Tuesday, March 15, 2011

Roubini recommends a "Marshall Plan" for the Middle East

My previous post, Dr. Doom's Latest Warning, put forward Nouriel Roubini's caution that previous stagflations resulted from oil price spikes. Roubini is now concerned that the situation in MENA (Middle East and North Africa) is threatening a repeat, which would result in a double dip for the global economy.

I also cited a post of Mahdi Darius Nazemroaya showing how Pan Arabism is on the rise and could present wider geopolitical problems for the West if not handled appropriately. The demographics of the region are youth-dominated, and the problem is that youth feels left out of the political process and is cut out of the economic picture.

The West must address this challenge creatively. The US especially cannot hang out the promise of democracy and progress without delivering on this promise. Roubini concludes that what is needed to do this is a new "Marshall Plan" for MENA.

... the time to act is now. The transition from autocracy to democracy in the Middle East is likely to be bumpy and unstable, at best. In countries with pent-up demand for higher income and welfare, democratic fervor could lead to large budget deficits, excessive wage demands, and high inflation, ultimately resulting in severe economic crises.

So a bold new assistance program should be designed for the region, modeled on the Marshall Plan in Western Europe after WWII, or on the support offered to Eastern Europe after the collapse of the Berlin Wall. Financing should come from the International Monetary Fund, the World Bank, the European Bank for Reconstruction and Development, as well as from bilateral support provided by the US, the European Union, China, and the Gulf states. The goal should be to stabilize these countries’ economies as they undertake their delicate political transitions.

This is an area where MMT principles could play a formative role, especially the employment assurance program. The government acting as employer of last resort extends a job guarantee for anyone willing and able to work in order to provide employment for anyone without a job offer from the private sector.

The wage associated with the employment assurance program would be under the minimum wage offered in the private sector so that government would not be competing with the private sector. The employment assurance program provides a buffer of employed instead of a buffer of unemployed.

(If you are new to MMT and this raises your eyebrows, the employee assurance program has been exhaustively explored and documented by professionals studying employment. See, for example, CofFEE — Centre of Full Employment and Equity for explanation and references.)

The employee assurance program has several benefits.

1. An employment assurance program greatly reduces or eliminates unemployment. Unemployment is associated with many negative social and economic factors, and it is a key factor in the present unrest.

2. An employment assurance program transfers unused resources to the public sector for public purpose, which could be used for public improvements. This would also serve to train workers in various skills that could be drawn on by the private sector.

3. The income from the employee assurance program would increase demand, spur investment, and increase growth in the local, national, and regional economies.

4. The guaranteed wage serves as a price anchor in achieving full employment with price stability, a major objective of MMT.

The new "Marshall Plan" would not be needed to fund the employee assurance program in the MENA countries that are monetarily sovereign, hence, are able to fund themselves with currency issuance. However, the new "Marshall Plan" could provide foreign reserves needed for importing materials needed for projects, as well as enough goods, especially food, to meet increased demand. This would mean that the new "Marshall Plan" would also increase trade with the sponsoring nations, making it a win-win.

Undertaking such an international developmental program would demonstrate that the way forward is through cooperation and coordination in putting resources to work is a sustainable fashion. Failure to do this will result not only in huge forgone opportunity that can never be recaptured, but also it also risks a volatile area of the world spinning out of control with unpredictable consequences.


Mario said...

brilliant idea.

I completely agree and in fact I also think this Japan catastrophe is great for MMT to really step up and show us what it's made of...not only do the Japanese people need it but the whole world needs to see once and for all what a floating exchange rate system can do in a deflationary spiral + major earthquake + tsunami...I can tell you one thing...raising taxes is probably the WORST IDEA possible!!!

googleheim said...

Japan does MMT and eats all of this for breakfast.

If the Japanese stimulate with $700 billion worth of Yen to their banks, then they will be able "to buy more US Treasuries".

If they convert U$D to Yen they lose due to Yen strength.

If they print Yen, then they win because of strength of Yen to USD and all other currencies.

They can print and buy up your backyard.

The USD will not spike because Bernanke will not let our standard of living appreciate as per Mosler/Norman pointing out how the currency game is rigged.

Kevin Fathi said...

If Lew Rockwell(of the Austrian School)has an article published in Al Jazeera, surely Al Jazeera would accept an article about a Job Guarantee program. Perhaps James Galbraith or Warren Mosler could do this?

Mario said...

"The USD will not spike because Bernanke will not let our standard of living appreciate as per Mosler/Norman pointing out how the currency game is rigged."

I'm with you completely until here...how is bernake manipulating things with currencies? Just asking...want to understand.

Where does Mosler/Norman talk about this?

Also I think in the other post on currencies, Tom and Mike both said that sure foreigners could buy up over here but only if we let them...we don't need to sell to them and I think that we definitely need to regulate that...just like we need to regulate university students to stay in the USA for 5 years or so after they graduate from a US uni.


