The way we designed the program of the Fiscal Sustainability Teach-In Counter-Conference, was to introduce the fundamental ideas of Modern Monetary Theory (MMT) in the first three presentations on defining fiscal sustainability, whether or not there are spending constraints on governments sovereign in their currency, and whether deficits, debts, and debt-to-GDP ratios are really a problem for entitlement programs and our grandchildren. Then Presentation Four, by Marshall Auerback, was given to consider the main critique of MMT's stance on deficit spending, the possibility of inflation or hyperinflation.
Finally, Presentation Five, which we'll cover in this post was designed to highlight the proposals for full recovery favored by the MMT economists. These proposals are the counter to the austerity proposals of Paul Ryan, Pete Peterson, Erskine Bowles and Alan Simpson, David Walker, Barack Obama, and the rest of those convinced that the US Government has solvency/debt/deficit problems that must be solved by some combination of spending cuts and tax increases.
Of course, there are disagreements in details among the people named above, and even more variations and nuanced disagreements among them and many of the Washington DC think tank career progressives. But all of them share the Peterson neoliberal worldview that eventual deficit/debt reduction is essential for fiscal sustainability. So, all of the above spend their time devising budgets that plan for deficit reduction “over the long-term.” Naturally, “the long-term” varies greatly among them, with their appetites for subjecting the mass of Americans to governmental austerity. But all who share this Government Budget Constraint (GBC) perspective want to implement austerity eventually, because they believe, or say that they believe, that austerity is central to fiscal sustainability and responsibility.
In contrast, the MMT counter-narrative, emphasizes that indicators like the size of the national debt, or the debt-to-GDP ratio have nothing to do with the spending capacity of a government sovereign in its own currency, and that even the deficit can't be evaluated as too large or too small in the abstract, but only relative to its impact on the economy. Given this orientation, MMT economists, don't spend time formulating long-term plans for either deficit reductions or deficit increases; but instead propose fiscal sustainability policies based on their anticipated impact. This is the orientation underlying the final presentations by Professors L. Randall Wray and Pavlina Tcherneva which I'll review in this post.
Presentation by Professor L. Randall Wray
Randy Wray begins his presentation with this overview:
“. . . I’ll talk about the causes of unemployment; the appropriate goals for a sovereign government – and by that we mean what we’ve been talking about all day, one with a sovereign floating exchange rate, non-convertible currency; cause of unemployment – Bill was getting into this in his last comment; some lessons from the New Deal – which we gradually forgot; and then abandoning the commitment to full employment – and this is almost the exact title of a book written by Bill Mitchell that is very good talking about this period. And then Pavlina will take over and talk about the Job Guarantee program in both theory and practice and how this can be used to achieve what we think are the appropriate goals of a sovereign government and contrast that with the view that growth alone is an appropriate goal, and then conclude.”
He then outlines the causes of unemployment, which he initially divides into short-run causes of unemployment and long-run causes. In the long-run he mentions two problems: demand gaps and structural unemployment.
Short-run causes: Randy points to the Great Recession and approaching losses of 9 million jobs by April 2010. He also says there would be continuing losses for “many years,” and mentions that even official projections and experts predict a best case that unemployment would remain high for years. We are two years now into that prediction with no end in sight, given the government austerity policies we are seeing.
Randy then mentions the lost opportunities both for people, and for young people just coming into the labor force, including for college graduates, who had been having a very difficult time finding jobs. Randy then points out that if one does a careful assessment of the number of jobs needed one would find that the number is “well above 20 million jobs.”
LetsGetItDone Comment: This is probably a conservative estimate for today (2012). We are probably closer to needing 27 or 28 million jobs.
Randy says people are thinking about creating jobs on far too small a scale. He mentions Obama's 2 – 3 million, but that nobody in Washington was thinking in terms more than “. . . tens or maybe hundreds of thousands of jobs.” So nobody was thinking big enough about the problem. More than two years later, that's still the case, and we still need programs that will create “. . . a massive number of jobs.” The problem is that Washington wasn't focused on Main Street, but on saving Wall Street.
“Maybe it needed to do that; we probably have different opinions over whether that was necessary or not. But in any case the problem is that right now both the politicians and the population at large believe we’ve already spent so much money, how can we possibly afford to create 20 million jobs now. It’s too late. We’re not going to be able to save Main Street because we spent too much on Wall Street.
The confusion that more government spending isn't affordable is the “major barrier,” now to a job creation. There's always resistance to the idea to be discussed later “. . . that the government should be responsible for ensuring full employment. But the affordability/deficit hysteria issue is the main barrier to getting out of the deep recession, likely to continue for years. That's the source of our major short-run employment problem.
LetsGetItDone Comment: And two years later, the politicians are still saying we can't afford jobs programs, while they entirely ignore the much heavier both real and financial costs of not having a full employment program.
