Originally published April 6, 2012 on the New Economic Perspectives blog.
There were a number of questions, but commentators dealt with most of them quite well. I’ll organize the questions and responses and then add a few of my own. I suppose the excellent comments show that we’ve made a lot of progress. I’m dropping the names and combining posts. Sorry this is late.
Q: The entire buffer stock argument as set out above and as set out by Bill Mitchell is flawed. JG is no more effective in “restraining market pressures on wages” than is unemployment. I.e. if a country has a given number of JG employees making a given amount of effort to find regular jobs, that has exactly the same “restraining” effect on wages as the same number of UNEMPLOYED individuals making the same effort to find regular jobs. Of course JG can make JG employees more employable, and that in turn would certainly “restrain market pressures on wages”. But that point was not mentioned above and it’s not the basic point in the buffer stock argument.
Responses: NAIRU becomes NAIBER. That’s what Lerner always said. It has roughly the same amount of effectiveness as current unemployment-based policies… but everyone has a job and become far more employable. A buffer stock of workers is a restraining influence on wages, whether they are unemployed or JG-employed. I can’t see why there would be any difference in the influence. The point is that the JG-employed buffer stock IS just as effective as an unemployed buffer stock, and far more humane and far more beneficial to the economy. People engaged doing something have a lower hiring risk than those not doing a job. Reducing risk reduces costs in the economy.
Wray’s additional responses: The points are well-argued. What the skeptic does not seem to understand is that it takes two to tango: someone who wants a job and an employer willing to hire her. A long-term unemployed potential worker can try as hard as she might, but if employers view long-term unemployed persons as “damaged goods”, they simply will not take the risk. The evidence on this is voluminous. Employers much prefer to hire those who are already employed. Now the only objection is that employers will view JG workers as “damaged goods” simply because they are in the JG program. So this comes down to program design. I resist “means tested programs” for exactly that reason. We want the JG program to be universal—not restricted to poor, low educated, long-term unemployed, and so on. Anyone can participate. Indeed, everyone should be encouraged to participate (it can be part of the normal transition from school to college or work). The projects should be well-designed both in terms of service to the community but also in terms of enhancing skills on the job. There is nothing inherent in a JG program that produces “damaged goods” workers—so the objection to JG as an employable buffer stock that is better than an unemployed buffer stock is simply wrong. The question requires a presumption about program design: that it will produced “damaged goods” workers. There is nothing inherent in a JG that would do so. It is true that a badly designed program could produce damaged workers. But there is no justification for automatically assuming such a program.
Q: ”The greater the costs to them of losing their higher-paying jobs.” Does that then require that the system remove its employment protection programmes so that employers can ‘hire and fire’ at will? Or does it work at a more macro level, where those businesses with, say, unionised high staff costs are vulnerable to failure due to competition from businesses able to hire directly off the JG pool?
Wray’s Response: No we do not need to remove social protection. JG is an add-on. We can discuss later a specific proposal (for specific countries) to eliminate other parts of the social safety net if desired (I don’t favor that—I like more choices, not fewer). Note that the threat of lower wage workers (domestic or foreign) to high paid union workers is always a real threat—JG is not special in that regard. Problems are made worse if business can participate in the JG program, getting the federal government to pay the wages. That is why I do not favor for-profit business participation—because the temptation is too great to get the workers onto the government payroll. If for profit firms are not allowed to participate, then the main threat comes in the public sector: local government uses JG projects to replace existing workers. How can we protect union workers (etc) from the threat of replacement by lower-paid JG workers in public projects? We need to have participation by organized labor in the project approval stage. It is a danger, but it is manageable.
But remember that the JG is an add-on. Right now we have unemployed people desperate to get jobs. And very low wage workers (many even working below minimum wages) desperate to get better wages. Don’t you think they already depress wages and threaten union jobs? Yes they do. The JG program creates an effective minimum wage (anyone can get it) and by gradually raising standards overtime we succeed in eventually achieving a living wage. I do not see how the current system is better than one with a JG. Yes, attacks on unions could continue to occur with a JG. We need more public policy to “level the playing field” for workers and their unions.
