Monday, October 31, 2011

Job Guarantee: Zero Unemployment Without Causing Inflation

Once when I was explaining Modern Monetary Theory(MMT) to someone in person, she asked me in a very irritated tone, "what is your point?" I realize now that getting too far into the details about government spending, trade deficits, and bond markets can make some people's eyes glaze over without assuring them that the end goal is worth it. So today I'd like to introduce one of the primary policy goals that most economists of the MMT school advocate. You see, once you realize that the federal budget is constrained by inflation, not revenue, that bond vigilantes raising our interest rate isn't a real thing, and there is no such thing as a crowding out effect, new policy options become available in the fights against unemployment and inflation.

One of the primary policy goes of most MMT economists is a Job Guarantee. Sometimes we'll refer to it as a Federal Job Guarantee(FJG), Employer of last resort(ELR), Labor Buffer Stock, etc... It's all basically talking about the same thing, A job guarantee. A job Guarantee would be a permanent job offer from the federal government to all citizens of a certain age for a basic wage to anyone who is ready, willing, and able to work.

The first thing to know is that heading into this discussion you should already understand that the federal government is constrained by inflation, not revenue. The United States, like any country that controls it's own currency cannot be forced into default. Therefore, we can do "radical" things like setting our own price and letting the market decide quantity. As opposed to setting the quantity we want to purchase and letting the market decide price. That is what a job guarantee does. Instead of asking for x number of workers and letting the market determine how much we pay them, the federal government can say we will pay any worker y wages, and let the market decide how many people will take it. The amount of money spent is irrelevant as long as inflation is controlled.

So how will a Job Guarantee achieve both full employment and price stability? Well, first of all, it will, by definition, eliminate unemployment. Everyone who is ready, willing, and able to work will be able to get a job that is funded by the federal government. That pretty much wipes out unemployment as we currently define it. Of course, there will be some people who refuse the job offer because they'd rather spend time looking for higher paying work. There may be others who refuse to work at the set wage. That's fine. The program is meant to be completely voluntary.

Now, why won't something like this be inflationary? Wouldn't the increased expense of the program increase inflation? The answer is no. Because the program would never demand more labor than is available, it would be impossible for it to cause "demand-pull" inflation. In a recession, employment and aggregate demand decrease which has a deflationary effect. However, with this program in place those workers have the ability to get a job from a job guarantee which would counteract the falling demand. Sure, the increased federal spending could be inflationary, but it's more than offset by the falling demand caused by the recession.

What about during economic expansions? As the economy recovers people leave the job guarantee program and enter the private workforce for more money. People leaving the program would cause government spending to go down which would cause deflationary pressure, but would be offset by the potential inflationary pressures of a rapidly expanding economy with rising wages.

*poof!* You now have full employment with non-accelerating inflation. You know, when I first started writing this diary, I thought it was going to be long and complicated, but it's not. It really is so simple that it can be summarized in about 4 paragraphs. Now... time for all the caveats and frequently-asked-questions.

Are you saying there won't be inflation?
No. I'm not saying that inflation can't still occur in the economy. There could still be cost-push inflation(like oil prices). There could still be demand-pull inflation if some commodity other than unskilled labor is in short supply. The point is however, we can give everyone a job, without causing accelerating inflation.

One more caveat about inflation. Depending on what we set the "Basic Wage" to be, it could cause a one time hike in prices. If the basic wage is set to be higher than the current minimum wage, then that could cause a 1 time rise in inflation. That's because whatever the basic wage is will also be the minimum wage. The reason? Most people aren't going to work for less money in the private sector if the federal government is offering them more. While there might be individual cases where a person may choose to work for less(a "fun" job or with the promise of future pay, like an internship), most will choose the better pay. So, while there might be a one-time rise in prices when the program is put into place, it won't last and will eventually lead to stability.

If unpaid for, How can it not be inflationary?
This is the last thing I'll say about inflation. When you add up all the benefits, it's extremely easy to imagine how A "job guarantee" program could actually be less inflationary than what we currently do with our unemployed workers.

First, There's the automatic stabilizing effect that I talked about above so I won't repeat myself.

Second, the unemployed will be working instead of doing nothing. Right now unemployment pays people to not work. The job guarantee puts them to work. Not only them, but the part time "underemployed", the discouraged workers, and maybe even those who have never worked before. With all these people doing something, even semi-useful, it's better than doing nothing.

Third, a lot of the cost of the program will be offset by a reduction in spending on other social programs. As it turns out, when people work, they need less government assistance.
Fourth, there will likely be faster movement of workers from the job guarantee to the private sector than under our currently unemployment regime. Even if you don't believe that SOME(not all, not most, but some) people will take their unemployment until it runs out before getting a new job, you have to recognize that employers are hesitant to hire someone who has been unemployed for a long time. They believe that people lose their "good work habits". In a job guarantee regime that won't happen because people will be working.

