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Can the Government Guarantee Everyone a Job?

Unemployment Line
AP
Unemployment Line

Unemployment has become a lot like the weather. Everyone talks about it but no one really does anything about it.

One group of heterodox economists would like to change that. The Modern Monetary Theory school of economists would like to see the government act as an employment backstop. When people cannot find employment elsewhere, they would be able to turn to the government for a job.

The federal government, in other words, would act on employment much like the Federal Reserve does for bank liquidity. It would be the employer of last resort.

The MMT crowd tends to call this the "Jobs Guarantee." It's a good slogan. And after years of persistent unemployment, I bet a lot of Americans might think it is not too bad of an idea.

Regular readers will have noticed that I've been writing a lot about MMT recently. I was introduced to MMT by Cullen Roche at the blog Pragmatic Capitalism after someone mentioned that my writings on the debt ceiling sounded a lot like MMT.

I had been explaining that the federal government could never run out of money, even if it refused to borrow because it had hit the debt ceiling. A government that pays for things with currency it creates can always just create more currency, regardless of what the bond markets say. What I hadn't realized until I was directed to the MMT crowd was that an entire school of economics had been built around this core insight.

But the MMTers do not limit themselves to explaining that the government is not revenue constrained. Many of them also subscribe to the idea that the government should guarantee everyone a job. In fact, one of the key proponents of MMT recently argued that the Jobs Guarantee is a "central aspect" of the school.

If this were true, it would mean that MMT is wrong. Fortunately, I don't think it is true. It's entirely possible to do MMT without the jobs guarantee. In fact, it's necessary because the Jobs Guarantee is unworkable.

There are at least three reasons the Jobs Guarantee cannot work.

1. It's massively inflationary. Australian economist and MMT proponent Bill Mitchell insists that no inflationary pressure arises from having the government buy labor that no one else wants. But he's just wrong.

While employing the unemployed may not create upward pressure on wages, it dramatically increases demand. The national income is increased by the amount the government pays those laboring in JG jobs.

That income is entirely from newly created money, so the money supply is expanding.

That additional demand is not matched by additional supply, however.

The people working in JG jobs are not producing goods that the market needs. Their work product is largely waste. Which means that demand increases without the supply of desired goods increasing. The result: inflation.

2. It's a bureaucratic nightmare. There are currently over 13.5 million people unemployed in the United States. Creating worthwhile jobs for every single one of them is impossible. Even if we had 13.5 million shovel ready jobs today, we would very quickly run out of them next year or the year after that.

Here's how Cullen Roche describes the program:

There are 13.5MM people unemployed today. The Federal govt employs 2MM people currently. WalMart employs 1.8MM people today and is the largest pvt sector employer. You’re not simply talking about a public works program. You’re talking about swallowing Wal-Mart by more than FIVE FOLD. A JG would involve the largest govt program ever instituted in the history of the world.

The JG is a creature of happier times and smaller economies. Bill Mitchell explains that he thought up the idea while he was a student at the University of Melbourne. The total employed population of Australia is only about 11.5 milllion. Australia currently has an unemployment rate of around 5.3 percent, which translates into 635,800 jobless people. In other words, a jobs guarantee in Australia might be workable. But it doesn't scale to fit the United States.

3. It's economically stagnating. Economic booms are often characterized by malinvestment--people dedicating capital to projects that turn out not to be economically sustainable. This is true not just of financial capital—it is true of human capital as well. People learn trades and develop career networks that turn out to be worth far less than they expected.

Unemployment encourages those who went into trades that turn out to lack adequate demand to give up those trades and seek another. This is economically productive because it brings stagnate resources—people who can do things no one will pay for—out of stagnation.

The Jobs Guarantee would eliminate this process. The government would buy the labor of people who hold skills not demanded by the market, preventing those people from seeking out new skills. Stagnant human capital would just continue to stagnate.

In short, the Jobs Guarantee is a nice sounding project that might work out well on paper. But it doesn't work in the real world.

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