by Hugo Heden and John Lounsbury
John Carney, a senior editor at CNBC.com, has been writing a series of articles about the job guarantee (JG) aspect of what is known as Modern Monetary Theory(MMT). The JG is also known as the employer of last resort (ELR), a concept often associated in modern times with economist Hyman_Minsky.
On December 29 Carney posted an article which has raised a vigorous response from many MMT protagonists. The specific three issues Carney raised were really presented as statements of fact as follows:
- It’s massively inflationary.
- It’s a bureaucratic nightmare.
- It’s economically stagnating.
There has been a great deal of discourse in informal discussion groups on the internet, including one that we have participated in hosted by Roger Erickson. A flavor of some of the problems that the proponents of MMT have with Carney’s three statements can be sampled in the comment stream following the article.
In this article, which developed from our discussion in the Erickson group, we hope to bring together some of the salient points related to Carney’s three statements and attempt to establish some positions that address arguments against their validity.
Carney suggests that a JG program would be “massively inflationary”.
MMT proponents acknowledge that at the point in time the JG program is introduced there could be price distortions, but these would be less than would occur with the same level of aggregate demand without JG. See Wray and Mitchell, page 7.
If there is considerable slack in the economy (businesses have problems with low sales and operate below full capacity etc.) an increase in aggregate demand should in fact not be inflationary according to MMT proponents and other economists.
Businesses running below capacity are likely to meet increasing demand by increasing output — not prices. See “Painstaking, dot-point summary – bond issuance doesn’t lower inflation risk” (Mitchell). (Apparently, this is a conclusion that follows partially from results presented by neo-classical economist Alan Blinder in his book “Asking About Prices”.) The rationale for opting to increase output is to not lose market share – or even increase it; raising prices (instead of output) while competitors keep their prices constant is risky for any business.
Anyhow, for the sake of argument say instead that JG is introduced when the economy is running at “full capacity” (with say 5% unemployment) at a point at which an increase in aggregate demand would indeed be inflationary. Bill Mitchell has called this the “inflation barrier” (Mitchell, ibid). This is somewhat akin to an unemployment level the mainstream calls NAIRU. See Wray and Mitchell, page 8.
Say that the introduction of JG results in an increase in (nominal) aggregate demand stressing capacity constraints. In that case, taxes could be raised somewhat to compensate — and inflation would not result.
There is also the option of letting aggregate demand increase, accepting a bit of inflation. After a while, prices should stabilize. The inflationary episode should be a once-off, continuing only for a limited period of time. Why? Because during an inflationary episode, prices and wages are rising — but the JG “pool” of workers that businesses can hire from remains at a constant floor wage level. As the discrepancy between nominal wages in the non-JG sector versus JG-sector increases, it will be cheaper and cheaper for businesses to find good labor from within the JG pool to hire.
So what happens then? The size of the JG “pool” decreases while the capacity of the private sector expands. That is — the government deficit spending decreases which dampens aggregate demand, except to the extent that production increases. Ultimately, prices should fluctuate around a new level supported by increased private employment and with reduced government JG support.
This is, say the MMT proponents, the way in which the JG program acts like a “nominal price anchor” and “automatic stabilizer”, much like unemployment benefits do. During an economic slump, the JG program causes government deficit spending to automatically increase. In a boom, deficits are automatically decreased – The JG program automatically (partly) offsets fluctuations in private sector spending (commonly known as “business cycles”). This is similar to how unemployment-benefits work as an automatic stabilizer for the economy.
Carney’s argumentation rests on the statement that the JG program adds to aggregate demand, while the “work product is largely waste” – and an increase in demand without a corresponding increase in “supply of desired goods” is inflationary.
We will note that the JG output should be useful, and absolutely not “largely waste”. Examples would be environmental restoration, urban development, social work or infrastructure repair, maintenance, development.
But ignoring that, MMT does not accept the theory of inflation invoked by Carney. As indicated above, MMT proponents hold that an increase in aggregate demand is likely to be inflationary (like Carney suggests) when the economy already operates at full capacity. But when there is slack in the economy (aggregate demand is considerably lower than the “inflation barrier”), an increase in aggregate demand would not be likely to cause prices to increase. Instead, to meet increased demand it is output that would increase – in a move toward greater capacity utilization. This is an entirely good thing.
Carney indicates that a Job Guarantee scheme would be a “bureaucratic nightmare”, as that creating 13.5 million (the number referred to as the currently unemployed) jobs would be “impossible”.
First, an MMT aware regime would use other means to stimulate the economy — all the way to the inflation barrier. The end result would perhaps be a JG pool fluctuating around a few million.
Yes, there will be bureaucracy. The current system has its flaws too though. Mass unemployment results in huge permanent losses every day in foregone output and income. Add to that the depreciation of human capital, increasing family breakdowns, child abuse, crime, medical costs, skill loss, psychological harm, ill health, reduced life expectancy, loss of motivation, racial and gender inequality and loss of social values and responsibility. The personal, family and community losses are enormous and persist across generations. See MMT Wiki.
In the light of this, a bureaucratic burden seems a reasonable price to pay. And the bureaucratic structure is already in place – unemployment insurance benefits administration which would largely be replaced by JG administration. Unemployment benefits would not be paid to the unemployed, they would be paid to those temporarily entering the JG programs.
