Obama's Jobs Proposal Inadequate

Highlights from L. Randall Wray and Stephanie Kelton's critique of and alternative to Obama's jobs proposal via truthdig.com:

On Thursday night Barack Obama will deliver his highly anticipated jobs speech. At this point, only those closest to the president know exactly how he intends to help spur the economy and create jobs, but reports suggest that he is mulling a $300 billion jobs package that includes more of the same—a one-year extension of the payroll tax cut, a continuation of unemployment benefits, some additional spending on infrastructure and tax incentives to encourage businesses to hire and invest in new capital. Too little of what will work and too much of what won’t for an economy that’s teetering on the brink of a double-dip recession and a president who is running out of time to deliver jobs.

There’s little doubt that extending unemployment benefits will help those who are struggling to find work. But continuing the payments we’re already making doesn’t add a single dollar of new demand to the economy. Nor does extending the payroll tax cut, which simply allows workers to keep the extra 2 percent they’ve already been getting. There will be no boost in consumer spending from these measures, although they account for more than half of the $300 billion plan the president is said to be considering. For the same price tag, the president could do something truly different—he could eliminate unemployment altogether.

The job market is much worse than the official numbers suggest. Officially, we’ve got 14 million unemployed Americans looking for jobs—about four job seekers for every job vacancy. But those 14 million Americans are also competing with 8.8 million part-time workers who are hoping to land a full-time job. Since the recession began, employers have cut so many hours from the workweek that it is equivalent to the loss of a million more jobs. Add to that the roughly 2.6 million people who gave up looking for a job, and you’ve got about 25 million people needing more work and an economy that is creating no new jobs.

Whatever the president promises, it is certain to be too little, too late. Indeed, as Eric Tymoigne has shown, by some measures job performance since the start of the “recovery” has been even worse than during the Great Depression. At the rate we’re going, it will take nine years to return to the pre-recession employment level; by contrast, in the 1930s the jobs lost in the aftermath of the Great Crash had been fully restored within seven years. The difference was the New Deal, which created jobs for 13 million Americans. President Obama has never displayed any Rooseveltian sense of purpose and he will not propose any comprehensive job creation programs like the New Deal’s WPA and the CCC.

The problem is that the president believes we can cure our jobless problem by providing the proper incentives to the business community. And here he is committing one of the few big policy blunders from Lyndon Johnson’s War on Poverty. Like Johnson, who focused on retraining the unemployed for jobs that did not exist, Obama has focused on incentivizing the businesses community to hire workers to produce for customers that do not exist. Time and again, Obama has shown that he will only tinker around the edges, relying on the same tired supply-side initiatives that will not work: more incentives to build business confidence, subsidies to reduce labor costs and to promote exports, and maybe even tax cuts to please Republicans.

Economists and policymakers alike appear to believe that if we can only improve the outlook of our entrepreneurs, they will suddenly begin hiring. And the Republicans warn of the depressing effects of Obamacare, Dodd-Frank regulations and EPA restrictions that damage the sentiments on Wall Street.

The truth is simple and contrary to these views. Business will not hire more workers until it has more sales. Consumers will not spend more until they’ve got more jobs. A private-sector recovery requires 300,000 new jobs every month. But the private sector doesn’t need 300,000 new workers per month to meet prospective sales.

The new jobs can only come from the federal government—the only economic entity that can afford to hire. Obama’s 1 million infrastructure jobs is a nice down payment, but it is only three month’s worth. New workers will create the sales that firms need to justify new hiring. Still, we must think bigger if we are to create 20 million jobs.

When it comes to the health and welfare of a nation, there is no economic policy that is more important than job creation. And yet decades of experience, in nations across the globe, provide ample evidence that while the private sector plays an important role, it cannot by itself provide employment for all who want to work.

There is a way to do that: The government could serve as the “employer of last resort” under a job guarantee program modeled on the WPA (the Works Progress Administration, in existence from 1935 to 1943 after being renamed the Work Projects Administration in 1939) and the CCC (Civilian Conservation Corps, 1933-1942). The program would offer a job to any American who was ready and willing to work at the federal minimum wage, plus legislated benefits. No time limits. No means testing. No minimum education or skill requirements.

The program would operate like a buffer stock, absorbing and releasing workers during the economy’s natural boom-and-bust cycles. In a boom, employers would recruit workers out of the program; in a slump the safety net would allow those who had lost their jobs to continue to work to preserve good habits, making them easier to re-employ when activity picked up. The program would also take those whose education, training or job experience was initially inadequate to obtain work outside the program, enhancing their employability through on-the-job training. Work records would be maintained for all program participants and would be available for potential employers. Unemployment offices could be converted to employment offices, to match workers with jobs in the program, and to help private and public employers recruit workers.

