The Trouble with a Job Guarantee

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The Jobs Guarantee has now become a major point of debate on several finance and economic blogs. It’s a conversation that I think I helped kick-off, so it’s nice to see how much interest it has generated.

At the end of this post, I’ll provide a pretty comprehensive list of links to the most recent debate.

For now I want to focus on the strengths and weaknesses of the MMT Job Guarantee.

Perhaps the greatest strength of the Jobs Guarantee is its directness.

Instead of trying to balance the economy through the usual channels of fiscal policy—which typically just means lining the pockets of banks, defense contractors and big corporations with close government ties—the Job Guarantee spends into the economy directly through individuals. This isn’t a program that enriches the crony capitalists clients of the Predator State.

It’s direct in another fashion as well: it’s based on fiscal spending rather than interest rate manipulation.

Typically, policy makers attempt to address unemployment indirectly.

Ever since the Great Depression, policy makers in the United States have attempted to use monetary policy to achieve something called “full employment.” The idea is to loosen monetary policy enough to spur more demand in the economy, which would increase employment.

The main problem with this is that there was little reason to think that the additional demand created would be for the skills and services the unemployed possessed. If the cause of unemployment was not just a lack of demand but a lack of demand for what the unemployed could do, job growth would not result. What would happen instead was that there would be more money chasing the goods and services actually in demand. This created the potential for high unemployment and high inflation.

Here’s how Friedrich Hayek put it in his 1950 essay “Full Employment, Planning and Inflation”:

If expenditure is distributed between industries and occupations in a 'proportion different from that in which labour is distributed; a mere increase in expenditure need not increase employment. Unemployment can evidently be the consequence of the fact that the distribution of labour is different from the distribution of demand. In this case the low aggregate money income would have to be considered as a consequence rather than as a cause of unemployment.

Even though, during the process of increasing incomes, enough expenditure may "spill over" into the depressed sectors temporarily there, to cure unemployment, as soon as the expansion comes to an end, the discrepancy between the distribution of demand and the distribution of supply will again show itself. Where the cause of unemployment and of low aggregate incomes is such a discrepancy, only a re-allocation of labour can lastingly solve the problem in a free economy.

In other words, the core problem of most unemployment is a distribution problem. The distribution of labor did not match the distribution of demand. Increasing aggregate demand would not necessarily decrease unemployment. What is typically required to actually decrease unemployment is relocation and retraining of workers, something which many of the temporary measures intended to ameliorate the effects of unemployment actually interfere with.

The Job Guarantee gets around one of these problems: it guarantees that anyone who comes to the government employment office ready, willing, and able to work will be able to get work for pay and benefits. The problem of mismatch is seemingly solved since the government will just supply the demand for something the unemployed can do. Direct hiring works better, in this sense, than trying to jigger the knobs of monetary policy.

But is the problem of mismatch really solved? I do not think it is.

The jobs created under the Job Guarantee are specifically not supposed to compete with the private sector, which means that they supply goods and services for which there is not a market demand. The total output of the economy might increase, but much of this output is non-productive—that is, it doesn’t actually improve our lives.

Now some people will say that this is fetishizing the market. Aren’t there things that improve our lives other than what the market will pay for? I don’t want to argue that there are not. I do not think, for instance, that these days we could pay for the Sistine Chapel but our lives are greatly improved by its existence. The problem is that there is no reason at all to think that people laboring in Job Guarantee positions will supply meaningful improvements rather than holes in the ground.

The Job Guarantee folks seem to think that there are plenty of meaningful jobs that aren’t getting done but that could be done by the unemployed. I don’t think this is correct. In fact, I cannot really think of many at all. Sometimes things like caring for the elderly or constructing bridges and roads are nominated as candidates. But these are not jobs that can be done just by anyone. They require a certain sort of person with a certain set of skills. Most jobs do.

So the Job Guarantee actually falls prey to that old problem of the distribution of labor. Unless the skills, talents and dispositions of the unemployed miraculously match the jobs the government would like done, it doesn’t actually work much better than the “full employment” monetary policy.

This creates the inflation problem I wrote about when I first addressed the Job Guarantee. The MMTers claim that their approach isn’t inflationary. In fact, they like to call it “Full Employment and Price Stability.”

But if they are creating jobs that put more money into people’s hands without creating more supply of that which is actually demanded, then prices are likely to increase. Businesses may be able soak up some of the extra-demand by increasing their output—but this has limits, especially if there is a labor-demand mismatch. The productivity of existing workers can only be increased so far.