Tom Hickey said...

Good idea, Kevin. The Roubini post that initially appeared at Project Syndicate was re-posted by Al Jazeera as an op-ed.

Musgrave said...

1. If the wage in JG is less than min wage, precious few will take the work – certainly in countries where unemployment benefit is roughly comparable to the min wage.

2. As regards training, several studies in Europe have shown that the training associated with “make work” schemes” produces less successful subsequent employment histories than straightforward subsidised work. I.e. “learning by doing” is better than listening to a lecturer.

3. If JG projects consist mainly of the recently unemployed, i.e. relatively unskilled, plus there are few other inputs like capital equipment or materials, output per head will be hopeless. On the other hand if there are plenty of those other factors of production, those other factors will have to be knicked from the existing economy, assuming the latter is at capacity. Net effect: skilled labour and other factors are transferred from normal and productive use to “make work” schemes. Net result: GDP is reduced.

Moreover, if a JG project does involve a plentiful supply of “other factors” it becomes indistinguishable from a normal employer. This anomaly was obvious to everyone in relation in the WPA construction projects in the 1930s: many WPA construction projects were almost indistinguishable from normal contractors, and the latter objected, quite rightly, to the subsidy behind WPA.

I’m in favour of something roughly along the lines of JG, but no one – not even Warren Mosler or Bill Mitchell – has anything resembling a grasp of the theory behind JG.

Tom Hickey said...

Ralph: I’m in favour of something roughly along the lines of JG, but no one – not even Warren Mosler or Bill Mitchell – has anything resembling a grasp of the theory behind JG.

Ralph, I would be interested in what would you suggest, in particular for MENA, where unemployment is endemic in a population that is overwhelmingly young and restive.

Demographics Of Africa And The Middle East Continue To Explode

I realize that a comment doesn't afford much scope for developing this. Have you a post on it? If not, it's a timely topic, if you are open to hints.

Letsgetitdone said...

When the Central Bank of Japan prints money and "injects it" into the economy, that's still monetary policy and isn't very stimulative. What Japan needs is for the Government to spend money on recovery efforts, and to do it without taxing and, without (for political reasons) issuing debt.

Mario said...

Musgrave, I respectfully do not agree w/ you. However I do share your desire to examine it more closely. I think point #3 is important but I don't think you reach the proper conclusions. My responses match your # points. I can't post it all in one shot...so I did it in two.

1.Do you have any evidence or are you assuming the way opportunity cost will work? I know a ton of people that work for minimum wage or thereabouts instead of UE and I also know a ton of people that would love a job...any job...at this time. This job would give them health benefits too remember. But if we do go with your seemingly irrational and unfounded assumption that a person will just "graze around" on UE, then what about when their UE runs out? Where do they go then? Our society has nothing for them but homelessness or charity. I am actually kind of surprised about this point on premise alone. How many people statistically have NEVER WORKED AGAIN once they got on unemployment? Right. This seems to me to be a ridiculous argument.

2. who said anything about a "lecture"? Essentially this is subsidized work. It's to get people working where the government is their employer. Real job, real work, real money.

3.These are good points & I think they're legitimate. However you do realize you said if the economy is "at capacity." Right...but we're not at capacity...we're far below it & far too many people don't know what to do & the private sector doesn't seem to be able to lend a hand or a job. So even if total revenue is below variable cost (aka the shutdown point) & the government is running losses on its books...so what! They are still paying variable costs (labor) into the private sector and that's the whole point...remember the government is not revenue constrained. It's about jobs not making a "profit." Government owns all money anyway. However this is all assuming the project does run below variable costs...and I don't think it will. You're assuming it seems to me that this is factory work where they are producing something (hence your use of output). But what kind of fixed costs are there to hire an assistant in an already existing department? One more computer? A phone? I mean it's so low. In fact I think it's very possible that the government is losing money NOW, b/c they have tons of fixed costs that are just not being used equating to a business that's shutdown. They are making zero revenue on those fixed costs...all they'd have to do is meet variable costs and boom they are better off than before. How many shovels do you think the government has lying around that aren't being used?

Mario said...

musgrave here's part 2 ;)

The jobs would probably be more like cleaning up highways, digging ditches, scrubbing floors, simple computer data work, answering calls, switch board operators, assisting other teams and departments w/in the government, etc. There is definitely room for the government to become more efficient and less backlogged! In the case of the NEMA countries the jobs could be more extensive b/c they have more infrastructure needs that aren't getting done anyway so there's not a competitive market to crowd out. To say we'd see a drop in GDP I think is unfounded, simply b/c the government jobs would not be in competition with other companies. That's like saying creating a new government department (like Homeland Security) drops GDP...huh? I don't think so. The private sector is not large enough to provide employment for all people, therefore how could GDP be reduced by having more workers? Fixed costs means output sales to get them too remember. Remember these jobs would not (or at least very little) compete with private sector jobs. Full capacity doesn't really matter either when talking about a government job program b/c if there's someone that needs a job then we're obviously not at full capacity!

