Sorry for the interruption of the blog. Originally I had planned 52 blogs, one-year’s-worth, although along the way I added a few so that we would have run about 13 months. Here’s why: the blogs came from a book manuscript, the Modern Money Primer. The idea was that you would not only be a test audience, but that your questions and comments would allow me to revise the manuscript as we went along. And that worked. I think the manuscript was much improved because of this blog. You helped write the book.
At the beginning of May, there remained three topics for the blogs: to finish up on the JG, a section on inflation, and a concluding section on the nature of money. Unfortunately, due to family commitments I cannot do all of the remaining blogs. I will do one blog on each of these topics. Today’s blog will complete the series on the JG. And I’ll do two more blogs (one on inflation and one on the nature of money) to complete the promised 52. These will probably not be posted each week—I expect it will take me longer than a week to produce each. But they should be finished during June.
To make a long story short: the book will be released soon. (See here) When I get the publicity materials, I’ll post them on NEP. If you liked the blog, you’ll love the book (if you hated the blog, you’ll hate the book!). The book contains a fair amount of material that is not in the previous blogs, plus the material that I won’t be able to cover in the next few weeks. Further, the organization was revamped and I think improved. Finally, as you’ve probably noticed, when NEP switched blog platforms, the formatting of all the old blogs got messed up. Mitch is trying to fix that but it is too much work for him to manually reformat everything. So for newbies, the book will be much easier to read than it would be to try to read the old blogs.
Finally, let me make one more comment. As you know, I had been accumulating your comments and questions, with a response on Wednesdays. I won’t be able to do that for these final blogs. Further, as you know, I did not want this Primer to become a debate with critics. And I certainly did not want it to become a chat room with more than a hundred comments weekly, most of which are promoting personal websites and idiosyncratic positions on a range of off-topic matters. I’m not opposed to debates or chat rooms. But that was never the purpose of the Primer. Besides, since the manuscript is in production with the publisher, I cannot do any rewriting now—so the main purpose of soliciting your comments no longer applies.
Let us move on to a conclusion of our discussion of the JG. The contentious issue is this: can one adopt MMT while rejecting the JG?
I had made the analogy between disease and unemployment: would any reasonable person who understands the cause of a disease oppose a cure? If you knew that a vaccination can prevent smallpox, would you oppose providing vaccinations (at least to those who want them—I do not want to get into a debate about forcing vaccinations as we have never advocating forcing jobs on those who do not want to work)?
Now I do realize this is not quite a fair comparison because it is possible that there are many cures for the disease of unemployment. MMTers advocate the JG cure. I am open to alternative cures. I just do not hear any coming from the critics.
Some try bait and switch: Let’s give them BIG instead of jobs. That does not cure the disease of unemployment. It is like providing antibiotics instead of vaccinations to fight Polio. They then try to justify this on the argument that if we give people BIG, they can still choose to work if they want to. No, they cannot. There must be jobs. Certainly it is true that giving everyone antibiotics does not prevent them from seeking vaccinations. But the vaccinations need to be available. I’m not going to argue more about this—the argument is just too silly. Yes we can give people BIG but that does not give them jobs. If someone is involuntarily unemployed, she wants a job. BIG will not cure the unemployment disease.
Can we have BIG and JG? Sure. But it is the JG that cures the disease of involuntary unemployment. (Some claim BIG cures the disease of poverty; I doubt that, but it is a different disease.)
Some argue for demand stimulus alone. The theory is that if government spends enough on “general” demand, jobs will trickle down in sufficient numbers that everyone (?) who wants one will get one. When pushed, they will admit that they really do not mean “everyone”. They mean the rate of involuntary unemployment will be reduced “sufficiently”. Sufficiently for whom? Well, for those who get the jobs.
See the Vonnegut quote below. Those who do not get the jobs are not deserving. Better luck next year. Go improve yourself so that you can get a job and some other unlucky shmuck goes jobless. There are always winners and losers—and you happen to be a loser. In your next life, choose better parents. You all know the drill. And, yes, that means people of color will have three times the unemployment rate of the luckier whites (and in most countries, females will have higher rates of joblessness) but that is just the luck of the draw when it comes to job creation through demand stimulus.
Again, this is a bait and switch argument. Aggregate demand stimulus will likely create more jobs. For everyone? No.
Further, it begs the question of what to spend on. Except for random helicopter drops (or tax cuts) all spending (and tax cuts) is targeted. The only question is to whom. It is really strange that many opponents of the JG dislike the targeted nature of the program, yet, they like the targeted nature of Congressionally-approved spending that will go to the usual suspects: big oligopolies that tend to have higher skilled and paid workers and strong pricing power, as well as the much maligned pork barrel roads to nowhere. And, finally, it evades the inflation issue. If jobs do indeed trickle down, it is at least in part because the targeted “general” pump priming pushes up wages and prices in those favored sectors sufficiently that employers look to workers who are less desirable.
