job guarantee

Error message

Deprecated function: The each() function is deprecated. This message will be suppressed on further calls in _menu_load_objects() (line 579 of /var/www/drupal-7.x/includes/menu.inc).

The need is to fix the system, not just to provide ‘sticking plasters’

Food Bank Cupboard stocked with tinned and packet foodImage by Staffs Live (CC BY-NC 2.0)

“The test of our progress is not whether we add more to the abundance of those who have much; it is whether we provide enough for those who have too little.”

Franklin D. Roosevelt

 

It feels lately that we, like Lewis Carrol’s Alice, have fallen down a rabbit hole into an immensely troubling surreal situation with seemingly no idea how we are going to extricate ourselves.

Whether it is the distressing daily reports of Covid-19 deaths, the disturbing video accounts of the huge pressures on our NHS or care services, the political upheavals taking place across the Atlantic and elsewhere or the most serious challenge of all, climate change, it seems ever clearer that we are in Antonio Gramsci’s ‘time of monsters’ in which ‘the old world is dying and the new world struggles to be born’.

What that world will look like remains to be seen, but recent political events would seem to suggest that we still have some way to go before the ‘old world’ breathes its last. The pandemic, combined with the consequences of forty and more years of Neoliberalism Central which has infected every aspect of our lives and dominates political decision making, has created not only public disillusionment, but also petrification as our institutions sit in their blinkered bunkers holding on for dear life to all they knew.

Whether it’s the existing and growing union between government and global corporations, policy decisions which have increased inequality and poverty and encouraged charity, volunteering and philanthropy to take up the reins of public provision, or the promotion of sound finance as a vital component of good governance, the old structures are embedded in our consciousness.

It wasn’t always like this.

During the second world war, William Beveridge was appointed to investigate social security in Britain and his report, published in 1942, identified five major problems which prevented people from improving their lives. These were:

Want (caused by poverty)

Ignorance (caused by a lack of education)

Squalor (caused by poor housing

Idleness (caused by the lack of jobs or the ability to gain employment)

Disease (caused by inadequate health care provision)

It was recognised that government had a role to play in addressing those five ‘evils’ and as a result of the Beveridge report, the post-war government set up the social security system and pursued policies which aimed to address them including full employment. It may not have been perfect, but it changed people’s lives for the better.

Over recent decades, that connection between the state and publicly paid-for provision, management and delivery of services has been broken. Responsibility for such provision is increasingly being shifted into the charitable/voluntary sector, whilst at the same time, the dominant orthodoxy of individual responsibility has led to shaming and blaming people for their situation as the government takes a back-seat role.

Food banks have become a normalised feature of Britain, as Therese Coffey, the Tory minister for the Department for Work and Pensions, indicated last year when she referred to people using food banks as ‘customers’ and suggested they were a ‘perfect way to help the poor’. It implies that government has no role at all in ensuring the economic well-being of its citizens, and worse, that the 14 million Britons who do not have enough to live on are there through their own lack of moral fibre!

When charities buy into this picture and act as mitigators for a rotten economic system (which drives the poverty and inequality, that drive, in turn, the consequences including hunger, homelessness, and illness), they are not aiming to fix the system, but to provide sticking plasters. As such, it demonstrates how they, too, have been captured by an ideology and accept it without question.

This was made shockingly clear in a paid-for content article in this week’s Guardian. The CEO of the Bethany Christian Trust, when talking about tackling the problem of food insecurity said: ‘if by giving someone a meal we’re sitting them down with people they can talk to about debt counselling, mental health issues, addiction, domestic abuse, or whatever help they might need, then that plate of food can work so much harder’.

Rather than starting with the political roots of these problems, charities increasingly view them as issues to be solved through improving the capacity of the individuals themselves to manage the challenges they face.

Quite simply, this facilitates the shifting of blame onto people, rather than highlighting the failure of the government to make provision for its citizens and is classic neoliberal text. As Neil Valley suggests in his article in the New Internationalist ‘The Self-Help Myth’.

‘The pervasive rhetoric of personal responsibility has transformed the role of government and society in the neoliberal era. Where once the role of government was to safeguard the general happiness of the majority of citizens, albeit to varying degrees, its primary role now is to facilitate the conditions where each citizen can take on more and more individual responsibility, absolving the state from its responsibility towards its citizens.’

Then step in charities to fill the gap in service provision and provide the mitigating support for the rotten toxic system which has created the need in the first place and designates those in receipt of such support as customers rather than victims.

The increasingly pervasive narrative, which is being driven further by the pandemic crisis, is that charities and the voluntary sector should be at the heart of our local communities to ensure that vulnerable people don’t fall between the cracks, rather than publicly paid for, managed and delivered state provision.

It was, therefore, all the more disconcerting this week to read the proposal in the left-wing publication The Tribune that a National Food Service should be set up. Whilst its aims to serve the public good rather than private profit are indeed laudable, one has to question the logic.

Of course, one could not object to the removal of private companies delivering public services, given that the tentacles of private profit are growing exponentially as government distributes contracts to its friends and large corporations with few strings attached, whilst at the same time the coffers remain largely bare to serve the needs of those who have for decades been at the sharp end of government policies. The resulting poverty and inequality have been highlighted during this crisis.

The proposal, however, seems to suggest that we mitigate for the crisis of capitalism being played out in the growth of hunger through mutual on the ground action, rather than dealing with its root causes – government policy driven by ideology. We don’t need a plan to ‘respond’ to this fundamental crisis of capitalism, we need a plan to change it; to put public purpose and the interests of citizens, not to mention the planet, at the heart of all government policy.

Over the last few decades, working people have borne the consequences of a toxic economic ideology underpinned by the notion of monetary scarcity, which has led to the reduction in their share of their productivity, which has translated into lower wages, insecure employment and underemployment and a decline in living standards. Poverty is the direct result. The constant repetition of these ideas via politicians, think tanks, economists and the media has led us to believe that this is the inescapable default.

Government, far from serving its citizens, has overseen through its employment and other policies, huge disparities in wealth and access to resources, allowing, for example, chief executives of big corporations to earn many more times that of their employees, not to mention garner political influence as a result.

To add to this picture is the decimation of our post-war public and social security infrastructure, which existed to provide health and social care through various publicly paid for institutions, to ensure that those in need had access to shelter, food and warmth, in times of personal tragedy, sickness, unemployment or economic collapse. When this infrastructure was built, the profiteers had no place in this model and nor should they today.

Whilst the human suffering continues to play out across the nation, the government cynically continues with its U-turns on policy in the vain attempt to keep its MPs and the public on side. Last week, as noted in the MMT Lens, Boris Johnson told MPs that ‘most people would rather see a focus on jobs and growth in wages than…welfare.’ This week, with his signature tune U-Turn, he has indicated a potential rethink of ending the £20 a week Universal Credit uplift, saying he wanted to ensure that ‘people don’t suffer as a result of the economic consequences of the pandemic’. You couldn’t make it up.

Yes, indeed, to more jobs through the implementation of a Job Guarantee, to drive better wages overall and restore the government’s role as the price setter and rebuilding public service provision. But in the meantime, let’s ensure while the consequences of the pandemic continue to cause economic and social pain, that all people have enough to pay their bills and keep food on the table without worry, stress or having to get into debt to keep their heads above water. We have witnessed the power of the public purse, let us not allow that knowledge to be polluted by the restoration of household budget politics.

It is regrettable that politicians, journalists, institutions and think tanks, in their weekly forecasts of doom and gloom, continue to build up the narrative of money scarcity and a future price to pay for this massive round of government monetary intervention. A narrative that will be used to justify eventual hard decisions or another round of austerity in some form or another.

Whilst the livelihoods of many people lie in the balance, not just for now but in a rapidly changing world, we still have to endure the false notions of tax rises to pay for government spending and the penchant for sound finance. Such narratives suggest, not only that people must suffer, but also that the cost of saving our planet from climactic destruction will be too high.

The fact that the government continues to find huge sums of money to support businesses and yet quibbles over a few pounds to working people, suggesting that it is unaffordable should surely be a public conversation starter!

As the chancellor opines that there are some hard choices ahead, one of his treasury ministers clearly of the deficit dove variety, softens the blow by suggesting that the need for tax rises to tackle the record levels of government borrowing could be delayed at least until the economy ‘bounces back’. As if somehow increased tax revenues equate to the capacity to spend or pay down the national debt.

The experts at the Institute of Fiscal Studies and other think tanks then put the fear of God into the public that £40bn in tax rises might be necessary to put the public finances back onto a sustainable footing. Thus, making that public even more cautious about the government’s future spending plans. Self-fulfilling prophecies come to mind.

And then, just this week, when people thought that the vast round of government spending signified a change of approach to managing the economy, Rishi Sunak told Conservative MPs that he will be using his March budget to begin the process of restoring ‘order’ to the public finances through implementing higher taxes.

To those Tories who would like to see the Universal Credit uplift continue beyond April, he gave a reminder of its high cost which represents, according to his calculations, an equivalent of 1p on income tax plus 5p per litre on fuel duty. Thus, further reinforcing the idea that the provision of higher welfare benefits means collecting tax from elsewhere to cover it.

The ‘someone, somewhere will have to pay for it’ model of the state finances will no doubt be used cynically to drive further wedges between the haves and the have nots and justify the further decimation of the already inadequate social security safety net.

According to this narrative, the magic porridge pot is running on empty and needs replenishing in order to pay down debt and avoid a giant burden for future generations.

This tale of supposed coming woe serves to keep people in their place while reinforcing the old myths about how governments spend. It displays both economic illiteracy and a disregard for the lives of those who will lose out as a result, not to mention addressing the biggest challenge of all – climate change.

And then at the ‘left’ end of the household budget scale, we have economists, opposition politicians, unions and other so-called experts, urging the Chancellor to take advantage of low borrowing rates of interest to avoid tax rises until the economy gets back on its feet and restores tax revenues, or reinforcing the false narratives about taxing the rich to pay for the pandemic. The household budget model is endemic and those on the political left keep shooting themselves in the foot repeatedly.

A paper published by the LSE’s International Inequalities Institute last December, using data from 18 OECD countries over the last five decades, concluded unsurprisingly enough that tax cuts for the rich didn’t trickle down; that they contributed to inequality and did little to stimulate business investment.

The authors then went on to suggest that it was time to tax the rich more to repair the public finances. This was backed up in the same month when the Wealth Tax Commission, founded in April of last year, concluded that a one-off wealth tax would raise significant revenue and be fairer and more efficient than other alternatives. To be exact, it suggested that a ‘one-off wealth tax on millionaire couples would raise £260 billion’ The implication being yet again that such a tax could be used to repair the public finances.

Whilst we can’t avoid these false tropes, which lead the public astray and reinforce the messages that government spends like a household, we can challenge them. When Matt Hancock, the Secretary of State for Health and Social Care, bleats on as he did this week about the NHS Pay review body taking ‘account of the extremely challenging fiscal and economic context’ in its decision about future pay rises, we can show the public that such decisions have no connection, either with the current state of the public finances or the future monetary affordability of those pay rises.

We can reinforce the message that curtailing public sector pay won’t increase the ability of the government to ‘set the public finances straight’, any more than the decade of austerity did. It could actually have a negative, indeed disastrous, effect on the economy at a time when it will, without doubt, need continuing government support.

Aside from the fact that public sector and, indeed, other key workers have seen their pay dwindle in real terms as a result of a decade of pay freezes or inadequate employment legislation, and that the pandemic has revealed the vital nature of their contribution to society, all increasing taxation will do is leave less money for working people to spend into both the national and local economies. Also, should that increased taxation fall on corporations, (as is being suggested) who will likely pass that additional cost on through higher prices to working people anyway, it will create a double whammy effect.

Whilst a pay rise will increase tax revenues, it will not increase the government’s capacity to spend. But we see the false narrative again in a study published this week by the London Economic Consultancy. The report claimed that the government would recover 81% of the cost of any pay rise in additional taxes, which would, in turn, have significant ‘knock-on’ benefits for the Treasury. Clearly suggesting that tax funds its spending.

Whether from the left or right of the political spectrum, the public is treated daily to a mishmash of false information dictated by the dominant economic paradigm which masquerades as truth. It’s no wonder that people are confused and feel disempowered or turned off by politics and economics, which they feel do not relate to their lives at all, even though, in reality, these things have everything to do with them.

While politicians, journalists and economists argue about monetary affordability and who should pay for government spending, people are dying and will continue to die for the want of a government that puts their interests first.

What happens next will depend on a successful challenge through raising public awareness that there is indeed an alternative to the vast disparities in wealth, the rise of poverty and inequality, the whittling down of democracy and increased corporate dominance in our lives. And it starts with understanding how government really spends.

 

Upcoming Event

Phil Armstrong in Conversation with Pavlina Tcherneva – Online

January 24th 2021 @ 4:00 pm – 5:30 pm GMT

GIMMS is delighted to present another in its series ‘In Conversation’.

Phil Armstrong, author of ‘Can Heterodox Economics Make a Difference’ published in November 2020, will be talking to Pavlina Tcherneva.

Pavlina is program director and associate professor of economics at Bard College and a research associate at the Levy Economics Institute. She conducts research in the fields of modern monetary theory and public policy and has collaborated with policymakers from around the world on developing and evaluating various job-creation programmes. Her work on the Job Guarantee spans over 20 years.

Author of the recently published book ‘The Case for a Job Guarantee’, she challenges us to imagine a world where the phantom of unemployment is banished and anyone who seeks decent living-wage work can find it – guaranteed. It will be of particular relevance as we begin to grapple with the economic fall-out of the Covid-19 pandemic but for anyone passionate about social justice and building a fairer economy it should be essential reading.

We invite you to join us for this informal event which we are sure will be both stimulating and insightful.

Tickets via Eventbrite

 

Past Event

Phil Armstrong in Conversation with Fadhel Kaboub – Online

Author and MMT Scholar Phil Armstrong talks to professor of economics and president of the Global Institute for Sustainable Prosperity Fadhel Kaboub about how MMT insights apply to the global south, colonial reparations, the MMT Job Guarantee contrasted with Universal Basic Income, and much more.

 

 

Audio via the MMT Podcast here

 

Join our mailing list

If you would like GIMMS to let you know about news and events, please click to sign up here

Support us

The Gower Initiative for Money Studies is run by volunteers and relies on donations to continue its work. If you would like to donate, please see our donations page here

 

Share

Tweet

Whatsapp

Messenger

Share

Email

reddit

Pinterest

tumblr

Viber icon
Viber

The post The need is to fix the system, not just to provide ‘sticking plasters’ appeared first on The Gower Initiative for Modern Money Studies.

