Mitchell’s laws: Reduced money growth never stimulates economic growth. To survive long term, a monetarily non-sovereign government must have a positive balance of payments. Austerity = poverty and leads to civil disorder. Those, who do not understand the differences between Monetary Sovereignty and monetary non-sovereignty, do not understand economics.
[Same caveat as always: I agree with most of Modern Monetary Theory. That said, I have certain quibbles.}
Based on comments I’ve received, both on this blog and in correspondence, there seems to be some confusion about what the MMT (Modern Monetary Theory) proposed JG (Job Guarantee) really is, and why it is .
The confusion about “what” revolves around the question: Who provides the jobs, the government or the private sector? That is, under JG, would unemployed people be able to work for, and be paid by, the federal government? Or would the federal government merely pay private industry to hire the unemployed? Or both?
Here is what Randy Wray wrote to Warren Mosler and me on January 11, 2012, regarding JG (formerly called “Employer of Last Resort” –ELR):
I do not know of any proposal that advocated creation of any new “company” or bureaucracy. I, personally, have never advocated any new federal govt jobs (altho I am not necessarily against that as a supplement). So I have no idea where you got these ideas.
At most, I have advocated federal funding, paying to a social security number (a private bank account); and using existing unemployment offices as necessary to help link workers to jobs. but I’m not sure even that is needed. I think we might need one new Federal government employee to run the program. Everything else is already in place.
O.K., that’s clear. Randy says the federal government would supply the money, and function as a kind of super employment agency, and private industry would supply the jobs. (Note that the former title, “Employer of Last Resort,” implies government jobs).
But wait. Here’s a summary from a writer who posted to Wikipedia:
The JG is based on a buffer stock principle whereby the public sector offers a fixed wage job to anyone willing and able to work thereby establishing and maintaining a buffer stock of employed workers. This buffer stock expands when private sector activity declines, and declines when private sector activity expands, much like today’s unemployed buffer stocks.
According to that writer, the government would supply the money and the jobs. I’m not sure there is an “official” MMT view on this. If ever a JG were instituted, it probably should be something like the Randy Wray version. It is much closer to the Monetary Sovereignty idea: Merely extend unemployment compensation.
All of this takes us to the stated purpose of JG: To create “full employment with price stability.” There is, in fact, a Center for Full Employment and Price Stability at the University of Missouri at Kansas City (UMKC), the heart of MMT in America. Clearly the association of full employment with price stability is an important part of MMT.
And here may be where Monetary Sovereignty (MS) truly diverges from MMT, for MS disagrees with the need for full employment and it disagrees with the use of employment to achieve price stability.
Here is what the Wikipedia author said:
A job guarantee (JG) is an economic policy proposal aimed at providing a sustainable solution to the dual problems of inflation and unemployment.
When private sector employment declines, public sector employment will automatically react and increase its payrolls. So in a recession, the increase in public employment will increase net government spending, and stimulate aggregate demand and the economy.
Conversely, in a boom, the decline of public sector employment and spending caused by workers leaving their JG jobs for higher paid private sector employment will lessen stimulation, so the JG functions as an automatic stabilizer controlling inflation. The nation always remains fully employed, with a changing mix between private and public sector employment.
Since the JG wage is open to everyone, it will functionally become the national minimum wage. To avoid disturbing the private sector wage structure and to ensure the JG is consistent with price stability, the JG wage rate should probably be set at (or slightly below) the current legal minimum wage.
Yes, that is completely different from Randy Wray’s concept, which demonstrates the confusion, and does not answer the question, “Why full employment?” I won’t repeat the contents of previous posts, which in summary said, employment neither is a public nor a private goal. Most people seek jobs, not as an end, but as a means to income.
(Yes, I know. People have a need for activity, but relatively few would work in their current jobs, were they not bribed. The popularity of weekends and vacations speaks to that. Surely, few young people have told their parents, “I want to grow up to become a Burger King server.)
It is the nature of minimum wage jobs that while they may be useful, they are not economically constructive. Human advancement does do not emanate from minimum wage jobs, so the drive to increase the availability of those jobs seems misplaced. Far better, simpler, faster, easier it would be to provide the end (income) than to create a convoluted, complex system for providing the means (minimum-wage jobs) to the end.
And that leaves us with price stability (inflation). There is a hypothesis, with some historical merit, that unemployment mitigates against inflation, and “too-full” employment causes inflation. This hypothesis is called “Non-Accelerating Inflation Rate of Unemployment” (NAIRU) – the level of unemployment below which inflation rises.
The logic is simple. When unemployment falls “too low,” and employees are hard to find, competing employers must increase wages, which adds to costs, which pushes up prices. Conversely, when unemployment rises, employers feel free to offer jobs at lower salaries, which cuts costs and subsequent prices.
If the U.S. were a closed society, NAIRU would work. We aren’t, so it doesn’t.
Especially in the past two decades, international trade has become the growing norm for product and service supply. If a product or service can’t be found at a low price in America, that product will be produced in China. Or India. Or Thailand. Or Mexico. Or Vietnam. Or any of a few dozen other nations.
The fact that no nation is an island unto itself means that to an ever-increasing degree, inflation has become more a worldwide phenomenon caused by energy (mostly oil) prices and less by local conditions.
Given that minimum-wage employment, in of itself, neither is a productive nor a demanded goal, and controlling unemployment no longer controls inflation, the entire “full employment with price stability” paradigm becomes obsolete.
Rodger Malcolm Mitchell
No nation can tax itself into prosperity, nor grow without money growth. Monetary Sovereignty: Cutting federal deficits to grow the economy is like applying leeches to cure anemia. Two key equations in economics:
Federal Deficits – Net Imports = Net Private Savings
Gross Domestic Product = Federal Spending + Private Investment and Consumption + Net exports