interviewers, in addition to seeking a consensus among the job guarantee proposals emanating from progressive think-tanks.

On the Costs of Doing Without a Job Guarantee

Published by Anonymous (not verified) on Wed, 02/05/2018 - 6:04am in

Pavlina Tcherneva — who, along with L. Randall Wray, Flavia Dantas, Scott Fullwiler, and Stephanie Kelton, authored this report estimating the economic impact of a job guarantee proposal (the Public Service Employment program) — was interviewed by Bloomberg’s Joe Weisenthal and Julia Chatterley about the purposes and costs of the plan.

This recently released policy note by L. Randall Wray also takes on some of the criticisms raised by the interviewers, in addition to seeking a consensus among the job guarantee proposals emanating from progressive think-tanks.

Why “If You Don’t Work You Don’t Eat” Is A Hell Ethic

Published by Anonymous (not verified) on Fri, 27/04/2018 - 2:55pm in

Once upon a time, most of humanity lived in a condition of scarcity.

There was a lot of work to do, and unless you were disabled, you could do it.

When a farm needs work done, it needs to be done. In hunter-gatherer societies, one can usually step away from the campfire and look for food.

There is work to be done, and you can do it.

It is not fair, reasonable, or adaptive, for someone who can work, in such societies, to not work.

This has been true for virtually all of human history, but it stopped being true some time during the industrial revolution.

We gained the ability to make more stuff than we needed AND we gained the ability to do more damage than whatever we made.

Well, strictly speaking we’ve always been able to do more damage than the work was worth: but the industrial revolution brought that up by some orders of magnitude.

Right now probably about a third of all the work done in the world is harmful: we would be better off if it wasn’t done.  Most of the carbon extraction industry; most of the airline industry; practically all of what amounts to deciding who owns what, is harmful, because it involves people using carbon to go places and do thins that really don’t need to be done.

It includes vast amounts of environmental and human pollution. This extends far beyond where it’s obvious, and it’s obvious everywhere.

For example, there appear to be no studies which don’t show a correlation between time spent on social media and lowered happiness and mood, and yet social media is one of the flagship industries of our era.

We work like dogs at jobs that either don’t need to be done, or are harmful, and thus can’t care for our children, so we hire strangers to care for our children. We fly on jets we hate, after going thru airport security that is dehumanizing, dumping huge amounts of carbon into the air.

And we build items, like the old lightbulbs, which could last almost forever, with death swtiches so we can sell even more of them.

And yeah, we’re destroying the biosphere: choking it with plastic, and causing runaway climate change. We know we’re doing it and we keep doing it.

So, jobs—there’s a lot of talk about a job guarantee. And that might be great if those jobs would be ones that added to human welfare beyond giving some people some money, but under current governments and corporations, they won’t. What we need to do is give people the food, housing and other resources they need, and giving them a job is a roundabout way to do it.

While a guaranteed income has its own issues it at least doesn’t create jobs that probably don’t need to be created. We already have excess capacity: more food than we can eat, more manufacturing than we use. We don’t need more. We need less, and less in ways that feel like the same: items that aren’t engineered to fail, food that isn’t unhealthy for us, jobs that involve less work and more time with our families and friends.

One of the great problems with culture is that ethics that were once mostly adaptive, like “work or don’t eat” linger on even after they become maladaptive. (Another example is “have lots of children.”)

But we’re emotionally attached to them: we take our self worth and self-image from them, and thus we cling to them even as they harm us both individually and as a civilization.

Time to stop. The problem isn’t that we don’t have enough jobs: the problem is that we distribute resources primarily thru jobs, when too many jobs add little or negative welfare to the world (virtually every job in finance, sadly.)

What people need isn’t jobs. It is the resources jobs let them buy.

The results of the work I do, like this article, are free, but food isn’t, so if you value my work, please DONATE or SUBSCRIBE.

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Critics of the Job Guarantee miss the mark badly … again

Published by Anonymous (not verified) on Thu, 26/04/2018 - 6:41pm in

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job guarantee

My blog post last week – On the path to MMT becoming mainstream (April 17, 2018) – discussed the way in which the language and concepts that have been developed by the Modern Monetary Theory (MMT) authors are now permeating mainstream narratives and the media. While this has increased the pushback and hostility from both the Right and Left opposition to MMT, it is also a sign that the public understanding of the way in which the monetary system works and the policy options available to currency-issuing governments, is improving. Most recently, there is been a flurry in the US media discussing employment guarantees, which is a welcome relief from the previous saturation coverage of impoverished UBI ideas. It is fabulous, that at the policy level, the idea that the state can eliminate mass (involuntary) unemployment if it so chooses is becoming more acceptable. That’s down, in part, to the great work being done there by my MMT colleagues. There are also derivative public sector job creation proposals getting ‘airplay’ which I do not consider to be MMT-inspired nor are what I would call Job Guarantee initiatives, but which are still, to their credit, raising awareness of the need for the state to ensure there are sufficient jobs for all rather than dispatch citizens who are unable to find work to the unemployment queue. The push back is increasing and that is a sign that dissonance is being felt by the neoliberals who oppose the state taking responsibility for mass unemployment and using its fiscal capacity to render it a thing of the past. Many of the critics from the Left do not have the courage to come out and say they prefer the alternative to a Job Guarantee, which is entrenched unemployment. That leaves them carping away with no legs to stand on. The Right objections are venal as they always are – they want mass unemployment to persist to dampen wages growth and allow more real income to be captured by the top-end-of-town.

Before we get into the specific topic of today’s blog post, I note that various social media discussions still don’t quite grasp the idea that the Job Guarantee is a specific and intrinsic element of Modern Monetary Theory (MMT) rather than a policy choice that might reflect progressive Left values.