Q: I understand from a video conference that appears in another blog (Modern Money Mechanics – Fiscal Sustainability Teach-In) that a JG-program was implemented in Argentina. Can you please comment on that experience, or point me in the direction of materials that may shed further related light? This country has one of the highest inflation rates in the world right now, but I have to assume that relates to other macro-economic policies in place, and not the specific JG-program that is the topic of this blog.
Wray’s Response: Go to http://www.levy.org and http://www.cfeps.org for papers I wrote with Pavlina Tcherneva on Jefes. Unfortunately, Argentina has almost phased out the Jefes program, so it cannot act as a buffer stock program. In any event, while it did tremendous good in the first few years, it always deviated in significant ways from our proposal. Still we learn a lot from mistakes. We went several times to Argentina to interview workers, project coordinators, and government officials at all levels. There was a tremendous disconnect between high level officials and managers and workers “on the ground”. The high level officials saw the program as temporary—a crisis response.
In a sense, the program was actually too successful—it helped to promote recovery, and as the private sector began to grow, most of the males got hired out of Jefes (the limited JG program—read the papers for details, it was a means tested program that paid half the poverty line in wages for only half-time work; obviously all those are deviations from our proposal). So the government moved most of the women into welfare and the remaining few men onto unemployment insurance. In other words, it preferred to pay them for NOT working.
So a big lesson I learned from this experience is that you must focus on jobs as a human right—something I have done in this primer. That is also the approach India has taken with its program. That way government cannot take away the program when the economy begins to grow quickly—on the argument it is no longer needed.
In any case, Jefes cannot constrain inflation because it has been mostly dismantled. (Let me also say that I was just in Brazil and heard discussion about the big controversy over inflation data. In the US the mainstream media reports that the Argentine government underreports inflation. But others argue inflation is not as high as reported. I do not know enough to say anything about this. But as argued earlier in the MMP I do not believe the simplistic stories about inflation, high inflation, and hyperinflation—it is virtually never a simple case of excess demand driving up prices.)
Q: In that the employability of some categories of JG people IS NOT improve by doing JG work (and the empirical evidence is that in some cases it doesn’t) JG is no more of a buffer stock than is unemployment (which also fails to improve employability). So in this “no improvement” context, claiming that JG introduces an entirely new element to the labour market (i.e. a buffer stock) is just not true. In contrast, to the extent that employability DOES IMPROVE under JG, this a welcome characteristic of JG, but it’s not a characteristic of a typical buffer stock of some physical commodity. If anything, the quality of physical buffer stocks DETERIORATES with time. So what is left of the buffer stock analogy? Not much, far as I can see.
Wray’s Response: This, again, looks like a handwave to me. Present the empirical evidence that working in a JG is not an improvement over unemployment—if any such evidence exists. What I saw in Argentina is that most of the men quickly got hired out of the Jefes program. With regard to the comparison to physical commodities as a buffer stock that “wears out”, that is rather disingenuous. Yes if we store wheat that spoils and gets eaten by rats, it is no longer a buffer stock. That is rather obvious. To act as a bufferstock, you’ve got to keep the wheat in good shape. For labor to act as a bufferstock, it has to be kept in good shape. That is why the JG works so much better than unemployment. You don’t want your bufferstock drunk, engaged in crime, and imprisoned. You want it working.
Q: JG as a title works just fine for a fiscal progressive like me, but maybe there’s a title that would strike a chord with hardworking Americans who hate taxes because they incorrectly think their money is being used for unemployment benefits and the like. The Work-For-Pay Initiative, maybe. Employment Insurance. If you have homeowners’ insurance, and you lose your home, they get you another one. If you have car insurance, and your car is wrecked, they get you another one. If you had Employment Insurance, and you lose your job, they get you another one.
