Originally published April 1, 2012 on the New Economic Perspectives blog.
The JG posts here at MMP have generated a huge number of comments. I have focused my responses at the comments more-or-less directly directed to the actual posted blogs. I can understand the impatience: many questions have not been answered. However many of these questions and comments concerned upcoming topics.
Let us move on to macro stability issues. I have given JG talks all over the world and the two main objections raised always refer to inflationary impacts and exchange rate impacts. It seems to me that those who respond with these fears have not paid attention to the set-up of the program and to the MMT arguments.
So this post will provide quite general responses to questions about “macro stability”. It is necessary to keep in mind as you read the following that we are talking about a program that pays a fixed (but periodically adjustable) wage (plus benefits) that becomes the floor in the economy. Government never bids against the private sector at a higher wage. But those who fall out of private sector jobs can always move into the JG and receive the JG wage.
Also note we are adding the program onto the existing economic system. All other programs and policies of economic stabilization are still available. There is no claim that the JG will completely and by itself stabilize wages, prices, and exchange rates, much less private demand. It will not “tame” the business cycle, by itself. Wall Street will still make the same crazy bets and periodically go bust.
Our claim is that the economy with a JG will be more stable than one without the JG.
And, finally, we do not believe the JG solves all “labor market” problems. But it does offer a job at a basic wage to anyone who wants one. That is an improvement over the current system.
So let us turn to the two main issues concerning stabilization: inflation and exchange rates. Next week we continue the arguments.
Critics of JG/ELR. Critics argue that a job guarantee would be inflationary, using some version of a NAIRU-Phillips Curve approach according to which lower unemployment necessarily means higher inflation. Some argue that JG/ELR would reduce the incentive to work, raising private sector costs because of increased shirking, since workers would no longer fear job loss. Workers would also be emboldened to ask for greater wage increases. Some argue that the program would be so big that it would be impossible to manage it; some fear corruption; others argue that it would be impossible to find useful things for the workers to do. It has been argued that a national job guarantee would be too expensive, causing the budget deficit to grow on an unsustainable path. We will examine some responses to these criticisms in the following sections.
Macroeconomic Stability Issues. This subsection will address issues surrounding macroeconomic stability, such as wage and price inflation and exchange rates. Subsequent blogs will address affordability and manageability issues. (Affordability questions should by now be quite easy for all readers to resolve; manageability issues might be more difficult.)
As discussed, the program would set a fixed (but periodically adjusted) basic compensation package. This will ensure that the JG/ELR wage will not pressure private wages in a competitive spiral. Such a wage would only set a floor below which private sector wages could not fall; thus, it operates like an agricultural commodity price floor—which does not cause prices to rise but only prevents them from falling.
Indeed, an JG/ELR program designed along these lines can be analyzed as a buffer stock program that operates much like Australia’s wool price stabilization program used to operate (an Australian advocate of the JG, William Mitchell, actually developed his proposal after recognizing that it could operate in a manner similar to his government’s wool program). The government purchases wool when the market price falls below the price support level, and sells wool when the market price rises above that level. By design, the program stabilizes wool prices in order to stabilize farm income and thus consumption by those who raise sheep.
If you do not like sheep, think corn. The problem with sheep and corn is that no one except the farmers care if sheep and corn are fully employed. So why not labor? What about a buffer stock program for humans that want jobs? This was the logic that set Bill Mitchell to thinking about a JG.
In the JG/ELR program, government offers a floor price for labor, paying the program wage to participants. Government “sells” labor at any price above the JG/ELR wage to firms (and non-JG/ELR government employers). Just as in the case of a floor price for wool, a floor price for labor cannot directly generate inflationary pressures on the market wage.
Indeed, so long as the buffer stock pool of labor is large enough, it will help to restrain market pressures on wages as government “sells” labor in a boom. Further, because labor is an input to all production, to the degree that wages are stabilized by the program, production costs will be more stable. Above we noted that income and thus consumption of wool suppliers is stabilized by a wool buffer stock; JG/ELR will directly stabilize income and consumption of program workers, and if other wages and incomes become more stable because of the program, that will further enhance macroeconomic stability.
Critics fear that existence of the program will embolden workers, leading to rising wage demands and inflation. However, there are two reasons to doubt that this effect will be large. First, an effective labor buffer stock will tend to dampen wage demands because employers always have the option of hiring out of the pool if the wage demands of non-JG/ELR workers are too high. The price demands of wool suppliers are attenuated by the government’s buffer stock of wool; stubborn wool suppliers cannot raise wool prices much above the government’s sell price.
The second reason to doubt that obstinate workers will adopt accelerating wage demands is because the further their wages rise above the JG/ELR wage, the greater the costs to them of losing their higher-paying jobs. If the JG/ELR wage is $10 per hour, it may well be true that nonprogram workers earning $10.50 per hour will be emboldened to demand $10.75, but they are not likely to continue to demand ever-higher wages in subsequent years simply because they can fall back on a $10 per hour JG/ELR job. (Please note, the numbers used here are purely for illustration. They do not represent a proposal for a JG wage at ten dollars Austrian, Canadian or American.) The cost of losing a $15 per hour job is not the same as the cost of losing a $10.50 per hour job.
In sum, it is very hard to sort out all the possible effects but it is hard to see that the JG favors labor more than employers—or vice versa.
Still as I said last week, those “worst employers in America” that currently pay far below a living wage could well be forced to raise compensation or go out of business.
I cannot see that that is a bad thing.
What about exchange rate effects? A related argument concerns the exchange rate: if jobs are created that provide income to the poor, consumption will rise, including purchases of imports. This will worsen the trade deficit, depreciate the currency, and possibly lead to accelerating inflation through an exchange rate “pass through” effect (import prices rise as the currency depreciates, adding to inflation of the price level of the domestic consumer basket). In other words, unemployment and poverty are viewed as the cost of maintaining not only low inflation, but also the value of the currency.
Two kinds of responses can be provided. The first is ethical. Should a nation attempt to maintain macroeconomic stability by keeping a portion of its population sufficiently poor that it cannot afford to consume? More generally, is unemployment and poverty an acceptable policy tool to be used to maintain currency stability? Are there other tools available to achieve these ends? If not, should policymakers accept some currency depreciation in order to eliminate unemployment and poverty?
There are strong ethical arguments against using poverty and unemployment as the primary policy tools to achieve price and exchange rate stability. And even if currency stability is highly desired, it is doubtful that a case can be made for its status as a human right.
However, we can challenge the notion that the program actually threatens price and currency stability. To be clear, we should not argue that the program would have no effects on a particular index of prices (such as the CPI) or on the exchange rate. Instead we argue that the JG/ELR program provides an anchor for the domestic and foreign value of the currency, hence, actually increases macroeconomic stability.
As argued above, JG/ELR will not cause domestic inflation, although it can lead to a one-time wage and price increase, depending on where the wage (and benefit package) is set. Similarly, if JG/ELR does increase income when implemented, this can lead to a one-off increase of imports. Even if the exchange rate does decline in response (and even if there is some pass-through inflation), the stable wage will prevent a wage-price spiral. If a nation is not prepared to allow its trade deficit to rise with rising employment and income in the JG/ELR program, it still has available all policy tools at its disposal with the lone exception of forcing the poor and unemployed to bear the entire burden. In other words, it can still use trade policy, import substitution, luxury taxes, capital controls, interest rate policy, turnover taxes, and so on, to minimize pressure on exchange rates if they should arise.