Funding for the job guarantee program must come from the federal government—and the wage should be periodically adjusted to reflect changes in the cost of living and to allow workers to share in rising national productivity so that real living standards would rise—but the administration and operation of the program should be decentralized to the state and local level. Registered not-for-profit organizations could propose projects for approval by responsible offices designated within each of the states and U.S. territories as well as the District of Columbia. Then the proposals should be submitted to the federal office for final approval and funding. To ensure transparency and accountability, the Labor Department should maintain a website providing details on all projects submitted, all projects approved and all projects started.

To avoid simple “make-work” employment, project proposals could be evaluated on the following criteria: (a) value to the community; (b) value to the participants; (c) likelihood of successful implementation of project; (d) contribution to preparing workers for employment outside the program.

The program would take workers as they were and where they were, with jobs designed so that they could be performed by workers with the education and training they already had, but it would strive to improve the education and skills of all workers as they participated in the program. Proposals would come from every community in America, to employ workers in every community. Project proposals should include provisions for part-time work and other flexible arrangements for workers who need them, including but not restricted to flexible arrangements for parents of young children.

In truth, the $300 billion the president might propose Thursday is more than enough to jump-start our economy if it is really targeted to job creation. We can estimate the total program cost at $20,000 per worker, times 15 million workers. That adds up to a $300 billion gross cost, less savings on unemployment compensation (roughly $150 billion), welfare and food stamps, as well as the social cost of depression, divorce, abuse and crime. A direct job creation program modeled on the New Deal’s WPA could create 15 million jobs for less than $300 billion net spending, while also providing the infrastructure and public services required to bring our nation into the 21st century.

And because the job guarantee is designed not to compete with other employment options, the program would not result in the bidding up of wages (and prices) as workers were absorbed into the buffer stock. This is because the job guarantee program would hire only those that the market was not yet ready to employ. Because the program would not intensify competition for workers, it would not lead to wage-push inflation. It would, however, help to stabilize output and employment by establishing a floor on wages.

The program should be permanent, offering a good job at a basic wage to anyone who wants to work. With recovery, the number of jobs required in the program would quickly shrink, as the private sector would ramp up hiring as sales to consumers rise.

By keeping the program in place even once the economy recovered, we’d ensure continuous full employment, with the job program acting as a “buffer stock” that absorbed workers laid off when the private sector contracted and as an employment recruitment pool when private sector hiring resumed. In this way, full employment is maintained through the thick and thin of the business cycle.

Only jobs will create the infrastructure we need to compete in the 21st century. And we cannot restore the security needed to turn around expectations, to get the sales the private sector needs, with anything less than a nationwide universal jobs program.

The $300 billion “investment” in a direct jobs program would be the best way to prove that President Obama is committed to resolving the jobs crisis.

Employment for All

A friend I have met in the blogosphere, known as DarwinCatholic (or sometimes just Darwin) has agreed to engage in a debate with me over a federal job guarantee program.

It's a policy I feel very strongly about, because I feel that not only is it possible to achieve both full employment and price stability (low inflation) in the U.S. but also that an ‘employer of last resort’ (ELR) or ‘job-guarantee program’ is the key to obtaining those goals.

Here is my very truncated argument (it is very difficult to make this argument in a short blog post, but I'm gonna give it a shot):


1) Full employment is desirable.

Okay, obvious I know, but this goal isn't just desirable for the obvious reasons (greater economic prosperity and efficiency, lower crime, higher education, less poverty, etc.) it's also desirable because man develops as a person through his work. As Pope John Paul II said, work enables a man to become “more a human being” for “virtue is something whereby man becomes good as man” – Centesimus Annus pp.9. Denying someone an opportunity to work, to feed his family and develop as a person is a grave evil that should be avoided if doing so doesn't bring about other greater evils.


2) Price stability is desirable.

Okay, this one may not be quite as obvious, but is still pretty obvious. We want price stability because it brings about greater overall stability to the society. Not knowing how much your dollar is going to be worth tomorrow adds to the already uncertain conditions we live in and would make the economy much more volatile. High inflation also erodes the value of savings, thus punishing savers. Price instability is not near as grave an evil as unemployment, but the results of price instability can be, so it too should be avoided if it all possible.


3) The Catholic Church has in several instances mandated societies to provide for decent work for all willing and able to work.