The Covid-19 pandemic shows the need for change. For a real ‘Reset’.

Button with label "Push to reset the world"Photo by Jose Antonio Gallego Vázquez on Unsplash

‘We live in capitalism. Its power seems inescapable. So did the divine right of kings.’

Ursula K Le Guin

The year 2020 will be not be remembered with any great affection. So much suffering, loss of human life and economic uncertainty has left the nation in turmoil. Whilst in normal times we would be welcoming the new year with resolutions and hope for better days to come, the prospects for the future remain very uncertain.

Whilst the government’s handling of this pandemic crisis has been chaotic and indecisive with disastrous consequences, it has also revealed the dire state of our public and social infrastructure for which decades of ideologically driven government policies have been responsible. That, combined with the vast wealth and other inequalities that exist in both rich and poor countries across the planet and the climate tsunami following up frighteningly behind, should leave a bad taste in our collective mouth. It should start to make us question the very foundations of the economic model now turning to sand before our very eyes.

Covid-19 has exposed in the most distressing way the damaging consequences of the pursuit of balanced budget narratives which have allowed governments to justify public sector rationalisation or austerity on the grounds of unaffordability, and overseen a huge increase in poverty and inequality. Successive governments have abdicated their responsibility for the lives of citizens; their responsibility to create a fairer distribution of wealth and real resources and ensure that the public infrastructure meets their needs. Instead, they have plumped in favour of that elusive but all-seeing ‘god of the market’ which, in real terms, has meant ceding control to global corporations who direct the policy orchestra and pouring public money into the pockets of those same corporations with little transparency or accountability.

Whilst the government has found the power of the public purse to manage this crisis, there have been winners and losers throughout which reflect its ideological persuasion. It has only been with public pressure that it has been forced into political U-turns to help some of the poorest people in our communities, whilst leaving still others in distress and without adequate support. The road to Damascus moment still eludes a government which has chosen a path that so far has only led to economic hardship and inequity for many and yet great wealth for a few others.

It has also done so with the usual threats of a financial price to pay in the future to keep the household budget narratives of state spending alive and well. It would not do for the public to be disabused of the notion that taxes fund spending, that government has to borrow to cover its deficit and that public debt is real and will require difficult decisions at some unspecified time in the future. Such narratives are vital to government and will, without challenge, allow them to be able to finish off the job of destroying publicly paid for and managed public and social infrastructure and thus ensure the continuing dominance of global corporate power. We do indeed face a continuing hollowing out of democracy in favour of a growing alliance between the state and big business and the big political revolving door.

Whilst GIMMS and other educational organisations across the world have made huge strides in raising awareness of how money really works, the task ahead remains a daunting one. The weekly news is testament to the ongoing consequences of government policies and the spun narratives of how government spends but also encouragingly shows the power the public has to effect change, and not just through the ballot box. The on-going saga of free school meals continues to rumble on and elicit government U-turns. The latest, and most shameful, were the pictures on social media of the meagre ‘rations’ from a private company contracted and paid huge sums to provide substandard food packs which it turned out largely reflected government guidelines and did not meet the standards for the nutritious, balanced diet all children need to grow and thrive. It is to be regretted that the government, in the same week, went on to tell headteachers in England not to supply vouchers and food parcels to disadvantaged children during the February half-term, signalling it was already doing enough which is clearly not the case. There are no excuses for hungry children, or hungry adults for that matter.

The fiasco was yet another example of public money being poured into private profit and at the same time failing to address the reasons for children going hungry in the first place. Poverty and hunger are not new phenomena. Covid-19 has, without doubt, put a spotlight on the prevailing economic system and the economic decisions of successive governments which have not only been responsible for increasing poverty and inequality through employment, welfare and taxation policies but also shifted blame and created widening societal divisions which allow the real authors of economic distress to go scot-free.

It is therefore shameful that the Chancellor Rishi Sunak whilst facing opposition from campaigners is still considering cutting the meagre £20 per week universal credit uplift which has helped people struggling to get by during the pandemic. The consequences of the crisis will be with us for many months to come, possibly years, and therefore the government with its power of the public purse has no excuses when it comes to ensuring that its citizens can pay their bills and put food on the table while the disruption continues. Instead, its policy responses have proved not strategic but piecemeal and ill-thought-out with plenty of U-turns along the way.

Whilst we need the power of the public purse to mitigate the economic consequences of the current crisis, we also need a government with a long-term strategy for addressing the poverty and inequality that has arisen over decades and which has allowed top managers to reap excessive monetary rewards whilst depriving working people and their families, whose standards of living have declined substantially through low incomes and insecure employment.

Boris Johnson suggested earlier this week that he was still in favour of reducing Universal Credit saying:

‘what we want to see is jobs, we want people in employment, and we want to see the economy bouncing back. And I think most people in this country want to see a focus on jobs and growth in wages than on welfare’.

A change of heart? Given that the Tory government has presided over exactly the opposite over the last 10 years through austerity and economic policies which have increased economic instability whilst at the same time serving the corporate estate, instead, it is likely to be yet another in a long line of so far undelivered promises to level up. However, the sentiment is correct and is what should be driving government policy. We need a recognition of the power of the public purse to pursue full employment through a Job Guarantee and the vested power of government to legislate fair employment terms and conditions with the aim of shifting the balance of power back to working people instead of where it currently lies in corporate hands with government approval. We need a government prepared to address the key issues of our time using its currency-issuing powers, not just for the coming months but for always. Whilst Rishi Sunak calls upon the nation to spend the savings resulting from lockdown to get the economy going again (aside from the fact that he is turning a blind eye to the many millions of people as reported by the Resolution Think Thank this week who have lost out or got into further debt as a result of the pandemic adding to their already insecure lives) the looming crisis of climate change has been put on the back burner and time is running out. The god of growth must be worshipped anew to get the economy back into shape.

Aside from the fact that people are unlikely to spend their savings like drunken sailors in the near future, given the on-going uncertainty about the economy and jobs, exhorting the gods of growth and indiscriminate private consumption as a solution to economic slow-down would not only be folly but denies the clear power of government to spend to effect real and sustainable change.

We need a sea change in how we live our lives to address the already happening climate catastrophe and indeed, it will only be through large scale government action in spending policies and legislation that will enable this to happen. There is a pressing need for a national investment strategy that includes a massive and long-term investment in education and training in order to secure our future productive capacity. We much focus on high-skilled, low-carbon and well-paid jobs both for the private sector and in a much-expanded public sector to ensure high-quality basic services are provided to everyone, including our disabled and elderly citizens. Our nation must become more productive if we are to reduce our working week and support our retirees and support to those nations without the necessary real resources to support their communities.

The overarching need is to protect our environment for future generations which should also include acting to redress the vast wealth inequalities that exist. We need to restore our sense of the value of publicly paid for and provided public sector work to national well-being, implement a Job Guarantee to provide stability through an effective countercyclical response to the inevitable economic ups and downs all economies face, and a living income for anyone who is unable to work for health reasons or caring or other essential duties including higher education. Of course, these will not be magic bullets to bring about a perfect world, but provide a basis for a conversation that we need to have.

These are important decisions, not just concerning the big macroeconomic questions about creating an efficient functioning economy, but also relating to the sort of society we want to see. For left-wing progressives, this would suggest creating a fairer and more equitable society where people have sufficient wages to live comfortably with adequate nutrition and good living conditions as well as good public services such as health and education. Assuming that the future will bring forth a political party that has the express intention of addressing these issues, change is in our collective hands as an electorate and we should not forget the power we hold.

It is regrettable that currently there is no such party dedicated to the change we need and that all roads are still leading to an ever-distorted capitalism wherever you place the X on the ballot paper.

Whilst the very real human consequences of government decisions and its policies continue to play out in our communities and our families the government, opposition politicians, economists and journalists continue to pound out the messages of monetary scarcity; either talking about the need for ‘hard choices’ to deal with the deterioration of the public finances or delaying the ‘repayment pain’ until economic conditions will allow.

Whether it’s Rishi Sunak the Chancellor or his shadow opposition sidekick Labour’s Annaliese Dodds, they both adhere to a household budget narrative of the public accounts, in other words, the diktat of sound finance as if a government suffered from the same constraints as business. The operative question in either case being, at what point do you enact such fiscal tightening, not whether you actually need to. How the state really spends cannot have escaped their notice, and yet they stick to the orthodoxy like glue.

Whilst that is undeniably to be expected with the Conservatives, whose agenda is more about creating an alliance with big business under cover of stories about monetary scarcity and ‘hard choices’, Annaliese Dodds in this week’s Mais lecture indicated clearly her party’s on-going adherence to the false notion that government constraints are monetary. Whilst, to be fair, she gave a cutting analysis of the effects of government policies on people’s lives both before and after the arrival of Covid-19, she stuck to the orthodox economic mantras. Namely keeping the City sweet by maintaining the joke of supposed Central Bank independence and having a ‘responsible approach to government debt.

She summarised her approach to fiscal policy as requiring ‘a set of rules around both annual and the stock of debt, that simultaneously demonstrates a prudent approach to the public finances and leaves space for investment in the future and the ability to adapt to crises’. A sound approach to the public finances she said must ‘also include consideration of the quality and effectiveness of public spending.’ Whilst such evaluation should always be a part of government spending strategies (and clearly, we have seen in recent months and years the exact opposite) the concept of sound finance continues to be the guiding doctrine of politicians on both sides of the political spectrum. They might have different spending objectives, but both are couched within the clear limitations of household budget thinking.

As society implodes as a result of rising poverty, inequality and ill health which has arisen as a result of government policies and placed increasing pressures on public services such as our NHS which this last year has bravely served the nation in a deliberately created environment of insufficient staff, facilities and other resources, there is only one direction in which we can place the blame. Governments whose decisions have favoured market solutions through privatisation and legislative policies which favour them – with shocking consequences.

In similarity to nature’s web of life, which is defined by its interdependence, our economy does not exist as disparate parts. The economy represents the lives of working people and the businesses that employ them, and its health is reliant on the public and social infrastructure provided by the government to support it. Remove one vital link and you risk that eventually the whole will collapse.

This is the frightening consequence we already face, not just in the real but finite resources upon which our societies are built and owe their existence, but also our dependency on the goodwill and care we express for others. As reliance on charitable institutions to feed hungry people or deal with rising homelessness increases, or rich philanthropists replace public institutions with the equivalent of poor law boards dictating the pace and deciding who will be a beneficiary, our society will continue to break down on the basis of a ‘convenient lie’ that the state has no money of its own and there is no alternative course of action.

Instead of examining the public accounts and deducting from the financial position the health of a country, a future government should be turning that idea on its head to see the reality of the challenges we face. The reality of the real constraints which are not money but real resources and how they can be managed fairly in the interests of all citizens. The fast-approaching reality of climate change and its consequences threaten to engulf us if world governments fail to work together to create better, fairer and more sustainable solutions.

We need a ‘Reset’. Not the ‘Great Reset’ being promoted by the World Economic Forum which, whilst sounding just the thing to address rising inequality and climate disaster, will maintain the same power structures with the same corporations dictating the rules in the interests of accumulating more profit and wealth whilst still clinging to the sham economic model which seeks to keep power in the hands of the few.

We need quite a different ‘Reset’ as suggested by Associate Professor Fadhel Kaboub in a GIMMS ‘in conversation’ event last week. One where public purpose, not profit or greed, directs government spending and legislative actions for a sustainable and fairer future and without which the light at the end of the tunnel will recede, not get closer.

There is an alternative and history is still to be written on the choices we make. We once believed that the Earth was flat, that it was at the centre of the universe and the sun and planets revolved around it. Those notions were disproved by the observations of scientists like Copernicus and Galileo. We need now to disprove the notions that money is scarce – not because knowing it makes a difference in itself, but because knowing it will enable us to decide what history will eventually record about the decisions that were taken as a result.

We can be on the right side of history if we choose to be.

 

Upcoming Event

Phil Armstrong in Conversation with Pavlina Tcherneva – Online

January 24th 2021 @ 4:00 pm – 5:30 pm GMT

GIMMS is delighted to present another in its series ‘In Conversation’.

Phil Armstrong, author of ‘Can Heterodox Economics Make a Difference’ published in November 2020, will be talking to Pavlina Tcherneva.

Pavlina is program director and associate professor of economics at Bard College and a research associate at the Levy Economics Institute. She conducts research in the fields of modern monetary theory and public policy and has collaborated with policymakers from around the world on developing and evaluating various job-creation programmes. Her work on the Job Guarantee spans over 20 years.

Author of the recently published book ‘The Case for a Job Guarantee’, she challenges us to imagine a world where the phantom of unemployment is banished and anyone who seeks decent living-wage work can find it – guaranteed. It will be of particular relevance as we begin to grapple with the economic fall-out of the Covid-19 pandemic but for anyone passionate about social justice and building a fairer economy it should be essential reading.

We invite you to join us for this informal event which we are sure will be both stimulating and insightful.

Tickets via Eventbrite

 

Past Event

Phil Armstrong in Conversation with Fadhel Kaboub – Online

Author and MMT Scholar Phil Armstrong talks to professor of economics and president of the Global Institute for Sustainable Prosperity Fadhel Kaboub about how MMT insights apply to the global south, colonial reparations, the MMT Job Guarantee contrasted with Universal Basic Income, and much more.

Audio via the MMT Podcast here

Video will be available soon.

 

Join our mailing list

If you would like GIMMS to let you know about news and events, please click to sign up here

Support us

The Gower Initiative for Money Studies is run by volunteers and relies on donations to continue its work. If you would like to donate, please see our donations page here

 

Share

Tweet

Whatsapp

Messenger

Share

Email

reddit

Pinterest

tumblr

Viber icon
Viber

The post The Covid-19 pandemic shows the need for change. For a real ‘Reset’. appeared first on The Gower Initiative for Modern Money Studies.

Further evidence undermining the mainstream case against fiscal deficits

Published by Anonymous (not verified) on Tue, 22/12/2020 - 2:03pm in

Tags 

job guarantee

Yesterday, I discussed the results of recent research that demonstrated the ‘trickle down’ hypothesis, which has been used to justify the sequence of tax cuts for high income recipients, was without any empirical foundation. While mainstream economists have been enchanted with that hypothesis, heterodox (including Modern Monetary Theory (MMT) economists have never considered it had any validity – neither theoretical nor empirical. But it is good that mainstream researchers are now ratifying that long-held view. Today, I am discussing another case of the mainstream catching up. When I say catching up, the implications of these new empirical studies are devastating for key propositions that the mainstream macroeconomists maintain. The ECB Working Paper series published an interesting paper (No. 2509) yesterday (December 21, 2020) by an Italian economist from the Bank of Italy – Losers amongst the losers: the welfare effects of the Great Recession across cohorts. In brief, the research found that younger people bear disproportionate burdens during recession in the short-run, but also, face diminished prospects over the longer-term. The paper bears on some of the major fictions that have been propagated to disabuse governments of using fiscal deficits to smooth out the economic cycle – namely, the alleged burden that is created by the current generation’s excesses (the deficit) for their children and grandchildren (who according to the narrative have to pay back the debt incurred by the excesses). This is another case of evidence being produced that ratify the analysis that MMT economists have been advancing for the last 25 years.

