Fiscal Sustainability Teach-In: Session 5, Randy Wray
Policy Proposals for Fiscal Sustainability
L Randall Wray
[00:00:00] [WRAY] I'm going to start off, and I'm going to set the framework, and then Pavlina [Tcherneva] will talk about the specifics of the policy proposal.
[00:00:13] Here's an 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 [Mitchell] 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.
[00:01:19] The causes of unemployment: I wanted to look at two different kinds of problems. The first is short-run causes of unemployment. For example, we find ourselves in a deep financial crisis, with unemployment rates that are approaching Great Depression levels, and what causes that, and then turn to over the long run we also operate with chronic unemployment. That is, we don't normally achieve full employment, and I'll talk about two problems there: first, demand gaps, and second, structural unemployment -- that is, growth without job creation.
[00:02;10] So, in the current crisis, we lost over 8 million, approaching 9 million, jobs already, and I've put "already" down because I don't believe we're anywhere near through the crisis. I think this is 1931; that is, we're 2 years into the crisis and we could very well see continued job loss for many years. But, even if we only take the official projections of the so-called experts who do believe that we're starting on the road to recovery, even they agree that unemployment is going to remain high for years. So even if it doesn't get worse, they are saying the best case scenario is very high unemployment for a long time.
[00:03:00] The lost opportunities from this period - Warren [Mosler] was talking about the lost output and so on; of course we've got that. But we also are losing opportunities for people who should have been coming into the labor force in the past two years, for example, my college graduates, who are finding it very difficult to get any kind of job, much less a decent job. We have people who have had to take part-time employment rather than full-time employment, and of course career advancement has been hindered by the downturn. So there are lots of lost opportunities because of the crisis.
[00:03:42] I think that if we do a careful assessment of the number of jobs that we need right now, it's probably well above 20 million jobs, because not only do we have to replace the jobs that have been lost and make up for the jobs that should have been created to take care of the people who would have come into the labor force if it had been operating at a higher capacity, but also, even if the business cycle peaked back in 2007, we were nowhere near full employment.
[00:04:15] So, to provide enough jobs to take care of those, and get us to something close to full employment, we're going to need 20 million jobs, well over 20 million jobs probably. And just contrast that with what Obama was promising when he came into office: We're going to either create or save 2 to 3 million jobs. Obviously it's far too little. Nobody really is looking at big enough numbers. I am told by by people who work with politicians in Washington that a new jobs bill is still possible, but they're talking about tens or maybe hundreds of thousands of jobs. It's not going to be adequate. Nobody is thinking on the scale of the kind of program we need. We need a massive number of jobs.
[00:05:07] Now the problem is that Washington during the first two years of the crisis really wasn't focused on job creation; it wasn't focused on Main Street. We all know it was focused 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.
[00:05:47] And so I think that this confusion about what's affordable has become the major barrier. Now there always is a barrier to proposing this program. We've always encountered resistance to the idea that the government should be responsible for ensuring full employment, and we'll try to make that case. But now, this affordability, and, oh no, we've already spent so much money on Wall Street that we can't possibly afford a reasonably-sized employment program, that now the deficit hysteria is the main barrier to getting us out of this deep recession that I think will continue for many years. So, that is sort of our short-run unemployment problem, dealing with crisis and getting things going.
[00:06:38] But we have had a long-run employment problem, and that really results from two really different causes. First is, and Bill [Williams] was alluding to this, and this is dealt with in his book that I mentioned, that unemployment came to be used as a policy tool. That is, unemployment was not a problem to be tackled by government policy, No, unemployment became the policy tool to deal with the supposed problem of inflation. So, policy actually was targeting unemployment, using that to keep inflation rates low. And so I know all the economists or anyone who studied economics, knows about the NAIRU approach; we're trying to get unemployment up high enough that it will prevent inflation or prevent inflation from accelerating. And so that is the use of unemployment as a buffer stock. That is, and Warren [Mosler] described this process, those unemployed people are supposed to help keep wages from rising. And then that helps keep the pressure off prices and so it keeps inflation low. Or, Marx called it the "reserve army of the unemployed." And so it's sort of ironic that you had people like Milton Friedman adopt a Marxist ideology that we need that unemployed "reserve army" to keep labor in check. OK, so that was one aspect of the problem.
[00:08:26] And then there is another aspect, a structural unemployment problem. I'm not going to read the long quote here, but the ILO has produced a lot of research on structural unemployment, and they noted in 2007 -- the date is important because this is at the peak of the business cycle -- that we had 200 million unemployed people around the world. No doubt this is a vast undercount, OK, I don't want to argue about that, but obviously it is a very large number, and they emphasize this is in spite of strong economic growth. And unemployment -- every region in the world has to face major labor market challenges.
