Recessions are very costly events. The income losses come quickly and sustain for several periods after the worst has occurred. Unemployment rises sharply and if government doesn’t take appropriate action (job creation), it takes a very long time to return to previous levels. The losses of income are huge and are lost forever. The related pathologies such as increased rates of family breakdown, increased crime rates, increased alcohol and substance abuse, increased suicide rates, increased incidence of mental and physical problems, the lost opportunities for skill development and work experience among the young, make the costs of enduring recession very high. These costs dwarf any of the estimated costs of so-called structural rigidities (micro imbalances) that have been produced by researchers over the years. Mass unemployment is the single greatest source of income loss. It is amazing therefore that policy makers do not prioritise the avoidance of recession yet expend vast energy talking about structural reforms etc. The fact is that recessions can always be avoided and should be. Governments can always adjust fiscal policy settings to ensure there is sufficient total spending in the economy to avoid recession, irrespective of what the private sector spending patterns are.…Bill Mitchell – billy blog
Recessions can always be avoided and should be
Bill Mitchell | Professor in Economics and Director of the Centre of Full Employment and Equity (CofFEE), at the Charles Darwin University, Northern Territory, Australia
12 comments:
Governments can always adjust fiscal policy settings to ensure there is sufficient total spending in the economy to avoid recession,
Perhaps true in a benevolent dictatorship, certainly not true in what passes for representative democracy where you must get a thousand or so congresscritters to agree on economic policy in a timely manner.
The only politically feasible way that I can envision to implement functional finance budgeting is to pass a functional finance budgeting requirement (as was proposed in 1946) and include some sort of mathematical rules for budgeting.
Possibly the rules could include indexing the tax rates to the unemployment rate.
Alternately you could index a social credit amount to the unemployment rate. That would be in keeping with Abba Lerner and C.H. Douglas's notion of a social credit calculated to offset demand leakages.
Re: Australia's post-WWII "golden years" that maintained full employment and low inflation for 30 years. That is indeed a remarkable data point, a reminder of what is possible (even without a JG), but there was some luck involved -- it was a period of stable energy prices, strong growth in the US and Europe, and an absence of major Western wars.
"The only politically feasible way that I can envision to implement functional finance budgeting is to pass a functional finance budgeting requirement"
The Job Guarantee implements functional finance and handles the cyclical parts.
That's why it needs to be strong and universal.
Everything else is then a matter for the democratic representatives. And one of the rules of democracy is that those elected are permitted to screw up.
Because if they aren't then you don't have a democracy, you have a form of autocracy.
Trying to come up with some totally automatic system and a set of rules administered by Very Clever People is a form of autocracy.
One which lots of economists and quite a few political theorists are strangely keen on.
A JG is not full employment unless you redefine full employment as picking up litter for minimum wage, regardless of skill and experience.
The 1946 functional finance budget proposal specified that the president submit a full employment budget to congress. The full employment budget could be achieved either by increasing the size of government or by reducing taxes, subject to negotiation between congress and the executive branch. It could include some direct job creation or not, subject to the politicians' discretion. One president might emphasize direct job creation, the next president might emphasize tax cuts. All consistent with Warren Mosler and Abba Lerner.
A JG *is* a "totally automatic system and a set of rules administered by Very Clever People." So your real complaint is that my proposed automatic system is different than your proposed automatic system.
My criticism of the 1946 functional finance budget proposal is that it lacked "teeth." What if the budget did not actually achieve full employment, either due to incompetence or apathy? Unless you have a great deal of faith in politicians to do the right thing -- and I don't -- then there needs to be "teeth," and that requires an automatic rule-based system. The JG is one such system, indexing tax rates or indexing social credit could be another.
"A JG is not full employment unless you redefine full employment as picking up litter for minimum wage, regardless of skill and experience."
Yes it is. You just have to deal with the concept that skills go obsolete, and that the majority of JG demand comes from the secondary labour market which is generally unskilled.
Everything else is in the gift of the private sector.
A JG is just an automatic stabiliser program that pays the living wage to people who do stuff. It doesn't require a cabal of clever people to come together every month to make decision.
You just give people a job and pay them.
Politicians are the way we get things that need deciding done. It's the least bad way of doing that once the auto stabilisers of the JG, and progressive taxation deal with the cyclical variation. Then you can make strategic calls based upon political priorities.
If you have no faith in them then you are proposing something other than a democracy. A dangerous concept.
Skills go obsolete? No, skilled jobs are moved offshore, or filled by immigrants who will work for less than natives, all to the benefit of the 1%.
the majority of JG demand comes from the secondary labour market which is generally unskilled.
If by "JG demand" you mean the long term unemployed, then the opposite is true -- it is the older workers who are most likely to suffer long term unemployment. For example, I have a friend with a PhD. in Chemistry who was laid off (from a government job) and has been unemployed for several years. He will probably never be hired for the rest of his life since he is now tainted by long-term unemployment. Is chemistry an obsolete skill? Only in the US, where our manufacturing base has been offshored to please the 1%.
Everything else is in the gift of the private sector.