Background reading

I have written about these issues – the grandkids myth – several times over the last few decades.

1. Democracy, accountability and more intergenerational nonsense (May 22, 2009).

2. The rising future burden on our kids (August 2, 2009).

3. Another intergenerational report – another waste of time (February 2, 2010).

4. Our children never hand real output back in time (December 13, 2010).

5. 66,592 children relieved of debt burdens by their parents (April 11, 2011).

6. When 50 per cent youth unemployment is (apparently) protecting the grand kids (June 18, 2012).

7. Lower deficits now, undermine our grandchildren’s future (May 7, 2013).

8. Australia – the Fourth Intergenerational Myth Report (March 5, 2015).

So a consistent record of conceptual and empirical analysis based on MMT rejecting the arguments that are designed to convince the public that they should lower standards of public services and higher unemployment because it is good for their grandchildren.

Latest evidence

The author of the ECB Working Paper, Alessandro Ferrari, who works for the Bank of Italy (its central bank), set about examining how recessions impat on different age cohorts.

The reason why we might expect different impacts is because of the different life-cycle behaviour in saving, debt profiles, wealth accumulation, age-earnings profiles across the age cohorts.

So young people engage in schooling enter the workforce to earn labour income and expect to keep earning for the duration of their working lives as they start to accumulate assets.

Retired people no longer rely on labour income (typically) and rely on a combination of financial wealth and government transfers.

In terms of these age profiles, recession damages the older cohorts because it reduces the value of their financial wealth, whereas persistent unemployment damages workers who are reliant on labour income.

The author of the ECB Working Paper sought to estimate how these two impacts affect “households at different ages and quantify the welfare costs of deep recessionary episodes for different cohorts.”

Mainstream economists have previously claimed that younger people benefit from recessions because they can buy up risky financial and real estate assets that lose value during a recession.

The problem with the extant studies is that they typically ignore the impacts of unemployment.

Mainstream theory is generally in denial about involuntary unemployment and so it is no surprise that they ignore it in these type of studies.

The ECB Working Paper explicitly includes the intergenerational impacts of income loss arising from unemployment.

The Working Paper focuses on the impacts arising from the GFC. It uses three US datasets – the Consumer Expenditure Survey (CE), and the Panel Survey of Income Dynamics (PSID) which is a household panel survey going back to 1968, and the Survey of Consumer Finances (SCF).

The use of the PSID allows the researcher “to follow an household across the recession” and well beyond.

I won’t go into the technical aspects of the research design, which explots an overlapping-generations model approach. You can read up on that if you have that bent.

The main result of the paper is that:

… younger households, who become active during an economic downturn, are the most severely hit by the recession. Their welfare losses are more than double in magnitude than any other cohort and that this result is mainly driven by the permanent losses of unemployment.

The mechanisms or “channels” that cause this result are:

1. An enduring recession prevents young people from accumulating relevant ‘human capital’ (experience, skills etc), which impact over the duration of their working lives.

2. The loss of income arising from recession is the most important reason for the author’s main result.

We read that:

… as a consequence of the Great Recession households’ in their 20s experienced a loss in human wealth 25% higher than those of any other cohort in the model …

… the cohorts that entered the labour market during the Great Recession suffered a huge welfare loss from the uninsurable shock of being born during a major downturn.

3. Individuals impacted by recession adopt risk-averse attitudes to accumulating financial assets and real estate. They also cannot gain loans to enter the real estate market.

As a result, they fall behind the usual wealth profiles for those already accumulating wealth.

4. “welfare losses arising from employment fall dominate those arising from assets’ markets collapse.”

This result means that policies that bail out the financial markets are less beneficial than those who aim to restore employment as quickly as possible.

Why?

The author concludes that:

… it reduces the welfare loss of those cohorts that are most damaged and it reduces the welfare loss of all cohorts minimizing the loss on potential growth that affects welfare also to those cohorts that are already out of the labour market.

In turn, this means that policy should always prioritise large-scale job creation when private employment falls due to a non-government spending disturbance.

It also means that having a Job Guarantee in place as a safety-net employment capacity will deliver massive long-term gains, especially to young people who find themselves being the first to join the unemployment queue in a downturn under LIFO type hiring strategies.

And if you reflect on the results further, you will also conclude that employment creation strategies including a Job Guarantee buffer is far superior than an basic income guarantee (UBI) approach to income loss.

A UBI can never address the life-cycle earning profiles that result from on-going employment. A young person who gets trapped in a UBI (that may or may not be indexed) will never enjoy the income growth that their employed peers benefit from over their lifetimes.

The paper makes the important point that the income losses arising from recession are not temporary:

… a worker that suffers layoff and/or unemployment has, ceteris paribus, lower labour income even after decades …

In other words, there are first-round (immediate) losses, which then are made worse by the second-round losses that arise from the way individuals respond to the income losses and the constraints that are put on them as a result (such as ability to access credit to purchase homes).

I have also previously discussed the impacts on children who grow up in jobless households. The evidence is very clear that they inherit the disadvantages of their parents and endure negative effects all their lives – increased propensity for job loss, higher rates of job instability, lower life-time incomes, lower capacity to accumulate wealth (particularly housing), and other negative impacts relating to personal health, family stability and more.

With private spending lagging at present, higher deficits are required to stimulate saving and wealth creation at the lower end of the distribution. Higher deficits now will lead to a better life for our grandchildren later.

Poor framing subtracts from the paper’s credibility

Just as the research I discussed yesterday fell into mainstream framing about taxing the rich to repair fiscal positions, which reduces the impact of the substantive results presents, the ECB Working Paper also cannot break out of the mainstream framing.

In the first paragraph it talks about “the elevated public debt burden has reduced the fiscal policy space in many western countries”, which says that governments (so constrained) have to ration “available resources” to ensure they help the most impacted by recession.

The “available resources” are in the view of the author – government spending capacity – rather than actual real productive resources.

While the public debt issue presents restrictions on the 19 Eurozone Member States because they forfeited their own currency creation capacity, the other western nations (the majority) face no such constraint.

The paper concludes in the same way talking about increasing taxes on the next generation to pay back the debt.

The MMT position

The only reasonable conclusion when you understand how the monetary system functions is that burdens can only be considered in terms of real resources.

In that context, the level of public debt that is carried through time has no bearing on what each generation is able to consume (or produce). The next generation will be able to consume the outputs of their labour in the same way that the current generation is potentially able.

Clearly, governments bent on fiscal austerity deliberately deny successive generations the ability to consume and produce but that is not an intrinsic function of the level of public debt outstanding.

It is rather a wrongful policy direction driven by an irrational fear (and ignorance) of what the public debt means.

The mainstream belief is based on the erroneous conflation of a household and government budget.

So when a household/firm borrows now to increase current consumption (or build productive capacity) there is a clear understanding that future income will have to be sacrificed to repay the loan with interest.

This result follows because spending by the non-government body (household and/or firm) is financially constrained.

A household must finance its spending either by earning income, running down saving, borrowing and/or selling previously accumulated assets. There is no other way.

Borrowing has to be repaid via access to the other sources of spending capacity but by implication such repayments reduce the future capacity to spend.

This is translated (erroneously) into the public sphere with the claim that governments have to pay the debt back in the future by increasing taxes.

The consumption benefits of the higher spending now are enjoyed by us and our children pay for our joy by facing higher tax burdens. That is the nub of the mainstream argument.

But do our children forego real consumption in this way?

Answer: no!

If our children produce $x billion in real GDP in 2020 all of that flow of real goods and services (and income) will be available for consumption should they choose to do that.

They probably will save some of it (especially if the government runs a deficit of sufficient magnitude to fill the spending gap left by the desire to save by the non-government sector).

But the important point is that real GDP is not a reverse-time traveller. There is no government agency collecting real output to “pay back past debts”.

Moreover, running fiscal deficits which support aggregate demand at levels where everybody who wants a job can get one maximises employment and output each year and provides each demographic with the best opportunities to expand their real consumption possibilities.

Fiscal austerity – in the misguided hope that the public debt ratio will fall – undermines growth over time and the resulting unemployment erodes the capacity of our children to consume in the future.

Potential output (expanded by investment) and productivity growth are cyclical in the sense that if an economy is in recession or stagnating investment falters and future growth potential is reduced.

Similarly, productivity growth lags when aggregate levels of activity falter.

So the best way to increase the opportunity set for our children is to keep (environmentally-sustainable) economic growth strong and fiscal austerity will typically work against that reality.

The public debt ratio has no bearing on any of this. The only possible burden on our children relates to my term “environmentally-sustainable” which includes consuming through time within the limits of real resource availability.

If the current generation cruels the world’s environment and exhausts finite resources then unless technology changes dramatically (for example, to use different energy sources for transport, etc) then our children will not enjoy the same lifestyle that we enjoy (using enjoy liberally!).

But that conclusion relates to competing uses of real resources.

The public debt ratio has nothing to do with that possibility.

Public policy should be aiming to promote material prosperity across time that allows the available real resources to be shared across generations and prorated according to a sense of public purpose. Using the “price system” only prorates according to “dollar votes” and intertemporal considerations are subjugated.

Once you understand that there are no real consumption burdens to be borne by our children as a result of the public debt ratios, you then can trace the origin of this myth to the false government/household analogy.

Conclusion

It is interesting to see these ‘mainstream’ research papers seeping into the public arena.

They don’t tell me anything that wasn’t already clear decades ago.

And they don’t seem to question the underlying theoretical approaches that they effectively undermine.

But they do open the debate up further – more people see that the sort of conclusions that MMT economists were providing over the last 25 years have empirical support and that is a good thing.

The next step is to take these empirical results out of the mainstream framing at which time the full import of the findings will be realised.

That is enough for today!

(c) Copyright 2020 William Mitchell. All Rights Reserved.

The Paradox of the Two Knights

Published by Anonymous (not verified) on Mon, 07/12/2020 - 12:01am in

By Carlos García Hernández

Article originally published in Spanish by RedMMT here

Two knights chess pieces on a chess boardPhoto by Hassan Pasha on Unsplash

Marx argues that any economic system based on private ownership of the means of production is doomed to disappear, in order to give rise to a superior system without private ownership of the means of production. The reason for this collapse of capitalist society and the subsequent emergence of socialism is to be found in the Law of the Tendency of the Rate of Profit to Fall. According to this law, the contradictions among social classes within the capitalist system can only tend to increase, because in order to be able to compete against each other, the capitalists have to increase their rate of profit permanently. This is only possible through increased exploitation of the workers, which results in ever lower wages and ever longer working hours. However, this impoverishment of wage-earning labour comes up against a limit, “capital itself”. Below this limit, a crisis of demand occurs after which workers cannot subsist, as they cannot buy enough of the goods they produce. Moreover, the few capitalists who exist at this stage go out of business. This is how the edifice of capitalism collapses and a better, sustainable system without private ownership of the means of production, called socialism, emerges, whose higher phase is called communism. “Development of the productive forces of social labour is the historical task and justification of capital. This is just the way in which it unconsciously creates the material requirements of a higher mode of production”.

No one took Marx’s work more seriously than John Maynard Keynes. That is why he realised that history was faced with a fundamental question: Is what Marx says true? In order to answer this question, we have to pay attention to the logical form of the Law of the Tendency of the Rate of Profit to Fall. The logical form that this law takes is the modus tollens ((P→Q) ʌ ¬Q) → ¬P, if private property exists (P) then the system collapses (Q); if the system does not collapse (¬Q) then private property does not imply the collapse of the system (¬P).

Certainly, during the decades between the publication of Marx’s Capital and the time of Keynes, there had been dramatic developments. While capitalism did not seem to be on the verge of collapse in many places on the planet, the communist revolution had triumphed in the Soviet Union, in 1929 the US economy had entered a major recession following the analyses of the demand crises set out by Marx and Germany was being torn between Nazism and communism. In the eyes of an anti-socialist like Keynes, the situation was highly worrying. However, to prove the falsity of the premise P→Q it is enough that this premise is false in one single case. This led Keynes to study what, in his eyes, was Marx’s main contribution, his analysis of the monetary circuit. If there was any contradiction in Marx’s approaches, it had to be there.

To get to the monetary circuit, Keynes had to go first through Marx’s theory of labour. In fact, he accepted it as true and wrote: “It is my belief that much unnecessary perplexity can be avoided if we limit ourselves strictly to the two units, money and labour, when we are dealing with the behaviour of the economic system as a whole”. From an anthropological point of view, Keynes has no problem accepting that human labour is the only source of value and that commodities receive the value from human labour, just as cold water receives the heat from a hot object when the object is immersed in it. The contradiction is found in the next step, when Marx analyses the monetary circuit in a monetary economy of production in which there is a shift from having producers who exchange their commodities for money in order to buy other commodities (c – m – c) to having capitalists who accumulate money in order to buy commodities which they then sell for a larger amount of money thanks to the surplus value extracted from the workers (m – c – M). This step is explained by Marx as an extension of barter, he mentions Robinson Crusoe and takes a metallist stance with regard to money, this is where Keynes finds the contradiction he was looking for, in the exogenous commodity money presented by Marx, and it is from here that he builds his work.

First, he denies exogenous money and defends the endogenous character of fiat money. Thus, in his “Treatise on Money,” he presents the creation of money as an endogenous part of the economic cycle and denies the loanable funds theory. The money is mostly created by banks lending to their customers regardless of their money reserves, as they can always turn to the Central Bank as a lender of last resort. The rest of the money is created directly by the states through the coordination of the Central Bank and the Treasury to carry out public spending. In both cases, the money is denominated in national currency and comes from the Central Bank, which does not depend on its gold or silver reserves, tax collection or debt issuance to issue national currency.

