Tuesday, September 26, 2017

Peter Cooper — The Income-Expenditure Model with a Job Guarantee

Under a job guarantee, there would be a standing job offer at a living wage for anyone who wanted such a position. Anyone without employment in the broader economy, or unhappy with their present employment, could opt for a position in the job-guarantee program. Similarly, anyone with less hours of employment than desired could top up their hours by working part-time in the job-guarantee program. In principle, the program might be locally or centrally administered. But, irrespective of administrative details, it will be assumed that a currency-issuing government funds the program.

One interesting aspect of a job guarantee, from an analytical perspective, is that it introduces an endogenous element to government spending. The government’s spending on the program will adjust automatically to variations in the number of people who accept the standing offer of a job. These variations will reflect employment fluctuations in the broader economy. Government spending will respond directly to employment fluctuations, and only indirectly to variations in income....
The Income-Expenditure Model with a Job Guarantee
Peter Cooper


Unknown said...

I wonder if any of those folks who are advocating part time jobs in the job guarantee program have ever held a part time job, and if they have, if they have held more than one part time job in an effort to get an income equivalent to full time work. It is very difficult if not impossible to get a living wage with part time work.

IMO, part time work if necessary for employers should be compensated at penalty wage rates 2 to 4 times the going full time hourly wage for the work in question. Employers have to be discouraged from employing workers part time. The effort has to be to give employers an incentive to hire workers full time.

NeilW said...

Under the Job Guarantee you can always have full time work. So the only part time jobs that exist will be ones that people have chosen for whatever reason. Similarly with zero hour contracts, internships and self employment.

Because the Job Guarantee competes with the private sector at a fixed wage it guarantees that anybody with part time work - even if topped up with JG work will earn more than the living wage. Because you can earn the living wage full time on the Job Guarantee.

AXEC / E.K-H said...

The profit effect of a Job Guarantee
Comment on Peter Cooper on ‘The Income-Expenditure Model with a Job Guarantee’

Peter Cooper analyses the effect of a Job Guarantee applying the familiar Keynesian formalism. This formalism is false because it lacks the pivotal variable macroeconomic profit. Keynesian macro models are since 80+ years only good for the wastebasket.

Economics has to be reconstructed from scratch. As new analytical starting point, the pure production-consumption economy is defined with this set of macro axioms: (A0) The objectively given and most elementary configuration of the economy consists of the household and the business sector which in turn consists initially of one giant fully integrated firm. (A1) Yw=WL wage income Yw is equal to wage rate W times working hours. L, (A2) O=RL output O is equal to productivity R times working hours L, (A3) C=PX consumption expenditure C is equal to price P times quantity bought/sold X.

Under the conditions of market clearing X=O and budget balancing C=Yw the price is given by P=W/R, i.e. the market clearing price is equal to unit wage costs. This is the most elementary form of the macroeconomic Law of Supply and Demand. For the graphical representation see Figure 1.#1

Monetary profit for the economy as a whole is defined as Qm≡C-Yw and monetary saving as Sm≡Yw-C. It always holds Qm+Sm=0, in other words, the business sector’s surplus=profit (deficit=loss) equals the household sector’s deficit=dissaving (surplus=saving). This is the most elementary form of the Profit Law. Under the condition of budget balancing total monetary profit is zero.

With this, the point to start with is clearly defined. Now it is assumed for simplicity that the business sector reduces initial employment L by half and that government immediately absorbs the unemployment such that total employment remains unchanged, i.e. Lb+Lg=L=full employment. The wage rate W remains unchanged and therefore total wage income Yw remains unchanged. Under the condition of budget balancing C=Yw consumption expenditures, too, remain unchanged.

Because labor input is reduced from L to Lb=1/2L the initial output is reduced from O to Ob=1/2O. On the other hand, the output of the public good increases from zero to Og=LgRg. This output is made available to the public for free by the government sector.

The wage bill of the business sector is reduced by half, i.e. Ywb=WLb with Lb=1/2L. The other half of the wage bill is paid by the government sector, i.e. Ywg=WLg with Lg=1/2 L. The government pays the wage bill Ywg with money created by the central bank.

Consumption expenditures C remain constant but the business sector’s output is halved. By consequence, the market clearing price rises from P0 to P1. As a result, the profit of the business sector rises from Qm0=C-WL=0 to Qm1=C-WLb=C-W1/2L.

Ultimately, the budget deficit of the government sector, i.e. Ywg, ends up as profit in the cash box of the business sector, i.e. Qm1=Ywg. This configuration can continue for an indefinite time with public debt vis-a-vis the central bank rising continuously and with the business sector’s pile of cash rising continuously.

What is rather strange is that the word profit does not appear once in Peter Cooper’s analysis of the Job Guarantee program which is in effect a Profit Guarantee program.

Egmont Kakarot-Handtke

#1 Wikimedia, Pure production-consumption economy

Six said...

Egmont, unemployment results from unspent income, also know as "savings", also known as "surplus", also known as "profit".

Tom Hickey said...

Need to keep coming back to the basic point. The choice is between a buffer stock of employed and a buffer stock of unemployed. The rest is detail.

Matt Franko said...


