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ALTERNATIVE FISCAL POLICIES: WHY THE JOB GUARANTEE IS PREFERRED by Pavlina Tcherneva
A few weeks ago I called for a technocratic debate on the merits of the JG, relative to other fiscal policies. A number of bloggers took the charge but the debate was not immune to ideological biases, which proved the starting point of my piece that one cannot separate fact from theory or ideology (and by ideology I do not mean the derogatory use of the word, but that which signifies ‘ontology’ or a ‘world view’). What I didn’t expect is for friends and sympathizers to resurrect one particularly invidious charge we have long heard from MMT deniers, namely that MMT is pushing authoritarian policies.
Oh, boy. How did we even get here? I thought this was going to be a technocratic debate.
Let me deal with just a few issues here: 1) the seeming resurrection of status quo fiscal policies, 2) the merits of JG compared to other fiscal policies, 3) some additional real-world evidence on the benefits of direct job creation, and 4) offer a vision for a JG in a free and democratic society.
1)Why defend the status quo?
The criticism of JG boils down to unproven claims that it will impose hidden costs on firms and competition, have a negative impact on incentives to work, wealth creation and productivity, and will lead down the path to socialism. After all, great prosperity had been achieved under the old system, so why change it? 100 years ago the same arguments were made in opposition to 8-hour workdays, 5-day workweeks, child labor, mandated vacation and today they are made against paid family leave, living wages, etc. So there is nothing new in the critics’ claim that JG would reduce incentives, productivity or growth.
Indeed these are not arguments against the JG. They are arguments for the status quo. Those who support MMT, but not the JG, say that they favor more deficit spending in the form of pro-investment, pro-growth, pro-productivity policies, coupled with strong public infrastructure and education investment and income support to the poor and unemployed. But all of these policies are the status quo, even if proponents are demanding more funding for them. They are the status quo because they have been tried with generous funding at one point or another in the postwar era and have still failed to solve the most important problems of modern society like poverty, income inequality, short and long-term unemployment, instability, deteriorating incomes and on and on and on.
I am baffled why JG critics who nevertheless sympathize with MMT have embraced the neoclassical definition of full employment in the presence of volumes of literature on the problems with this definition and the fundamentally flawed theory behind it. They are suggesting that policy should target a ‘full employment’ rate consistent with 4% unemployment. Note that for MMT scholars, full employment is a condition where everyone who wants to work has a job, not a condition where 4% of the workforce wants to work but cannot find employment. With respect to policy, JG critics have been arguing that government spending should be based on ‘new’ fiscal rules that deliver the desired unemployment rate.
Why are we reinventing the wheel? There is 80 years of literature deriving from an approach known as Hydraulic Keynesianism that already thinks that full employment is equal to some level of bufferstock unemployment (known as the NAIRU), thereby assuming away much of the problem of unemployment. Priming the pump up to that bufferstock unemployment level based on some version of Okun’s law is the hallmark of the ISLM approach and all of its modern neoclassical descendants who favor fiscal policy intervention (btw, Okun himself cautioned that the link between output and employment growth is very tenuous). We have volumes and volumes of analysis critiquing the macro-theory underpinning the Hydraulic Keynesian approach but suddenly we are resurrecting it?
What is the new contribution in the proposed policies by critics of the JG? The idea that governments can spend without facing budget constraints? That’s not new. The ISLM economists of the postwar era who took Lerner seriously knew this all too well. Even modern New Consensus economists seem to understand this (see Woodford and Bernanke’s work). Or is it the idea that we can spend on a ‘new’ fiscal rule that fine tunes the economy? That’s just old wine in new bottles. Automatic hydraulic fiscal policies that adjust spending and taxation throughout the business cycle are the trademark of postwar fiscal intervention that has not delivered long term stability or full employment.
Priming the pump, whichever way you dress it, works extremely poorly. It is trickle-down Keynesianism, which erodes the income distribution and fails to address unemployment and poverty, no matter how well intentioned it is. If you want to get a job done, you do it directly. If private sector sales are too low, you provide demand. If the private sector still fails to create enough jobs for all, the public sector fills the gap through direct hiring. If firms pay poverty wages, the public sector establishes an above-poverty wage floor (minimum/living wage). If companies fail to provide health insurance for all, the public sector does. Fine-tuning is an inferior policy that is akin to shooting darts blindfolded—some of them will hit the target, some won’t, but a whole lot of time, effort, and resources will be wasted in the meantime. This was well understood by Minsky and Kalecki and anyone who reads them seriously understands the difficulties with fine-tuning policies, especially those that are pro-investment, pro-growth.