Randy then moves on to the long-run employment problem. First, unemployment has come to be used as a policy tool to deal with inflation. Governments have deliberately tried to keep unemployment high enough to either prevent inflation, or prevent its acceleration. The unemployed are being used as "a buffer stock," Marx's “reserve army of the unemployed” to hold down wages and consequently keep prices from rising.
Then there's structural unemployment. The ILO claimed that at the peak of the business cycle in 2007, there were still “200 million unemployed people around the world.” Randy says that's “a vast under count,” but even so it's a very large number. So, in spite of strong economic growth, the world has no solution to the unemployment problem which continues to exist. Why?
It's because economic “. . . growth fuels productivity growth. . . ” but not necessarily employment growth at the same rate. In the past decade productivity grew 26%, but employment by 16.6%, which isn't keeping pace with population growth. So, productivity growth, along with population growth are causing higher unemployment, because we don't need as many workers to have economic growth.
Randy then turns to the question of the goals of a sovereign government. He cites John Kenneth Galbraith’s idea of “public purpose, and mentions some aspects of it: “. . . decent social security for the aged . . . full use of domestic resources.” Government “. . . has the fiscal capacity to do this. Economic growth and promoting economic growth alone is not going to give us full capacity use.”
“So, we think that government ought to be focusing on full employment because it is much more important to have labor fully employed than it is to have, say, our agricultural resources fully employed — although we ought to aim for that too. But let’s make full employment a primary goal. And, as Warren keeps emphasizing, for political reasons, not really for economic reasons, we need to make price stability also a goal. The problem is that for a very long time orthodoxy has thought these two goals are completely in conflict. You cannot have both of these at the same time. You either can have full employment and then you’re going to have inflation, or you can have price stability but you’re going to have to have a lot of unemployment. Okay, so, what we’re trying to do is to promote a program that can give you full employment with price stability, okay, and that this should be the goal of sovereign government. And our argument is that it has the capacity to do this.”
Randy then points again to the economic costs of unemployment in terms of tremendous net income and GDP losses, and continues to other losses mentioned by political scientists and sociologists: poverty, social isolation, crime, regional deterioration; health issues, family breakdown, school dropouts, violence, ethnic hostility, homelessness, even terrorism, “the loss of human capital, because when people are unemployed for long periods of time they become unemployable”.
So, the benefits of full employment aren't just adding to GDP and producing more goods and services, there will also be more job training and skill development and increase in human capital, poverty alleviation, community building and social networking.
LetsGetItDone Comment: This is a very important point. When debating economic policy people focus on unemployment and GDP statistics. They also spend a lot of time talking about the dangers of inflation and the “fiscal responsibility” issue focused on the national debt, the deficit, and the debt-to-GDP ratio; but there is very little discussion among economists of the human, and social costs of high unemployment, or of the possible longer-term political costs of developing political instability, increasing political authoritarianism, and potential civil violence at the end of a long road of economic and national or international decline. The MMT focus on the costs of unemployment is a much more holistic one than most of what we see today in the discussion of economic policy and its impacts.
“. . . . Pavlina will talk very briefly about Argentina. We went down there and we saw the benefits to communities of creating jobs in areas that had had no jobs before a jobs program was created. Social, political, and economic stability are all promoted by full employment. And then finally there’s this notion that our colleague Mat Forstater has written about — and unfortunately he was going to be here, but he couldn’t. There are positive feedbacks, reinforcing dynamics, so in a sense there is a multiplier effect of all these things. So, if you just add up the benefits, we get more GDP, we get poverty alleviation, and so on. There also is a multiplied impact greater than the sum of these individual benefits from achieving full employment.”
Randy next points to the experience we had post-Great Depression and during the Post WW II period and to two major reforms. The first was downsizing and constraining the financial sector of the economy, and most of that was done by the market. This time around the Government prevented the markets from downsizing finance by bailing out the banks and Wall Street. But during the New Deal and the Post-war period the Government let that happen and passed regulations constraining finance which worked for a very long time.
The second class of reforms was in direct job creation. The New Deal created 13 million jobs (See Randy's slide 10) which greatly reduced the unemployment rate, even though many now claim this is not true because they refuse to count the Government jobs provided by the New Deal as “real jobs,” and so continued to count those employed by them as “unemployed.” This is just ideological bias however, intended “to understate the true impact of the New Deal.”
LetsGetItDone Comment: I couldn't agree more with this point. The idea that a job you have to work at everyday and that produces a paycheck should not be counted as a job, simply because it was provided by the public sector is both silly and inconsistent with the idea that permanent civil servants, consultants, and State civil service employees, are all considered part of the employed work force.