I think it's more than possible...it's necessary at this point...also when you add in the fact that we have a trade deficit plus the GFC...we really need this imho.

Thanks and Cheers mate!

Mario said...

letsgetit done I agree completely and have been saying the same thing. We seem to be on the same page more often than not lately.

cheers mate!

Mario said...

in fact when you really think about it...what "revenue" does social security admin. make? I don't think any right...it's a service we provide ourselves...right or wrong or what have you...it's what we do. I think the same thing applies to many of the government departments...I mean the government, at least as far as I know, go around making sales in the private sector to turn profits on things. Right?!?! What revenue does the police force bring in? None hence all the blabber about taxes and allocations, etc., etc. So the whole concept of total revenue exceed average variable costs or average total costs for an economic profits is completely the wrong paradigm to begin with. So it would seem to me at least.

Musgrave said...

Tom, In answer to your question what do I “suggest” as an alternative to JG, I’ve set out details here:


Re a Marshall Plan for North Africa, I’ve got doubts. Marshall Plan worked for Europe in the 1940s because Europe had a technically competent population which had bombed itself back almost to the stone age. All it needed was machinery and materials, which it got thanks to the Marshall Plan. In contrast, why has North Africa failed to copy the West’s technical and job creating abilities (despite being on Europe’s door step), whereas Japan succeeded in copying same almost a century ago? I suspect there are deep cultural or genetic factors at work here which a Marshall Plan will not overcome. To illustrate, the Tazara railroad in East Africa, built by the Chinese and run by Africans is chaotic: constant derailments, accountants running off the with railroad’s money, etc. Looks like the Chinese will take over running the thing.

Mario, I fully accept that a proportion of the unemployed would prefer JG to idleness. But therein lies another problem. Where someone finds JG preferable to idleness, their incentive to seen normal work is reduced, which is inflationary. That problem is not insuperable: it just means that JG must have a workfare element – i.e. “do this JG job else your UE gets cut”. The Swedish labour market economist, Lars Calmfors, recognised this and called it “The Iron Law of Active Labour Market Policy”. In other words, absent a workfare element, JG will to some extent be AT THE EXPENSE OF normal employment.

Next, you ask what evidence I have that a significant proportion of the unemployed are happy to “graze around” rather than look for work. Answer: a study of the unemployed in the UK, “A National Survey of the Unemployed”, by W.W.Daniel, p. 70 found that a quarter of those becoming unemployed waited a month before starting actively looking for work. And (p.74) about a third turned down job offers.

Musgrave said...

Mario, Re training, lectures, etc. (point No 2), I only mentioned this because Mike Norman suggested that JG should incorporate training (as advocates of JG type schemes often do). And numerous such schemes in Europe in recent decades have incorporated training. Training that leads to a formal recognised qualification is fine by me, but the evidence is that training associated with JG type schemes is not worthwhile. Straightforward subsidised work is better (as part of a JG type scheme or in the form of some other type of subsidised work).

Re “capacity” (No. 3), etc. If an economy is below capacity (i.e. unemployment is above NAIRU), the best way to raise employment is to boost demand. Thus JG only really makes sense as a NAURU reducing tool. I.e. it is legitimate to assume unemployment is at NAIRU when considering JG.

On that assumption, any skilled permanent labour, capital equipment etc used by JG will have to be taken from the existing economy: i.e. the latter factors of production move from more productive to less productive use. Thus there is a danger that JG reduces GDP.

My preferred solution to that problem is to leave the latter factors of production in place (i.e. leave them with their existing employers, public and private) and instead, subsidise the unemployed into work with EXISTING employers, rather than subsidise them into work in specially set up JG or WPA type schemes.

E.g. the best thing to do with a unemployed teacher is to allocate them to an EXISTING school as a teaching assistant, or similar, rather than have them sweep the streets.

Mario said...

ahhh I see what you mean particularly about reduced GDP...that's a very good point and I like your solution about subsidizing existing employers. That really is great.

I also like your Iron Law of Active Labor Market Policy. It could activate after a certain amount of time on UE. Love it. Completely agree.

it is legitimate to assume unemployment is at NAIRU when considering JG.

Is this to say that you really don't see a JG maximizing full employment based upon your reduced GDP analysis?

It's interesting, b/c I think the subsidy idea would likely cause "problems" with people...I have this sense that people will be very suspicious of government subsidized work like this...even though I think it's a great idea...I think others (like co-workers) will feel like it's just "too easy" to work like that. I actually think this "too easy" kind of suspicion is one of the main reasons many people resist monetary sovereignty in a floating exchange rate system...they think..."no. It can't be like that...it's too easy!"

Thanks for clarifying. I like your ideas.

Wouldn't it be cool if the government allowed a way for people to submit their ideas to them to consider implementing?...and of course they actually listened!

Tom Hickey said...

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