Can we have demand stimulus plus a JG? Sure. But it is the JG that cures the disease.
Others protest that the JG creates low-paying jobs that won’t utilize all the skills of the workforce. Hence it does not really resolve all the problems of unemployment and so instead we need a combination of demand stimulus, skills matching services, and retraining. Again, another bait and switch argument.
While demand stimulus plus active labor market policies are desirable, they do not ensure that a sufficient supply of worker-ready jobs is created. As discussed in previous blogs, the JG “takes workers as they are, where they are”. Training programs train workers on the hope that jobs will exist and that employers will hire them. It is faith-based policy.
JG creates jobs for those who want them, then trains workers on the job. If the better, higher-paying jobs do come along, they can move out of the JG. Meanwhile, they’ve got the job and are allowed to contribute to social production.
Some still persist in arguing that the JG is “just” workfare—that it forces people to work. No. It provides a job for those who want one. It hires the involuntarily unemployed. Involuntary describes a situation that one does not want; unemployed means without a job. Involuntarily unemployed people want jobs. The JG offers jobs. No one is required to take one.
JG can be added to any safety nets society wants—whether non-means-tested programs like BIG, or means-tested programs like welfare. That is why I said the JG is a policy “add-on”.
Recall that I began the discussion of the JG with an exposition of Lerner’s functional finance approach to policy and with a discussion of human rights. The first of these builds on the “state money” view that government can afford to buy anything for sale in its own currency. It then derives a policy—that is what government SHOULD DO: spend more if there is unemployment.
The second comes at the topic of unemployment from the human rights angle: the right to a job is one of the internationally recognized human rights. Again, this is about what government SHOULD do: ensure that anyone who wants to work has access to a job. While consistent with Lerner’s proposal it goes further. For Lerner unemployment is an economic waste—since government can “afford” full employment, it should ensure it. From the perspective of human rights, unemployment is evidence of a violation of human rights.
Clearly, this is a violation of a human right by government as no one should expect for-profit firms to ensure this right. Only government can “afford” to ensure this right. Further, it is the position of MMT that imposition of taxes creates a demand for money—from inception, one with a tax liability but without the means to pay it is in some sense “unemployed”, searching for a way to earn the money needed to pay the tax.
Carried to the logical extreme, we can say that unemployment is created by the monetary system (as Paul Davidson always points out, there is no unemployment in a nunnery—economic systems that are not based on money do not have unemployment), a system that from inception was created by government to move resources to the public sector. Thus unemployment is not just a problem to be resolved by government, it is a problem that is created by government. And sovereign government has the key: provide the jobs. Warren Mosler always says the unemployed are already in the public sector—we have to support them and deal with them in some manner—so we might as well let them work for the public sector.
Now, I admit that some other advocates of MMT do not accept the human rights angle. But I do. Still, as I argued before, human rights are aspirational and even rich, developed, and nominally democratic nations persistently violate most of the accepted human rights. In my view, that does not diminish the value of the argument.
In the comments section from Blog 48, someone provided the following statements by MMT advocates:
Bill Mitchell: “The reality is that the JG is a central aspect of MMT because it is much more than a job creation program. It is an essential aspect of the MMT framework for full employment and price stability.”
Pavlina Tcherneva: “The JG is not just an afterthought to MMT but a crucial component that has so far offered the most coherent counter-cyclical economic stabilizing mechanism.”
Neil Wilson: “Discussing MMT without the Job Guarantee is to discuss some other economic theory, and one without any stability anchor to nominal prices.”
The commentator then wrote: “It does appear that Wray is parting ways with his colleagues here. Can someone clarify this contradiction?”
While I find that statement puzzling, let me try to clarify.
MMT has three levels or aspects: description, theory, and policy.
As a description there are actually two levels. First we describe a “pure” or “hypothetical” case that applies to any currency issuer. We begin with the imposition of the tax denominated in the state’s unit of account; the state then spends the currency into existence, moving resources to the public sector; people then can pay their tax. To that we can add private sector “money creation” as a leveraging activity. We discuss interest rate setting and the purpose of government bond sales. We note that no one can pay taxes until government spends currency into existence. And so on. I won’t repeat all the analysis presented in previous blogs.
Then we describe actual practice. This must be case-specific. This is where we bring in a Treasury and a Central Bank since most governments divide responsibilities between the two. We also need to discuss self-imposed constraints (Treasury writes checks on its account at the Central Bank, which is not permitted to buy Treasury bonds. And so on.) In other words, we discuss “how government REALLY spends”, going into all the operational details. This does not change any of the general conclusions from level 1 analysis, but it does respond to the critics.