Back to my summary of Randy's narrative. Since the de-regulation started in the 1970s and accelerated in the 1980s, the first reforms constraining financial institutions eroded or were repealed. So, now the financial sector is huge and the old New Deal constraints on it are gone. The second reform of direct job creation programs was abandoned during the post-- WWII period of rapid economic growth, when people came to believe that growth could create full employment and that we didn't need these programs.
Randy says this about the very successful post-War period:
”In the post-war period, for the first two decades or so, we had the golden age of capitalism, the highest sustained growth rate. We had no financial crises in a twenty year period. Normally in US history, every 20 years we had a depression. We not only didn’t have a depression, we had no financial crises. We had minor recessions, but we recovered quickly. But It wasn’t true just for the US, and Bill could tell you the same story about Australia. And it wasn’t just true for the developed nations. The developing world also had the highest sustained growth it had ever experienced. In fact, it was better than our Industrial Revolution. The developing world was growing faster than the UK did during the Industrial Revolution. So, in a sense, it was a golden age of capitalism.
“We had a commitment to high employment. Now Bill would talk about a commitment to full employment in Australia and they probably came close to achieving that. In the US, we never really embrace that, but we did embrace high employment. We achieved unemployment rates for white males of 3%, almost as good as Australia. But it was only white males. We were not really committed to full employment, including women and especially African Americans, and so their unemployment rates were much higher than this. We had the… A lot of people misname the 1946 act, they say the Full Employment Act, but it wasn’t the Full Employment Act, it was the Employment Act. But it did commit the government to trying to maintain a low unemployment for most groups, if not full employment.
“We had the creation of the US middle class over this period that was sustained by jobs and decent wages. The problem is — Minsky started writing in 1957, arguing that, yes, we have created the conditions for economic stability, a generally high-wage economy, a high-consumption economy, a constrained-finance economy, and all of these things are conducive to rapid economic growth with financial and economic stability — the problem is stability is destabilizing.”
Randy also says that Minsky predicted that the financial institutions would get rid of the constraints on them and then engage in “riskier” activity and also that inflationary pressures would build before full employment is reached given our type of economy. Meanwhile the US rediscovered that poverty still existed by way of Michael Harrington's The Other America, leading the “War on Poverty” which Minsky participated in.
Minsky wrote many letters to Sargent Shriver and Hubert Humphrey, and also papers and books warning that attempts to stimulate economic growth, coupled with training, programs designed to get rid of “the culture of poverty,” an idea popularized by anthropologists Oscar Lewis, and Daniel Patrick Moynihan (who was part of the Kennedys' “Irish mafia,” and still later helped shape Nixon's policy of 'benign neglect” of the poor, and also greatly helped to advance the emergence of the “New Democrats” and their fiscal responsibility/sustainability orientation), and finally welfare payments for people who aren't able to work, would NOT work to solve the problem of poverty.
Why? Because 1) it's demoralizing since you're telling people to remake themselves, but aren't supplying a job at the end of the process; and 2) he calculated that providing one minimum wage job to each poor family “. . . would lift two thirds of all poor families out of poverty.” So, Minsky said, give 'em jobs, not the War on Poverty. Randy and Stephanie, using data from the Clinton boom got a similar result. “One minimum wage job per family would eliminate two thirds of poverty.” And 3) Minsky also objected to the War on Poverty's welfare component on political grounds: “The problem is that Americans are not going to support a generous enough welfare safety net in order to lift people out of poverty. And of course that prediction turned out to be true.”
So, Minsky believed that Americans will support giving people jobs to get them out of poverty, but won't support giving welfare to end it. The poverty rate did fall from 1962 to 1973, almost in half. But as it turns out, that wasn't due to the War on Poverty, but to Social Security payments to the elderly, and the civil rights movement which “. . . . increased the labor market outcomes, mostly for African Americans.” The rate continued to fall until Reagan for African Americans, but the US as a whole “. . . . it stopped falling in 1973.” So, Minsky was right, the War on Poverty failed.
LetsGetItDone Comment: I thought this was a great short summary of what was wrong with the War on Poverty; but, as I remember it, it's failure was also due to something else, and that was LBJ's insistence that Americans could have both guns and butter and his continuing increasing expenditures on the Vietnam War. War spending did compete with “War On Poverty” spending during much of Johnson's tenure, and, I think that a reluctance to spend more on eradicating poverty has to be counted as part of the reason why the poverty program was unsuccessful. In the end, the motivation and commitment to make the program successful wasn't strong enough in the Democratic Party, especially since much of its vitality was sapped by the split among its supporters over the Administration's commitment to the Vietnam War.
