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, individuals 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.
What is the most appropriate entry point to the study of a monetary economy in which government is currency issuer? Is it “the market”? Is it the definition: total spending equals total income? Is it real exchange? Real production? Is it total output? Total employment? Total value? Distribution of income? The origin of profit? Price formation? Competition?
A monetarily sovereign government is one that issues its own currency and is the currency’s sole issuer. Ideally, it allows the currency’s value to float in relation to other currencies in foreign exchange markets, meaning its currency is not convertible at a fixed rate into either another currency or a commodity (other than possibly the commodity labor-power through the provision of a job guarantee). Although this ideal maximizes policy space, a government that promises convertibility can renege at a later date, and so, strictly speaking, does not relinquish its monetary sovereignty so long as it retains the authority to issue its own currency. A monetarily sovereign government that operates a flexible exchange rate faces no revenue constraint provided it refrains from borrowing in a foreign currency and so avoids exchange-rate risk on its debt.
It is easy to represent the ‘income-expenditure model’ in a graph. Some people find this helpful as a visual aid to understanding; others, not so much. For those who find graphs confusing, this post can safely be ignored. In terms of economic meaning, it does not add much to what has already been explained. But for those who are comfortable with graphs, they can be a handy tool for illustrating or thinking through the logic of a model.
We have seen that the ‘income-expenditure model’ combines key macro identities (introduced in parts 7 and 15) with particular behavioral assumptions to provide a theory of income determination (considered in parts 16 and 18). The behavioral assumptions relate to causation. The causation envisaged in the income-expenditure model has implications for the sectoral balances, some of which are the focus of the present post.