I have explained this point several times in detail, here are two blog posts (among others) for you to reflect upon if you’re uncertain as to what I meant in the last paragraph:

1. Whatever – its either employment or unemployment buffer stocks (December 30, 2011).

2. MMT is biased towards anti-crony (December 28, 2011).

The point is that in macroeconomics we care about ‘efficiency’, which means that wasted productive resources that are willing and able to be deployed (referring obviously to labour resources but it generalises to all productive resources) are being used to advance societal well-being within a context of sustainability of the natural environment.

That also means that macro stability is important, which includes a goal of price stability. In other words, full employment and price stability are key macroeconomic goals, and a body of theory must seek to outline an achievable path for both, by understanding how the economic and monetary system operates and the policy choices available to the government within that system.

As I explained in the blog post – Modern monetary theory and inflation – Part 1 (July 7, 2010), to achieve price stability in a fiat currency monetary system there are only two options available to government, and both involve the use of buffer stocks:

  • Unemployment buffer stocks: Under a mainstream NAIRU regime (the current orthodoxy), inflation is controlled using tight monetary and fiscal policy, which leads to a buffer stock of unemployment. This is a very costly and unreliable target for policy makers to pursue as a means for inflation proofing.
  • Employment buffer stocks: The government exploits the fiscal power embodied in a fiat-currency issuing national government to introduce full employment based on an employment buffer stock approach. The Job Guarantee (JG) model which is central to Modern Monetary Theory (MMT) is an example of an employment buffer stock policy approach.

Given the massive costs involved (see below) in the use of the first buffer stock option (mass unemployment), the only efficient option for government is the use of a Job Guarantee.

There really is no alternative in this context.

Full employment requires that there are enough jobs created in the economy to absorb the available labour supply. Focusing on some politically acceptable (though perhaps high) unemployment rate is incompatible with sustained full employment.

The other point of clarification (hinted at in the Introduction), which I will expand on in a future blog post, is what I see as the difference between a Job Guarantee as developed by the original MMT authors (Mosler, Wray, Forstater, Fullwiler, Tcherneva, Kelton and myself) and various derivatives of that idea that had been proposed in more recent times.

The Job Guarantee is a very specific concept that constitutes a macroeconomic stability framework. It cannot merely be seen as a national job creation program nor does it apply to any localised subsidised public job initiatives (trials, pilots etc).

To suggest that some of the recent employment creation proposals that have been marketed under the moniker of a ‘jobs guarantee’ program are MMT-inspired is like saying that if you put wings on a Ford Fiesta you get a Mustang. I’ll write more about that another day.

Further, the MMT Job Guarantee also has nothing in common with so-called ‘workfare’ or ‘work-for-the-dole’ programs that neoliberal-inspired governments have introduced as compliance initiatives in some misguided attempt to force the income support recipients to ‘earn’ their pitiful benefit allowances.

Some of the cheap push back tries to dismiss the Job Guarantee as ‘workfare’ because they know that carries a negative connotation. In doing so, they disclose their ignorance and their lack of knowledge of the vast literature we have created, some of which has addressed that exact criticism more than two decades ago.

I know that some readers think it is unreasonable when I urge them to read widely before making assertions about what I write in my blog posts.

But for a journalist engaging in commentary and opinion rather than news reporting, there should be no other option – they are holding themselves out as experts, qualified to pass comment (judgement), and as such should be familiar with the literature and attribute ideas and concepts correctly.

They don’t, which usually ends up creating confusion among their readership and half-witted responses via social media about complex ideas.

And then the whole discussion gets lost in a haze of ignorance.

A recent example is the article on Vox (April 24, 2018) – Job guarantees, explained – by one Dylan Matthews, who asks the question “Would it work?”.

A point of relevance is to ask him exactly what “IT” is?

It is easy to invoke a concept, set up a straw person, and debunk the latter then suggest that defeats the former.

You will also note that Matthews talks about “Job guarantees” rather than a Job Guarantee. In my view, there is only one Job Guarantee in the literature and that is the framework developed by the original MMT authors. Note my comments above.

But there are a plethora of employment creation proposals which come under the more general group heading of ‘job guarantees’.

In the article cited above, this distinction is implied but not elaborated on. Matthews concentrates on non-MMT employment creation suggestions that are abroad in the American debate at present and gives scant attention to the development of a Job Guarantee within the MMT literature.

He ignores that literature except for a cursory reference to the excellent work by my MMT colleague Pavlina Tcherneva.

And most of the critical references he cites are not relevant to the Job Guarantee framework. They also have questionable relevance to any employment guarantee proposal in that they dredge up the usual suspects – where would the jobs come from, when they compete with the private sector, wouldn’t they just be unproductive resource wastage, who would get the jobs, et cetera.

All of these issues have been addressed by MMT authors over the last 25 odd years.

As an example, Matthews cited a paper published in July 2015 by the Forschungsinstitut
zur Zukunft der Arbeit (Institute for the Study of Labour) in Bonn – What Works? A Meta Analysis of Recent Active Labor Market Program Evaluations – written by David Card, Jochen Kluve and Andrea Weber.

I suspect he hasn’t fully read the paper or understood its method and limitations. He clearly doesn’t understand that is says nothing of interest about the Job Guarantee proposal or any other employment proposal that guarantees on-going work to workers.

The Vox article chose to summarise the Card paper in this way:

Berkeley economist David Card recently conducted a meta-analysis of more than 200 evaluations of programs meant to boost labor markets, along with fellow economists Jochen Kluve and Andrea Weber. While they found a variety of impacts of different programs, one constant was that public employment programs that simply hired people directly performed worst.