[00:09:11] So what they're saying is that strong economic growth is not a solution to this unemployment problem. It is going to exist -- even with strong economic growth. OK. And why is that? It is because growth fuels productivity growth, which they said averaged 26% up to that business cycle peak over the past decade, on average around the world, but jobs had only grown by 16.6%. And meanwhile, of course, populations are also growing, and so the unemployment problem is becoming worse in spite of very strong productivity growth. In fact, it's not "in spite of," it's "because of."
[00:09:56] It's because labor is becoming more productive that we don't need as many workers in order to have economic growth. And again, the economists in here will recognize this is David Ricardo's machine problem. So David Ricardo pointed this out back in the 1820's. He said this is going to be a continuous problem, that through labor-saving technological advance we are going to create a growing pool of unemployed labor that we can't put to use. So Ricardo was very pessimistic about the long-run outcomes. We were able to put this off for a very long time because we were able to find ways around this problem by opening up new markets, creating new sources of demand. But it has become a chronic, global problem that growth alone will not create enough jobs. OK.
[00:10:52] So what do we think should be the goals of a sovereign government? Now I think there are many. We have mentioned several times that we conceive of, in John Kenneth Galbraith's terminology, there is a public purpose, so there are things we want the government to provide for us. OK. Maybe we want decent social security for the aged, but taking a step back from that, and just saying in the most general terms possible, what are the most important things that a sovereign government should do for us? Well, it ought to insure that we have full use of domestic resources, and it has the fiscal capacity to do this. Economic growth and promoting economic growth alone is not going to give us full capacity use.
[00:11:48] 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 [Mosler] 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. OK, so, what we're trying to do is to promote a program that can give you full employment with price stability, OK, and that this should be the goal of sovereign government. And our argument is that it has the capacity to do this.
[00:12:58] OK, Bill [Mitchell] sort of got into this in his last comment, and because I presume most people here are not academic economists what I'm going to say is pretty obvious to you, but to academic economists this is all new. Now, they recognize [laughter] that unemployment does have a cost, and that is, OK, you don't fully utilize, you get these open gaps, as Bill was talking about. All right, we lose some net income because those people could have been working and earning income and producing goods and services, GDP could have been higher. And so that's what economists focus on, and it's significant. And as Bill and Warren [Mosler] have been arguing, the losses in the past two years are just tremendous in terms of lost GDP. OK, so that's one thing.
[00:13:52] But... the sociologists and political scientists would point to these other things, which are also huge, and they are almost always ignored by economists. OK, just run through very quickly: poverty, social isolation, crime, regional deterioration -- because unemployment usually is regionally concentrated and all the Americans know we can identify parts of the country that suffer from unemployment to a greater extent than others -- health issues, family breakdown, school dropouts. You know, this is well established in the literature outside economics. It promotes violence, ethnic hostility, even terrorism. The loss of human capital, because when people are unemployed for a long periods of time they become unemployable, partly because of behavioral changes, but also because of the way that potential employers perceive them. Two years unemployed, I don't want to take a chance on you. So, whether it's a real human capital loss or a perceived capital loss, it will prevent them from having the same job opportunities they would have had if we hadn't gone through this two year period. OK, and hysteresis: long-term unemployed become unemployable because of all these things I'm mentioning here. You become homeless and this is going to have a very long-term impact on your employability.
[00:15:33] OK, benefits of full employment. Again, the economists are going to point to the first one: They produce goods and services, they add to GDP. Of course that is a big benefit. But there are lots of other social and political benefits of achieving full employment. On the job training and skill development... If you are employed you will be increasing your human capital. Poverty alleviation -- I'll mention this again in a few minutes. Community building, social networking. Pavlina [Tcherneva] 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 Matt 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.
[00:17:05] OK, we went through a period similar to what we're going through now, and of course we had two major reforms that I think had a huge impact on our experience in the post-war period. The first was that finance was downsized and constrained. Read John Kenneth Galbraith's The Great Crash, and it will sound extremely familiar. The account he gives, the kinds of financial institutions, innovations, practices that were all put in place, the rising inequality, the growth of finance, all previous to the 1929 Crash, sound an awful lot like what we went through in the past decade. OK. Anyway, we massively downsized finance, and mostly that was not the government downsizing: The markets downsized it. This time around we prevented the markets from doing the downsizing. Markets wanted to downsize Wall Street, OK; and if we had left them alone they would have done it, but we stopped them this time. And then we constrained them, and this helped to promote financial and economic stability in the post-war period.
[00:18:26] The other kind of reform that we had was the direct job creation. We created about 13 million jobs in the alphabet soup of programs that we had, so I've listed some of these here, and the unemployment rate was greatly reduced by these programs. And Marshall [Auerback] has written on this, because I know some writers have argued that it didn't reduce the unemployment rate, but that's because they counted these 13 million people as still unemployed even though they're showing up to work. So it really was a political decision, made now, to understate the true impact of the New Deal.