Next we move to theory. In truth there is no description without theory. I realize that many people, including economists, think that you can describe the “real world” without theory or value judgments. Uncle Milty Friedman was famous for pushing such a view—“normative” versus “positive” economics. This was at best a naïve view—or, more likely, a purposeful deception designed to hide his agenda. It cannot be done. You cannot observe “reality”. To make sense of your observations you must have a theory. You cannot use a word like “money” without having a theory of money. The theory held by most people is, according to MMT, completely inappropriate for the type of economy in which we live. Indeed, this whole Primer really boils down to an argument about the “nature of money”.
That is the topic of the final chapter of the soon-to-be-published book. However, if you look back to MMP #30 you will see how I defined MMT as an integration of several approaches to monetary theory, including Chartalism, Endogenous Money, Monetary Theory of Production, Functional Finance, Sectoral Balances Approach, and Circuit Theory. Personally, I’d also add Minsky’s Financial Instability theory and probably a few other bells and whistles.
Now does every MMTer have to integrate every one of these approaches into her own MMT approach? No, that would be too much to ask. Do I like my own approach better than the approaches taken by others? Yes. Of course, I need to convince others that mine is best. At least until I change my mind.
The third aspect is the policy implications. So far today I’ve been focusing purely on JG as a solution to the unemployment disease. But that is only part of the story. From the beginning, we have argued that the JG is needed to “anchor” prices. The JG is a bufferstock program and like all bufferstocks it can be used to stabilize prices. Further, it helps to resolve that Minsky problem—instability—by helping to stabilize (actually, reducing instability, but stability is destabilizing!) wages, consumption, employment, and aggregate demand.
Inflation is the topic for next time. But very briefly (and really this is just a reprise of the explanation of the bufferstock made in a previous blog), you can use the JG pool as a better wage- and price-stabilizing bufferstock than the “reserve army of the unemployed” can be.
Look at it this way. The great fear of our goldbugs and others who warn about the danger of “fiat money” is that it has no commodity anchor to keep it valuable. Since it is “fiat”, government can print up unlimited amounts, give it away free, and drive its value to zero. Zimbabwe here we come! Tie it to gold and you cannot get inflation—so the story goes.
The goldbugs are not completely crazy. Money does need backing—and an infinite regress, arguing that we accept money and believe in its value because we think others think it is valuable, is not acceptable.
In the MMT view, taxes create a demand for the currency, but currency’s value is determined by what you’ve got to do to get it.
There is a long tradition in economics that adopts a “labor theory of value” approach. As both Marx and Keynes argued, the value of commodities (here I’m using the term broadly to include all things produced for sale for money—not just the “resource” commodities like oil and pork bellies) can be taken to be determined by labor. More specifically, we use labor hours as one of our units of measurement to assess the value of all things produced by (admittedly heterogeneous—thus we need to make quality adjustment)s labor. The other measuring unit is money—the state’s unit of account.
Now, I do not want to get into a debate about labor value theory. My point is much simpler and highly intuitive: if I must work an hour to get something valued at one unit of the money of account it will be more valuable than if I received two money units per hour of work. If money grew on trees (our moms always claimed it does not!) then it would be worth the effort of going out to pick it. Not much, in other words. Clearly, modern money takes very little effort to produce (keystrokes create government IOUs), so the goldbug fear is that its value will fall to nearly zero as we increase the number of keystrokes.
But what if government will only issue $1 in return for 1 hour of hard labor? Will the number of dollars issued make much difference in its valuation?
At UMKC we’ve been running exactly such an experiment, imposing a “Buckaroo” tax on our students for the last dozen years, and paying them 1 Buckaroo for each hour of work at local community service providers. They pay the tax using the Buckaroos they earn. We’ve run budget deficits every year since the program began, fulfilling the net saving desire of students. Our students are fully employed—they choose how much to work and we ensure there is always a job available. The MMT principles have been verified by the program.
Oh, what about inflation? Zero, Zip, Nada. The wage is still exactly 1 Buckaroo = 1 Student Hour of Labor.
We let the exchange rate float to give us complete policy independence. Have all of those budget deficits reduced the Buckaroo exchange value against the Dollar? No—the Buckaroo has appreciated more than the Swiss Franc! According to Warren Mosler, the Buckaroo has been the best investment in the world over the past dozen years (although I have not fact-checked that).
Oh, alright it is a simple little real world experiment, so the results might not scale up to real world currencies, but it does shed some light on the value of a bufferstock to give value to a currency. Tie your currency to labor, and stabilize wages in that currency. That will provide full employment with a greater degree of price stability.
So that is the additional argument for tying the JG to MMT: price stability.