Which is not a conclusion that anyone who actually read the paper by Card et al, would draw and certainly the quality of the research in that cited paper was not subjected to any scrutiny by Matthews.

He chooses just to be passive mouthpiece, which doesn’t do him any credit at all.

A Meta-analysis derives its results from existing research – it is like throwing all the extant research into a melting pot and generating a “common truth”.

The technique is not without serious problems including bias in the selection of the studies to be concluded, addressing data differences including incompleteness, and so-called publication bias.

Further, if the original studies are flawed, the meta-analysis cannot fix that. In an attempt to overcome that limitation, researchers delete studies they think might be problematic. But that introduces selection bias – which a ‘skilled’ researcher can maximise to their advantage without disclosing the extent of the bias.

The publication bias problem is acute. If one relies only on studies that have been ‘published’, the editorial bias of the relevant journals is also inherited.

In economics, it is nearly impossible to get published in the so-called ‘top’ journals if you are, for example, a heterodox economist.

I once attended a seminar where the then editor of one of these ‘leading’ journals (noting that the ranking system is self-referential and ‘cooked’ anyway) said he undertakes his duties by weeding out 90 per cent or more of submissions received using simple word scans before the rest are sent out to peer review.

Further, I discussed in this blog post – Bank of England Groupthink exposed (January 8, 2015) – how Olivier Blanchard (who at the time was the chief economist at the IMF) wrote in his August 2008 article – The State of Macro – that research articles in macroeconomics now:

… look very similar to each other in structure, and very different from the way they did thirty years ago …

He said that they now follow “strict, haiku-like, rules”.

Graduate students are trained to follow these ‘haiku-like’ rules, that govern an economics paper’s chance of publication success.

So if an article submission does not conform to this haiku-like structure it has a significantly diminished chance of publication.

So we get a formulaic approach to publications in macroeconomics that goes like this:

  • Assert without foundation – so-called micro-foundations – rationality, maximisation, RATEX.
  • Cannot deal with real world people so deal with one infinitely-lived agent!
  • Assert efficient, competitive markets as optimality benchmark.
  • Write some trivial mathematical equations and solve.
  • Policy shock ‘solution’ to ‘prove’ fiscal policy ineffective (Ricardian equivalence) and austerity is good. Perhaps allow some short-run stimulus effect.
  • Get some data – realise poor fit – add some ad hoc lags (price stickiness etc) to improve ‘fit’ but end up with identical long-term results.
  • Maintain pretense that micro-foundations are intact – after all it is the only claim to intellectual authority.
  • Publish articles that reinforce starting assumptions.
  • Knowledge quotient – ZERO – GIGO.

This is why the publication bias problem is significant.

Further, in my field (economics) one can never really get a publication if the research only produces ‘negative’ results. That is, the researcher fails to find anything. I believe this is a common problem in other disciplines as well.

I won’t go into the specific statistical issues that arise from truncating the sample of information that is used and ignoring a vast body of research that never reaches journal publication stage (such as doctoral studies, conference papers etc).

The Card meta-analysis attempt to address this issue is, in my view, unconvincing.

There are a host of other issues involved in using meta-analysis, so I would never confidently cite them as an authority without first understanding exactly what the authors did.

In the Card et al. approach they also only focus on:

… studies that measure the impact of a program on the probability of employment …

This narrows the field considerably and assumes that the purpose of the employment creation programs were to increase that outcome rather than to provide on-going employment itself.

The literature also typically narrows the outcome down to the “probability of employment” with a private employer. So if that transition likelihood is found to be low, the program is deemed a failure because it fails the ‘market’ test.

This is a version of the ‘make work’ criticism of employment guarantees – which goes that unless the work is making profit for some capitalist or another it must be worthless and unproductive.

I considered that issues in this blog post (among others) – Boondoggling and leaf-raking … (April 22, 2009).

The evaluation paper published in the OECD Economic Studies (2000) – What works among active labour market policies by John P. Martin, who is an economist at the OECD, is instructive in this regard.

Martin notes that

… “outcomes”, in the evaluation literature, are invariably expressed in terms of programme impacts on future earnings and/or re-employment prospects of participants … There is little or no evidence available on potential social benefits which could flow from programme participation such as reduced crime, less drug abuse or better health.

This is an important point because we know that apart from income loss, unemployment (particularly for extended periods) is associated with the pathologies mentioned in the quote.

Over the years we have done considerable research in that area and I reported some of that in these blog posts (among others):

1. The daily losses from unemployment (January 13, 2010).

2. The costs of unemployment – again (January 13, 2012).

While the daily losses in income alone are enormous, it is also well documented that sustained unemployment imposes significant economic, personal and social costs that include:

  • loss of current output;
  • 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 costs are also enormous and dwarf the measures that various governments have come up with to estimate losses arising from so-called microeconomic inefficiencies (such as transport systems not running on time etc).

They also ensure that the losses extend beyond the current generation. Children growing up in jobless families inherit the disadvantages of their parents and perpetuate the cycle of disadvantage.

So to just focus on whether a specific program increases the transition probability of an unemployed person into private employment (no matter what wage, conditions, tenure is offered in that private job) is hardly a basis for concluding that a Job Guarantee would fail.

From where I sit, if a Job Guarantee provides stable income (a socially-inclusive living wage and non-wage benefits such as child care, access to training and education, health care etc) to a severely disadvantaged citizen who cannot find work elsewhere, and if, that person increases their self esteem and is healthier, more engaged with society and can better care for their families, then it is a huge success.