A firm can have a profit in the quarter and pay 100% out in dividends which are taxed to and remainder spent by the recipients of the dividends...

Profits are not savings...

AXEC / E.K-H said...

Six, Tom Hickey

You obviously have not noticed that the issue is MMT profit theory and NOT MMT employment theory.

MMT employment theory has already been refuted elsewhere, see ‘Macrofounded labor market theory’

Egmont Kakarot-Handtke

Six said...


The firm can't "pay 100% out in dividends" until they've made the profit. The dividend payment has to happen subsequent to the profit, or else there is no 100% dividend to pay out.

Once it leaves the firm, we have no idea if it is taxed, saved, spent, set ablaze, etc.

Profits or savings or surpluses can cease to exist in subsequent time periods. Or not.

Six said...

"You obviously have not noticed that the issue is MMT profit theory and NOT MMT employment theory."

Actually, I have. See:


Matt Franko said...

They could do it all on the same day if they wanted to...

Matt Franko said...

Commuting expenses to a job are not tax deductible... Egmont you are refining terms...

Matt Franko said...


Matt Franko said...

You guys are talking about Retained Earnings:

What is 'Retained Earnings'
Retained earnings refer to the percentage of net earnings not paid out as dividends, but retained by the company to be reinvested in its core business, or to pay debt. It is recorded under shareholders' equity on the balance sheet. The formula calculates retained earnings by adding net income to, or subtracting any net losses from, beginning retained earnings, and subtracting any dividends paid to shareholders.

Read more: Retained Earnings http://www.investopedia.com/terms/r/retainedearnings.asp#ixzz4tuJPJh74
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AXEC / E.K-H said...

Six, Matt Franko

In your utter confusion, you obviously have not noticed that the issue is MMT profit theory and NOT distributed and retained profit.

These issues have already been dealt with elsewhere, see ‘Essentials of Constructive Heterodoxy: Profit’, Sec. 7

Because MMT got profit theory wrong it got also profit distribution wrong, nay, it got the whole analytical superstructure wrong. Which brings us back to Peter Cooper’s provably false MMT income-expenditure model which neither mentions profit, nor distributed profit, nor retained profit.

In sum: (i) the formal foundations of MMT are inconsistent,* (ii) MMT is a wholesale analytical failure, (iii) MMTers are incompetent scientists, (iv) MMT policy is a Profit Guarantee program for the one-percenters, (vi) the claim that MMTers support the cause of the ninety-nine percenters is either self-delusion or political fraud.

Egmont Kakarot-Handtke

* For the axiomatically correct formal framework see on Wikimedia ‘Pure production-consumption economy incl. distributed profit and money’

Six said...

"They could do it all on the same day if they wanted to..."

They could, but wouldn't the profit still need to precede the dividend? Or could they borrow funds, pay the dividend and compile profits to pay back the loan in a later time period. Could they time travel between different accounting periods? The possibilities are endless if we hire the right accountants, but I think I'm gonna stick with my original position of profits preceding dividends.

Matt Franko said...

Egmont, all MMT is doing is relying on the well established accounting methodology in National Income Accounting ...

What is 'National Income Accounting'
National income accounting is a bookkeeping system that a national government uses to measure the level of the country's economic activity in a given time period. Accounting records of this nature include data regarding total revenues earned by domestic corporations, wages paid to foreign and domestic workers, and the amount spent on sales and income taxes by corporations and individuals residing in the country.

Read more: National Income Accounting http://www.investopedia.com/terms/n/national_income_accounting.asp#ixzz4tur8CNsb
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If you have a problem it is that you don't like the methods of National Income Accounting not MMT....

MMT didn't invent NIA, they just seek to comply with it in their analysis like everybody else...

There is nothing "wrong" with this...

Matt Franko said...

Six there are accounting methods already established for all of this... the deficit can't be profits as this year the US deficit will be about $650b and just the SP500 firms will have about $1T of earnings after taxes...

AXEC / E.K-H said...

Matt Franko

You say: “Egmont, all MMT is doing is relying on the well established accounting methodology in National Income Accounting ...”

That is very bad because National Accounting is methodologically flawed and if MMTers were only a little above Trump University level they would have realized the blunder.#1

In addition, it is NOT true because profit appears in National Accounting but NOT in the MMT balances equations.#2

Fact is that economists in general and MMTers, in particular, are too stupid for the elementary mathematics of accounting.

Egmont Kakarot-Handtke

#1 The Common Error of Common Sense: An Essential Rectification of the Accounting Approach

How Keynes got macro wrong and Allais got it right

#2 MMT and the magical profit disappearance

Matt Franko said...

Egmont you are certainly entitled to develop your own accounting methods...

AXEC / E.K-H said...

Six, Matt Franko

Let us agree on the essential points:

(i) A Job Guarantee program combined with deficit spending increases the business sector’s overall monetary profit by the exact amount of the deficit,

(ii) Peter Cooper’s Income-Expenditure Model does not capture this effect,

(iii) all models that do not explicitly contain macroeconomic profit are scientifically worthless,

(iv) the MMT policy agenda has no sound scientific foundation,

(v) MMTers have to be expelled from the sciences.

Egmont Kakarot-Handtke