What programs could be eliminated?
The program is not meant to replace any existing government assistance such as food stamps or medicaid. While many households could be brought out of poverty if only 1 more adult started working full time, it will not work for all households. So while the program might reduce the size of other programs, it will not completely eliminate their function.
Even the concept of unemployment wouldn't necessarily go away. You would still want people to spend some time looking for a new job before entering the job guarantee program. However, there could be a move to reduce the number of weeks that unemployment is offered. Once anyone can get a job, they won't need to rely on unemployment checks. Plus, depending on what the basic wage is set too, they would benefit overall by being paid more than what unemployment benefits pay them.

What will these people do?
More often, this question usually comes from conservative leaning people. I guess only a conservative could look around this country and say, "eh, there's nothing that needs to be done". However, occasionally a left leaning person will ask the slightly more intelligent question, "with so many unemployed and underemployed are you sure we could find work for everyone? Let me assure you, there is always more work to be done. First, look up everything done by the WPA. If looking at that doesn't convince, let's list a few more jobs that almost any worker would have the basic skills that are required.
  • Reading to Children at the library.
  • Library assistant. If they know the alphabet and their numbers, they can haul around books and put them away.
  • Teacher's assistant: Grading multiple choice tests and making copies
  • Low level aid for elected officials. Every office could use an intern
  • Neighborhood watch. Bunch people into groups and have them patrol neighborhoods and report to police anything they see.
  • Clean and maintain Parks and playgrounds
  • Clean graffiti
  • Pickup litter from the streets
  • Dig trenches to bury electric wires
  • Plant trees along major highways
Those are just jobs for low to unskilled workers. The possibilities are endless if someone shows up for a job that has a particular skill. You could pay musicians to give free performances at local venues, a handyman could repair dilapidated public buildings, child care professionals could open a free or low-cost day care. Better yet, You could pay those with skills to teach those skills, and pay the "unskilled" workers to learn them. I'm not saying that these workers would do all, some, or any of these things. The point is, if you spend 10 minutes thinking about it, there are a lot of things that can be done.

What if somebody never leaves the Job Guarantee program?
So? Seriously, so what? If someone wants to work for minimum wage for the rest of their lives, it isn't going to hurt you and I one bit. In fact it just means we'll have a very experienced public worker working for minimum wage, so it would be beneficial to society if this happened. We should thank the individual for not demanding more money and moving to the private sector.
But won't people [insert scheme to cheat the system]?
There is always the possibility for people to 'game' the system. When it happens we'll just have to be nimble enough to recognize it and correct the problem.

You'll be replacing existing jobs
This is a strong concern for many. However, I think it's not a likely scenario. The Job Guarantee "employees" will have a very high turnover rate. Jobs that require a large amount of knowledge and experience could not be replaced by people who may only be there 3 weeks and could quite without a single day's notice.

How would the program be administered?
There is no strong consensus on how to structure the program. Most MMT economists who want to be apolitical just say, "that's a political question". Less cautious individuals give some suggestions. Some advocate it being managed nationally like the WPA. Others think it should be administered by states. Others by non-profits. Those details aren't as important as buying into the idea of a job guarantee. Once we all can agree on the idea, we can start talking specifics - I have my own thoughts on that topic. The only requirement is that no matter how it's administered, it must meet the 2 most important criteria: One, everyone can get a job that is ready, willing, and able. Two, the jobs must be completely federally funded.

What will the "Basic Wage" be?
The basic wage should be what a full time employee needs to live. I don't know what it would be, but I think it should higher than what our current minimum wage is, but that's just my opinion. Also, the basic wage should not be inflation indexed. Otherwise it'll spiral upwards and downwards along with the economy instead of providing an anchor for prices. Of course, congress can change the basic wage at any time, but it should not be automatic.

People will be lazy and not work if the job is guaranteed
This is a very common critique. One that has a simple answer. Give whoever is administrating the program the authority to fire people. We can get into the details of how it would work, but just because you are willing to hire anyone who wants a job, doesn't mean that you can't also have the ability to fire them. If people don't show up, or don't do the work they are assigned - as long as they are capable they can be fired. Depending on how the program is setup you can have other rules like, once fired you can reapply for the job guarantee for a specified amount of time. Other rules would have to be in place to prevent discrimination as well. The point is, there are simple ways to solve the incentive problem without violating the spirit of the job guarantee.

zOMG!  Communism!  USSR!
Communism, you couldn't be fired.
Communism, you can't leave the job and join the private sector for better pay.
Communism, you get paid the same as those in other industries.
None of these things apply to the job guarantee.  You can be fired, you get paid the least(so you have every incentive to leave to work in the private sector), and the work is voluntary.  It is only a last resort for people who can't get work in the private sector.

Finally, I want to say something about the intangible benefits of the program. There will be intangible, nearly impossible to measure benefits to the system as well.
1. Stronger Families. A full time job, even minimum wage job will bring many families out of poverty. Poverty and unemployment has been observed to correlate with kids not doing well in school, and putting strains on marriages.
2. Dignity. Those who depend on the government will have a real chance to have a job and earn the pride that comes with a paycheck.
3. Economic Security. Everyone will know that, worse comes to worse, they can get a government job and at least they can earn enough to feed themselves.
An entire book could be written on a the Job Guarentee so I can't fit everything into one diary. Other aspects to be explored are comparing it to our current inflation fighting techniques, exactly how it can be structured, and other angles. There will be followup posts on the topic.
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