Even if that person stays in that Job Guarantee position for ever and no private employer would ever take them on.

Huge success.

That sort of ‘successful’ outcome is denied (excluded) in the Card meta-analysis.

So when they conclude that:

Public sector employment subsidies tend to have negligible or even negative impacts at all horizons.

They are not saying anything meaningful about a Job Guarantee, which by definition creates stable jobs with socially-inclusive wages for anyone who cannot find a job elsewhere.

Further, readers should note also that the sample of programs included in the Card meta-analysis was “restricted … to time-limited programs, eliminating open-ended entitlements”.

So the sort of programs they are considering might include a job creation initiative that offers subsidised wages for a 3-month time period but terminates after that.

Accordingly, their results have little application to an MMT-inspired Job Guarantee which is unconditional and open-ended.

Further, their study can say nothing about any employment guarantee program (MMT-inspired or not) that is not time-limited.

Further, the sample created by the Card meta-study has very few public sector job programs – they said these programs “were relatively rare in all county (sic) groups”, which means there is probably insufficient variance in the original estimates of variables associated with these programs to get accurate estimates anyway.

Of their conclusions, I have this to say:

1. They conclude that “public sector programs” perform poorly because “private employers place little value on the experiences gained in a public sector program — perhaps because many of these programs have little or no skill-building component, and only serve to slow down the transition of participants to unsubsidized jobs”.

This conclusion is irrelevant to a Job Guarantee.

Even if it was true that in times of stronger activity the private employers choose to lose market share by shunning Job Guarantee workers, the Job Guarantee workers will still enjoy stable incomes that allow for a socially-inclusive life to be led.

Their children will still learn to value work and not inherit the disadvantage that would have arisen if their parent(s) remained long-term unemployed.

And the rest of it.

The reality is that it is highly unlikely that private employers would be prepared to lose market share in this way as economic activity was boosted.

They can afford to be choosy during recession. But when they are enjoying higher levels of demand for goods and services, a firm that engages in such discrimination, will just lose their sales to a competitor.

The evidence is very powerful. During the full employment era, when unfilled vacancies ran ahead of available workers, firms would structure their job offers to take even the most unskilled workers – offering them training and assistance to ensure they were capable of performing the tasks required.

They did that because otherwise they would have sacrificed profits.

2. “public sector employment programs appear to be relatively ineffective at all time horizons” – the term ineffective is not applicable to a Job Guarantee which aims to unconditionally provide stable employment with a living wage.

Whether this improves a participant’s chances of getting a private sector job is irrelevant. The point is that the operation of the Job Guarantee, by definition, creates successful outcomes.

And if the private sector are in need of labour then they just have to offer wages and conditions that are better than what the Job Guarantee worker is enjoying to attract the labour from the program pool.

As above, if the private sector employers don’t want to do that, then in times of growing economic activity, all they will do is sacrifice profits. Unlikely.

3. Card et al. also find that all programs “work better in recessionary markets” but they are unable to determine why. This is a well-known problem of these types of studies.

John P. Martin (cited above) notes that:

This literature is bedevilled by a number of data and technical difficulties, notably simultaneity bias since cross-country comparisons reveal that the amount of spending on active programmes is positively related to the unemployment rate.

In other words, it is impossible to decompose the cyclical effects from the underlying impacts of the programs being compared.

Readers might also be interested in the excellent historical analysis – Lessons from the New Deal Public Employment Programs (October 1, 2009) – by US academic Nancy Rose.

I had the pleasure of hosting a visit by Nancy Rose to Newcastle some years ago.

She has been a long-time advocate of job creation programs and a critic of Workfare type programs. She is not what I would consider to be an MMT-er.

Her research confirms that evidence from the Great Depression show that:

… it is possible to implement expansive and creative public employment programs …

Further, she notes that criticisms such as “inefficiency and unnecessary ‘make-work’ … workers … substituted for normal government employees, payments … too high, and the entire program … too expensive and riddled with graft and corruption” are always invoked by critics who just oppose public sector intervention per se.

These critics have worked to dissuade governments from introducing public sector employment creation:

This absence has been bolstered by the now commonly accepted “wisdom” of several decades of conservative, neoliberal ideology, which argues that as much economic activity as possible should be left in the hands of the private sector.

The neoliberal era has pushed the line that:

… government is … inefficient simply because it does not operate on profit criteria — the lack of a profit motive automatically leads to inefficiency. This contrasts to the private sector, which does base decisions on profits.

This is related to the use of private sector employability as a measure of success for public sector job programs, even though that goal may be subsidiary or irrelevant to the aim of improving general welfare.

In other words, efficiency is far broader than a concept that maximises private profits.

And that is not to mention the obvious fact that the private sector is not the exemplar of efficiency anyway, even when defined in the narrow way mainstream economists might choose.

The GFC confirms that if you ever doubted it.

Further, the legacy of many of the Depression projects in the US and Australia (the Great Ocean Road, for example) demonstrate how productive this sort of work can be if designed and implemented properly.

The importance of designing projects appropriately is emphasised in the study published in the October 2000 edition of the Monthly Labor Review by Melvin M. Brodsky from the US Bureau of Labor Statistics – Public-service employment programs in selected OECD countries.

He provided a very detailed analysis of experiences with public service employment programs.

He argues that notwithstanding the criticisms of such programs, public sector job creation:

… may be the only effective way to aid those among the long-term unemployed who are less skilled and less well educated.

Brodsky emphasises the following design features that improve the effectiveness of such programs:

1. “flexibility” – this is why the Job Guarantee can be tailored to be inclusive to any form of disadvantage including mental and physical disabilities.