This raises a political question, again not analysed by Marx. If in the “Treatise on Money” the creation of money is presented as a decision made by banks when they are faced with an opportunity to make profits, in the “General Theory”, the creation of money is also presented as a political decision by governments to create aggregate demand through public spending via deficits. Without this ability of governments to create aggregate demand through public deficits, not only would Marx’s prophecy about the collapse of capitalism be fulfilled, but it would also be impossible to explain the very birth of the monetary economies of production. The monetary circuit is not born of barter, neither of gold nor of silver, but of credit granted by governments as sovereign issuers of national currency, which in today’s societies passes through the existence of central banks.

Keynes’ recipe is simple: to avoid the demand crises described by Marx, states must create aggregate demand through public expenditure in order to maintain levels of full employment and levels of welfare that do not lead to the collapse of capitalism. This is the recipe that Franklin Delano Roosevelt applied, in contact with Keynes himself, to set in motion the New Deal that brought the US out of the Great Recession of 1929, and it is also the recipe that was applied in the West after the Second World War to build up welfare and social protection systems. Here are two cases in which P→Q is not fulfilled and therefore the premise enunciated by Marx is refuted.

 

Chess board showing the two knights endgame

 

In my opinion, it is essential for the left to draw lessons from all this accumulated experience. I like to pose the question as the end of a chess game in which only the two kings and two knights of the same colour are on the board. In these cases, the game is considered a draw. However, a paradox occurs. Theoretically, it is still possible to reach a checkmate position as the one shown in the diagram. However, the game is considered a draw because a checkmate position like the one shown in the diagram is only obtained if the player who only has his king collaborates with the player who has both knights. If the player with only the king on the board does not cooperate, checkmate is impossible. The same applies to the question at hand. The states that allow the existence of private ownership of the means of production collapse if they are incompetently governed. States with private ownership of the means of production do not collapse if they create sufficient aggregate demand through their spending policies via public deficits and if they intervene in the economy through a strong public sector presence that guarantees high levels of welfare for their citizens. The collapse of capitalism in Russia and the rise of National Socialism in Germany were only possible because of the manifest incompetence of Tsar Nicholas II and Kaiser Wilhelm II respectively; likewise, the collapse of capitalism in the USA due to the Great Recession of 1929 was only prevented by public intervention through the New Deal. We are currently witnessing a similar event in the European Union. To combat the COVID pandemic, the EU has decided to suspend its absurd and reactionary deficit limits. It has done so because the pandemic threatened the existence of capitalism itself in the EU. As soon as the pandemic passes, the EU will re-impose its deficit limits so that its model of mercantilist capitalism continues to guarantee the privileges of the export elites and continues to condemn the working majority to suboptimal living standards.

Does this mean that we should renounce socialism, that the attempt at a socialist transformation of the economy and society as a whole is a waste of time? Not at all. To renounce socialism is to renounce a better life. Keynes himself writes: “it is an outstanding characteristic of the economic system in which we live that, whilst it is subject to severe fluctuations in respect of output and employment, it is not violently unstable. Indeed, it seems capable of remaining in a chronic condition of subnormal activity for a considerable period without any marked tendency either towards recovery or towards complete collapse. Moreover, the evidence indicates that full, or even approximately full, employment is of rare and short-lived occurrence. Fluctuations may start briskly but seem to wear themselves out before they have proceeded to great extremes, and an intermediate situation which is neither desperate nor satisfactory is our normal lot”. We socialists cannot resign ourselves to living under this order of things. To conclude this article I would like to present very succinctly a proposal, which I have elsewhere called fiat socialism, as an alternative path towards the socialist transformation of society and which I hope will soon take the form of a book so that it can be presented more widely.

To begin with, the two opponents must shake hands and accept that the game is a draw. Socialists have to accept that there are no historical laws and capitalists have to accept that the most they can offer are unsatisfactory solutions to major social problems. Then the pieces have to be put in place to start a new game.

We have to start asking ourselves, what does it mean that there are no historical laws? Historical laws like the one expounded by Marx conceive history as the development of a law towards whose essence (idea) humanity flows over time. Therefore, the essence (the idea) is placed at the end of a process towards which humanity tends inexorably. This scheme followed by Marx was adopted first by Aristotle and then by Hegel as opposed to Plato and Kant respectively and must be abandoned by the left. This means that we must return to Kant and abandon Hegel. There are no inexorable historical laws governing the destiny of humanity; the human being is not an actor whose mission is to hasten the birth pangs of a new society predetermined from the beginning of history. On the contrary, we must start from a primaeval idea from which our political activity is derived. This entails establishing our goals as the premises of our politics. We believe that these premises are correct, but we cannot be sure of this and we do not even know if they will become a reality. The truth or falsity of our premises will have to be corroborated by free and democratic elections. In the specific case of socialism, we have to start from a definition that does not reflect any inexorable historical law but the ends we defend. I propose that those ends should be those set out by the American economist Stuart Chase, who in his 1942 book “The Road We Are Traveling” says that all economic policy must meet five fundamental objectives:

  • guaranteed and permanent full employment
  • full and prudent use of natural resources
  • a guarantee of food, shelter, clothing, health services and education to every citizen
  • social security in the form of pensions and subsidies
  • a guarantee of decent labour standards.

If we look at all but the second point, which has to do with the preservation of nature, these have been fundamental axes of socialism in all its forms, from the socialism of the Soviet Constitution as the first binding legal document that included guaranteed work, to the socialism of the welfare systems, which both in the former socialist bloc and in the advanced societies of the West guaranteed access to the services set out by Chase. In fact, it was the defence of these five points that enabled the left to survive the demise of the Soviet Union, and in terms of environmental protection, the left has already incorporated the Green New Deal to its ideas. Furthermore, these five points were fundamental in non-Soviet socialist experiences of great importance that we cannot forget, such as that of Mohammad Mosaddeq in Iran, the Arab socialism of Gamal Abdel Nasser and the Ba’ath Party, the experience of Olof Palme in Sweden, of Thomas Sankara in Burkina Faso, of Patrice Lumumba in Congo, of Salvador Allende in Chile, of Evo Morales in Bolivia, of Jaime Roldós Aguilera in Ecuador, of Maurice Bishop in Grenada or of Hugo Chávez in Venezuela, among others. It is, therefore, these five points and their achievement that we must call socialism, not a system in which, regardless of the achievement of these five points, but in accordance with a historical law, there is no private ownership of the means of production or in which the surplus value is equal to zero. Both the size of the private sector and the levels of surplus value must be decided by the citizenry democratically. There will be places where, in accordance with the different cultural traditions of their constituents, socialist organizations will advocate the achievement of these five points through greater or lesser involvement of the private sector. Likewise, workers, in return for guaranteed work, good wages, adequate social benefits and not having to take the risks involved in private entrepreneurship, will tolerate a greater or lesser degree of surplus value. What is important is that they have in their hands the democratic mechanisms necessary to control these levels. In my view, the best mechanism for this are the job guarantees based on employment buffer stocks advocated by modern monetary theory.

This leads us to the last section of this article, the one devoted to the method. In my view, the best method to achieve the five goals of socialism outlined above without creating runaway inflation is modern monetary theory. As its founder, the Australian economist Bill Mitchell, says, this economic school is not a political regime, but a lens through which economic science can be focused in the right way. Modern monetary theory tells us the method for employing all the real resources of the economy while maintaining price stability. The full employment of these resources can be directed towards the objectives that are decided politically. My proposal is to direct the full employment of real resources to the five objectives set out above and to give this employment the name of socialism.

I am therefore of the opinion that a new definition of socialism should be put forward. Currently, the Spanish Royal Academy of Language defines socialism as: “Social and economic system based on collective or state ownership and administration of the means of production and of distribution of goods”. This definition is filled with notions from historical laws, whose existence we have previously denied. I, therefore, propose that a new definition of socialism be: Social and economic system which, through modern monetary theory, provides guaranteed and permanent full employment, full and prudent use of natural resources, a guarantee of food, shelter, clothing, health services and education to every citizen, social security in the form of pensions and subsidies, and a guarantee of decent labour standards.

As I have said, I have called this in the past fiat socialism, but it could also be called flexible socialism, as it frees socialism from the rigidities imposed by historical law. This socialism will take different forms in different places, it accepts that socialist organizations are not exempt from making mistakes, it will involve different levels of participation by the private sector, as well as different levels in the gross operating surpluses, and it is open to processes of improvement in order to mobilize real resources in the best possible way to achieve the five ends of socialism. Only one rigidity is established: monetary sovereignty. Modern monetary theory is only valid in monetary systems where the state is the sovereign issuer of its currency and where there is an appropriate coordination between the Central Bank and the Treasury. If Archimedes in ancient Greece said give me a point of support and I will move the world, a socialist Archimedes would say give me monetary sovereignty and I will build you socialism. Without the point of support of monetary sovereignty, the proposal of socialism as explained above is not possible. In most parts of the world, this is not a problem because monetary sovereignty is already in place, but in the European Union this is the main stumbling block to any socialist transformation of the economy. Therefore, in Spain, the first step towards socialism would be to abandon the European Union and the euro.

Euro delendus est.

Carlos García Hernández – editor of Lola Books publishing house.

 

Share

Tweet

Whatsapp

Messenger

Share

Email

reddit

Pinterest

tumblr

Viber icon
Viber

The post The Paradox of the Two Knights appeared first on The Gower Initiative for Modern Money Studies.

Governments will always let inflation accelerate – apparently

Published by Anonymous (not verified) on Tue, 17/11/2020 - 1:43pm in

Tags 

job guarantee

Today the UK Guardian editorial – The Guardian view on Rishi Sunak: time to create jobs, not anxiety – endorsed the introduction of a Job Guarantee to alleviate the terrible unemployment situation that Britain will create in the coming 12 months. Existing programs from the British government are “too small and too reliant on private companies to help much”. Even after the pandemic is solved (hopefully via vaccine) “the unemployment crisis will remain”. That is a positive step from the Guardian. And, it runs counter to the way many progressives are viewing the solution box, with UBI still figuring among their main options. The problem is that the UBI cannot deliver on its promises to everyone. But this blog post is not about UBI. As the Job Guarantee gains more profile in the public debate, several mainstream economists are now taking aim at it. The latest attempt, which I choose not to link to because it is not worth reading in full, invokes one of the arguments that mainstream economists developed in the late 1970s and early 1980s to justify their attacks on discretionary fiscal policy and elevate rules-based monetary policy to become the primary, counter-stabilisation tool. It was, of course part of the neoliberal putsch that has seen sub-optimal outcomes ever since for most of us and superlative outcomes for the top ends of the income distribution. The reason I note this argument is because it is general in nature and should be understood. In other words, I do not have to talk about the paper that introduces this attack on the Job Guarantee, because it just mimics the standard criticisms of government policy making that have been around for ages. So any time some new government policy approach is proposed, these characters just whip out this tired old defense. But it is useful for my readers to be on the lookout for it.

In 1977, Edward C. Prescott and his former PhD student Finn Kydland published a paper entitled Rules Rather than Discretion: The Inconsistency of Optimal Plans in the Journal of Political Economy (85(3), pp. 473-492).

They published a few more papers on this topic in the ensuring years.

Their conjecture was termed ‘time inconsistency’ and they were awarded the (so-called but it is not) a Nobel Prize for the papers.

You can be sure that if some economists are awarded this prize that they are not threatening any of the mainstream fictions. In this case, their work was a fundamental building block to the anti-government policy paradigm that began with Monetarism, then morphed into Real Business Cycle theory, New Classical Economics and most recently New Keynesian economics.

What is ‘time inconsistency’?

Kydland and Prescott argued that (pp.473-474):

We find that a discretionary policy for which policymakers select the best action, given the current situation, will not typically result in the social objective function being maximized. Rather, by relying on some policy rules, economic performance can be improved. In effect this is an argument for rules rather than discretion …

How do they justify this conclusion?:

Current decisions of economic agents depend in part upon their expectations of future policy actions … In situations in which the structure is well understood, agents will surely surmise the way policy will be selected in the future. Changes in the social objective function reflected in, say, a change of administration do have an immediate effect upon agents’ expectations of future policies and affect their current decisions.

Okay, and their example?:

The issues are obvious in many well-known problems of public policy. For example, suppose the socially desirable outcome is not to have houses built in a particular flood plain but, given that they are there, to take certain costly flood-control measures. If the government’s policy were not to build the dams and levees needed for flood protection and agents knew this was the case, even if houses were built there, rational agents would not live in the flood plains. But the rational agent knows that, if he and others build houses there, the government will take the necessary flood-control measures. Consequently, in the absence of a law prohibiting the construction of houses in the flood plain, houses are built there, and the army corps of engineers subsequently builds the dams and levees.

So the government is seen as a sucker – they are forced by smart private sector decision makers into policy development that runs against socially desirable outcomes.

Conclusion: the government shouldn’t have discretion.

Okay, but see the logic flaw.

In most nations, government is not only responsible for building flood protection infrastructures (dams and levees) but also in charge of planning regulations.

If they were reluctant to provide the infrastructure up front and believed that residential development was harmful to social well-being then they can easily prevent it through the planning process.

Yes, that means rules are required, but that doesn’t justify banning discretionary policy shifts.

Kydland and Prescott also claimed that their analysis had implications for “aggregate demand management” aimed at addressing an inflation or unemployment problem.

So they were building on Friedman’s Natural Rate Hypothesis that said that if governments tried to reduce unemployment using fiscal policy initiatives all they would achieve was accelerating inflation because decisions-makers (consumers, households, workers, price setters) would expect higher inflation and build that into their pricing decisions (wage claims, mark-ups, etc) which would just drive the inflation rate up without reducing unemployment.

The only way that the government could stabilise inflation would be to allow unemployment to rise to the ‘natural rate’, which was invariant to aggregate demand management and had to be addressed via microeconomic reforms – cutting unemployment benefits, cutting minimum wages, deregulating occupational health and safety standards.

In other words, the whole neoliberal agenda.

During the 1980s, their estimates of the natural rate rose to ridiculous levels. At one stage, in Australia, in the late 1980s, mainstream economists were trying to argue that the rate of unemployment below which inflation would accelerate was in excess of 8 per cent.

I discussed that issue in this recent working paper – The Job Guarantee and the Phillips Curve (November 2020) as well as countless other papers and blog posts.

In my 2008 book with Joan Muysken – Full Employment abandoned – we provided an analytical approach to debunking the natural rate theories.

Kydland and Prescott claim that (p. 477):

The standard policy prescription is to select that policy which is best, given the current situation … such policy results in excessive rates of inflation without any reduction in unemployment. The policy of maintaining price stability is preferable.

They assume that “private agents or their agents have as much information about the economic structure as does the policymaker”. This is the standard claim of those who consider rational expectations to rule.

I considered that proposition in this blog post (among others) – The myth of rational expectations (July 21, 2009).