Wray’s Response: Yes, good ideas. We called it “public service employment”. When we get to the point of writing the Act and implementing the program, we do need a catchy title.
Q: You noted one off inflation from this. I would think this could be significant. You are talking about employing upwards of 20 million people (unemployed/underemployed) most of whom are not today receiving any payments in unemployment benefits. So I’m wondering what the increase in spending will be? It would seem to be in the order of 300 billion a year or so not counting benefits. That is a pretty good stimulus and on the plus side, maybe we can get the economy moving again. But there is a second order effect here. There are millions of jobs out there that pay only minimum wage and your $10 an hour far surpases that. So there will be an added bump as these businesses raise their wages to compete or simply go out of business.
Wray’s Response: These are all implementation details. We will need to take into account political, institutional, and economic realities when we introduce the program. Look at it this way: we can implement a JG program without increasing nominal aggregate demand if desired—set a low wage and remove other parts of the safety net (such as unemployment compensation and welfare) while raising taxes. NOTE THIS IS NOT MY PROPOSAL. I doubt that will be needed. There aren’t any developed capitalist countries that are operating near to capacity. (Indeed, that is why you mention the possibility we will have tens of millions in the JG—the massive excess capacity is just the flip side of the coin.) Outside WWII we’ve never reached capacity in the US.
Think about that: we had to move 50% of all US capacity to the war effort, making stuff to blow up, in order to get to full capacity. It always amazes me how low the expectations of our “free marketeers” are about the ability of capitalism to “deliver the goods”. I think we—and all other developed capitalist economies—operate so far below capacity we will be amazed at the economic growth we are going to get as soon as we create jobs and start thinking about the possibilities.
But let me repeat: JG is an add-on and we still have available all policy tools to constrain aggregate demand should that become necessary: raise taxes, reduce non-JG spending, raise interest rates (Note: in my view that can actually stimulate demand), impose credit controls, manipulate the exchange rate, impose wage and price controls, and stimulate the supply side to keep pace with growth of aggregate demand. All of them still exist. All we do is eliminate unemployment and replace it with a wage stabilizing bufferstock.
Q: JG proposals do include benefits that most minimum-wage jobs do not include. Health care is the biggest, but also child care, usually, and 401(k). Warren Mosler shrugs that off by saying he also proposes federal funding of health care and child care for everyone, not just JG workers. $8/hr with primo benefits would lure lots of workers from the private sector who do not have such benefits now. I think if we tried to do JG now, with 20+ million unemployed and underemployed, it would be a logistical nightmare and the cost would be politically un-doable, even if the JG wage were $10 cash only, no benefits. We first have to have a better fiscal policy (aka “pump-priming”) to get unemployment down to a more normal level, and then JG needs to be phased in so as not to cause too much political shock.
Wray’s response: That doesn’t make much sense to me. The US already devotes twice as much of GDP to healthcare as do similarly rich countries. It is unlikely that we will need more resources in healthcare—rather we need to change how it is provided and paid for. All plausible studies show that it takes far fewer resources if you treat health problems before they become emergencies. And it makes no sense to pay for healthcare through insurance premiums—as I’ve argued elsewhere with Marshall Auerback. But those are not topics for this blog. And if the problem is that the JG will increase aggregate demand too much, then we don’t need fiscal stimulus but rather the fiscal restraint as we implement the JG.
Fiscal stimulus is far more inflationary than the JG because it funnels money to the higher wage and higher price oligopoly sectors in the hopes some jobs might trickle down. As Pavlina Tcherneva argued on NEP’s main page, directed spending is much more effective at job creation and stimulating economic growth rather than inflation. Finally, the actual setting of wages and benefits will require analysis of the institutional, political, and economic situation of each country. The situation is much different in a rich and highly productive country like the US and all European nations versus the situation in a relatively poor and underdeveloped nation that mostly relies on subsistence agriculture. In some cases a phase-in of the program will be desired. We will discuss these issues later.