2. “more targeted to local needs” – the Job Guarantee is funded nationally but implemented locally to ensure that the voice of local communities is instrumental in generating the types of jobs that address unmet community and environmental need.

3. “better linked to other labor market services” – the Job Guarantee would incorporate assistance for disadvantage.

For example, in a study we did for the NSW Mental Health Department we created designs that allowed for clinical support for youth with psychosis to be embedded in the job design. No private employer would allow this degree of flexibility – which means that cohort would be precluded from jobs where they might be very useful if they had the chance to access clinical support when needed (on an episodic basis).

The Job Guarantee embeds training ladders into the guaranteed job such that if a person desires to develop their skills beyond the current level they can.

The Job Guarantee would be accompanied by child care services, health care services to ensure needs beyond the narrow workplace issues can be addressed.

In other words, the Job Guarantee would incorporate many of the features of ‘labour market programs’ that the Card meta-study felt were important, in addition to providing a stable job with a socially inclusive wage.

In 2008, our research team published a comprehensive report after a 3-year study – Creating effective local labour markets: a new framework for regional employment policy – we built on those design features to produce a comprehensive operational plan for the implementing of a Job Guarantee.

Conclusion

The problem with journalists like Dylan Matthews is that they are not experts yet they hold themselves out to be authorities on topics they write about.

While David Card and his team do solid work, the particular research study that Matthews cited as criticism of the latest array of employment guarantee proposals in the US misses the mark significantly.

By definition, a Job Guarantee would succeed in terms of its aims – to provide a stable job at a socially-inclusive wage to those who cannot find work elsewhere.

That offer is unconditional and not time-limited or supply-constrained. Most past public service job creation initiatives are supply-constrained (a given fiscal allocation is made which limits scope and duration).

The Job Guarantee is not of that type. It is demand-driven – as many workers as desire work will be hired. They can stay as long as they like. They can make it a career if they choose.

Whether it enhances private sector employability is not the aim so studies that assess programs solely in terms of that aim are irrelevant.

Matthews clearly does not get that and so spuriously quotes studies that have no application to the topic he is writing about.

To close, I don’t normally agree with much that conservative politicians say but this statement during an Interview with Michael Rowland on ABC New Breakfast (April 20, 2018 7:05), by the Australian Federal Minister for the Environment and Energy is what everyone on the Left should learn to repeat when they start surrendering to ideas that the nation state is powerless (it is at the 1:42 minute mark):

The Parliament is always sovereign so legislation can be changed.

Got it! The state retains power and we just have to reclaim it for progressive outcomes.

See my latest book with Thomas Fazi for more – Reclaiming the State: A Progressive Vision of Sovereignty for a Post-Neoliberal World (Pluto Books, 2017)

That is enough for today!

(c) Copyright 2018 William Mitchell. All Rights Reserved.

On the path to MMT becoming mainstream

Published by Anonymous (not verified) on Tue, 17/04/2018 - 5:52pm in

Over the last few years, it is clear that Modern Monetary Theory (MMT) is achieving a higher profile and the attacks are starting to come thick and fast. I see these attacks as being a positive development because it demonstrates that recognition has been achieved and a threat to mainstream ideas is now perceived by those who desire to hang on to the status quo. Hostility and attack is a stage in the process of a new set of ideas becoming accepted, ultimately. Clearly, some new interventions never receive acceptance because they are proven to be flawed in one way or another. But I doubt the body of work that is now known as MMT will be discarded quite so easily given my assessment that is is coherent, logically consistent and grounded in a strong evidence base. As part of this evolution there are now lots of what I call ‘sort of’ contributions coming from mainstream commentators. One of the ways in which mainstreamers save face is to claim they ‘knew it all along’ and that the existing body of practice can easily accommodate what might be considered ‘nuances’ or ‘special cases’. We are seeing that more now, with the more progressive mainstream economists claiming there is nothing ‘new’ about MMT that it is just what they knew anyway. Even though that approach is disingenuous it is part of the evolution towards acceptance. People have positions to protect. These ‘sort of’ contributions demonstrate a sort of half-way mentality – a growing awareness of MMT but with a deep resistance to its implications. A good example is the UK Guardian’s editorial (April 15, 2018) – The Guardian view on QE: the economy needs more than a magic money tree.

As a little historical aside – about stages in acceptance of new ‘things’ (ideas) – at the Third Biennial Convention of the Amalgamated Clothing Workers of America in 1919, held in Baltimore, Nicholas Klein, a delegate from Cincinnati was given the floor to “say some few words of encouragement to the Schloss Brothers strikers of Baltimore, who had been on “strike for five consecutive weeks”.

He spoke to the delegates about the strength of worker organisation and the importance of the Union.

His contribution is recorded in the Proceedings of the Third Biennial Convention of the Amalgamated Clothing Workers of America (Baltimore, Maryland, May 13-18, 1919).

To illustrate his point, he finished with a excellent example of how social perceptions and opinions change when new ideas emerge that challenge the cognitive dissonance of the mainstream.

Here is what he said (pages 51-53):

I close by telling you the story, because I think it explains better than anything else, at this time, the great possibilities which can come to labor. There is a story told about the making of the first railway. There was an old man, it is said, whose name was Stevenson, who made the first locomotive. You know, just like in the labor movement they said locomotives were impossible. You had to have horses or cattle to pull a train; that nothing would go without something being attached to it. There would be no locomotion.

And when old man Stevenson proposed a train – something to be run without the aid of horses or oxen, he was ridiculed. One day a test was made, and they laid two pieces of wood and upon these two pieces of wood they placed some thin sheets of metal, and upon that crude arrangement was placed the first locomotive.