Randy goes on:
“From ‘73 forward, the US, and — Bill argues in his book, most — or is it Bill — all other developed nations abandoned the commitment to high employment and full employment outside the US. And this was associated with the rise of free market ideology. We can all remember Reagan’s campaign against welfare queens who supposedly drive Cadillacs, government is the problem, supply-side/trickle-down economics is all we need, Clinton arguing that we need to end welfare as we know it — and I actually think there was a very good aspect to Clinton’s agenda here. He said we need to change the way Americans look at poor people. We need to make them see them as deserving poor, and the only way to do that is to get them off welfare and into jobs. I think that was completely correct. The problem is Clinton didn’t give them any jobs. He said we’re going to take away welfare, now you go get a job. But he didn’t provide the jobs. If he had provided the jobs it would have been, I think, a successful policy.
“Bush, of course, talking about the ownership society — If you’re interested, you can go to the Levy Institute. I wrote a paper in 2005 that said this promotion of the ownership society, for most Americans the only thing they own is their house, and what we have got going on in the United States, writing this in 2005, is a way that is going ensure that Americans are just going to lose their homes. Okay, so it’s actually going to reduce ownership in society.
“And, then, finally, under Clinton, the Democrats sort of very strangely and ironically became the party of fiscal responsibility, which has always been the role of the Republicans. Now it became the primary policy of the Democrats: We’ve got to balance the budget. And they learned the wrong lesson from the Clinton years, when we ran a budget surplus, because the economy performed very well in terms of growth. Of course, it was a debt, household debt, fueled boom which was absolutely destined to eventually collapse. But the lesson they learned was, oh, budget surpluses lead to rapid growth, when actually it was the rapid growth that created the budget surpluses. So, anyway, the Democrats become the party that’s always advocating tightening fiscal policy.
“And finally we had the rise of something that takes a variety of names. Jamie Galbraith called it the predator state, many people call it financialization, or neoconservatism, or neoliberalism. Minsky actually called it the rise of money manager capitalism, and that that over the past decade — well, longer period than that — but over the past decade has built up the conditions which finally led to this crisis. This is my last sentence.”
LetsGetItDone Comment: One of the great ironies of modern times is that the Party of FDR became the party of fiscal responsibility. Randy, implies above that this happened during the time of Clinton. But I think that Clinton's administration was the culmination of a transformation that had been going on for a long time. The Carter Administration was rather fixated on fiscal responsibility and tried but failed to achieve budget balance during its four years. Also, Alice Rivlin rose to prominence as the first Director of the CBO in 1975, and had great influence at least since the early 1980s in spreading the doctrine of fiscal responsibility. Also, prominent Democrats like Bill Bradley, Dick Gephardt, Paul Simon, Bob Kerrey, Max Baucus, Tom Daschle. Al Gore, Harry Reid, Kent Conrad, Chuck Robb, Lloyd Bentsen, Sam Nunn, and John Glenn, were all supporters of deficit reduction, if not balanced budgets, during the 1980s.
During the Reagan/Bush41 Administrations, Democrats used fiscal responsibility rhetoric against the Republicans. In doing so they began to commit the party to the priority of fiscal responsibility. During the Clinton Administration, Democrats had these tendencies reinforced by the Administration and its success in achieving budget surpluses. By the time, the Party lost to Bush43 in 2000, a majority of its members in both Houses of Congress were “fiscal responsibility” fixated. The Bush43 Administration's deficits and Cheney's statement that “deficits don't matter” only confirmed that orientation. So, by the time Obama took the White House, the Democrats as a party were confirmed fiscal responsibility advocates, if not deficit hawks.
Presentation by Professor Pavlina Tcherneva
Now, with Randy's outline of the sorry history of the failure to provide full employment and eradicate poverty, especially since the War on Poverty, in mind, we come to Pavlina Tcherneva's half of the counter-narrative policy presentation.
”So, now we get to the vision. How do we utilize this operational understanding of government expenditures to get past the obsession with the financial ratios, with these numerical measures of government success, and actually get to the real thing? Talk about financial ratios in context of what is happening to the real economy. So our vision is, I’d say a Smithian vision, Adam Smith’s vision. Adam Smith said that the wealth of a nation rests within its people. This is what Bill was talking about, not wasting human resources. So how do we do that?
“So this is what we think of features of responsible fiscal policy. We don’t use unemployment and human livelihoods as means to check inflation. This whole idea that Randy was addressing that somehow unemployment is a necessary evil, and we have to put up with it in order to maintain price stability. The empirical evidence first of all, is very spotty on this. Economists constantly redefine their NAIRU or their inflationary barriers and you look at the data and its very difficult to find this particular level. So let’s just measure fiscal policy in terms of employment creation effects. This is how we tend to see things. And so long as we are living in a monetary production economy, where the access to livelihood is a wage-paying job, then that should be the criteria for responsible fiscal policy.