2)How direct job creation and the JG/ELR compare to other fiscal policies
In a recent Levy paper I use the insights of Minsky and Kalecki to demonstrate why alternative policies are inferior to direct job creation in general, and the ELR in particular. The paper augments the conventional Post Keynesian markup model to study the effects of different fiscal policies on prices and income distribution. Minsky often argued that in the modern era, government is both ‘a blessing and a curse’ – it stabilizes profits and output by imparting an inflationary bias on the economy, without stabilizing it at or near full employment. In this paper, I consider several distinct functions of government: 1) government as an income provider, 2) as an employer, and 3) as a buyer of goods and services. The inflationary and distributional effects of each of these fiscal policies differ considerably. First, I examine the effects of income transfers to individuals and firms (in the form of unemployment insurance and investment subsidies, respectively). Next, I consider government as an employer of workers (direct job creation) and as a buyer of goods and services (indirect job creation). Finally, I modify the basic theoretical model to incorporate fiscal policy a la Keynes and Minsky (JG, ELR, “on-the-spot-employment”), where the government ensures full employment through direct job creation of all of the unemployed unable to find private sector work, irrespective of the phase of the business cycle. The paper derives a fundamental price equation for a full-employment-economy with government. The model presents a ‘price rule’ for government spending that ensures that the ELR is not a source of inflation. Indeed, the fundamental equation illustrates how in the presence of such a price rule, at full employment, inflationary effects are observed from sources other than the public sector employment program.
Critics of the JG have to make a really good case why the status quo should be defended, how conventional fiscal policy should be packaged under the guise of a new fiscal rule to deliver stability and better socioeconomic outcomes than the JG. They need to explain why higher markups and worsening income distribution from pro-investment, pro-growth policies are preferable to giving jobs to the unemployed in a productive project. But please make your case like engineers would—on the technical and not on the political merits of these rules (there is no such thing as one policy being ‘less political’ than another), and not by making unsubstantiated claims that the ‘the JG is politically disastrous’. You also cannot falsely claim that we know nothing about how direct job creation policies work in the real world and what impact they have on the economy or the beneficiaries.
http://neweconomicperspectives.org/2012/02/alternative-fiscal-policies-why-job.html
A few weeks ago I called for a technocratic debate on the merits of the JG, relative to other fiscal policies. A number of bloggers took the charge but the debate was not immune to ideological biases, which proved the starting point of my piece that one cannot separate fact from theory or ideology (and by ideology I do not mean the derogatory use of the word, but that which signifies ‘ontology’ or a ‘world view’). What I didn’t expect is for friends and sympathizers to resurrect one particularly invidious charge we have long heard from MMT deniers, namely that MMT is pushing authoritarian policies.
Oh, boy. How did we even get here? I thought this was going to be a technocratic debate.
Let me deal with just a few issues here: 1) the seeming resurrection of status quo fiscal policies, 2) the merits of JG compared to other fiscal policies, 3) some additional real-world evidence on the benefits of direct job creation, and 4) offer a vision for a JG in a free and democratic society.
1)Why defend the status quo?
The criticism of JG boils down to unproven claims that it will impose hidden costs on firms and competition, have a negative impact on incentives to work, wealth creation and productivity, and will lead down the path to socialism. After all, great prosperity had been achieved under the old system, so why change it? 100 years ago the same arguments were made in opposition to 8-hour workdays, 5-day workweeks, child labor, mandated vacation and today they are made against paid family leave, living wages, etc. So there is nothing new in the critics’ claim that JG would reduce incentives, productivity or growth.
Indeed these are not arguments against the JG. They are arguments for the status quo. Those who support MMT, but not the JG, say that they favor more deficit spending in the form of pro-investment, pro-growth, pro-productivity policies, coupled with strong public infrastructure and education investment and income support to the poor and unemployed. But all of these policies are the status quo, even if proponents are demanding more funding for them. They are the status quo because they have been tried with generous funding at one point or another in the postwar era and have still failed to solve the most important problems of modern society like poverty, income inequality, short and long-term unemployment, instability, deteriorating incomes and on and on and on.
I am baffled why JG critics who nevertheless sympathize with MMT have embraced the neoclassical definition of full employment in the presence of volumes of literature on the problems with this definition and the fundamentally flawed theory behind it. They are suggesting that policy should target a ‘full employment’ rate consistent with 4% unemployment. Note that for MMT scholars, full employment is a condition where everyone who wants to work has a job, not a condition where 4% of the workforce wants to work but cannot find employment. With respect to policy, JG critics have been arguing that government spending should be based on ‘new’ fiscal rules that deliver the desired unemployment rate.