And it is said in the story that thousands of people were out to see the first test of that locomotive, and of course the people all shouted, and pointed to their heads, and said the man was crazy, and they said the locomotive was out of the question; it was impossible, and the crowd yelled out: “you old foggy fool! You can’t do it! You can’t do it” and the same everywhere. The old man was in the cab, and somebody fired a pistol and the signal was given. He pulled the throttle open and the engine shot out, and in their amazement the crowd, not knowing how to answer to that argument, yelled out: you old fool! You can’t stop it! You can’t stop it! You can’t stop it!” (Applause.)

And my friends, in this story you have a history of this entire movement. First they ignore you. Then they ridicule you. And then they attack you and want to burn you. And then they build monuments to.

And that is what is going to happen to the Amalgamated Clothing Workers of America.

Relatedly, the idea of locomotives replacing horses was the subject of vigorous debate in the coal mining districts of Britain in the early part of the C19th.

This historical account from a book published in 1857 by Samuel Smiles – The Life of George Stephenson and of his son Robert Stephenson (Harper Brothers, New York) is interesting.

In Chapter VII George Stephenson’s Farther Improvement in the Locomotive — Robert Stephenson as Viewer’s Apprentice and Student – Smiles discusses the resistance in local communities to George Stephenson’s locomotives.

We read that:

… the voice of the press as well as of the public was decidedly against the “new-fangled roads.” … [the idea that] … steam-carriages … were to supersede the use of horses entirely, and travel at a rate almost equal to the speed of the fleetest horse!” … was too chimerical to be entertained, and the suggested railway was accordingly rejected as impracticable.

The “Tyne Mercury” was equally decided against railways. “What person,” asked the editor (November 16th, 1824), “would ever think of paying any thing to be conveyed from Hexham to Newcastle in something like a coal-wagon, upon a dreary wagon-way, and to be dragged for the greater part of the distance by a ROARING STEAM-ENGINE!” The very notion of such a thing was preposterous, ridiculous, and utterly absurd.

It is almost comical to read these historical accounts now.

But Groupthink, vested interests and all the related sources of resistance has been a powerful force holding back the acceptance of new ideas that are superior to the old.

The media has long been an important vehicle in giving voice to these vested interests.

Which brings me to the Guardian Editorial cited in the Introduction.

The UK Guardian maintains the myth that:

Quantitative easing succeeded in staving off disaster …

I will come back to that.

Their latest tack is that Brexit will open up new possibilities for Britain once it escapes the provisions of the Lisbon Treaty that ban central bank bailouts.

The Editor notes that Jeremy Corbyn’s early suggestion (2015) for a ‘Peoples’ QE’ was forbidden under EU membership but would become possible once Britain leaves the EU.

They don’t endorse Brexit but just “observe that the quiver of the argument against printing money might lose an arrow or two if we leave the EU”.

I wrote about Peoples’ QE in this blog post – PQE is sound economics but is not in the QE family (August 15, 2015).

The Editor observes, however, that Lisbon Treaty notwithstanding:

In fact, the Bank of England, while the UK was in the EU, did print hundreds of billions of pounds to avoid economic disaster. At the push of a button, the Bank conjured up £435bn to buy up gilts – government bonds – and exchange them for bank deposits. On the national balance sheet this sum is listed as debt, but it is not in the strictest sense because it is not owed to anyone. Turns out there is a magic money tree.

Well, in fact, that is not a factual statement.

Even a simple excursion to the – Bank of England – demonstrates the propaganda element in the Guardian’s claim.

The Bank states clearly:

The Bank of England can purchase assets to stimulate the economy. This is known as quantitative easing …

Quantitative easing does not involve literally printing more money. Instead, we create new money digitally …

Quantitative easing is when a central bank like the Bank of England creates new money electronically to make large purchases of assets. We make these purchases from the private sector … The market for government bonds is large, so we can buy large quantities of them fairly quickly.

The purchases are of such a scale that they push up the price of assets, lowering the yields (the return) on them. This encourages those selling these assets to us to use the money they received from the sale to buy assets with a higher yield instead, like company shares and bonds.

As more of these other assets are bought, their prices rise because of the increased demand. This pushes down on yields in general. The companies that have issued these bonds or shares benefit from cheaper borrowing because of these lower yields, encouraging them to spend and invest more …

No printing presses involved.

And no direct spending effect.

Whether it was successful “in staving off disaster” as the Guardian claims is another matter.

The data suggests otherwise.

The recovery really didn’t come until George Osborne curtailed his obsessive austerity pursuit and allowed the deficit to grow in 2012.

If QE had have done anything significant for the real economy, then we would have expected business investment to have picked up.

The following graph shows it didn’t do anything remarkable between 2010 and 2017. In historical terms the Business Investment ratio was around 12.6 per cent in 1998. It is now at 9.3 per cent and showing no signs of returning to the previous higher levels.

And the Guardian even recognises why, even though it wanted readers to believe that QE had done a remarkable job of saving the UK from permanent recession.

We read:

Having sold their gilts back to the Bank, investors bought up company stocks and bonds or property – sending prices to record highs – instead of creating new activity in the real economy, higher growth and jobs … The result was that the injection of money caused a stock-market boom in the financial economy, but on the real economy – the target of the policy – it had little effect.

Which makes one wonder about the editorial process at the Guardian, particularly when it comes to the so-called Editorial Comment, given the sub-title of the Editorial was that QE “succeeded in staving off disaster”.

No it didn’t. It did very little in fact. It certainly bestowed massive capital gains on holders of the financial assets that the Bank of England purchased and, in that sense, increased inequality, given the skewed nature of ownership of those assets.