RATEX theory claims that individuals (you and me) essentially know the true economic model that is driving economic outcomes and make accurate predictions of these outcomes with white noise (random) errors only. The expected value of the errors is zero so on average the prediction is accurate.

Everyone is assumed to act in this way and have this capacity. So we all understand the QTM and understand that whenever the central bank expands the monetary base or the treasury increases the deficit there will be inflation.

So “pre-announced” policy expansions or contractions will have no effect on the real economy.

For example, if the government announces it will be expanding the deficit and adding new high powered money, we will also assume immediately that it will be inflationary and will not alter our real demands or supply (so real outcomes remain fixed).

Our response will be to simply increase the value of all nominal contracts and thus generate the inflation we predict via our expectations.

If there proposition was true, then there would be no need to undertake a PhD in economics because everybody already understands economics (the “economic structure”).

It is clearly not sensible to believe that households and firms know very much about what drives economic outcomes.

While my blog readership is probably more informed than most, can any of you predict with white noise errors only what is going to happen in the next 12 months.

Do you seriously believe that people use the myriad of financial and economic data to determine every spending decision they take.

Does anyone believe that households are always rational and perfectly informed about all current and future events?

When I was a graduate student, I recall reading a critique of RATEX from James Tobin where he said that if everybody is rational and has the same information as the government and uses the same “model” of the economy that the policy makers use then what use is the economics profession.

If we can get our forecasts from the person who delivers the post or around our kitchen tables what can we learn by studying economics (RATEX says nothing – so sack all the mainstream economists in universities).

Other than me, of course!

Why would we pay economic forecasting agencies (RATEX says they are useless because we already know what they are going to produce – so send all of them broke).

Their point about inflation and unemployment was that if the government committed via its central bank to a low inflation rate and sustained policy rates that delivered that outcome then all of use would come to believe that they were committed and act as if there was to be sustained low inflation.

However, if the government then changed that approach and decided the unemployment rate associated with that low inflation commitment was too high, and, as a consequence, increased spending, Kydland and Prescott claim that we would all know this would be inflationary and we would no longer beleive the government was committed to low inflation.

As a result, we would start hiking wage demands (to protect real wages) and firms would hike prices (to protect real margins) and the situation is “worsened by the discretionary policy”.

So there is nothing left for governments to do but hand over policy responsibility to central banks who have one aim – to lower inflation.

Enter the period of elevated unemployment rates, diminished real wages growth, rising inequality and poverty rates and all the rest of it.

And, the historical record shows that central bank policy is ineffective in altering the inflation rate. For how long have central banks been expanding their balance sheets (through QE bond purchases) to, in their own words, get inflation back up to their price stability targets.

With the massive deficits in Japan over three decades (nearly) where is the accelerating inflation.

The problem with all this time inconsistency stuff is that it is a closed system.

I can write out an economic model with starting assumptions that will prove anything.

For example, I could write a model that proved that government spending leads to my football team winning each week and jazz being played on TV every night. It would be true, within the boundaries set by the model.

But the model would be so preposterous that no-one would credit it.

Same deal here.

GIGO.

I have given other examples of the GIGO disease in economics in these posts:

1. GIGO … (October 7, 2009).

2. OECD – GIGO Part 2 (July 27, 2010).

3. A continuum of infinitely lived agents normalized to one – GIGO Part 3 (February 6, 2012).

Time Inconsistency and the Job Guarantee

Apparently the Job Guarantee will fail to deliver stable inflation due to ‘time inconsistency’.

The argument is simplistic and goes like this.

The authors recognise that the Job Guarantee is a buffer stock mechanism, which means it is an automatic stabiliser.

That means the outlays on the Job Guarantee program are counter-cyclical – rising when the non-government sector economic cycle is falling and vice versa.

So there is no activation needed to build the Job Guarantee pool – as non-government spending falls and job losses occur in that sector, the Job Guarantee pool will increase.

The government doesn’t have to do anything – it just happens as a result of other unconditional job offer.

But that is one aspect of the Job Guarantee, which most people have become familiar with – especially since the GFC and, now the pandemic.

And that is the context in which the UK Guardian Editorial was written yesterday.

The Job Guarantee is a superior mechanism for dealing with declines in non-government sector spending, which would other manifest as harmful unemployment.

But recall that I wrote this blog post – The provenance of the Job Guarantee concept in MMT (April 20, 2020) – partly, because when we set out to develop these ideas, our concern was with the high inflation that was present (for me in the late 1970s).

Which means that the activation of the Job Guarantee mechanism requires government to engage in discretionary policy action.

This is the point that the authors relate the time inconsistency argument to.

So, we start with inflationary pressures in the non-government sector rather than recession.

Mainstream policy says the central bank has to hike interest rates to suppress spending and the outcome is rising unemployment.

Rising unemployment disciplines wage demands by workers and margin push by firms and by transferring workers from the employed sector to the unemployment pool, the government (via the central bank) suppresses the inflationary episode.

This is the standard Friedman-Phelps-style disinflation exercise.

According to their theory, eventually unemployment settles at the natural rate so all is well. I recall Milton Friedman being asked how long a disinflation exercise might have to be engaged in to get the economy back to the ‘natural rate’ and he replied maybe 15 years!

Amazing especially when all the estimates of the natural rate just follow the actual rate up and down anyway.

Under a Job Guarantee, the inflation fight is different but still involves discretionary policy interventions.

Here the government has to tighten fiscal and/or monetary policy and transfer workers into the fixed price Job Guarantee pool. The rising buffer employment ratio (BER) disciplines the inflationary process eventually.

How high does it have to go? That depends but the logic would suggest that the rise in the Job Guarantee pool would be smaller than the rise in the unemployment pool. See the working paper I referred to above.

The government would have other discretionary options, which do not require less spending and/or higher taxes. They could alter administrative pricing rules for example (indexation arrangements in health care, child care, energy pricing etc).

They could change the regulative framework.

But the critics focus on one thing only.

They argue that governments will never increase taxes to curb inflationary pressures.

So, apparently, no government would use the buffer stock to discipline inflation because no one would want to see workers in the Job Guarantee pool. As a consequence, governments will never step in to curb the inflationary pressures.

Which means, according to the assumptions (GIGO) used to mount the argument, that the Job Guarantee fails to provide an inflation anchor.

Two responses.

First, focusing on increasing taxes exclusively (as an expression of fiscal policy intervention) is very narrow.

In Modern Monetary Theory (MMT), we talk about a role of taxes is to create real resource space in which the government can spend without competing for goods and services at market prices and causing inflationary pressures.

However, we never say that when faced with an inflationary environment, the only tool that government would use was taxation hikes.

That is not to say that they would not.

Clearly, history shows that government adjust taxes up and down.

Take the Japanese case, where the sales tax was increased several times (unwisely) since 1997. So to eliminate the possibility of tax rises is counter-factual.

Second, governments have a wider array of policies that can slow the economy down and they regularly use them, in many situations unwisely.

If there was no public acceptance of tighter policies, how can we explain the years of fiscal austerity? Clearly, that exercise has created years of elevated unemployment and other problems.

The point is that while the justification for austerity was spurious, governments did it and continued to be reelected.

Third, if you really believed that government could not use discretionary policy interventions to curb inflation, then even the mainstream approach is invalidated.

Central banks make discretionary interest rate adjustments. We have been indoctrinated to accept them even if they create unemployment (as a tool to fight inflation).

Why would the public tolerate mass unemployment under the mainstream orthodoxy and eschew Job Guarantee employment within an MMT orthodoxy?

The reality is that the public are not very well informed and governments use all sorts of framing exercises to condition our responses.

Conclusion

Apparently, anyone who advocated discretionary fiscal policy interventions is naive to political economy.

So we just should have balanced fiscal outcome rules which provide these smart economic ‘agents’ (us) with certainty and all will be well.

If you believe any of that, send me an E-mail and I have things to ‘sell’ (anyone want to buy the Sydney Harbour Bridge?! Cheap!)

That is enough for today!

(c) Copyright 2020 William Mitchell. All Rights Reserved.

Helen Lachs Ginsburg, Jobs-for-All Scholar-Activist

Published by Anonymous (not verified) on Wed, 11/11/2020 - 3:50am in

Scholar, activist, advocate for living wages and a job guarantee, and D&S supporter Helen Ginsburg passed away on October 8th. Her obituary appeared in the New York Times on November 6th (online version here). Below is an obituary from Gertrude Schaffner (“Trudy”) Goldberg of the National Jobs for All Network, a close friend of Helen’s and a frequent D&S author.  –Eds. 

Photo of Helen Lachs GinsburgHelen Lachs Ginsburg in an undated photo. A Brooklyn College professor, she was a founding member of the National Committee for Full Employment, which was led by Coretta Scott King.Credit…via Ginsburg family.

Helen Lachs Ginsburg, Scholar-Activist and Leader in Advocacy of Living-Wage Jobs for All

Helen Lachs Ginsburg, life-long advocate for full employment or a Job Guarantee, died on October 8th at the age of 91. She retired some years ago as Professor Emerita of Economics from Brooklyn College.  Professor Ginsburg gained distinction in a field that was dominated by men, particularly some seventy years ago when she launched her career as an economist.

As a founding member of the National Committee for Full Employment, led by Coretta Scott King, Ginsburg wrote and lectured around the country in the 1970s in support of  the full employment legislation proposed by Representative Augustus Hawkins (D-CA) and co-sponsored  by Senator Humbert Humphrey. The original legislation would have given everyone a decent job who wants one–a key policy to reduce inequality and poverty.  Thus Ginsburg was a link between those like her who fought for full employment fifty years ago and the young activists now pressing for a job guarantee, a $15 minimum wage, and a Green New Deal that would include a right to living-wage work.

The Humphrey-Hawkins Full Employment and Balanced Growth Act of 1978, a much watered-down version of the legislation originally proposed by Representative Hawkins, guaranteed neither full employment nor balanced growth. In the wake of that disappointment, Professor Ginsburg began her study of Sweden’s successful, sustained full employment policy. Visiting that country with a grant from the Swedish Bicentennial Fund, Ginsburg conducted numerous interviews with trade union leaders, government officials, and academics, including such luminaries as Gunnar and Alva Myrdal–not to mention many unemployed persons whom she met at Labor Market Training Centers, employment offices, and rehabilitation centers. The result of that research—her 1983 book, Full Employment and Public Policy: The US and Sweden– was an important influence on the thinking of those who, despite the disappointing results of Humphrey-Hawkins, continued to advocate full employment—or as Helen Ginsburg referred to that goal in the title of a 1978 article in The Nation: “Jobs  for All.”

Upon learning of Professor Ginsburg’s death, the distinguished economist L. Randall Ray, wrote that her 1983 book that introduced readers to the Swedish model of full employment helped him and his colleagues at both the University of Missouri’s Center for Full Employment and Price Stability and the Levy Economics Institute at Bard College to get started with their work on full employment. Similarly, Professor of Law and Economics at Rutgers Law, Philip Harvey was encouraged by Ginsburg’s book because its detailed treatment of the Swedish experiment convinced him that “incremental progress could achieve revolutionary social change over time.”  Historian Frank Stricker, whose latest book is American Unemployment, Past, Present, and Future, wrote: “I used her books in my work.  Such a model of devotion to the cause and to the truth. ” Eduardo Rosario, Executive Board member of the Labor Council for Latin American Advancement, wrote, “This is a tremendous loss for all of us and for working people everywhere.”

In the 1980s, when the disappointing results of the Humphrey-Hawkins struggle led many progressives to give up on full employment, Helen Ginsburg was a mainstay among the scholars and activists who kept alive the dream of living-wage work for all–in a group called New Initiatives for Full Employment or NIFE. Soon after, members of NIFE, led by Columbia professor Sumner Rosen, initiated the Columbia University Seminar on Full Employment—as one means of refining the group’s ability to conceptualize full employment and to contribute to its political resurgence. This Seminar which Helen Ginsburg co-led for many years, provided an opportunity for full employment advocates to meet with scholars and activists in this country and abroad.

The proceedings of the Seminar on Full Employment contributed to the conceptualization of full employment in a 1994 book or manifesto that Ginsburg co-authored with Sheila Collins and Gertrude Schaffner Goldberg:  Jobs for All: A Plan for the Revitalization of America. Their plan for revitalizing this nation was “based on the philosophy that work and production, exchange and distribution should be redesigned in ways that are conducive to the full development of the innate potential of all people and to the sustainability of the ecosystem.” Their book launched the successor to NIFE, the National Jobs for All Coalition (now National Jobs for All Network). Helen Ginsburg was a co-founder of the National Jobs for All Coalition and,  for the rest of her life, a member and mentor to its Board of Directors.  According to Gertrude Schaffner Goldberg, Chair of the National Jobs for All Network, “Helen Ginsburg was a model of a scholar-activist whose research and writing, always informed by her engagement in the struggle for economic justice, was an inspiration and impetus to all who carry on the struggle for “jobs for all.” The National Jobs for All Network is deeply indebted to our co-founder and diminished by her death.”

Beginning with her work on Swedish full employment policy, Helen Lachs Ginsburg was a trail-blazer in cross-national or comparative study. She continued to study, visit, and write about Sweden in the years following her initial research there. In 1990, she was a Guest Scholar at the Wissenschaftscentrum in Berlin in 1990, an opportunity that broadened her cross-national perspectives. A subsequent presentation to the Columbia Seminar reflected that research: “Jobs for All: Values, Concepts, and Policies in the US, Germany, and Sweden.” Professor Ginsburg encouraged her colleagues to follow her example of engaging in cross-national study, and she informally mentored and co-authored work with them.

In paying tribute to Helen Professor Ginsburg, Gűnther  Schmidt, Director Emeritus of the Wissenschaftscentrum  in Berlin where Ginsburg was a Guest Scholar, admired “her broad approach of combining philosophy ofwork with sound economics.” This broad approach is exemplified in an article in the Department of Labor’s Monthly Labor Review, “Flexible and partial retirement for Norwegian and Swedish Workers,” for which Ginsburg was awarded the prestigious Lawrence R. Klein Award.

In his remembrance, Professor Schmid called attention to Ginsburg’s 2011 article, “Historical Amnesia: The Humphrey‑Hawkins Act, Full Employment and Employment as a Right,” published in “Review of Black Political Economy.” The article reminded him of “the legacy of the Roosevelt’s New Deal and the original Humphrey-Hawkins proposal, freshly and powerfully reformulated in her conclusion”: “Full employment […] shifts power from capital to workers […]. The right to a job […] is a visionary concept and can be empowering. […]. Living wage jobs as a right may seem unrealistic but so once did the right of all children to go to school, the right of women to vote and the abolition of slavery.”