[00:19:08] Now the problem is that gradually this first reform was eroded in the post-war period because financial institutions found ways around the constraints, which of course is natural profit-seeking behavior. By growing competition from unregulated financial institutions, the so-called shadow banking system, and a regulatory response to that: Oh, the commercial banks, that are heavily regulated, can't compete with the shadow banks, that are lightly regulated, so we need to reduce the regulations. OK? So for all those reasons we got rid of most of the New Deal constraints on finance.
[00:19:50] And, of course, the problem with second, the direct job creation, is that in the post-war fairly rapid economic growth we came to believe we don't need these programs. Growth alone, trickle down, rising tide raises all boats, and all these arguments that the growth will create the jobs so we don't need the government to engage in direct job creation.
[00:20:17] 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 [Mitchell] 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.
[00:21:12]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, OK. But it did commit the government to trying to maintain a low unemployment for most groups, if not full employment.
[00:22:12] 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.
[00:22:47] OK, so he predicted that the financial institutions are going to gradually break free of these constraints and they're going to engage in riskier behavior. And he also foresaw that we could start to get inflationary pressures building even before we get to full employment in this kind of economy. I don't have time to go into that. But, anyway, in 1962, in spite of this golden age, the US rediscovered poverty, found out that actually we still had poverty in 1962. And so this was sort of a shock in Washington. It's a book by Michael Harrington [that] pointed this out.
[00:23:34] And so they decided that we needed a war on poverty, and Minsky actually was involved in this War on Poverty. He was close to Shriver and Hubert Humphrey, and he wrote lots of letters to them, and actually wrote papers and was writing a book on poverty and employment at this time (he was at UC-Berkeley), and he said the problem with the war on poverty is that you're focusing on the supply side, you're trying to stimulate the supply side, economic growth is going to create jobs, and then we just need to make sure we have workers that are ready for the jobs. So we need to emphasize more training, and getting people to change their behavior, get rid of the culture of poverty, the Moynihan thesis, and so on. And then we'll have welfare for the people who aren't able to work. OK, So that's what the War on Poverty was.
[00:24:28] Minsky said this is going to fail. And he wrote letters to all these people, and they say the war on poverty is not going to reduce poverty. It's going to fail. Why? Because, first, it's demoralizing: You're telling people who are unemployed -- and poor -- that you've got to reform yourself first, OK, and then maybe you'll be able to get a job. Without supplying them a job. So even if they did it, even if they went to school, got educated, got training, we're not creating any jobs for you. OK? There was no significant job component in the War on Poverty, and Minsky calculated that if we just supplied one minimum wage job to each poor family we would lift two thirds of all poor families out of poverty. Even if the minimum wage pays a total annual income below the poverty line, the family is still getting income from other sources. And so he actually went into the data and calculated one minimum wage job per family would eliminate two thirds. So, instead of the War on Poverty, he said, give 'em jobs. You'll get rid of two thirds of poverty. Later Stephanie [Kelton] and I calculated the same thing in the Clinton boom, came up with exactly the same number. One minimum wage job per family would eliminate two thirds of poverty. OK.
[00:25:53] The final objection that Minsky had was, he said, OK, you're going to provide welfare, maybe that's a good thing. 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. Yes, we gave welfare, but it was never enough to lift a family out of poverty. What we really needed to do is give them jobs. And Americans, he argued, will support that. Americans believe that if you work you ought to be able to get out of poverty. But Americans don't support giving welfare to lift people out of poverty. Now the poverty rate did fall, and some people have wrongly said it was the War on Poverty, but it wasn't. It had nothing to do with it. If you actually look at the data, the reduction of poverty rates from 1962 to 1973, which was a large reduction of the poverty rate, fell almost in half, it was almost entirely due to Social Security payments to the elderly. So we greatly reduced the poverty rates to the elderly. That had nothing to do with the War on Poverty, OK; it was Social Security. And the other was the civil rights movement that increased the labor market outcomes, mostly for African Americans, OK, and that was a long-term trend actually, That had had been going on since World War Two; it was just a continuation of the trend. And actually, for African Americans, the poverty rate continued to fall until Reagan. For the US as a whole, it stopped falling in 1973. OK. So, anyway the War on Poverty did fail, just as Minsky argued that it would.
[00:27:39] OK, from '73 forward, the US, and -- Bill [Mitchell] 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.
[00:28:55] 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. OK, so it's actually going to reduce ownership in society.
[00:29:23] 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.
[00:30:22] 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.
[00:30:57] Now Pavlina [Tcherneva] is going to take over and talk abut the specific policy proposal.
audio available here