But in terms of the real economy – as the Guardian concedes, “it had little effect”.

Which then brings the Editorial to the ‘sort of’ MMT narrative.

1. “Government spending, however it is financed, needs to be the main agent of recovery” – that is, fiscal policy should be the primary macroeconomic policy tool to ensure the economy maintains growth and avoids recessions.

The ‘sort of’ tag relates here to the “however it is financed” qualifier. This is mainstream resistance to the reality constraining the full exposition of what the UK government can actually do, and which was hinted at in the opening paragraph of this Editorial (when it recognised that governments can simply spend its own currency without ‘financing’).

The Editorial notes that an effective use of fiscal policy was resisted because government “ministers were ideologically resistant to” deploying it.

The Guardian then suggests what Jeremy Corbyn should do if it wanted to be imaginative:

Its plans could have seen the central bank instructed to hand over funds to a state body so it could buy services and goods without issuing debt.

The MMT solution.

Run deficits to advance well-being and only reign them if with higher taxation if the economy hits full capacity and in is danger of accelerating inflation.

The Editor sees “two objections to this” proposal:

… one is the Bank would have to pay interest on excess reserves, which would inevitably build up; or let its target rate fall to zero. Both occur today and are managed. The second is hyperinflation. Yet all spending – government or private – carries an inflation risk.

Pure MMT being espoused there.

Note the language being used – “all spending – government or private – carries an inflation risk”.

If you do a string search of my writing you will find those exact words. Pure MMT. Mainstream macroeconomists never make that essential point when talking about fiscal deficits.

They leave the readers with the impression that government deficit spending is a special category of inflation risk. It is not and the Guardian editor clearly understands that.

And in relation to the inflation risk, we get some more pure MMT from the Guardian editor:

A future chancellor could commit to using fiscal policy to make sure nominal spending keeps pace with the real capacity of the economy to produce goods and services – and withdraw the stimulus if annualised GDP growth exceeded … [that capacity].

Again, if you do a string search of my writing you will find those exact words.

This is not the way a mainstream macroeconomists talks or writes.

This way of constructing the inflation problem is pure MMT.

And in conclusion, the Guardian recognises that the UK growth is languishing and in that vein:

The lack of demand in the economy needs urgent attention. Enlarging the economy may need bigger thoughts than politicians have so far entertained.

Exactly, what the MMT economists, such as yours truly, have been saying for years now, as advanced economies have been languishing in a state of excess capacity and elevated levels of unemployment.

The point is that now we have mainstream editorials using MMT language and constructs, which I think is progress.

There remains resistance for sure. But think about that speech made in 1918 to the delegates at the Third Biennial Convention of the Amalgamated Clothing Workers of America.

The arguments and criticisms are coming up with different points now.

We are debating inflation rather than insolvency.

We are recognising the central bank can control yields and only considering the impacts of that.

You won’t find those sorts of insights in a mainstream macroeconomics textbook yet, but time is ticking. Our next textbook is due out in November 2018 and I hope it will eventually form part of the mainstream teaching curriculum in world universities.

Part of the on-going resistance to MMT ideas is the rather odd claim that the population are not capable of absorbing its implications without engaging in destructive behaviour.

This came up again from our German-friends at Makroskop who appear intent on just repeating the same assertions about the political impractability of basing policy on the principles of MMT over and over again.

I dealt with the first entreaty in this three part series:

1. My response to a German critic of MMT – Part 1 (March 26, 2018).

2. My response to a German critic of MMT – Part 2 (March 28, 2018).

3. My response to a German critic of MMT – Part 3 (April 3, 2018).

Anyway, most recently (April 16, 2018), Martin Höpner published a further entreaty – Die Debatte um MMT: Eine Nachlese.

Remember Martin Höpner thinks that there is a case for keeping the public in the dark about what the government can and cannot do with respect to its currency – maintain the lie that it can run out of money and that spending is funded by taxes – because the citizens would not be able to handle it if they knew the truth.

They would go crazy and overspend or something and chaos would follow.

I don’t think this view is grounded in an understanding of human psychology.

The most recent article reasserted his view that (translating from German and summarising – Quotes are my translations. But I am mostly paraphrasing the argument.):

1. Humans are not robots. Good start although some days I feel like one.

2. Given that MMT exposes the truth about government spending capacity and its technical limitations (real rather than financial resource constraints), the “state could do more than it pretends to do” in the advanced world.

In other words, governments lie to people about running out of money and claim elevated levels of unemployment are inevitable because they cannot create jobs without risking insolvency.

3. If governments use their fiat-currency capacity – for example “state financing via the central bank or helicopter money” and avoid accessing “capital markets” then this would rely on “the behaviour of citizens” (spending, saving, etc) being consistent with a “stable, inflation-free growth path”.

Yes, true.

And MMT advocates strengthening the automatic stabilisers which are ‘private market’ driven to allow fiscal policy to be highly responsive to changes in non-government spending and saving behaviour.

Elaborate forecasting is not required to know that there are people queuing up in the morning at a Job Guarantee agency wanting to register for a guaranteed job.

The government immediately knows its current degree of expansion is insufficient.

And vice versa, when the Job Guarantee pool is draining. The speed of that drain and the spatial distribution quickly informs government about shifts in non-government activity.

Almost on a minute-by-minute basis given our IT systems these days.

4. But Martin Höpner doesn’t think this will work because were are not robots. And his problem is that we are susceptible to confusion, scares and our “real life experiences of the functioning of the economy and thus of the money” are mainstream.

The public have no experience with the ideas espoused by MMT.