Helen Lachs Ginsburg  was born  and lived her entire life in New York City. She is a graduate of Queens College and earned her doctorate in Economics from The New School. She leaves her husband of more than 60 years, Nathan Ginsburg of Flushing, New York, her brother and sister-in-law Sherman and Lorraine Lachs of Scottsdale Arizona, and a number of nieces and nephews.

Why luxury watches shouldn’t be the most egregious news to come out of Canberra

Published by Anonymous (not verified) on Tue, 10/11/2020 - 11:34am in

Today, we have a guest blogger in the guise of Professor Scott Baum from Griffith University who has been one of my regular research colleagues over a long period of time. He indicated that he would like to contribute occasionally and that provides some diversity of voice although the focus remains on advancing our understanding of Modern Monetary Theory (MMT) and its applications. It also helps me a bit and at present I have several major writing deadlines approaching as well as a full diary of presentations, meetings etc. Travel is also opening up a bit which means I can now honour several speaking commitments that have been on hold while we were in lockdown. Anyway, over to Scott …

Why luxury watches shouldn’t be the most egregious news to come out of Canberra

Over the past couple of weeks, the Australian government has been holding Senate Estimates Committee hearings.

Senate estimates allow members of the Australian senate (the upper house of government) to examine the financial goings on of government departments.

Officially, the Senate Estimates are to ensure the responsible spending of public money.

However, the transcripts of the committee hearings do sometimes make interesting reading if only to provide an opportunity to delve a little deeper into the business of government.

There are often revelations about how much a government department has spent on pot plants or how many paper clips they use.

Riveting stuff.

In this round we were informed that several senior executives working for government corporation in charge of Australia’s postal services (Australia Post) received luxury watches as a bonus.

The outcry within the Canberra bubble was swift and loud. During one parliamentary sitting the Australian Prime Minister Scott Morrison raged about how the use of government funds, which by the government’s misguided thinking is ‘taxpayer’s money’, to buy expensive watches for senior executives of Australia Post is something that most Australians would not stand for.

The PMs reaction, and the fallout for the head of Australia Post has been filling the media for much longer than such a nothing story should.

Sadly, other issues have not been so newsworthy, nor had the Prime Minister raging in parliament.

One of the more egregious things to come out of estimates has been statements around Australia’s support for the unemployed which show just how the government’s policy decisions consign a large number of Australians to precarious living conditions.

To set the context, on – Current numbers – the Department of Social Services tells us that there are approximately 1.4 million Australians receiving the government’s jobseeker payment as at June 2020.

This has of course increased significantly throughout the COVID economic slowdown with figures from March 2020 pointing to 792,814 Australians receiving payments.

The debate around the precarious living conditions of those who are unemployed is farmed around the adequacy of the payments they receive while unemployed.

Prior to the introduction of the federal governments COVID supplement, which paid an extra $125 per week, a single person claiming jobseeker received $287.25 per week or just over $40 per day, single person with a dependent child received $306 per week ($43.70 per day), while a person with a partner also receiving benefits received $255 each per week ($36.42 each per day).

The addition of the COVID supplement in mid-2020 lifted weekly income by $125 for each recipient class.

For each type of recipient, even with the addition of the COVID supplement weekly income falls far short of a figure equivalent to the poverty rate.

The problem of poverty is of course more than just about money. Individuals and families living in poverty face increasing dislocation from society.

The local economies and communities in which these people live suffer from a lack of sustainable economic activity and falling levels of social and economic resilience.

Taken together, it is not just individuals that suffer, but the whole of society.

This context, makes the release of the transcripts from the Government’s Senate Estimates Committee interesting reading.

As part of the Community Affairs Legislation Committee, we got a glimpse of the way the government sets income support levels for the unemployed and the true policy goals of support payments.

Someway through the session, one committee member asked:

Does the government/department … work with a current definition of a poverty line for the purposes of your payments and policy work around the payments?

There was a lot of ducking and weaving on the part of those supposed to be answering the questions, but the general conclusion was summed up as the government doesn’t consider poverty or the possibility that a person might fall into poverty when setting payment rates.

Instead, the government uses a range of factors:

Different factors are often applied in this space, but we tend to consider not just what is used as a more academic definition, which is people below a median income level, because that doesn’t take into account people’s circumstances.

It is a broader consideration of what might be the factors in the person’s background in terms of other resources that they may have available to them, not just their level of income.

Then we find out that the true goal of the government’s unemployment payments is to ensure that the unemployed do not get too comfortable with their day to day existence so that they will remain hungry for work.

We hear from the minister of Families and Social Services that the:

… payment system is very comprehensive and specifically targeted towards providing the policy outcomes that are defined by the particular measures …

You would think that the policy outcomes might be around ensuring that disadvantaged Australians aren’t thrust into poverty.

Not so it seems.

The minister then comments:

What I would say is that income support payments are put in place as a safety net, to assist people who—every Australian who is of working age and is able to work we expect to be either working or looking for work, and these benefits are to provide a safety net for them during that period of time.

But:

… at the same time, don’t provide a disincentive for people to engage in the workforce.

So, there we have it.

The government’s response to supporting those Australians who have been unfortunate enough to lose their jobs is couched firmly in the typical neoliberal view that unless support for individuals is punitive, then they will lose the incentive to work and hence the booming job market that is managed so well by the private sector will not have access to workers.

In short, it is the old story that if a person is unemployed it is their fault.

If a person loses the incentive to work because of over-generous government payments, then that is not good enough and it is up to the government to ensure that doesn’t happen.

It is hard to believe that a government who prides itself on slogans such as ‘we are all in this together’ and ‘working for all Australians’ would be so shallow as to deny the unemployed adequate support because of a view that if they are receiving a supplement that raised them out of poverty, they would lose the incentive to work.

Actively pushing people into poverty as a policy choice flies in the face of good governance.

The roll of governments is to protect their citizens not economically persecute them.

The poverty story is of course broader than just those consigned to being jobless.

It impacts on Australians earning an aged pension, those referred to as the working poor including people who cannot get enough hours of work and those working in the so-called gig economy who drive people or delivery food on scooters.

Some issues of poverty, such as the plight of our older Australians living on a pension, can be easily solved by the government increasing payments to these individuals.

There would be no barrier to this, it just needs political will and a few keystrokes.

The precarious position unemployed people find themselves in requires a different approach.

Although some have suggested the introduction of a Universal Basic Income to alleviate poverty, such schemes have been shown to be ineffective as a poverty alleviation tool.

As the driving factor in poverty for the unemployed is lack of a job, then the government has a role to play by introducing a Job Guarantee scheme.

Such a scheme, as we know, would provide a job for everyone who wished to work at a socially sustainable income level.

The result would be an immediate reduction in poverty experienced by those who are unemployed, an increase in resilience in local economies and communities as more people became engaged in the economy and society and a reduction in the associated social malaise that comes from the dual problems of unemployment and poverty.

In doing so, the government could move some way towards acting as if they really did care for all Australians.

That is enough for today!

(c) Copyright 2020 William Mitchell. All Rights Reserved.

Video – An economy that guarantees health and wellbeing for all

Published by Anonymous (not verified) on Wed, 21/10/2020 - 10:41am in

Today, on my blog-light day, I have a video of a recent event where I spoke (with other speakers being John Quiggin and Noel Pearson). The event was in conjunction with the Public Health Association of Australia’s annual conference and we are discussing the interface between health and the economy and the right to work and income security. It was an interesting and very civilised discussion. And when you are through watching that, we also have a ‘provocation’ to consider and then some jazz. All the interests of advancing humanity!

Public Health Association, Australia Event – October 14, 2020

Here is the full video of an event I spoke at last Wednesday. The topic was ‘An economy that guarantees health and wellbeing for all: the right to work and income security’.

The speakers were John Quiggin, Noel Pearson and myself. The hosts were Jayne Flanagan and Tim Woodruff.

The event went for nearly 2 hours and was a moderated Q&A style format – that is, no formal presentations.

Each of us had to make an opening statement and then the discussion followed.

Thanks to Jayne and Tim for their efforts in putting this session together.

Royal Society of the Arts

The London-based – Royal Society of the Arts – recently asked me to contribute to their next quarterly journal, which is widely circulated and aims to disseminate new ideas to foster a more equitable future for all of us. It was founded in 1753.

The RSA Journal has been pushing innovation for 150 years.

Given the state of the world and particularly in the arts sector, their next edition will have the focus of economic security and resilience.

Each edition has a one-page ‘provocation’ where the author is required to … well, be provocative and issue a challenge to the reader.

They asked me to write about Modern Monetary Theory (MMT) and I had 520 words to do so.

Thanks to CEO Matthew Taylor for the invitation and Milena Bellow for editorial assistance.

Here is what I wrote:

In 2013, philosopher Daniel Dennett said in reference to religion: “There’s simply no polite way to tell people they’ve dedicated their lives to an illusion.” The same applies to our embrace of mainstream macroeconomics, which, given its appalling predictive performance over many years, falls into the category of religion. For example, since the 1990s, Japan has run large public deficits and accumulated the highest level of public debt in the world (and its central bank has been buying most of this debt). Mainstream economists predicted rising interest rates and bond yields, accelerating inflation and, inevitably, government insolvency. All predictions failed dramatically. Japan has low interest rates, low and negative bond yields, and faces no inflation problem. It enjoys very low unemployment rates, putting most nations to shame.

Similar predictions of disaster were made during the global financial crisis, when many governments followed the Japanese example. But the predictions were grossly inaccurate – because the underlying economic theory is wrong. Austerity-obsessed governments, applying that flawed theory, have forced their nations to endure slower output and productivity growth, degraded public services and infrastructure, elevated and persistent unemployment and underemployment, flat wage growth, and rising poverty rates and inequality. Neoliberalism fails to deliver, and the theories used to justify it are wrong.

An alternative, emerging macroeconomics paradigm – Modern Monetary Theory (MMT) – is attracting attention because it provides for an accurate understanding of real world monetary systems that allows for better policy formulation to meet the social, health and climate challenges before us. A mainstream economics graduate can say nothing sensible about public policy.

MMT teaches us that a household uses its country’s currency and its spending is financially constrained. The government that issues this currency is not so constrained. It can never run out of its own currency and can purchase anything for sale in that currency, including all idle labour. Mass unemployment is always a political choice.

Government spending is only limited by the availability of goods and services. If productive resources are idle, government spending can always bring them back into use, without generating inflation. The role of fiscal policy is to ensure all productive resources are fully employed; to maximise material prosperity within ecological constraints. It is not to achieve some financial outcome (surplus or otherwise). At full employment, any further public spending growth will cause inflation. At that point, a government wishing to increase its resource use has to reduce non-government usage. Taxation achieves this purpose by curtailing private purchasing power. But it is not required to fund public spending.

Why have Japan’s huge deficits, largely funded by central bank money, not been inflationary? Because the government maintains total spending in proportion to available goods and services and the non-government sector chooses to save. Why are bond yields low in the face of large public debt? Because central banks can always control yields through bond purchases. Private markets can never push yields up if the government does not allow them to. MMT is often dismissed as flawed and unrealistic. But mainstream economic theory has shown time and again that it cannot effectively tackle the challenges facing the world today. It is time for a change.

Music – Lou Donaldson – Blues Walk

This is what I have been listening to while working this morning.

It is from – Lou Donaldson – who plays the alto sax and was very important in defining the hard bop and BeBop era, which means Charlie Parker is in his music.

He is thought of as the ‘father of funk’ given his albums of the late 1960s, which are among my favourites and on my often play list.

But this album – Blues Walk – one of my favourites – meaning it never leaves my iPhone collection – was released by Blue Note Records in 1958.

This album features some of the best jazz players:

Only Lou Donaldson and Dave Bailey are still alive. Lou Donaldson stopped playing live in 2016 when he was 90 years of age.

Here is a nice bio from via the National Endowment for the Arts – Lou Donaldson – Saxophonist.

I prefer tenor or baritone sax, but I always loved listening to Lou Donaldson play.

That is enough for today!

(c) Copyright 2020 William Mitchell. All Rights Reserved.

The long-term unemployed are not an inflation constraint in a recovery

Published by Anonymous (not verified) on Mon, 19/10/2020 - 5:46pm in

I gave some advice to a politician last week who had read some MMT literature that he said indicated that using the Job Guarantee reduces inflationary pressures in a recovery relative to a situation where a nation had an unemployment buffer stock. I was surprised by the question because the assertions didn’t appear congruent with the facts. It appeared to be rehearsing and endorsing the standard neoliberal supply-side agenda that defined the so-called ‘activation’ approach to unemployment, which militated against job creation programs in favour of training initiatives – the full employability rather than the full employment mindset. The fact is that long-term unemployment always lags behind the overall unemployment movements given it takes time for people to work their way through the duration categories until they get to 52 weeks, after which the national statistician terms a person long-term unemployed. The longer the recession the higher average duration of unemployment becomes and the larger the pool of long-term unemployed as people start to flow into that category. However, the way we think about solutions has been influenced by the myths about the way long-term unemployment behaves, which we summarise as the – ‘irreversibility hypothesis’. This idea has influenced governments to rely on training approaches rather than job creation as solutions to unemployment. And, it has led to the various pernicious unemployment management policies where the victims of the system’s failure to create enough jobs are considered culpable in their own misfortune and shunted through a series of compliance processes in order to receive income support, which do little to get them work.

The argument the politician presented to me was that:

1. Employers do not know whether a long-term unemployed person has desirable traits and will prefer to employ a short-term unemployed person.

2. So employers choose not to employ the long-term unemployed in a recovery and instead compete among each other for those already employed.

3. The wage chase then causes inflation.

4. So the long-term unemployed represent an inflation constraint until they are subjected to attitudinal training so they work with others, training etc.

5. In other words, stimulating the economy will only induce inflationary pressures if there is a significant pool of long-term unemployed.

6. The solution is to have a Job Guarantee, where the workers are ready for work and reduce the inflationary pressures in an expansion.

All but the last point, could have been written by a supply-side oriented, mainstream economist. The type I have been opposing for all my career.

The problem with this sort of reasoning is that it doesn’t reflect the empirical world.

1. Obviously, if there is an all out bidding war in the private labour market for labour for workers who are already employed then the rising nominal wage pressures may provoke an inflationary spiral.

Whether this does become inflationary depends on what else happens. For example, if productivity growth provides the room to accommodate the nominal pressures and unit labour costs do not accelerate then for given margins there will be no inflation.

2. The empirical evidence is clear – when a recovery occurs, employers bid for labour out of both the long-term and short-term unemployment pools.