Yet a good chunk of the highly skilled jobs in the US -- perhaps a majority -- are directly or indirectly supported by the government. I.e., military, aerospace, spy, medical, education, and nuclear. Like my friend the unemployed PhD. Chemist who had formerly worked at a Federal nuclear "lab" (really a nuclear waste dump).
You just give people a job and pay them.
But why not give them skilled jobs, as many of the New Deal programs at least attempted to do? Why not pay them the prevailing wage for their occupation, as the New Deal WPA recommended in their final report?
Democracy? Neil, we don't have a democracy.
What I have proposed is consistent with our existing political system, and would have to be passed by congress, and would be subject to congressional oversight. No different than the EPA, the IRS, the NSA, or any other government program in that regard.
If we had a true democracy, there would be no deficit spending, since the public opposes deficits. Polls show 74% of Americans supporting a balanced budget amendment. There's your democracy.
Democracy only works when the public is educated. In the US, we have a poorly educated public -- who don't believe in vaccines or in evolution, never mind functional finance -- and who get their information from the oligarch-controlled media. But that's another rant. :-)
Deficit spending is only needed to offset saving desire. In a state in which saving for future needs was unnecessary owing to social provision, there would be not need for deficits, and with no rent, the need for taxation would be low to non-existent also.
A distribution system would (and will) be developed to effect distribution more effectively and efficiently. Distribution within families doesn't operate through market, and the human families needn't either. Market distribution using "money" is just one convenient way to do it, and depending on how it is organized this can be efficient or not, fair or not, effective or not. Presently, it is not working very well, judging from results like Gini coefficients, measures of inequality, and poverty statistics.
Dan, you are worrying about non-problems, and as usual attacking straw men. In a full employment economy, to which a JG is essential, people with real skills - your chemist friend - are going to almost certainly get a job using their skills that pays better than the JG wage. In part the money he would get would come from JG supported demand, especially in recessions.
His better job could be a government job. But then it is not a JG job. Paying more, a prevailing wage, poses an inflationary risk. A society might or might not decided to do this. Contrarily, a JG will be disinflationary. The JG would fit the job to the worker, so would offer skilled jobs.
The point of the JG is that it is the minimum for a sane society, not the maximum. Everybody has their own bright ideas to tack on. But these bright ideas are of trivial importance for individuals and for society compared to the JG - that everybody who wants a job will get a decent one at a living wage. Unfortunately the only people who understand that are the plutocracy & the MMT thinkers. Many MMT fans are sorely deficient in understanding the JG and its effects.
Calgacus, I am worrying about real problems -- what would a JG do for me? What would it do for my unemployed & underemployed friends?
in a full employment economy
But we've never had a full employment economy in my lifetime, and a JG would not guarantee full employment unless you downgrade the definition of full employment to "picking up litter for minimum wage."
a prevailing wage poses an inflationary risk.
There is zero inflationary pressure from paying a prevailing wage, or slightly less than prevailing wage. Who is worrying about non-problems?
To the contrary, paying the prevailing wage for each occupation, or slightly less, would create a "buffer stock" situation for each occupation, if you believe in buffer stock wage theory (I don't).
a JG will be disinflationary
For once we agree! A minimum wage JG could drive down wages, and that's a bad thing.
The JG would fit the job to the worker, so would offer skilled jobs.
That was Minsky's original promise, but it was a lie, or at best a foolish ivory tower pipe dream, and most MMTer's have since admitted as much. There has never been a realistic plan to create skilled JG jobs to fit the worker.
For example, given the JG's rule limitations (max 20% of budget on non-labor, cannot compete with private sector, cannot duplicate existing govt. programs), what kind of skilled JG jobs would you create for:
-- a 60 year old machinist?
-- a 60 year old welder ?
-- a 60 year old millwright ?
-- a 60 year old semiconductor process engineer?
-- a 60 year old nuclear chemist?
-- a 60 year old geologist ?
-- a 60 year old logger?
-- a 60 year old cowboy?
everybody who wants a job will get a decent one
That would be awesome, but it depends on your definition of "decent." What is "decent" for one person is indecent for another person, depending on skill, experience, aptitude, and career goals.
it is the minimum for a sane society
Well, chattel slavery was a minimum for the pre-Civil War South. There were no unemployed or blacks in those days. Every black was given a job, was provided with a basic subsistence, and even received basic health care when they were sick. According to MMT's definition of full employment, the pre-Civil War South must have been the promised land?
If MMT embraces Abba Lerner's functional finance, as it claims, then why would any MMTer oppose a law that mandates functional finance budgeting?
If functional finance budgeting can provide full employment with low inflation as Abba Lerner claimed, and as was successfully demonstrated for 30 years in Australia, then why do we need a JG, anyway?
Those are rhetorical questions, because the answers become obvious if you read Minsky thoroughly, and understand his personal biases, and acknowledge his false assumptions.
Dan L, the JG is designed for a single purpose, that is, ending involuntary UE by "mopping up the residual" rather than leaving it unemployed.
It's not about giving everyone a work at their skill level. Unemployment compensation gives workers the space to seek new work.