5. Which means that the idea that the state is still being responsible by “printing money” (there it is again) and spending without borrowing “is incompatible with everyday experience”.

Which means?

That Martin Höpner asserts that MMT is a “highly simplified, pre-sociological (and therefore not ‘modern’) theory of action because we, allegedly, suppose that such radical departures can be introduced without the unintended effects on the citizens”.

And what are those “unintended effects”?

Well he “does not pretend to be able to predict in detail the effects” – although he thinks people will lose confidence in the currency.

This is a repeating argument

He just asserts, again that:

… inflation … would inevitably have to break out … once the myth that governemnt spending was not revenue-constrained.

Why?

Presumably, because either the government would overspend or the citizens would stop saving (having lost confidence in the currency) and went on a spending spree.

Martin Höpner thinks both would happen.

He also thinks that the MMT notion that governments do not need to fund its spending is “practically unable to be eradicated because it is a perfect fit of our everyday experiences”.

And so it is easy for politicians to use the ‘household budget analogy’ to gain political traction over its rivals.

So there is nothing new there.

We are basically stupid, habit-driven, and unable to be educated beyond our primitive daily experience of having to go out to work to get money in order to spend. We think the government is the same and if it says it is not then we go crazy and chaos results.

I disagree with all of that.

Humans have a great capacity to learn and be educated into adopting highly sophisticated understandings.

The media is highly influential. So how many people who read that Guardian editorial would go away and resist its simple (pro-MMT) narrative?

Not many.

And in the last several years, the public has been confronted with major challenges from very senior monetary officials.

Remember, former US Federal Reserve Bank Governor Alan Greenspan’s famous admission on NBC’s Meet the Press (August 7, 2011) relating to a potential US debt downgrade:

The United States can pay any debt it has because we can always print money to do that. So there is zero probability of default.

Then the next governor, Ben Bernanke, a more modern man altogether because he knows the process doesn’t involve a printing press, was asked by the US 60 Minutes program by Scott Pelley (December 3, 2010) about QE and the growing fear that it would unleash an inflationary spiral.

The transcript included this Q&A (Source):

Pelley: Many people believe that could be highly inflationary. That it’s a dangerous thing to try.

Bernanke: Well, this fear of inflation, I think is way overstated. We’ve looked at it very, very carefully. We’ve analyzed it every which way. One myth that’s out there is that what we’re doing is printing money. We’re not printing money. The amount of currency in circulation is not changing. The money supply is not changing in any significant way. What we’re doing is lowing interest rates by buying Treasury securities. And by lowering interest rates, we hope to stimulate the economy to grow faster. So, the trick is to find the appropriate moment when to begin to unwind this policy. And that’s what we’re gonna do.

Okay, no printing presses.

QE lowers interest rates only.

Lower interest rates may or may not stimulate spending depending on a host of other things including the state of confidence, unemployment dynamics etc.

We also might recall an earlier interview between Scott Pelley and Ben Bernanke on the US 60 Minutes program (March 12, 2009) – Ben Bernanke’s Greatest Challenge .

The interview is largely a litany of mainstream statements but at one point Bernanke provided a very clear statement about how governments that issue their own currency actually spend.

At around the 8 minute mark of the segment, Bernanke starts talking about how the Federal Reserve Bank (the US central bank) conducts its ‘operations’ (in this case, how it conducts government spending).

Interviewer Pelley asks Bernanke (Source):

Is that tax money that the Fed is spending?

Bernanke replied, reflecting a good understanding of what we call central bank operations (the way the Federal Reserve interacts with the member banks):

It’s not tax money. The banks have accounts with the Fed, much the same way that you have an account in a commercial bank. So, to lend to a bank, we simply use the computer to mark up the size of the account that they have with the Fed. It’s much more akin to printing money than it is to borrowing.

That is, the US government spends by creating money out of ‘thin air’.

And we have now lived through nearly a decade of major shifts in government policy.

Large deficits to stimulate growth – working.

Massive expansions of central bank balance sheets (QE) in the UK, Japan, Europe, the US – all accompanied by the sort of claims that Martin Höpner is making (although he does it more politely) that hyperinflation would result and currencies would be trashed.

We have observed none of those things happening.

And has our behaviour changed dramatically? Not in any unpredictable (broadly) ways.

When unemployment started rising we increased our saving ratios – as you would expect.

When the fiscal stimulii started to work – we loosened our spending again – but modestly.

Investment has been slow to pick up because it is asymmetric due to the irreversibility of capital formation. All as expected.

Borrowing didn’t go through the roof at zero interest rates. Why not? Because credit worthy borrowers were cautious in the milieu of high unemployment and previous credit binges.

And, of course, the Japanese have been going through this process for a quarter of a century. They have seen credit rating agencies embarrassed as they downgrade Japanese government debt to junk status only for the public to observe nothing of consequence follows.

They have seen on-going deficits, low to zero interest rates, low inflation (bordering at times on disinflation), high gross public debt levels.

I haven’t seen major behavioural shifts in the economic behaviour of Japanese residents.

In fact, as I noted in my three-part response to Martin Höpner, destructive non-government behaviour accompanied the intensification of the myth narrative about fiscal deficits and the promotion of fiscal surpluses.

We had credit binges, criminal behaviour by our financial sector, and then crisis.

Conclusion

The UK Guardian Editorial is a sign of progress. One small step as they say.

But for years we were ignored – “you old foggy fool! You can’t do it! You can’t do it”.

Then we were ridiculed – “you old fool! You can’t stop it! You can’t stop it! You can’t stop it!”

and whenever, we might become mainstream.

That is enough for today!

(c) Copyright 2018 William Mitchell. All Rights Reserved.

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