The stronger the recovery, the more quickly the long-term get absorbed.

But usually there is not a sequential process where the employers exhaust the short-term pool and then turn to the long-term pool.

And when the labour market tightens, the employer’s job offer is typically a package, which combines some job specific training and a wage offer.

It is generally cheaper for firms to do that rather than try to bid workers away from other firms.

Moreover, firms with market power (meaning they have price setting volition) rarely try to compete on price (up or down).

When sales opportunities increase they defend their market share first and foremost.

They fear that if they push prices up and their immediate competitors do not then they will lose market share which is very costly.

As a result, they will avoid adopt non-price strategies that allow for increased production (and employment) to meet the rising demand for goods and services.

3. A Job Guarantee is not inflationary, in itself, because the government is buying off the bottom of the market – offering a fixed price for a resource that has zero bid in the market.

That is the point.

The government offers an unconditional job offer at a socially-inclusive minimum wage to anyone who wants to work and cannot find it. There is no competitive process from the side of the government.

They just act passively – that is, the Job Guarantee acts as an automatic stabiliser and the pool rises and falls on the tide of non-government spending.

The pool will increase for two reasons:

(a) The government is tightening policy settings to cut into an inflationary spiral in the non-government sector, or

(b) There are no inflationary pressures but the non-government sector cuts spending for any number of reasons – uncertainty, excessive debt, etc

4. Clearly, if there is a Job Guarantee in place, then in the early days of a recovery, when the Job Guarantee pool might be bigger than usual, the wage offers required to bid the workers back into the private labour market may be modest and there are plenty of workers available, so it is unlikely that there would be any inflationary pressures.

It is also true that Job Guarantee workers are more attached to the labour market than the unemployed.

But the hysteretic mechanisms that see firms relax and tighten hiring standards and combine training slots with jobs slots at different points of the economic cycle also mean that the long-term unemployed are absorbed along with the short-term unemployment when economic growth is strong enough coming out of a recession.

I provide some evidence of that below.

In a deep and long recession, the number of long-term duration Job Guarantee workers will be higher than if the recession is short and sharp.

If the recovery is strong enough, then they will get absorbed back into the employed workforce just as they would be if they were long-term unemployed.

5. But once the economy gets close to capacity and the Job Guarantee pool is minimised, then any extra bidding from that pool will be stronger than before and the margin over the Job Guarantee wage that would arise will be larger than before. Again, this might not spark inflation but it is more likely to than before.

6. The point is that the price anchor provided by the Job Guarantee becomes moot when the pool of jobs becomes very small, just as in the case when the unemployment pool is small.

The difference between the two buffer stock mechanisms, however, is that if there are inflationary pressures in the non-government sector, and the government tightens policy settings to suppress them, then under the unemployment buffer stock approach, workers lose their jobs, whereas under a Job Guarantee workers are redistributed from the inflating sector to the fixed price job sector.

While neither system is ideal, the employment buffer approach is vastly superior to using the unemployed as a front line fighting force to discipline distributional struggles between labour and capital.

Definitions

The first issue to clear up is the definition of long-term unemployment. Long-term unemployment tracks the total unemployment rate in a lagged fashion. So as governments abandoned full employment in the in the 1970s and allowed unemployment to rise significantly, they also had to then contend with the politically troubling issue of long-term unemployment.

The solution they took was the purely political – they redefined long-term unemployment. So in the early 1970s, a person was long-term unemployed if they has been unemployed for 13 or more weeks. This was changed in the late 1970s to 26 weeks and from the mid-1980s to 52 weeks. There is on-going pressure change the threshold to 104 weeks and confine it to a small number of so-called intransigents.

The changes were designed to disabuse the citizens of the severity of the problem that occurs when government’s fail to deal with an economic downturn in a timely and sufficient manner.

This has become a common problem during the neoliberal period.

Patterns of unemployment duration

First, what is the pattern of unemployment duration?

The next graph shows the pattern of unemployment duration in Australia since January 1992.

It shows the evolution of the workers (000s of persons unemployed) across the duration of unemployment categories (in weeks) since February 1992.

The consistent dataset begins in January 1991 and I have calculated 12-month trailing moving averages of raw ABS data to allow you see trends a bit better.

The graph provides interesting information about how the pool of unemployment builds as the cycle turns down. After a long period of growth, long-term unemployment (currently defined as more than 52 weeks of continuous joblessness) is relatively low and workers enter and exit the unemployment pool regularly as jobs are created and destroyed.

The initial spike is because the series starts about a year after the severe 1991 recession and the lack of policy response over the 1990s saw a slow decline in all categories of unemployment. But the longer the recovery was delayed the more workers flowed into the LTU category.

Once the downturn started (February 2008), the short-duration categories obviously take the initial unemployment. So the 4-13 weeks; 13-26 weeks; 26-52 weeks categories all rise sharply in a lagged pattern with the shorter-duration categories lead.

As the recession persists, you start to see the longer-duration categories rising sharply (the dynamics are suppressed somewhat by the moving-average construction of the time series).

The irreversibility agenda

As unemployment started rising in the 1970s and has mostly persisted at high levels ever since, orthodox economists concentrated on the supply side of the labour market, hypothesising that full employment should be redefined to occur at much higher unemployment rates than in the past.

My definition of full employment is less than 2 per cent official unemployment, zero hidden unemployment and zero time-based underemployment.

I base this on the view that the government can always run the economy at sufficient pressure to absorb all the workers who desire a job.

And if we introduce a Job Guarantee, then the problem of involuntary unemployment disappears as does time-based underemployment (because Job Guarantee workers can always choose their own hours).

Skills-based underemployment where a worker may not be able to find a job in their given skill range is more difficult and open to all sorts of definitional issues.

The reminder from American economist Michael Piore (1979: 10) is also worth remembering:

Presumably, there is an irreducible residual level of unemployment composed of people who don’t want to work, who are moving between jobs, or who are unqualified. If there is in fact some such residual level of unemployment, it is not one we have encountered in the United States. Never in the post war period has the government been unsuccessful when it has made a sustained effort to reduce unemployment. (emphasis in original)

(Reference: Piore, M.J. (ed.) (1979) Unemployment and Inflation, Institutionalist and Structuralist Views, M.E. Sharpe, Inc.: White Plains.)

The orthodox approach, however, has been to consider long-term unemployment to be a (linear) constraint on a person’s chances of getting a job.

The so-called negative duration effects (scarring etc) are meant to play out through loss of search effectiveness or demand side stigmatisation of the long-term unemployed.

That is, they become lazy and stop trying to find work and employers know that and decline to hire them. Over this period, skill atrophy is also claimed to occur.

All sorts of vile nomenclature was then introduced to make sure that the workers were divided between those who worked and those who didn’t – the latter being bludgers and more.

So it has been common for mainstream economists and policy makers to postulate that there is a formal link between unemployment persistence, on one hand and so-called ‘negative dependence duration’ and long-term unemployment, on the other hand.

Although negative dependence duration (which suggests that the long-term unemployed exhibit a lower re-employment probability than short-term jobless) is frequently asserted as an explanation for persistently high levels of unemployment, no formal link that is credible has ever been established.

However, despite the lack of evidence, the entire logic of the 1994 OECD Jobs Study which marked the beginning of the so-called supply-side agenda defined by active labour market programs was based on this idea.

This was the period when governments abandoned their Post World War 2 commitment to full employment, and, instead, adopted the diminished, supply-side goal of full employability.

The import of that shift was that governments stopped dealing with downturns in non-government spending, especially when the downturn was severe, with direct job creation programs, and, instead, introduced supply-side programs – training, attitudinal coaching, CV preparation and all the rest of it.

Labour market recoveries from downturns in the full employment era were much more rapid because governments used their fiscal capacity to address the spending gaps.

In the neoliberal era, a major downturn which drives unemployment up sharply, results in a slow, drawn out recovery where unemployment takes many years to recover.

This period also coincided with the creation of a new industry. We mostly think of industries as being where production occurs – adding value to our lives.

In the neoliberal period, the Financial sector grew quickly which is largely unproductive (wealth shuffling).

But another, new industry was also created – the unemployment industry.

In Australia, the government privatised the Commonwealth Employment Service and created a sort of quasi-market where all sorts of private companies (including Churches – to their eternal shame) tendered to offer case management services for the unemployed under the guise of preparing them for work.

In addition, the governments (federal and state) started starving the public education system of funds and created a private training system where all sorts of fly-by-night operators emerged, where a steel set of shelves with a single book would be called a ‘library’ and millions of dollars were given to them under the guise of vocational training.

And the job service providers became the front-line attack dogs for government in that they implemented the pernicious welfare-to-work regulations.

The entire system was a depoliticised farce with terrible impacts for the victims – the unemployed seeking income support at a time when the government austerity starved the economy of job creation potential.

All this was justified by the claim that the long-term unemployed were unemployable and unless they were trained up and disciplined to have better work attitudes then they would never be absorbed back into work.

And if governments tried to stimulate an economy where there was significant long-term unemployment then inflation would result – because employers would just compete among the existing employed workforce to expand.

The question as to why anyone was long-term unemployed fell to the back of the public debate.

Does long-term unemployment have strong irreversibility properties?

There is little credence in the irreversibility hypothesis.

Once you examine the dynamics of the data you quickly realise that short-term unemployment rates do not behave much differently to long-term unemployment rates.

The irreversibility hypothesis is unfounded.

Clearly, if the government allows a downturn in non-government spending to descend into recession and refuses to stimulate the economy in any significant manner then long-term unemployment rises just because of the movements of the short-term unemployed through the duration categories.

But the data shows that the relationship between long-term unemployment and the unemployment rate is very close as can be seen in the following graph.

We have defined short-term unemployment as the residual between long-term (above 52 weeks) and total unemployment. The dataset used here is seasonally adjusted from February 1978 to August 2020.

As unemployment rises (falls), the proportion of long-term unemployment in total unemployment rises (falls) with a lag.

Several studies have formally examined this relationship.

My earlier work has found that a rising proportion of long-term unemployed is not a separate problem from that of the general rise in unemployment.

This casts doubt on the supply-side policy emphasis that OECD governments have adopted over the last two decades.

So while the mainstream economics profession may claim search effectiveness declines and this contributes to rising unemployment rates, the overwhelming evidence is that both are caused by insufficient demand.

The policy response then is entirely different.

To argue that long-term unemployment is a constraint on growth and therefore needs supply-side programs rather than direct job creation, you would have to find that even during growth periods, long-term unemployment was resistant to decline.

How have the LTUR and STUR behaved over the business cycle? Is there evidence that the LTUR is resistant to growth as is claimed by the irreversibility hypothesis?

The following graph shows the decline in the LTUR and the STUR from the unemployment rate peaks coinciding with the 1982 and 1991 recessions, respectively.

The peaks were in July 1983 and July 1992. The observations are indexed with the peak observations being 100. The behaviour is charted out until low-point is reached.

The peaks for the short-term unemployment rate precede that of the long-term unemployment, which in turn, lag the related troughs in GDP.

The important finding is that the growth phase provides job opportunities for both pools of unemployment.

There does not appear to be any sequential accessing of the short-term first, followed by the long-term unemployed, as the irreversibility hypothesis would suggest.

Indeed, following the 1991 recession, the long-term unemployment rate fell much more sharply than the short-term rate.

I also have examined the possibility that this could have been due to labour force exit and I largely reject that proposition as an explanation.

And this graph shows the most recent cycle after the GFC. The unemployment rate rose from 4 per cent in February 2008 (the low-point of the previous cycle) to 5.9 per cent by June 2009.

The initial fiscal stimulus then started to reduce the short-term unemployment rate but was not strong enough to start eating in to the long-term pool.

By 2012, the Federal government was under extreme pressure from the conservatives to start cutting the fiscal support, which they did, and the economy nose-dived and unemployment started to creep up again, which meant that more and more workers at the longer end of the short-term category started to move into the long-term unemployed pool.

And the on-going pursuit of fiscal surpluses has meant it has been very hard for the long-term unemployed to gain work.

This period shows what happens when the economy is slowed due to fiscal drag which reduces duration transitions away from the longer duration categories.

And then the pandemic struck and short-term unemployment has shot up.

Conclusion

The evidence very strongly supports the view that long-term unemployment rises and falls with net job creation. The stronger is employment growth the more quickly long-term unemployment falls.

When recoveries are stalled and slow, the long-term unemployed get trapped in that state.

And in the periods examined, there is no evidence that as the pool of long-term unemployed was declining (simultaneously with the short-run pool) that inflation was accelerating.

It is far better for the government to ensure there is strong spending support when non-government spending declines to prevent the build up of long-term unemployed in the first place.

That is enough for today!

(c) Copyright 2020 William Mitchell. All Rights Reserved.

Tracing the roots of progressive views on the duty to work – Part 7

Published by Anonymous (not verified) on Tue, 06/10/2020 - 1:57pm in

Tags 

job guarantee

This is Part 7 of my on-going examination of the concept of ‘duty to work’ and how it was associated with the related idea of a ‘right to work’. Today, I go back in history (again) to discuss a literature that influenced the evolution of my own early advocacy of a Job Guarantee. We see how I considered developments in the early C19th which established very clearly the responsibility of the government to act as an ’employer of last resort’ could be integrated with the buffer stock literature (which analysed the use of commodity buffer systems) in C20th to provide a coherent buffer stock full employment capacity in our modern economies. In Part, this establishes where the Job Guarantee idea, that is now central to Modern Monetary Theory (MMT) came from – at least, in terms of my early contribution to that body of work.

The earlier parts in this series are:

1. Tracing the roots of progressive views on the duty to work – Part 1 (August 4, 2020).

2. Tracing the roots of progressive views on the duty to work – Part 2 (August 11, 2020).

3. Tracing the roots of progressive views on the duty to work – Part 3 (August 20, 2020).

4. Tracing the roots of progressive views on the duty to work – Part 4 (September 1, 2020).

5. Tracing the roots of progressive views on the duty to work – Part 5 (September 8, 2020).

6. Tracing the roots of progressive views on the duty to work – Part 6 (September 29, 2020).

The theme today is to report on early concepts of the right to work, which in Modern Monetary Theory (MMT) are expressed, in part, by a commitment to a Job Guarantee.

But, we should not think of the Job Guarantee as the only expression of a government’s responsibility to ensure a right to work.

I often see commentary in the social media from those who are apparently sympathetic to the idea of a Job Guarantee that would lead one to conclude that MMT economists think the buffer stock capacity will solve all unemployment issues.

