MMP Blog #50 Responses

Originally published June 8, 2012 on the New Economic Perspectives blog.

As I said I am not going to provide responses to comments on the final blogs of the primer. In any case, the commentary has degenerated into a chat room utilized largely by aging retirees who do not understand that we’ve got at least 25 million people in the US who want full-time jobs but cannot obtain them. The JG is a program designed to offer jobs to those who want to work. If our aged retirees are correct, we’ll offer the JG at and no one will show up to claim the job. I cannot see what all the fuss is about.

The bigger problem is that most of this discussion fails to deal with the dynamics of our actual real-world economy. In my view, Hyman Minsky understood these dynamics better than any economist of the second half of 20th century. He is best known for his work on financial instability, of course. But he wrote almost as much-at least in his early years-on unemployment and poverty. He formulated the ELR / JG proposal that I have described in recent weeks.

I thought it might therefore be useful to provide a link to a paper I wrote that summarizes many of his papers on the ELR proposal, and to paste here the outline I use in class for a lecture on Minsky’s writings. Take a look at the outline, then go to my paper, then use the reference section of my paper to locate Minsky’s actual writings on the topic. This is only for those who are serious about trying to understand the argument that we need jobs to solve the “disease” of poverty, and that welfare will not be sufficient because of the perverse dynamics created. My paper is titled “Minsky’s Approach to Employment Policy and Poverty, Employer of Last Resort, and the War on Poverty,” Levy Working Paper September 2007.

Next up: A blog on inflation and efficiency.

MINSKY’S APPROACH TO EMPLOYMENT POLICY AND POVERTY
L. Randall Wray

1. GENERAL APPROACH: Analytical Institutionalism

• a. Structure of economy affects performance: emp, growth, inflation
• b. Institutions of real world affect how policies impact economy
• c. Policy change must act through individuals (must change their behavior) and through institutions (which constrain or empower)
• d. In a dynamic and complex economy, growth and policy have differential impacts across sectors: leading sectors, merely expanding sectors, and lagging sectors; diverse growth across sectors means prices rise before full emp.—even in sectors with excess capacity
• e. This alters the “trade-off”, such as Phillips Curve; Prices rise w/o necessarily reducing Unemp; and Emp can rise w/o inducing inflation
• f. Financial factors matter, affect market processes and the efficacy of policy; Need to include how the mix of govt debt and private debt implied by policy mix affects private behavior
• g. Higher growth, alone, is not an appropriate goal; need to consider how it affects allocation and distribution;
• h. Policy cannot really be general: it has differential allocational and distributional impacts

2. REDISTRIBUTION AS SOLUTION TO POVERTY

• a. Cannot rely on human capital investment—takes too long; gestational period = 18 yrs or longer
• b. Cannot rely on growth
• i. Growth doesn’t necessarily reduce poverty; wage dispersion actually increased 1948-66 (hrly wage dispersion fell in 1960s but offset by overtime pay in high W jobs and lay-offs in low W jobs); geographic and sectoral lagging
• ii. Growth actually tends to favor the leading sectorsrewards the better-off; not much trickles down
• iii. Growth is not necessarily sustainable; creates instability: high growth raises expectations, encourages high investment, shifts distribution toward profits, fuels explosive growth policy to restrain growth, generates bust
• iv. Policy to promote growth usually relies on investment; 4 flaws: financial fragility; inflationary; increases capital’s share; increases inequality of wage. Favors heavily monopolized, unionized sectors; increases private debts and thus interest payments and rentier income; can fuel stock mkt boom; promotes consumption of luxuries and emulative consumption
• c. Can we use redistribution?
• i. Radical Income Equalization: Redistribute gains from growth toward poor to move large proportion of population close to today’s median income, by taking from rich; arithmetically possible, but requires rate of growth of incomes above the mean would fall by 90%; and the cost of redistribution would grow over time
• ii. Negative Income Tax, or Social Dividend (BIG): Has 3 effects: incentive effect on labor supply (likely discourage women and others); inflationary impact through wealth effect (it is like a free insurance policy; even if budget is balanced, the benefits exceed the taxes); and inflationary impact thru reduction of uncertainty (lower liquidity preference, raises AggD). NIT cannot improve situation of poor because the excess AggD is inflated away.
• iii. Baumol’s Disease: constrains “share the wealth” feasibility; as productivity growth reduces inputs in leading sectors, relatively more are in lagging sectors; but competition tends to equalize W. If economy achieves balanced growth (ratio of the outputs of the 2 sectors remains constant) then rate of growth of economy falls toward zero (ever larger portion of resources are in low productivity sector).
• iv. Anti-poverty program must be consistent with underlying behavioral rules of a capitalist economy. Taxpayers don’t benefit much from welfare.