“But we can debate that. These are the questions that sort of emerge from the historical perspective that Randy provided, and also you will see how we believe that this kind of approach utilizes this operational knowledge that we’ve just built to build a very sustainable system. So we are redefining sustainability in terms of employment creation, price stability, as opposed to certain debt/GDP ratios.
“We have to switch the conversation, we really need to re-orient our thinking about fiscal policy. . . .
“We have no sense of the sort of dynamic forces that are determining output. So we would like to measure potential output in terms of men and women put to work. So the way to flip fiscal policy is not to target a demand gap, because that’s not very clear what that means, but instead to target a labor demand gap.
“And you know we’re arguing that this delivers more bang for the buck. We do not know today how much more, even if we agreed that maybe deficit spending is sustainable, even in the most sympathetic, I would say, commentators to the deficits I would say ‘look we need to push further, we’ve got to deficit spend. We still don’t know how much we need to spend, how large deficit spending is large enough to produce the real outcomes that we are aiming for. So what we are proposing is that we actually tie deficit spending directly to the objective and you know exactly how much you need to spend.”
LetsGetItDone Comment: So, this is that important MMT point again. Deficit spending isn't bad or good in itself. It has to be judged by its outcomes and impacts. It's fiscally responsible and sustainable if those outcomes lead to full employment, price stability, and/or other benefits. It's less responsible when it leads to bad outcomes. This, the standard that MMT would use to evaluate any Government fiscal policy, can be used to evaluate the fiscal policies advocated by the austerians who agree with The Peterson Fiscal Responsibility narrative.
Put simply, whether or not their idea of fiscal responsibility is a valid one, isn't just a matter of definition. You can tell whether austerian policies are fiscally responsible by their fruits. We see these all over the the industrialized world these days, and clearly we have to conclude that their notion of fiscal responsibility isn't fiscally responsible. Or, to put this another way (h/t Mandy Patinkin playing Inigo Montoya in The Princess Bride): “You keep using that word, but I do not think it means what you think it means.”
”How many people do you want to put to work? Obama wants to save and create 3 to 4 million people, OK, put them to work, you know exactly what your wage bill is going to be, you’re going to find out your materials and your costs. If you want to create ten million jobs you know what your budget is going to be and you have directly achieved the goal as opposed to going backwards through this vision of producing growth and hoping that somehow the growth will lift up all boats and trickle down to the economy and produce the kind of job growth.
“So we see a responsible fiscal policy as an employment stabilization via direct job creation, and we see direct job creation as a permanent feature of policy making, because the objectives are to guarantee full employment, not for the short run but also for the long run. In other words this is very different from depression economics, which is Paul Krugman’s euphemism, finally the return to Keynesianism is because we’re in a depression. No, we would like to achieve sustainable fiscal policy throughout the short and the long run.”
LetsGetItDone Comment: In election after election Democrats criticize Republicans by pointing out that the Rs keep advocating “trickle down” economics, which they certainly do. But the truth is that when it comes to stimulus programs as a cure for unemployment, Democrats and progressives also advocate and practice “trickle down” as well. Pavlina is saying that if you want to create 4 million or whatever number of jobs, then use deficit spending to create those jobs directly; don't just use various measures to put more money in the private sector that may or may not stimulate people with money in the private sector to invest and “trickle down” some jobs to people. So, we need a real end to “trickle down” economics when it comes to job creation, and that means spending that directly create jobs, not spending that will “encourage” or incentivize private parties to create them. Why can't Democrats and progressives see that? Why have they bought so strongly into the fable that the only real jobs are those created by private businessmen? Now on to Pavlina's treatment of the theory of buffer stocks, and the superiority of a Full Employment buffer stock:
”Okay, so what is the job guarantee in theory? Let me just synthesize some of these ideas very quickly. There is an alternative to the NAIRU, that is, we can use an employable, or employed pool of labor as the buffer stock, not the reserve army of the unemployed. So I’ll explain a little bit about what that means. This is the job guarantee Bill refers to. This program is a job guarantee, there are various other – public service employment, direct job creation, you name it. But what that basically means is that you provide an unconditional offer of a public sector job at a minimum wage to anyone who wants to work. This way, as a permanent program, and an unconditional program it attains and maintains full employment.
“Okay, so essentially the features of the job guarantee is that this is a bubble up policy, this is not trickle down economics. It is a policy that hires off the bottom. It deals precisely with those that are either never employed or the ones that are last into a job and first out of a job. So, it’s a bottom up approach. It operates with flexible markets via a buffer stock mechanism, so this is the part that we need to explain how the job guarantee serves as this buffer stock. And I’m using Bill Mitchell’s terminology here, who basically made the case a number of years ago that, just like any other commodity buffer stock, you can stabilize the price of that stock by simply selling it when the price is too high, and buying it when the price starts falling. So you can envision labor as being a kind of a buffer stock where you offer employment to all those who want a job at a base wage. And that would be your stimulus, essentially, that produces growth.”