In Rerum Novarum, Pope Leo XIII wrote, “Among the several purposes of a society, one should be to try to arrange for a continuous supply of work at all times and seasons.”

In Quadragesimo Anno Pope Pius XI wrote, “But another point, scarcely less important, and especially vital in our times, must not be overlooked: namely, that the opportunity to work be provided to those who are able and willing to work.”

In Caritas in Veritate, Pope Benedict XVI wrote, “The dignity of the individual and the demands of justice require, particularly today, that economic choices do not cause disparities in wealth to increase in an excessive and morally unacceptable manner, and that we continue to prioritize the goal of access to steady employment for everyone.”

4) Economists have long thought that achieving both is very difficult if not impossible.

They call this the Phillips Curve. As unemployment goes lower and lower, inflation gets higher and higher. The opposite is also true. This relationship has held pretty well, with shifts in the curve occurring frequently, often times upon the onset of a recession. So full employment, that is everyone willing and able to work having a job, is NOT possible without accelerating inflation. Instead economists have shot for a low level of unemployment they called the NAIRU (non-accelerating inflation rate of unemployment) that would bring about the lowest unemployment possible without stimulating increasing inflation. This NAIRU has also shifted over the years, although economists don't really know what the number really is. They can only guess based upon the evidence they receive, which is why the number is constantly being revised.

Somewhat ironically, despite this perceived impossibility, the Humphrey-Hawkins Act of 1978 gave the Federal Reserve Bank the dual mandate of full employment and price stability.


5) So despite the desirability of full employment and price stability and the mandates given by the US gov't and the Catholic Church (which granted doesn't really carry much sway in the US), economists believe the goals to be incompatible. The best they think we can accomplish is some low rate of unemployment with some low rate of inflation.

I say, however, that it IS possible to achieve both and that to do so, the government would have to play an active role as an employer of last resort providing a job to anyone willing and able to work at a living wage.


6) To understand how this is possible, one first has to understand money. I argue that money is not a commodity like gold, but a token or debt/credit relation, a promise to pay, and has been for the past 4000 years at least. There have been periods in history where gov'ts fixed the currency to a commodity, but what made it the acceptable form of money used in that nation was the government's demand for it in payment of taxes, not the weight of metal in the coin. (Read here and herefor more on the history of money).

In nations where the gov't doesn't fix their currency to a commodity or another currency, that is, in nations with a sovereign fiat currency, there is no constraint to government spending. The issuer of the currency defines the currency and cannot go bankrupt or default on its obligations.

So going bankrupt or spending more than it "brings in" is not a reason we can't have full employment. I also argue that there is nothing inherently wrong with deficits. I argue that they don't crowd out private spending by raising interest rates (the central bank controls interest rates), they do not burden future generations, and they do not lead to financial ruin or a weak currency.

Deficits are expected to be the norm due to the private sector's desire to net save financial assets. To do so, the private sector must run a trade surplus (exports>imports) or the government must run a deficit.

Deficits can be too high, however. When they are too high they can be inflationary, so it is still necessary to show how inflation wouldn't ensue with such a program.


[This part gets kinda wonkish, so stick with me!]
7) The job guarantee program would act as a 'buffer stock'. That is, it would anchor prices by fixing the price for low-skilled labor and let the quantity of said labor in the program float.

I argue that the gov’t doesn’t have to pay the market price when it buys goods and services. If it offers a lower price suppliers may refuse to sell to the gov’t inciting a deflationary cycle, if the gov’t offers a higher price an inflationary cycle may set in.

It would not be wise to try and fix the price for everything it buys (the effects of which would be quite destabilizing and have major distributional changes). Instead it could fix the price of an important commodity letting the quantity float which would also mean the gov’t deficit would float with it. By fixing an important price, one that enters as a major cost in the private sector, the gov’t would impart some price stability to the economy and by letting the deficit float counter-cyclically the gov’t would fill any demand gap created when private sector spending is too low.

The best commodity to fix the price of, I argue, is low-skilled or unskilled labor. This will stabilize private sector wages and thus costs and prices. Employment in the program will increase when private sector employment decreases. When private sector spending picks back up, employees will be hired out of the job guarantee program back into the private sector.

The recommended wage for the program would start with the minimum wage and be ratcheted up until what is deemed a living wage is reached. Starting at a minimum wage and ratcheting it up to a living wage minimizes the one-time adjustment and subsequent adjustments in all other relative prices.

Such a policy guarantees full employment, a counter-cyclical deficit to fill any demand gap left by the private sector, and impart greater price stability than the current system.