3. THE WAR ON POVERTY

• a. Conservative rebuttal: attempt to end poverty by changing people
• b. Cannot end poverty, can only give existing poor a better chance
• c. Accepts Unemp=5% as interim goal on way to 4%; too slack. Okun’s Law: every 1% point reduction increase GDP by 3% points; means lowering Unemp to 2.5% would create 3-5 times the GDP required to raise all above poverty line
• d. Must transfer from those who work to those who don’t; policy cannot rely on altruism; benefits to worker/taxpayer is small
• e. It is an admission that we cannot make the productive process work to provide factor payments to lift people out of poverty
• f. It puts the cart before the horse: if the poor change their character, then they won’t be poor
• g. Creates dependent class, not conducive to social cohesion or democracy

4. OUTSTANDING FAULTS OF CAPITALISM AND POLICY TO RESOLVE

• a. Keynes: 2 outstanding faults = arbitrary and inequitable distribution of income; and unemployment. Better econ performance since WWII has not resolved these.
• b. Can be resolved only thru euthanasia of rentier + modest bias of taxes and transfers in favor of poor + tight full employment
• c. Tight full emp = over broad range of occupations and industries, employers would like to employ more workers than they do
• d. Jobs, not welfare. Tight full emp helps poor in 3 ways: some move from Unemp to Emp; eliminates involuntary unemp; increases relative wages for the poor; Works to reduce poverty by increasing # of workers per family and by increasing growth of low-end wages relative to high wage jobs
• e. Need for low-W jobs to have faster W growth than high-W jobs; this means at low end, W growth > productivity growth; at high end, productivity growth >W growth. Pwill grow in low-W sectors; to prevent inflation overall requires some kind of constraint on P,W in high W sectors. Can be justified: previously low W workers “subsidized” high W workers thru unemp.
• f. Even the poorly designed War on Poverty did reduce poverty. It was designed to resolve insufficient Effective Demand, biased toward War, gave tax relief to rich, relied on trickle down. Still, by raising AggD it did tighten labor mkts, reducing poverty.
• g. Problem: the WOP/pump priming led to inflation and instability. Tended to favor oligopolistic industries; unionized workers; public sector workers in labor-intensive (Baumol disease) sectors
• h. Tight full employment was ultimately constrained by B-W—inconsistent with fixed exchange rate; cross of gold borne by the poor
• i. High Govt spending and welfare sets floor to AggD, encourages investment, profits, capital share, etc, so is destabilizing
• j. Promotes stop/go policy, that tends to increase W in leading sectors
• k. Only a jobs program can resolve the problem; directed demand, not general demand/pump priming

5. JOB CREATION AND EMPLOYER OF LAST RESORT

• a. Need “bubble up” policy not trickle down; targeted spending
• b. Take workers as they are and provide jobs that fit
• c. Provide jobs where workers live; slow down urban migration
• d. ELR wage becomes effective minimum wage; raises the floor; should increase over time faster than high wages to reduce spread; may need to constrain high wage growth
• e. Include part-time work; child maintenance; discounted youth wage
• f. Would work on projects with readily visible public benefits
• g. Probably need a permanent cadre to provide critical services
• h. Would partially euthanize rentier; expansion of these jobs doesn’t require private debt; won’t require speculative finance; doesn’t foster speculative boom
• i. Should set tax to balance budget when ELR employment = 4.5%  automatic stabilizing budget
• j. Would use progressive tax, and distribute benefits of publicly produced goods and services progressively; taxpayers would get something for their taxes, but program would redistribute. Taxpayers would benefit from parks, safety, clean streets, education, etc.
• k. Will provide jobs and public goods and services where most needed; urban ghettos, quell unrest
• l. A return to pre-WWII New Deal, which emphasized public employment; reduces investment, reduces capital’s share, reduces financial instability, favors consumption and pubic investment
• m. Won’t be inflationary; maintaining full emp does not have same inflation impact as moving to full emp. Raising AggD to move to full emp will be inflationary. But it hasn’t been shown that holding Unemp low is inflationary. Esp if full emp maintained thru price floor
• n. Need to drop gold standard; within a short time, the US dollar standard will arise based on ability of $ to buy US goods and services
• o. Make labor more homogenous thru education and training; but do not make this a reqmt for getting a job
• p. Jobs for all, available at min wage; govt agencies can bid for workers
• q. Will need some programs for those who lose high W jobs and fall into the ELR program
• r. Will still need welfare; children’s allowance; medical care for all
• s. But will solve most poverty problem; of the poor 30% work part-time, 40% don’t work at all.
• t. Not utopian; will not solve econ problems for all time. Will need adjustment, evolution.
• u. An alternative to the dole. Unemp compensation just institutionalizes unemp. Jobs affirm the dignity of labor
• v. Other policies: reduce bigness; restrain construction wage; need W&P controls for things govt buys (utilities, defense, health)
• w. Must change the system, not the people