”As that demand trickles up to the economy and the private sector rejuvenates and starts demanding labor, then the private sector will be able to hire from the public sector pool, by bidding up the wage. Once the private sector has been saturated, or has hired as much as they desire, if you observe sort of an overheating economy, inflationary pressures, the private sector decides that it needs to downsize, then those workers will be laid off and instead of moving into unemployment they move into the public sector buffer stock. So essentially what this program does is it establishes a wage floor to labor. Today the wage floor of labor is essentially zero, because you can hire somebody that is willing to work at a premium above the zero wage that they are earning at the very moment.”
LetsGetItDone Comment: So, that's the full employment buffer stock idea. It establishes wage and benefit floors for labor, and indirectly for prices in an economy and for aggregate demand. With the JG in place, and provided it pays a living wage, it is impossible for the bottom to drop out of an economy. Recessions can still occur, collapses like the Great Depression, and the Great Recession cannot. Also, price stability has two sides to it; and upside and a down side. The JG limits the downside and so contributes to price stability. The JG limits the upside too in a way explained in a bit.
Other benefits of the JG are that it deals with any kind of unemployment: cyclical, structural, seasonal, and entrance into the labor market, and also that it maintains and enhances human capital. The JG provides jobs, but also an opportunity maintain and improve skills. Also, the JG is targeted to local areas where the workers are. It also takes them as they are, no training in hopes of finding a job later on. “So this program can be seen as a transitional employment program. It’s a safety net that captures the unemployed and prepares them for private sector work if they so desire. Of course the projects have to be useful and valuable. . . . .”
Firms also benefit from the JG, because they can always recruit from a stock of employable labor whose work experience is clear. In addition, the JG contributes to solving the economic inequality problem, because it improves the economic distribution by lifting the wage floor, provided of course the JG wage rate is set at a living wage lifting people out of poverty.
The JG also has a built-in inflation control mechanism dealing with the up-side of price srability. Specifically, “when the economy decelerates the budget expands as those workers enter the public sector, so it has an expansionary effect. When the economy grows the JG budget automatically contracts as workers move out into private sector jobs. So that’s the counter-cyclical mechanism.” That is, the former public deficit spending stimulus provided by the JG goes away, and assuming taxes remain at the same level, that will have a net effect of removing net financial assets from the private sector.
“So full employment and price stability also promotes currency stability. And the idea here is that we are establishing better anchors than the current system. We use labor as that anchor. This is not a solution for all labor market problems. We can use this program as an institutional vehicle, as a program to address specific goals. We may want urban inner city renewal, maybe you want green infrastructure investment, you can use those resources then to direct them to the specific things you want to do. There will be other things that you might want to deal with, labor market discrimination, and other things. This is not a panacea for all labor market problems, but it’s definitely better than the unemployment buffer stock.”
Then Pavlina turns to Argentina as a case relevant to the JG proposal. Its program isn't a JG program, but it “mimics” one. It is a limited program, but was large-scale, and Randy, Pavlina, and other MMT economists have been looking at its project impacts and macro effects. The Jefes program in Argentina was implemented after people took to the streets to protest austerity measures. The government then got the jefes program up and running in a few months and gave them government jobs. The jobs were part time, offering “. . . 4 hours of community work to the unemployed heads of households at a minimum hourly wage . . . “ About 13% of the labor force, or 2 million people accepted the jobs offered. The level of unemployment was similar to the level of actual US unemployment, not just our U-3 or U-6 levels. Women and minorities in particular benefited from the Jefes program.
”It was counter-cyclical, it stabilized output, prices, and currency. You look at the data and you find all of those indicators stabilize. GDP growth was between 8 and 12% between from 2003 to 2007 and only in the last year it dipped to 5%. So it’s job creation that produces growth as opposed to the other way around. The government budget moved into surplus. There were a variety of things going on there; but of course you’re generating large amount of incomes which are being taxed. The multiplier effect of this program, I’ve looked at some of the measures and some of the more conservative measures is 2.57. Meaning that for every dollar spent on the program you’re creating 2.6 dollars of output.
“Now, and what happened? Did people get stuck in the public sector? No. Actually what happened was that as the economy recovered, many workers transitioned into private sector jobs. It was organized in a very interesting way. I can tell you about all those institutional details, how it was administered, how the resources were mobilized, but suffice to say it was federally funded, locally administered, the government actually maintained a database of skill and experience of the unemployed, helped them to transition to private sector jobs as well, and from our visits as well it was obvious what kind of impact this program had on the poor, it empowered, it provided on-the-job training, every project that we went to see had an adjacent room with literacy education, with training, with various other courses that they could take. I like to see this as a new form of microfinance, as opposed to lending to people you just give them a grant for the wages and for the materials, get them on their feet, get them to produce something, and pretty much every project that we saw was some people that set up shops, carpentry shops or baby clothes tailoring shops or toy shops, or something that they could then sell on the market. But they were also products that were freely distributed to the poor. Lots of food kitchens, daycare center, public libraries, elder care, centers for the abused etc.