The JG has to be seen as working along with using the sectoral balance approach to macro and functional finance in policy formulation. This reduces the cycles that endemic to capitalistic economies and eliminates the buffer stock of unemployed since everyone has a job offer.
Obviously, this could be supplemented to compensate for deep cycles where UE extends for many being the expiration of unemployment benefits by extending the expiration date, as the Democrats attempted to do, for instance.
MMT doesn't address the foibles of capitalism, and there is no way to fix capitalism without modifying it substantially so that it no longer resembles economic liberalism. That's a whole other matter than the MMT approach to policy in a capitalistic economy.
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But we've never had a full employment economy in my lifetime, and a JG would not guarantee full employment unless you downgrade the definition of full employment to "picking up litter for minimum wage."
That is not the JG proposal, but a straw man, as are the "rule limitations" you add to it below. I explained how a JG would guarantee full employment, even by your unusual lights, or by any definition ever used.
For once we agree! A minimum wage JG could drive down wages, and that's a bad thing.
There is no other kind of JG possible. God cannot make a JG which is not at minimum wage. Of course a JG will increase / support wages, as it constitutes more HPM spending than not-having-a-JG. More money is more money.
What is "decent" for one person is indecent for another person, depending on skill, experience, aptitude, and career goals.
Umm, no. What almost all people essentially want is enough money to live in their community, decent working conditions, some relation to their training, experience, hobbies, abilities. Period. Most people know "You can't always get what you want But if you try sometimes well you just might find You get what you need" - and that's the JG.
Very few people are extremely rigid prima donnas with narrowly specialized, non-transferable skills for which demand suddenly disappears. Very few people like me. :) Do you and your friends think you are naturally better than other people, naturally deserve more? I think the human race has advanced to the point that that is a rare attitude.
If MMT embraces Abba Lerner's functional finance, as it claims, then why would any MMTer oppose a law that mandates functional finance budgeting?
It doesn't.
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If functional finance budgeting can provide full employment with low inflation as Abba Lerner claimed, and as was successfully demonstrated for 30 years in Australia, then why do we need a JG, anyway?
Abba Lerner did not claim that. He distinguished between high full employment and low full employment. High is the genuine full employment, low full employment is employment up to the point of inflation. The difference is what MMT identifies as the buffer stock.
Lerner had a complicated wage policy to address this, later he had other anti-inflation policies like MAP. You might like the complicated version ch 14-16 of Economics of Employment because it addresses various segments of the labor force differently. But it bears more resemblance to the JG/buffer stock concept than I had thought & incorporates the mysterious basic principle of eradicating unemployment by paying unemployed people more money for their labor. Whodathunkit!
Me, I like KISS- so I think unemployment policies should be directed at the unemployed. In a society with a JG the people you are agonizing over would not be unemployed, even by your stringent definition, for the reasons I described in my last comment: Trickle-up is automatic, as everyone has always known. I am not opposed to such complicated schemes - like the prevailing wage - it is just that they are obviously unnecessary - and they could be inflationary (probably not too seriously) if they maintain employment in obsolete occupations. Again, since trickle-up is automatic, you are worrying about social problems which no society has ever had.
Bill Mitchell is the expert on Australia. His & Wray's etc point is enduring functional-finance low inflation full employment relies on some form of JG, if not in name. The JG is just a FF low-inflation full employment targetted at uhhh, the unemployed. You said Australia was successful, but it was lucky. What happened when "the luck ran out" - the inflationary 70s. Well this case of the economic sniffles was used as an excuse for amputation, bleeding & poisoning directed at the weakest in Australia & much of the world. Mitchell & Muysken point out that countries like Norway, Japan, Austria and Switzerland maintained the good old days of les Trentes Glorieuses by having a buffer stock of state employment, like the national rail system etc - essentially a JG.
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Those are rhetorical questions, because the answers become obvious if you read Minsky thoroughly, and understand his personal biases, and acknowledge his false assumptions.
I don't know why you are so incredibly biased against Minsky. I don't think you have once identified any bias or false assumption he makes, but exposed your own. I've never seen you quote anything from Minsky that supported your strange accusations.
Well, chattel slavery was a minimum for the pre-Civil War South.
A weird comparison, and not directed against my statement. I of course said a minimum for a sane modern monetary society. Chattel slavery is a crime whenever it happened. But MMT academics should not shy away from the comparison as they do. If you want to make the comparison, a monetary society with a JG vs one without a JG like ours is like classical or US Southern "human capital" chattel slavery vs. West Indian or WWII death camp "human beings as consumed inputs" slavery. The former is evil, insane but not as evil, as insane. My point again was that a monetary society without a JG is simply insane, insane behavior caused by insane lack of self-knowledge.
I still am unclear about your position - do you actually oppose a JG? You ask why a JG is necessary, well, as I have said, if there is one person unemployed, the society is insane, just as if it said it was OK if there was just one slave. I & other people who understand economics a bit think it is fantastically unlikely - in practice impossible - for a society without some kind of JG to meet that minimum sanity condition. If you do agree that JG is not bad thing, then there really isn't much practical difference. Live in a society with a JG, study past societies that came close, listen to people old enough to have lived in them, and you would see that the things you're worrying about are non-problems.
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