Market Mythology Underlying Criticism of the JG

The job guarantee continues to draw lively discussion on the various MMT-related blogs. Most of the criticism seems to be motivated by a particular conception of the efficacy of private markets and supposed deficiencies of government. Although in recent posts I have expressed a preference for a combined ‘job or income guarantee’ rather than a job guarantee on its own, it is hopefully clear that my reasoning has been along completely different lines. I won’t revisit that reasoning here other than to reiterate that my focus has been on how, as a society, we can enable a transition to a freer society. In this post, I instead want to remark briefly on the more common type of criticism being leveled at the job guarantee proposal.

 
Opponents of Full Employment Need to Justify their Position

The impetus for this post was a brief but interesting exchange at Mike Norman Economics between Matt Franko and Tom Hickey. In his comment, Matt made a point that I very much agree with:

Why is it that WE have to always defend our position of advocating Full Employment?

We should start to demand that these morons have to defend their advocacy of forcing millions of their fellow citizens into UN-employment!

In this comment, I think Matt is justified in suggesting that the onus should be on those who are opposed to full employment to make their case.

I think this for a number of reasons:

1. Unemployment is a macro problem. It is not due to shortcomings of individuals. MMT makes clear that the problem occurs whenever the non-government intends to net save more than is possible given the government’s fiscal settings. Unless markets can induce a change in non-government net saving behavior consistent with full employment, unemployment will persist. Past theoretical attempts to demonstrate such a capacity of the market mechanism have failed, and so no automatic tendency to full employment has been established.

Earlier neoclassical economists did claim such a tendency, but the work of Kalecki and Keynes showed that they had succumbed to a fallacy of composition. The capital debates further undermined the notion of a full-employment tendency, and aggregation problems uncovered by general equilibrium theorists ended the efforts of the neoclassical orthodoxy to make its case.

The bottom line is, arguments that depend upon the price mechanism having systematic effects on aggregate output and employment are without legitimate foundation. Those who oppose both a job guarantee and a basic income guarantee need to explain how this is morally justifiable given that unemployment is beyond the control of the individual.

2. The frequent, loose claims made by many orthodox, Austrian and even MMT economists along the lines that markets do a good job of evaluating productiveness are unconvincing, because:

a) Even if markets allocated resources in the “efficient” manner many seem to presume, all this would mean is that the assessment of productiveness reflected the prevailing income distribution. The measure of productiveness would reflect “one dollar, one vote” instead of “one person, one vote”. Unless the prevailing income distribution can be convincingly defended, there would be little reason to prefer the verdict of the market to the verdict of democracy.

b) In any case, markets do not perform in the manner so many seem to presume. Even the neoclassical orthodoxy recognizes that externalities cause a divergence between private and social costs and benefits. In orthodox terms, that means we are in the realms of second best. Once this is the case, government intervention cannot be said, in general, to move the economy further away from the “optimal” outcome rather than closer to it.

3. Ultimately, the question of what is productive can only be determined socially. What one person considers productive, another considers a boondoggle. The market is one social mechanism for evaluating productiveness, and it is not necessarily a good method, especially if the prevailing income distribution is considered undesirable. Democracy is another method, and it also has its limitations, especially when the rich and powerful enjoy undue influence over democratic processes. It seems likely that both markets and democracy will tend to work better when the distribution of income is more equal.

One benefit of a job guarantee that Bill Mitchell identified in a recent post is that it would be less susceptible to cronyism than generalized fiscal expenditure. The expenditure associated with the job guarantee would be targeted specifically at direct employment creation. The task of determining what work should be done by those employed in the job-guarantee program could to a large extent be performed by local communities.
 

Conclusion

In my view, the most serious challenge for those who reject both a job guarantee and a basic income guarantee is the moral one. The principle that a person should not be held responsible for events beyond his or her control is widely held. It should be clear to everyone by now that unemployment is caused by demand deficiency. It is outside individual control. Certainly, by applying more effort, one unemployed worker might obtain a job ahead of another, but if there is a demand deficiency, some workers are going to remain unemployed. There is nothing workers can do to eliminate it. Nor do I find the claim of a supposed payoff – a superior determination of productiveness – convincing. Supporting the deliberate maintenance of unemployment punishes the victims without necessarily providing any upside.