“Again, the employers hired from the pool. The economy, the economy stabilized very quickly. One benefit of this was that it formalized the informal sector. In Argentina actually there’s a very large share of the economy that is a gray economy. Those that used to work under the table were issued social security tax cards, they would be– when they transitioned to private sector jobs, now they were working under contract. The program established a wage floor. From all the people that transitioned … sort of a wage floor, because it was a limited program. But from all the people that transitioned from the public sector job to the private sector, they were all hired at a premium, 97% of those were hired at a premium.
“And communities were transformed. I can give you lots of examples, but what was interesting was the unemployed themselves proposed a lot of these projects, they were the ones that actually invented the kinds of things that they did. They did massive landfill cleanups, and recycling initiatives, and on and on and on. So these are some pictures of projects that we visited, and lots of food kitchens. There were lots of poor communities, but there were things like health promotion programs, subsistence farming, there were a lot of projects outside of the greater Buenos Aires area which we visited that dealt with agricultural projects, water irrigation, clay pits, etc.”
LetsGetItDone Comment: Since the Teach-In Counter-Conference there's been a lot more discussion of the JG program eliciting both supportive and critical comments. But I think it's fair to say that these previous quotations and summaries from her presentation anticipate and do much to address and answer many of the critical comments that have been made on various blogs. For some reason, the presentations of the Teach-In Counter-Conference have been largely ignored in recent discussions of MMT and the JG program. That should end, right now, and the points made by Pavlina here ought to be addressed by JG critics.
After this discussion of the impact of Jefes, Pavlina sums up:
“So again, growth itself is not the appropriate target, you have to wed it to job creation. It can promote inequality, this sort of pro-growth, or growth at all costs approach can promote inequality, it can harm the environment. We haven’t really said anything about the environment yet. So we are really looking at a bottom up approach that looks at full employment through direct job creation, a job guarantee. We view this as a program for shared prosperity. You can set an environmentally sustainable growth path and maintain price and currency stability.
“We can do it, we have done it once in the past, as have other countries in one form or another. It’s the right thing to do. I think we could debate this, but you know I want to get back to the point about having access to a job as a basic human right. And in my opinion I think Obama just needs a Rooseveltian resolve. We can talk more about this later, but just the wage bill, just the wage bill of hiring 20 million people at a – I think Warren has proposed $8 an hour – where you could do a living wage of $10-$12 an hour, we’re looking at 350-500 billion dollars. Compare this to the other expenditures.”
LetsGetItDone Comment: Compare it to the ARRA of 2009. The $787 Billion stimulus bill has reduced U3 unemployment from a high of 10.2% to the current 8.2% and left U6 unemployment at 14.8%. But for $750 Billion spent on a JG program we could have provided JG jobs at an average of $12.00 per hour with full fringe benefits for the 17.6% of the work force, or 28.598 million people, Hugh estimates are “dis-employed,” leaving pretty close to zero percent of people wanting full-time employment either unemployed according to the U-3 and U-6 measures or “dis-employed” using Hugh's measure, and the Great Recession would have been over by the end of 2009. This is the difference between a “trickle down” stimulus and direct job creation program in effectiveness and economy.
I should add here that the standard MMT policy recommendation is NOT to use the JG alone to facilitate full recovery, but to use a full payroll tax cut for employers and employees and say, $1000 per person in revenue sharing grants, to stop State and local Government lay-offs, as well as the JG. In that scenario, and assuming a JG wage rate of $12 per hour, I estimate that deficit spending would have been about $500 B for the payroll tax holiday, $310 B for the revenue sharing, and about $250 B for the JG to “mop up” the remaining “dis-employed.” So, for less than $1.1 Trillion, or a little more than $300 B more than was spent on the ARRA, we could have had all this over and done with.
In this scenario, it might have taken 6 months to get to full employment at the outside, so that by October of 2009, the Great Recession could have ended in the US. I should add that Warren Mosler, more than anyone else my mentor in MMT, thinks the period of recovery would have taken only 90 days. Whether one estimates 3, 6, or 9 months, however, it's fair to say that if an MMT fiscal policy had been followed to implement the recovery, then many of the bankruptcies, foreclosures, and homelessness, that led to the 40% reductions of median wealth experienced in the United States, would have been avoided. Such is the cost of bad, timid, and just plain stupid economic policy in a time of crisis.
