A Modest Job Guarantee Proposal: Domestic Servant Subsidies

Monday, 7 May 2012 | 1:58 PM ET
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Unemployment in the United States is a lot like the weather: everyone talks about it but hardly anyone does anything about it.

The Obama administration’s attempts to reduce unemployment have been only marginally successful. Republican rivals have proposed ideas that would only indirectly address unemployment with unproven schemes.

One group of economists who fly under the banner of Modern Monetary Theory have proposed something far more direct: a guaranteed job from the government at a set wage. The basic outline of the proposal is pretty simple: the government would make a job available to anyone willing to work. The government would be the “employer of last resort,” or ELR.

Here’s how Modern Monetary Theory guru Walter Mosler describes the idea:

The U.S. Government can proceed directly to zero unemployment by offering a public service job to anyone who wants one as a supplement to the current budget. Furthermore, by fixing the wage paid under this ELR program at a level that does not disrupt existing labor markets, i.e., a wage level close to the existing minimum wage, substantive price stability can be expected.

The ELR program allows for the elimination of many existing government welfare payments for anyone not specifically targeted for exemption, as desired by the electorate. Minimum wage legislation would no longer be needed. Labor would welcome the safety net of a guaranteed job, and business would recognize the benefit of a pool of available labor it could draw from at some spread to the government wage paid to ELR employees. Additionally, the guaranteed public service job would be a counter-cyclical influence, automatically increasing government employment and spending as jobs were lost in the private sector, and decreasing government jobs and spending as the private sector expanded.

Unfortunately, the Modern Monetary Theory conception of a job guarantee has a number of widely discussed flaws.

1. The precise character of the jobs created has always been unclear.

If useful, they risk undermining private competitors performing the functions. Alternatively, they could take work away from the "mainline" public sector. If useless, they amount to wasted labor.

2. If the jobs require capital equipment and goods, they could run up prices for those goods. A Job Guarantee (JG) job centered around “shovel ready” infrastructure construction projects, for instance, would compete with private sector projects for equipment, cement, steel, etc.

3. The JG department would likely require a vast national bureaucracy that would tend to be politically dominated by special interests. Jobs would likely be created, for instance, in the districts of powerful lawmakers to accomplish the goals of influential constituencies.

4. The availability of guaranteed jobs would likely have predictable and unpredictable consequences for the broader labor market, altering the balance of power between employers and employees. We don’t know what this would do to overall productivity.

5. We may also lose some of the entrepreneurial spirit that leads to new business creation. The unemployed would no longer be as motivated to create new businesses or conceive of new ventures.

6. There’s likely to be a skills mismatch between the jobless and the jobs available. Skilled workers may find themselves unable to employ their particular skills through the JG, and therefore would be inefficiently under-employed. Both skilled and unskilled workers may be called upon to perform work beyond their capacity.

7. Bureaucratic job creation is immune to market checks on the value of jobs, meaning many worthy jobs would go undone while unworthy jobs are performed. There’s no reason to suppose that the administrators of the program would be particularly apt at choosing the right jobs to be done.

8. The JG would increase the importance of government in people’s lives, leading to a society that was less built around rugged individualism and more dependent on state aid.

These objections, and many others, have led many to conclude that the Job Guarantee/Employer of Last Resort is unworkable. This is unfortunate, because many of the ideas behind the JG are worthy of serious consideration. Unemployment is socially and economically destructive for individuals and society. It leads to a host of social pathologies and the unused labor means that we’re not, as a country, being all we can be.

Fortunately, there is a type of JG that overcomes many of these problems. It is non-bureaucratic, does not make the government the employer of last resort, does not require capital equipment, and does not interfere (very much) with existing private or public job functions. What’s more, it is very affordable under existing economic arrangements.

The idea is simple: a federal income tax-credit for households that hire domestic-service workers.

Here’s how it would work. Households would be given a tax credit for salaries paid and benefits provided to domestic workers. That is, every dollar paid to the domestic-service worker would be a dollar less that would be owed in income taxes by the household.

It seems likely that almost every household that has income taxes due would choose to direct its income toward the domestic-service jobs program rather than general income taxes. In essence, people would be able to receive domestic service work for free.

This might seem to create a revenue problem for federal government.

Wouldn’t everyone choose to avoid taxes by hiring domestics?

Not quite. Let’s say that the minimum annual salary plus benefits would equal $30,000. In that case, only people with tax liabilities of $30,000 and over would definitely use the program. This means that only people with around $150,000 or more of income, which is to say those in the top 5 percent of all earners, would fully benefit from the program.

Since one of the purposes of the program is to provide full employment, we would have to cap the salaries of those employed by the program. The salary cap would insure that a maximum number of people could be employed through the program. If we capped it at the $30,000 figure, a tax credit for the top 5 percent of earnings—who collectively pay $508 billion in taxes—could pay for something like 17 million workers.

As the job market recovered, the number of workers available for domestic service at $30,000 would diminish. As Saki wrote in the epigram to 1904’s “Reginald on Besetting Sins":

“The cook was a good cook, as cooks go, and as cooks go, she went.”

Since the price available for the tax credit is capped, many households would simply cease to employ workers who were able to command higher prices. This would preserve the flexibility of the labor market in a recovery.

Domestic service would act as an automatic stabilizer, a buffer stock for an otherwise unstable economy.

In reality, making domestic service the tax-sponsored employment of last resort would likely not employ every single jobless person. Some of the jobless would prefer joblessness, particularly if unemployment benefits continued to be available. Nonetheless, the DSELR program would allow us to accomplish the goal of the job guarantee—a job for all willing to work—without the centralization, bureaucratization, politicization, and state-dependency of most ELR proposals.

No doubt some will object to using domestic service as a buffer stock economic stabilizer, on the grounds that it would be demeaning to workers. But this only displays a prejudice against domestic service on the part of those raising the objection. In reality, there is a long and dignified history of domestic service that demonstrates such positions need not be demeaning. What’s more, there’s little justification for holding that there is more dignity in working in a government-provided, workfare-style position.

Others will object to the plan because it provides a subsidized service for the well-off. But this objection ignores the real human and economic costs of joblessness. Those who are serious about addressing joblessness should be able to overcome their instinctive distaste for “socialism for the rich.”

It’s still possible, I suppose, to oppose the domestic service employment as a last-resort program based on politics. But those doing so will have to acknowledge that they prefer a system of unemployment to one of employment in the households of the top 5 percent of taxpayers. It’s a choice we can make: unemployment or domestic service.

Finally, it’s possible to take the principled libertarian position of getting the government out of the business of attempting to manage the economy. Perhaps it just isn’t a good idea to have the government craft schemes to address unemployment or whatever the latest socio-economic problems are. We’re unlikely to be able to know in advance how the latest scheme will interact with all the past and future schemes we enact. The consequences could be truly perverse.

But a return to market processes is a difficult job in our system: the federal government is enormous, the regulatory state is pervasive, the tax burden is complex and weighty, and our monetary system puts the central bank at the center of virtually all transactions in the economy.

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