The way we conceived of the Job Guarantee from day 1 was to be a relatively small, steady-state pool of jobs which would expand in the relatively rare times that inflation became a problem and/or private spending collapsed.

Typically the Job Guarantee pool would be very small and provide work for the most disadvantaged workers in the society.

When confronted with say a major downturn in private spending, while the Job Guarantee pool will expand, the most valuable intervention a government can make is to create career-based, high skilled jobs in the economy rather than passively sit back and allow the Job Guarantee pool to expand.

Warren Mosler constructs the Job Guarantee as a transition job – transiting the work back in the private sector.

I do not give it that emphasis for my own reasons and am happy to see the a worker permanently occupy a Job Guarantee job if that is the best outcome for them.

But the difference in that construction does not alter the fact that we both conceive of the pool of jobs as being very small when economies are operating at higher pressure levels.

The Job Guarantee is not a panacea for all ills.

As an aside, I keep getting E-mails with statements about the Job Guarantee and links to articles about it, which continue to repeat the assertion that the Job Guarantee is derived from the work of Hyman Minsky.

One recent Op Ed even claimed the idea was “first put forward” by Minsky. The author followed that statement claiming that this idea was “now promoted by” yours truly (and Noel Pearson) insinuating that I was promoting the work of Minsky.

The initial statement is factually wrong and demonstrates an ignorance of history or a willingness to revise history to fulfill some agenda.

The second statement – insinuating I am promoting Minsky’s work – is equally in contradiction with reality and the historical record.

I dealt with these matters in these blog posts:

1. The provenance of the Job Guarantee concept in MMT (April 20, 2020).

2. The historical beginning of the MMT team – from the archives (November 27, 2019).

3. Flattening the curve – the Phillips curve that is (April 7, 2020).

The point is this.

At the outset when the MMT work began, the concept of a Job Guarantee was the outcome of input from myself and Warren Mosler to an early E-mail discussion list (PKT) in mid-1990s.

I document those discussions in the blog posts cited above.

The historical record is clear.

Neither of us were influenced in any way by the work of Hyman Minsky. Warren and I came to the same point from quite different angles and those insights were then developed within the body of work we now know as MMT.

It is true that Randy Wray, who was a participant in the discussions on that E-mail discussion list was very influenced by Hyman Minsky (having had him as a doctoral supervisor) and saw similiarities in what Warren and I were inputting to the List with early work that Minsky had published.

And subsequently, it is true, that Randy and those that were influenced by his work built further connections with Minsky and the unfolding body of MMT work.

But that doesn’t allow one to conclude that the concept of the Job Guarantee as it became a central part of MMT was derived from Minsky. It categorically was not!

And an interesting question one might ask in this context is whether one could have extrapolated the body of work we now call MMT from Minsky’s earlier work.

My answer is that there is no possible way that sort of evolution would have occurred.

I considered those sort of issues in this blog post – Hyman Minsky was not a guiding light for MMT
(November 9, 2016).

Just before I came into contact with Warren Mosler on the PKT list, Hyman Minsky was expressing deep concern about deficits and inflation, which I document in that cited blog post.

In 1991, he was advocating what we call ‘sound finance’ the anathema to the ‘functional finance’, which underpins aspects of Modern Monetary Theory (MMT).

He says things such as:

1. “the government must validate our debt with taxes”.

2. In the context of rising government deficits in the 1980s, he claimed that “the quality of the government’s debt in international markets is deteriorating”.

3. “we lack the will to tax ourselves so that the government liabilities are fully validated by receipts”.

His public comments amounted to a rejection of basic MMT propositions.

While early in his career he was supportive of Abba Lerner’s functional finance ideas, by the time his 1986 book came out – Stabilizing an Unstable Economy – (Yale University Press), he was articulating the ‘sound finance’ principles.

This was the first book or article of Minsky’s that I had read in detail and it marked a change in his position after the election of Ronald Reagan.

At this point, he increasingly argued that government debt was at risk of becoming non-credible in the face of non-government bond investors.

His main message became that the fiscal outcome should be in balance or in surplus at full employment, which of course is not the MMT position at all.

His later work build on these non-MMT propositions, which I discuss in detail in the blog post cited.

The point is that by this time, a natural evolution of his ideas would never have yielded the insights that have become integrated in MMT.

Buffer stocks and the Job Guarantee

Further, I included that brief clarification because it actually bears on what I was going to write in this Part 7 of the series.

It is simply untrue to say that the idea of employment guarantees was first proposed by Hyman Minsky. A short research effort would disabuse anyone of that idea.

My evolution that led me to outline a Job Guarantee scheme, first, in 1978 and then later during the early discussions on the PKT List, was influenced by my research into the commodities literature on buffer stock schemes, which were common in pre-Second World War Australia and later.

It was well-understood that these schemes could provide a framework for macroeconomic stability (redress market movements that would lead to price and income instability).

And I was influenced by the work of Benjamin Graham (particularly his 1937 book ‘Storage and Stability: A Modern Ever-normal Granary’) which laid out a price stability plan based on the use of commodity buffer stocks (storage in the ‘Ever-normal Granary’), which he morphed into a derivative scheme he proposed to create a commodity reserve currency, that would reflect some weighted composite from 21 raw material stocks in the Granary.

I am skating through detail here because this is not the primary emphasis today and I could write a lot about Graham (as I did in my PhD thesis).

I had also read John Maynard Keynes’ 1938 paper – The Policy of Government Storage of Foodstuffs and Raw Materials – (published in the Economic Journal, Vol. 48, No. 191, September, pp.449-460) – link is to JSTOR which requires library access.

Keynes was impressed by Graham’s work and saw it as a way of stabilising prices amidst market fluctuations in commodity supply.

He refers to his 1937 book and Graham’s contention that government storage would be relatively low cost (see discussion in J.M. Keynes, ‘Activities 1931-1939: World Crises and Policies in Britain and America’, published in the Volume 21 The Collected Writings of John Maynard Keynes.

In his 1938 Economic Journal article, Keynes observed (p. 450):

… the fluctuations in the prices of the principal raw materials which are produced and marketed in conditions of unrestricted competition, are quite staggering …

An orderly programme of output, either of the raw materials themselves or of their manufactured products, is scarcely possible in such conditions.

He saw this problem as contributing to instabilities in export trade, which was a major issue for Britain at the time, given its export prominence.

He also saw that (pp. 451-52):

… nothing can be more inefficient than the present system by which the price is always too high or too low and there are frequent meaningless fluctuations in the plant and labour force employed.

While he considered that “measures to stabilise the aggregate of effective demand” (p.451) could be of help here, he considered a ‘storage’ approach could supplement.

He considered the government had a responsibility to facilitate this storage solution (a buffer stock manager) given that the competitive firms had no incentive to hold inventories in this way.

H.M. Treasury would fund the “warehouse costs and interest”, which he considered would be a modest expense.

He wanted to extend the scheme to the British Empire nations which provided raw materials – “sugar from the West Indies, jute from India, wool from Australia, vegetable oil products from West Africa, non-ferrous metals, and all the endless variety of Empire products which must be stored somewhere”.

I refer to the influence that Benjamin Graham had on my thinking as a student in this blog post: Modern monetary theory and inflation – Part 1 (July 7, 2010).

The point was that the principle that buffer stock mechanisms funded and administered by government could provide for market stability (volumes and prices) was well established in the commodities literature.

My departure came from an idea I had 1978 when I was studying agricultural economics at the University of Melbourne as part of my fourth-year studies.

It was a time when unemployment was rising sharply in Australia and inflation was high (as a result of the OPEC oil crises). I was trying to work out a way to advocate for continued full employment but address the issues that economists were raising about inflation.

I was also very interested in the Phillips curve literature which I saw as the major battleground for the emerging dominance of the NAIRU approach (using unemployment buffer stocks to discipline inflation) – that sort of research became my Phd research program.

So it came to be that if the government could buy and sell wool at will to correct shortfalls (or surpluses) of wool production relative to demand, which allowed it to stabilise prices and incomes, then why could it not do the same with labour.

And, for me the Job Guarantee idea was formed. Minsky was nowhere to be seen!

But I had also been reading historical literature that first introduced me to the idea of employment guarantees and the government as ’employer of last resort’.

The buffer stock approach allowed me to tie together full employment and price stability.

But that earlier literature reinforced my thinking about the centrality of government in maintaining a ‘right to work’ through employment guarantees.

So far from Hyman Minsky being the “first to propose” employment guarantees, we now head back to the early C19th. We could have gone back earlier but it is the early C19th literature that I first became acquainted with state-run employment guarantees.

The Saint Simonians

As a young student I read a lot of the literature about and by the – Saint Simonians – who were a “French political, religious and social movement of the first half of the 19th century” who followed the lead of “Claude Henri de Rouvroy, comte de Saint-Simon”.

He advocated the transformation of industrialisation so that “true equality” could be achieved by the “union of men engaged in useful work”.

He was one of the thinkers who tried to build a liberation Socialist philosophy after the French Revolution.

His early work – particularly the publications in l’Industrie (1816-18) – which was a collection of pamphlets where he and others would expound their philosophical positions on how humanity might develop from the primitive to sophisticated.

The Saint Simonians advocated socialism but were not aligned with the emerging Marxists.

Claude Henri de Rouvroy proposed that government would cease being a vehicle for class domination, and, instead use science and technology to introduce and maintain a welfare state to benefit all.

As I was working my way through the Marxist literature I was very interested in these alternative visions of socialism as a vehicle to advancing improved well-being for workers.

Louis Blanc

Louis Blanc – was a historian, a socialist influenced by the Saint Simonians, and for a short period, a French politician.

Karl Marx called him a ‘utopian socialist’

In the leadup to the – 1848 Revolution in France – Louis Blanc was among several writers who saw the 1846 harvest and financial crises as an instigation for progressive reform.

Louis Blanc became prominent in advocating the ‘right to work’ and his writing was interrupted by the February 1848 revolt, upon which he took a position in the provisional government and became Chairman of the Luxemburg Committee.

The February Revolution arose on the back of rising unemployment and poverty. Skilled workers were pushed down to material levels commensurate with the ‘proletariat’.

The so-called “Bourgeois Monarch”, Louis Philippe sat on his heels and acted in the interests of capital (particularly the bankers – the “financial aristocracy”) and largely ignored the growing plight of industrial labour.

Louis Philippe ignored the growing protest movement and because the poor did not enjoy political franchise, a revolt was inevitable.

The Revolution established the “droit du travail” (‘right to work’) as an operative principle binding government initiatives.

This article – Employment and the Revolution of 1848 in France – provides useful historical narrative and facts.

On February 25, 1848, Louis Blanc proposed a motion to the French government:

… to guarantee the existence of the workmen by work …

The provisional government rejected the motion saying it was outside its provisional jurisdiction.

Instead, Louis Blanc was appointed on February 28, 1848 to oversee a new body – Commission du Gouvernement pour les travailleurs (Government Labour Commission)- which operated out of the Palace of Luxembourg.

In a way, we are completing a circle here to – Part 1 – of this series, given that it was Louis Blanc who entered the phrase:

De chacun selon ses facultés, à chacun selon ses besoins

That is, “from each according to his ability, to each according to his needs”.

Louis Blanc believed this could be accomplished through strictly enforced labour regulations (safety etc), nationalisation of key industries, and the creation of a cooperative system of “social workshops”, which would be worker controlled in relation to the trade union movement.

His eventual socialist goal was “the eventual wholesale elimination of private capitalism and the market wage system, and its substitution by a “universal association” geared towards the needs of workers.” (Source).

The Commission set about fulfilling their agenda to create the ‘ateliers nationaux’ (national workshops) for all the existing trades, which would provide guarantee work for the unemployed.

There was considerable disputation however over topics such as whether the low-skilled were receiving favours that were not forthcoming for the higher skilled workers.

In terms of documenting the historical record of the evolution of the ‘right to work’ and employment guarantee ideas, no better person to be consulted is Dr Victor Quirk who wrote a masterly PhD thesis under my supervision on the topic.

He goes back to the 1351.

He wrote a guest blog here which is relevant – Advocating full employment (November 24, 2010).

He also provided some excellent analysis on the fortunes of these national workshops.

Given the necessity to organise the jobs quickly, the workshops struggled to come up to scale.

On March 15, 1848, 14,000 workers were employed in Paris. By June 15, 1848, this number had risen to 117,310.

But there were always more workers desiring jobs than the capacity could create which resulted in conflict.

Victor Quirk writes:

The chaotic nature of the scheme was partially the consequence of the tensions within the cabinet on the question of the elimination of unemployment.

Louis Blanc was largely sidelined in the management of the scheme once the fear of on-going revolts subsided.

In effect, the conservative forces did not support this utopian scheme. Ultimately, the National Assembly exploited the chaos within Louis Blanc’s workshop system to withdraw it.

If you want chapter and verse on this scheme then I urge you to consult Victor’s thesis.

Having failed, Louis Blanc migrated to England in August 1848 and was considered a “a leader of petty-bourgeois émigrés in London” (see Karl Marx and Frederick Engels, Selected Correspondence (Progress Publishers, Moscow, 1975)).

The point here is that his proposal was a coherent early example of the ‘right to work’ and for the government to act as an ’employer of last resort’.

When I read this literature as a student in the late 1970s and early 1980s, I was convinced that the government had to act in this way and that the later literature on the buffer stock mechanisms, provided me an understanding of the architecture and machinery in which this sort of capacity could be exercised to maintain price stability.

I saw the melding of these literatures (the ‘right to work’ socialists and the buffer stock approach) to be a way to overcome the Phillips curve dilemma of having to endure high unemployment to maintain price stability.

And Minsky was nowhere to be seen.

It is false to assert he was the first to introduce the notion of employer of last resort.

The US Second Bill of Rights 1944

The – Second Bill of Rights – was proposed by the then US President Roosevelt on January 11, 1944 as part of his – Eleventh State of the Union Address.

In it, he articulated that a key feature of the Bill would be a ‘right to work’ among other rights that are visibly absent from American life today. The ‘right to work’ meant, in those days, that the government was responsible to ensure that everyone who wanted to work had a job (that is, an employment guarantee).

In this neoliberal era, the term has become used in the context of right-wing “right-to-work laws” that attack trade unions an push power towards employers.

Unfortunately, Roosevelt’s bill never made it to the US Congress and he died before the Second World War was terminated. Subsequent efforts to revive it were always blocked by the conservative political forces.

But, clearly, the tradition of employment guarantees went back long before Hyman Minsky was writing about it (though briefly).

Conclusion

In Part 8 I will deal with the issue of coercion.

That is enough for today!

(c) Copyright 2020 William Mitchell. All Rights Reserved.

Pages