Why are we reinventing the wheel? There is 80 years of literature deriving from an approach known as Hydraulic Keynesianism that already thinks that full employment is equal to some level of bufferstock unemployment (known as the NAIRU), thereby assuming away much of the problem of unemployment. Priming the pump up to that bufferstock unemployment level based on some version of Okun’s law is the hallmark of the ISLM approach and all of its modern neoclassical descendants who favor fiscal policy intervention (btw, Okun himself cautioned that the link between output and employment growth is very tenuous). We have volumes and volumes of analysis critiquing the macro-theory underpinning the Hydraulic Keynesian approach but suddenly we are resurrecting it?
What is the new contribution in the proposed policies by critics of the JG? The idea that governments can spend without facing budget constraints? That’s not new. The ISLM economists of the postwar era who took Lerner seriously knew this all too well. Even modern New Consensus economists seem to understand this (see Woodford and Bernanke’s work). Or is it the idea that we can spend on a ‘new’ fiscal rule that fine tunes the economy? That’s just old wine in new bottles. Automatic hydraulic fiscal policies that adjust spending and taxation throughout the business cycle are the trademark of postwar fiscal intervention that has not delivered long term stability or full employment.
Priming the pump, whichever way you dress it, works extremely poorly. It is trickle-down Keynesianism, which erodes the income distribution and fails to address unemployment and poverty, no matter how well intentioned it is. If you want to get a job done, you do it directly. If private sector sales are too low, you provide demand. If the private sector still fails to create enough jobs for all, the public sector fills the gap through direct hiring. If firms pay poverty wages, the public sector establishes an above-poverty wage floor (minimum/living wage). If companies fail to provide health insurance for all, the public sector does. Fine-tuning is an inferior policy that is akin to shooting darts blindfolded—some of them will hit the target, some won’t, but a whole lot of time, effort, and resources will be wasted in the meantime. This was well understood by Minsky and Kalecki and anyone who reads them seriously understands the difficulties with fine-tuning policies, especially those that are pro-investment, pro-growth.
2)How direct job creation and the JG/ELR compare to other fiscal policies
In a recent Levy paper I use the insights of Minsky and Kalecki to demonstrate why alternative policies are inferior to direct job creation in general, and the ELR in particular. The paper augments the conventional Post Keynesian markup model to study the effects of different fiscal policies on prices and income distribution. Minsky often argued that in the modern era, government is both ‘a blessing and a curse’ – it stabilizes profits and output by imparting an inflationary bias on the economy, without stabilizing it at or near full employment. In this paper, I consider several distinct functions of government: 1) government as an income provider, 2) as an employer, and 3) as a buyer of goods and services. The inflationary and distributional effects of each of these fiscal policies differ considerably. First, I examine the effects of income transfers to individuals and firms (in the form of unemployment insurance and investment subsidies, respectively). Next, I consider government as an employer of workers (direct job creation) and as a buyer of goods and services (indirect job creation). Finally, I modify the basic theoretical model to incorporate fiscal policy a la Keynes and Minsky (JG, ELR, “on-the-spot-employment”), where the government ensures full employment through direct job creation of all of the unemployed unable to find private sector work, irrespective of the phase of the business cycle. The paper derives a fundamental price equation for a full-employment-economy with government. The model presents a ‘price rule’ for government spending that ensures that the ELR is not a source of inflation. Indeed, the fundamental equation illustrates how in the presence of such a price rule, at full employment, inflationary effects are observed from sources other than the public sector employment program.
Critics of the JG have to make a really good case why the status quo should be defended, how conventional fiscal policy should be packaged under the guise of a new fiscal rule to deliver stability and better socioeconomic outcomes than the JG. They need to explain why higher markups and worsening income distribution from pro-investment, pro-growth policies are preferable to giving jobs to the unemployed in a productive project. But please make your case like engineers would—on the technical and not on the political merits of these rules (there is no such thing as one policy being ‘less political’ than another), and not by making unsubstantiated claims that the ‘the JG is politically disastrous’. You also cannot falsely claim that we know nothing about how direct job creation policies work in the real world and what impact they have on the economy or the beneficiaries.
http://neweconomicperspectives.org/2012/02/alternative-fiscal-policies-why-job.html