And Pavlina ends:
“But I want to emphasize, costs here are not in terms of financial costs, it’s not necessarily the problem. I just want to show you that in perspective you get, you deliver so much more bang for the buck in real, in real terms, if you target your programs. So we have a deficit in convictions, I think, a deficit in cleverness, not necessarily in the ability to fund. And let me end with a couple of quotes. One is by FDR that says that
”. . . the liberty of a democracy is not safe if its business system does not provide employment, and produces and delivers goods in such a way as to sustain an acceptable standard of living.”
“And the last quote is a quote from Keynes. This is something we as academics constantly run against, and that’s this idea that we have to keep 5% or 10% of the population in idleness,
“The Conservative belief that there is some law of nature which prevents men from being employed, that it is rash to employ men (or women) and that it is financially ’sound’ to maintain a tenth of the population in idleness is crazily improbable, the sort of thing which no man could believe who had not had his head fuddled with nonsense for years and years.”
LetsGetItDone Comment: Those are good quotes from Pavlina to end her presentation, but to my mind, the most powerful quote would have been FDR's Economic Bill of Rights:
“This Republic had its beginning, and grew to its present strength, under the protection of certain inalienable political rights—among them the right of free speech, free press, free worship, trial by jury, freedom from unreasonable searches and seizures. They were our rights to life and liberty.
“As our Nation has grown in size and stature, however—as our industrial economy expanded—these political rights proved inadequate to assure us equality in the pursuit of happiness.
“We have come to a clear realization of the fact that true individual freedom cannot exist without economic security and independence.”Necessitous men are not free men.” People who are hungry and out of a job are the stuff of which dictatorships are made.
“In our day these economic truths have become accepted as self-evident. We have accepted, so to speak, a second Bill of Rights under which a new basis of security and prosperity can be established for all regardless of station, race, or creed.
“Among these are:
“The right to a useful and remunerative job in the industries or shops or farms or mines of the Nation;
“The right to earn enough to provide adequate food and clothing and recreation;
'The right of every farmer to raise and sell his products at a return, which will give him and his family a decent living;
The right of every businessman, large and small, to trade in an atmosphere of freedom from unfair competition and domination by monopolies at home or abroad;
“The rightof every family to a decent home;
“The right to adequate medical care and the opportunity to achieve and enjoy good health;
“The right to adequate protection from the economic fears of old age, sickness, accident, and unemployment;
“The right to a good education.
“All of these rights spell security. And after this war is won we must be prepared to move forward, in the implementation of these rights, to new goals of human happiness and well-being.”
The over-riding importance of the Job Guarantee, apart from its economic advantages, is that it implements many of these rights. And one of the great strengths of the MMT counter-narrative is that in its advocacy of the Job Guarantee it connects once again to the best of America, and to making real the hopes and dreams that underlie FDR's vision. We have, over the years forgotten or given up on that vision. But, MMT brings it to us again, highlights it, and tells us how to implement it. And, once again, when the Petersonians, whether they go by the name of Hoover, Ryan, Romney, Clinton, or Obama, talk to us about “fiscal sustainability” and “fiscal responsibility,” we have to say to them:
You keep saying those words, but we don't think they mean what you think they mean! Instead, what they mean is that the fiscal policy of the United States is sustainable when it does not compromise the future ability of the United States Government to deficit spend by destroying US productive capacity and human capital, and it is responsible when it is directed at the goal of public purpose as this is expressed in FDR's Second Bill of Rights. So, when you advocate or practice budgetary austerity for its own sake and without regard to its likely impact then it is you who are advocating and/or practicing fiscal policy that is fiscally irresponsible and fiscally unsustainable, and that will lead to the decline and destruction of the United States and its proud democracy. So, we say to you stop confusing public sector austerity with private sector discipline and morality. What you're advocating is destructive and immoral. Just stop, and do it now!
The presentations by Randy and Pavlina were followed by a Q and A session. I'll go through it and add comments in my next post. And, I'll end this one by providing some follow-up references on the subjects treated in their presentation appearing since the Fiscal Sustainability Teach-In. Recently, Randy completed a lengthy blog series comprised of 16 posts on the JG. The series begins here, and all its posts are accessible from here (Posts 42 – 50 including Randy's responses to the comments on each post). Pavlina also continued her work on the JG with a number of outstanding efforts including posts, papers, and interviews: here, here, here, here, here, and here.
Bill Mitchell also had a number of characteristically carefully reasoned and very illuminating posts here, here, here, here, here, here, and here. Warren also has some contributions here and here. And I've also written extensively on JG issues; links here, here, and here.
There have also been a number of critical treatments of the JG. You can find references to these in the links I've already given, and can see the full range of arguments over the JG if you follow those references. Many of the posts I've linked to above include answers to these critical efforts.