8) Like any gov’t program, such a program is not without challenges. It is unwise to assume that gov’t would ever be perfect, we humans are not, so why would an institution created by us be perfect?

The ELR is not slavery, only those willing and able to work will be hired. It is not meant to replace welfare, but will likely replace a large amount of unemployment insurance and some other welfare spending as people earn their way out of need. ELR workers can be fired with restrictions placed on re-hiring; there will need to be discipline. This program will not resolve all economic problems, but will likely improve a great deal of them.

There are plenty of different jobs ELR workers can perform: companions to the elderly, classroom assistants, safety monitors, neighborhood cleaners, low-income housing restorers, day care assistants, library assistants, environmental safety monitors, artists or musicians, and many, many more. These jobs may not all ‘produce’ as much as they are paid and I have many arguments to address this, but is it not better to offer someone a job at a living wage who will produce something rather than give someone unemployment insurance for nothing?

I argue that it would be best to run the program at the county level with the Federal gov’t simply writing the check. I believe this is in line with the CST’s principle of subsidiarity.

Admittedly this a very non-orthodox approach to economics, but is one which I believe to be far more accurate than the mainstream’s belief that reaching the two goals of full employment and price stability is impossible. The key I believe is in the understanding of money and gov’t finance. This program does not favor ‘bigger government’ but rather a government that proactively works for the common good according to the principle of subsidiarity. Understanding how modern money works is neither republican nor democrat. Once it is understood how modern money works it seems natural to come to the conclusion that the gov’t should have a job guarantee program. Whether gov’t should be active in other areas is a matter left to further debate and is outside the scope of this argument.

It is impossible to address all the objections to the program in such a short post, so I’ll turn it over to my fellow debater to object and point out weaknesses and then respond to them.

You can read his response here. [Link will be posted shortly].

More on the History of Money

Wow! What a start to the new semester. At this rate I'll never have time to post anymore, but fortunately I think things will ease up.

If you have been following the History of Money/Debt, part 2 from the Modern Money Primer at New Economic Perspectives has been posted. Check it out:

COMMODITY MONEY COINS? METALISM VS. NOMINALISM, PART TWO

You can find Part 1 here: COMMODITY MONEY COINS? METALISM VS. NOMINALISM, PART ONE


Tomorrow morning I will post my proposal for a job guarantee program that will immediately bring us to full employment and promote greater price stability than our current system. Darwin, a frequent reader and blogger, has agreed to debate with me over the proposal. So come back tomorrow, follow our debate, and pitch in with your own comments!

History of Money: Debts, Coins, and Religion

Over at the Modern Money Primer, Randall Wray briefly walks us through the history (up til Rome) of money, debts, and coins and their significance to religion, including Christianity.

COMMODITY MONEY COINS? METALISM VS. NOMINALISM, PART ONE

A must read if you want to understand the answer to the question 'What is money?'.

Understanding Modern Money

If you want a quick review of the background and history of Modern Money Theory, as well as a quick synopsis of its key elements there is none better than this post from Johnsville via Mosler:

Modern Money in a Nutshell

Highlights:

A rampaging mutant macroeconomic theory called Modern Monetary Theory, or MMT for short, is kicking keisters and smacking down conventional wisdom in economic circles these days. This is because an energized group of MMT economists, bloggers, and their loyal foot soldiers, lead by economists Warren Mosler, Bill Michell, and L. Randall Wray are swarming on the internet. New MMT disciples are hatching out everywhere. They are like a school of fresh-faced paramedics surrounding a gasping heart attack victim. They seek to present their economic worldview as the definitive first aid for understanding and dealing with the critical issues of growth, unemployment, inflation, budget deficits, and national debt.

MMT is a reformulated blend of some older macroeconomic theories called Chartalism and Functional finance. But, it also adds a fresh dose of monetary accounting for intellectual muscle mass. Chartalism is a school of economic thought that was developed between 1901 and 1905 by German economist Georg F. Knapp with important contributions (1913-1914) from Alfred Mitchell-Innes. Functional finance is an extension of Chartalism, which was developed by economist Abba Lerner in the 1940’s.

MMT is a broad combination of fiscal, monetary and accounting principles that describe an economy with a floating rate fiat currency administered by a sovereign government. The foundation of MMT is its recognition of the importance of the government’s power to tax, thereby creating a demand for its money, and its monopoly power to print money.