It should be noted that the idea is not for the federal government to “central plan” the millions of jobs that may be needed. This is best done locally by charities, environmental organizations, other non-profit groups and possibly by local businesses. The role of the federal government is solely to finance the program and not to define what job training assignments are needed.
3. Economic Stagnation
Carney claims the jobs program would inhibit movement of people into productive new lines of work. He wrote:
Economic booms are often characterized by malinvestment–people dedicating capital to projects that turn out not to be economically sustainable. This is true not just of financial capital—it is true of human capital as well. People learn trades and develop career networks that turn out to be worth far less than they expected.
Unemployment encourages those who went into trades that turn out to lack adequate demand to give up those trades and seek another. This is economically productive because it brings stagnate resources—people who can do things no one will pay for—out of stagnation.
The Jobs Guarantee would eliminate this process. The government would buy the labor of people who hold skills not demanded by the market, preventing those people from seeking out new skills. Stagnant human capital would just continue to stagnate.
Carney’s statements are assumptions rather than facts. He assumes that the jobs program would provide no avenues to new skills for those with skills no longer needed. He could just as well assume that the JG program would provide employment that would be directed toward areas were skills are lacking and that part of a JG position would actually involve retraining.
Indeed, the JG could be integrated into a coherent training framework to allow workers (by their own volition) to choose a variety of training paths while still working in the JG. The retraining could be in skill areas that private industry specifies have shortages of qualified workers. If there are no such shortages in private industry, then Carney’s stagnation would be occurring in spades, with or without a JG.
If private industry has no shortages in any skill category, we would argue that feeding these unemployed a stream of unemployment insurance benefits and then allowing them to drop off the end after 26 weeks, 52 weeks or 99 weeks offers no opportunity for re-employment at all. Contrarily, the capacity and skill level of unemployed workers has been shown to deteriorate over time.
There is also a hysteresis effect in business cycle downturns, meaning that yet more workers finally become unemployable or give up seeking work. In that sense, they are dropping out of the “pool of unemployed” at “the bottom”. This reservoir at the bottom becomes the real stagnation risk of a downturn, where the long-term unemployed have no way out.
Since a certain number of job-seeking unemployed (or JG-workers if a JG program is implemented) is required to discipline wage demands, this leads to ever larger numbers of fresh unemployed or underemployed being required — in order to maintain the inflation fighting effect of the “unemployment pool” when demand starts to increase. See MMTWiki – Full Employment along with Price Stability.
A JG program, on the other hand, would offer skill maintenance or retraining, considerably increasing likelihood of re-employment, and of finding skilled job-ready workers as needed for business.
We thus argue that a mass unemployment system should be far more economically stagnating than a JG based system.
John Carney is not a lone voice in raising the issues he has articulated. From Wray and Mitchell, ibid there is a list of those who have raised the same issues. Here is a list from that paper:
- Aspromourgos, A. (2000) ‘Is an Employer-of-Last-Resort Policy Sustainable? A Review Article’, Review of Political Economy, 12(2), 141-155.
- Kadmos, G., and O’Hara, P. (2000) ‘The Taxes-Drive-Money and Employer of Last Resort Approach to Government Policy’, Journal of Economic and Social Policy, 5(1), 1-
- King, J.E. (2000) ‘The Last Resort? Some Critical Reflections on ELR’, Journal of Economic and Social Policy, 5(1), 72-76.
- Kriesler, P. and J. Halevi (2001) ‘Political Aspects of ‘Buffer Stock Employment’, in E.
- Carlson and W.F. Mitchell (eds.), Achieving Full Employment, The Economic and Labour Relations Review, Supplement to Volume 12, 72-82.
- Mehrling, P. (2000) ‘Modern Money: Fiat or Credit’, Journal of Post Keynesian Economics, 22(3), 397-406.
- Ramsay, A. (2002-3) ‘The jobs guarantee: a Post Keynesian analysis’, Journal of Post Keynesian Economics, 25(2), 273-292.
- Sawyer, M. (2003) ‘Employer of Last Resort: Could It Deliver Full Employment and Price Stability?’, Journal of Economic Issues, 37(4), December, 881-907.
The Wray and Mitchell paper presents a thorough analysis of these issues in response to the papers listed above. The arguments we have presented here are a non-academic discussion of some of the factors as we perceive they have evolved since the 2005 paper by Wray and Mitchell with a few links to discussions presented since 2005. We have not tried to make a thorough search of the literature. If a reader recognizes research since 2005 that would bear adversely on the Wray and Mitchell results we hope they will point such work out to us.
Our conclusion is that Carney appears to be a captive of his assumptions rather than a critical analyst when it comes to the JG (Jobs Guarantee) concept. We do not feel that we can prove his three statements are wrong under all scenarios but we think it is clear that he is not correct in many realistic situations.
About the Authors
Hugo Heden is Swedish and lives in Stockholm, Sweden. He has worked for nine years at the Swedish Defense Research Agency, mostly with computer science issues, air warfare and software warfare simulations. His free time is spent way too much on trying to understand and explain MMT. There is also time for the occasional (or rather frequent) visit to the local coffee shops.
John Lounsbury is Managing Editor of Global Economic Intersection.