I’ll have more to say about inflation next time. But this is why MMTers believe that the JG is a necessary component of MMT: if you care about inflation, you want a price anchor. So far as I know, no one has come up with a better price anchor than a relatively stable wage unit. The JG provides that.
Let us quickly return to the argument that unemployment serves a useful public purpose, hence, we do not want the JG because it adversely affects incentives. We need the suffering to motivate the lazy.
There is a popular view that adversity is good. As Joe Firestone put it in a comment, many attribute their success to the beatings their fathers gave them: “spare the rod, spoil the child”. The threat of unemployment and deprivation is believed to be an essential motivator.
In truth, modern psychology knows this is false—the best way to produce caring and productive people who will make socially beneficial contributions to society is to provide a caring, nurturing, and secure upbringing. The best way to promote quality work is to create a caring and secure work environment. As I’ll discuss next time, this is all the more important as we transition to the “service economy”.
If you want to produce psychopaths, beat the crap out of them when they are young, convince them that the world is dog-eat-dog, make them fight for every scrap of food, and eliminate all protection in the work place. Make life as precarious as possible, with workers fearing they could be replaced by the unemployed—losing their jobs and joining the ranks of the starving masses. Richly reward the strong and punish the weak. (I think I just described an entire sector of the modern economy, where the psychopaths rise to the top—see below.) That is the idea behind NAIRU, which is so dear to the hearts of most economists.
Here’s the problem. Our society does produce a lot of psychopaths, and their behavior can lead to individual success at least on some measures. The rest of us—the 99% or so—have got to protect ourselves from them. However, their relative success makes that difficult not only because they can obtain positions of great power and influence, but also because we emulate them. In Chapter 24 of the General Theory, Keynes remarked that it is better to allow such psychopaths to inflict cruelty over their balance sheets than on their fellow humans. In other words, let them make money, but don’t let them run the show. As we all remember, he advocated policy measures to ensure full employment, to reduce inequality, and to “euthanize” the rentier class:
“dangerous human proclivities can be canalised into comparatively harmless channels by the existence of opportunities for money-making and private wealth, which, if they cannot be satisfied in this way, may find their outlet in cruelty, the reckless pursuit of personal power and authority, and other forms of self-aggrandisement. It is better that a man should tyrannise over his bank balance than over his fellow-citizens; and whilst the former is sometimes denounced as being but a means to the latter, sometimes at least it is an alternative”. Of course our 1% psychopaths will oppose these policies, since the psychopaths thrive in the current, unequal, environment.
An editorial in the NYTimes put it this way:
“A recent study found that 10 percent of people who work on Wall Street are “clinical psychopaths,” exhibiting a lack of interest in and empathy for others and an “unparalleled capacity for lying, fabrication, and manipulation.” (The proportion at large is 1 percent.) Another study concluded that the rich are more likely to lie, cheat and break the law…. Accounting fraud, tax evasion, toxic dumping, product safety violations, bid rigging, overbilling, perjury. The Walmart bribery scandal, the News Corp. hacking scandal — just open up the business section on an average day. Shafting your workers, hurting your customers, destroying the land. Leaving the public to pick up the tab. These aren’t anomalies; this is how the system works: you get away with what you can and try to weasel out when you get caught.
….while “job creators” may be a new term, the adulation it expresses — and the contempt that it so clearly signals — are not. “Poor Americans are urged to hate themselves,” Kurt Vonnegut wrote in “Slaughterhouse-Five.” And so, “they mock themselves and glorify their betters.” Our most destructive lie, he added, “is that it is very easy for any American to make money.” The lie goes on. The poor are lazy, stupid and evil. The rich are brilliant, courageous and good. They shower their beneficence upon the rest of us.”
Psychopaths on Wall Street are not the 10% anomaly, they are the Gordon Gekko role models. They are the 10% top dogs of the 1% that run the show.
And so it is not surprising that there are individuals who accept MMT as a description yet who adopt the policy recommendation of our successful psychopaths: use unemployment and the threat of poverty as motivation to “pull one up by one’s own bootstraps”. Yet that policy simply perpetuates the production of psychopaths and anti-social behavior more generally. As Keynes put it, such policy stacks the game with more zeroes—increasing insecurity and actually making it harder to achieve success with just normal luck. All pain, no gain.
A psychopath could discover the cause of Polio and yet oppose a policy of vaccination. Indeed, lack of compassion is part of the definition of psychopathology. Surely a psychopathic economist can accept MMT’s explanation of the cause of unemployment and yet reject policy to cure the disease.
So, can you separate the modern theory of the disease cause of Polio from the cure? Yes.
Can you separate the MMT explanation of the cause of unemployment from the policy to cure it? Yes.
Should you? Of course not.