There is really not that much “theory” in Modern Monetary Theory. MMT is more concerned with explaining the operational realities of modern fiat money. It is the financial X’s and O’s, the ledger or playbook, of how a sovereign government’s fiscal policies and financial relationships drive an economy. It clarifies the options and outcomes that policy makers face when they are running a tax-driven money monopoly. Proponents of MMT say that its greatest strength is that it is apolitical.

The lifeblood of MMT doctrine is a government’s fiscal policy (taxing and spending). Taxes are only needed to regulate consumer demand and control inflation, not for revenue. A sovereign government that issues its own floating rate fiat currency is not revenue constrained. In other words, taxes are not needed to fund the government.

MMT also asserts that the federal government should net spend, again usually in deficit, to the point where it meets the aggregate savings desire of its population. This is because government budget deficits add to savings.

In the U.S., MMTers see the contentious issue of a mounting national debt and continuing budget deficits as a pseudo-problem, or an “accounting mirage.” The quaint notion of the need for a balanced budget is another ancient relic from the old gold standard days, when the supply of money was actually limited. In fact, under MMT, running a federal budget surplus is usually a bad thing and will often lead to a recession.

MMT is not easy for many people, including trained economists, to understand. This is probably because of its heavy reliance on accounting principles (debts and credits). Some critics consider MMT nothing more than a twisted Ponzi scheme that is simply “printing prosperity.” Calling MMT a “printing prosperity” scheme, by the way, is the quickest way to send MMTers into spasms of outrage. MMT does not “print prosperty” according to its proponents. The MMT counter argument is: it [is] a perverse injustice that, in online discussions, MMT sympathizers are frequently reproached for imagining that “we can print prosperity” when in fact it is us who constantly stress as a fundamental point that the only true constraints are resource based, not financial or monetary in nature. We are the ones insisting that if we have the resources, we can put them to use. It is the neoclassical orthodoxy and others who try to make out that we can’t use resources, even if they are available, because of some magical, mysterious monetary or financial constraint. Just who is it that believes in magic here?

A heavyweight Keynesian economist, like Nobel Prize winner Paul Krugman, has felt the sting of MMT. But the quantity and quality of his criticism of MMT, so far, has been featherweight. He could not land a solid glove on the contender, Kid MMT. Krugman only proved that he does not understand MMT, so his criticism was weak (see MMT comments) and his follow-up even weaker. MMT economist James Galbraith did a succinct breakdown of Krugman’s major errors.

Teeter-Totter Economics

Though the title is silly, the topic is not. Here is a nice, straightforward, and simple post from my professor on the basics of how the government deficit works. The government sector is not the same as the private sector and is not subject to the same constraints. The government's deficit is our surplus.

Note: this argument does not support either political party. It is merely a description of how the process works.

What Happens When the Government Tightens its Belt?

What Happens When the Government Tightens its Belt? (Part II)


And to continue on with the MMT primer:
The Basics of Macro Accounting

Understanding Modern Money Theory

Modern Money Theory (MMT) is the basis for my understanding of macroeconomics and is one of the reasons why I advocate certain policies over others and why I say seemingly crazy things like "we are not facing a debt crisis."

Randall Wray has just begun a weekly primer on MMT for newcomers to both MMT and economics. I highly recommend following this series to better understand our current economic situation and to understand where many of my posts are coming from.

Modern Money Theory Primer

Randall Wray on the Crisis and Looking Ahead

Randall Wray Interviewed on The Real News

Responses to Debt Rating Reduction

Standard and Poor recently downgraded the U.S.'s debt rating. Here are 7 responses from well-known economists about the downgrade:

Is anyone listening to the S&P?

I may be a bit biased, but I recommend L. Randall Wray's opinion. The rest can be found on the left near the top.

Fraud

I try very hard not to get too worked up or emotional while posting on this blog because I don't feel that doing so effectively demonstrates the spirit of CST. But when I come across these stories, I find it extremely difficult not to get really upset.



My professors (most notably William Black, former Director of the Institute for Fraud Prevention, and Randall Wray) have been calling for prosecution of the perpetrators of this massive fraud for a while now yet there have been no arrests. Their reckless and fraudulent behavior has brought undue hardships to much of America (and throughout the world) and yet their punishment was higher bonuses.

The banks, regulatory comittees, and government deregulation are all to blame for this and they're still trying to get away with it. The injustice of it all really makes me mad.

Instability of Investment and the need for counter-cyclical Gov't Spending

Here is a good explanation of why we need government spending in general (that is, at all times) and why it would not be a good idea to cut back now. From Randy Wray:

Modern Budget Cutting Hooverians Want a Return to the 1930s