Because the workers without skills demanded by the private sector have jobs and earn income, their incentive to retrain and relocate is diminished—which means that the labor mismatch persists and businesses may not be able to increase output to match rising demand.

It would be possible, of course, to diminish or eradicate the inflationary effect by tightening other government expenditures, raising taxes, or making sure the Jobs Guarantee wages were so low that the increased demand generated would be minimal.

The MMTers argue that the Job Guarantee positions will be so low-paying that workers will not be incentivized to stay in them. But I’m not sure this is correct. Do we really understand how workers will react to a job they cannot lose? Will there be some people who prefer to work just enough to get by, showing up at the Job Guarantee office every now and then, working for a few weeks, then going back to their personal hobbies?

Yes. There will be. And some of these people will be very intelligent, even diligent people. I know people like this in New York City, who go through long periods of voluntary unemployment during which they paint, act, and write. They are enabled in this lifestyle by unemployment insurance and rent-control. Some of these people used to be computer engineers but found that they preferred more leisure and the income from unemployment insurance to less leisure and income from a private sector jobs.

It’s a wonderful life, really. But if it were too popular it would obviously be economically stagnating. I can see the possibility of The Job Guarantee inviting this type of economic stagnation at a whole new level. Work a week per month, earn enough to pay your for your rent-controlled apartment, then spend the next three weeks painting.

Work every other day. Work half days. Whatever. There's always a job waiting for you the next day. Get sick? Go down to the Job Guarantee office, take a job, then use the health insurance to pay for the medicine you need.

We do not know that this is what would happen. But that’s part of the point. Nothing on this scale has ever been tried before. It is bound to produce unexpected and unintended outcomes. Pretending as if we know the economic and social consequences of this kind of revolution in the way Americans work is a dangerous conceit.

As Cullen Roche at Pragmatic Capitalism points out, we know that we can have prosperity with unemployment. We don’t know we can have it without unemployment because we’ve never tried it and our economic models will always fall short. The maps aren’t the territory.

You’ll notice that in my story of my arty NYC friends above I pointed out that unemployment interacts with rent control in ways that many people have never considered. The Job Guarantee will not come into an economy unencumbered by regulation. It will become part of an extremely complex web of regulations enacted during the last hundred and fifty years. It is impossible for anyone know how the Job Guarantee will interact with the rest of the regulatory state.

The Job Guarantee is an elegant economic model that holds out the promise of price stability and full employment. Unfortunately, despite over a decade of discussion, serious flaws persist in the model.

Perhaps these will eventually be addressed. For now, however, the risks are too great to embark on a project this ambitious.

A Guide To The Jobs Guarantee Debate

I started things off with “Monetary Theory, Crony Capitalism and the Tea Party” noting that I believed the Jobs Guarantee was a distraction from the parts of Modern Monetary Theory that I like.

Warren Mosler posted it on his blog, where it generated 71 comments.

Tom Hickey also posted a link and excerpt at Mike Norman Economics, generating a round of debate in the comments section.

Bob Wenzel, who is a prolific blogger coming from the Austrian Economic perspective, didn’t like me playing nice with the MMT folks.

I responded by arguing that there was common ground between MMT and Austrian economics(mostly over the foolishness of using monetary policy to solve economic problems). Cullen Roche entered the discussion by pointing out what he considers the“fundamental difference” between Austrians and MMTers: the origin of money.

Later I respondedby saying that I think this difference can be synthesized. Cullen’s post also noted that he agreed with me on the Job Guarantee.

Bill Mitchell, the Australian economists who says he invented the Job Guarantee, weighed in with a post arguing that the Job Guarantee couldn’t—or shouldn’t—be separated from the rest of MMT.

Oh, and then the Economist got on board with an article about MMT, Austrian Economics and Market Monetarism.

In response to the Mitchell and Wray posts, I decided to explicitly addresswhat I saw as the defects with the Job Guarantee—and explain to readers what the debate was about.

Mitchell responded here.

Cullen waded back into the debate with a post arguing that the descriptive elements of MMT should be—or at least can be—separated from the prescriptive elements.

Ed Harrison at Credit Writedowns, who is influenced by both the Austrian and MMT traditions, explained that he thought the whole debate was a bit silly. After all, the idea of the US government guaranteeing everyone a job is a political “non-starter.”

Neil Wilson described the Job Guarantee as “put option.” (A topic I hope to eventually get around to addressing.)

And, finally: you just read this post. Congratulations! If you got this far, you’ve just become part of one of the most esoteric debates the economic corner of the internet has had for quite a long time.

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