13 thoughts on “Market Mythology Underlying Criticism of the JG

  1. Personally i have a question about a JG’s capability of maintaining price stability. Its main argument is that it pays a constant price for labor for which there is zero demand from the private sector (at least at the current minimum wage). In such a way it doesn’t create any wage price pressures.

    I completely agree with that but i feel there is a disconnect between the labor market and the available capital and capital producing resources. A sector of the economy or a specific area in the country might face unemployment but that does not necessarily mean that capital is equally unemployed, especially the specific capital needed to carry out the JG projects. Furthermore, capital is mostly privately owned so putting it to use will ultimately mean that the government will have to bid it with a sufficient price.

    Unless JG is labor intensive and/or uses idle capital we might face price pressures in the capital resources. For instance if a tourist island faces seasonal unemployment, that does not mean that the island carries idle capital resources, especially since a JG scheme would probably mean employing the idle labor on other non-tourist projects.

    I would appreciate any thoughts on the matter.

  2. Absolutely agree with this one Peter.
    I see a lot of micro being applied to this macro.

    However, the micro is a strong political argument if an unsound economic one. Reminiscent of “no worker worse off” – in aggregate this is true, not-aggregated it varies by individual.

  3. Kostas: Good comment. I do think that JG activities would be deliberately labor intensive, partly for the reason you outline and also because this provides the most employment with the least outlay in government expenditure.

    It is also important that the JG would of course be used in conjunction with other components of fiscal policy. If there were more structural imbalances of the kind you describe, there would need to be a tighter stance on generalized fiscal policy, other factors being equal, and a higher JG employment (i.e. more job loss in the broader economy) for price stability to be maintained. At the same time, specific fiscal measures might be appropriate in helping to address the structural imbalances.

    One motive for introducing a JG is that if demand management is going to be used deliberately to lower output and employment in the broader economy for the purposes of maintaining price stability (and all the more so if there are structural imbalances and bottlenecks, which are no fault of workers), the costs should not be born exclusively by those who lose their jobs in the regular economy as a result. A similar argument can be made in relation to a BIG. If price stability is of benefit to society, any costs of maintaining it ought to be shared across the community.

  4. Senexx, thanks for your thoughts. We were bound to agree on something eventually. :-)

    I think you are right, of course, about the political pull of arguments that rest on the supposed efficacy of private markets relative to government, particularly in the U.S.

  5. Warren, thanks for stopping by. I appreciate it.

    I’m not sure if you’ve had a chance to read my other posts on the topic, but I accept the MMT argument for a buffer stock, although I really don’t like the term “buffer stock” applied to humans.

    My argument in the earlier posts was in favor of the JG except that I wanted it combined with a basic income guarantee. That is, workers who lost their jobs in the regular economy could choose whether to participate in the JG or take the BIG instead. I called it a “job or income guarantee” (JIG).

    My motive is to enable a transition over time to a society in which, with the increasing mechanization of production, we can opt for more free time if we wish to do socially productive activity of our own volition or enjoy more leisure.

    I suggested that, in principle, a JIG might actually make the JG even more effective as a nominal price anchor, because those who chose to participate in it would be those who really wanted to be there. Another point I didn’t mention is that, by participating in the JG, these workers would also be sending a strong signal to employers that they were keen to find employment in the regular economy.

    Obviously, the political feasibility of my suggestion is another matter.

  6. Warren -

    That one went right over my head. Could you flesh it out a bit? I feel I’m missing an important concept.

  7. Peterc -

    I think you have some good arguments, but I’m leaning towards JG being the core with the features of JIG adding value. In reality, it seems we’re paying a cost for the unemployed (that JIG might address) in terms of lost production (of whatever society wants to produce), crime, mental illness, the list could go on. This also begins to open a committed dialog about what society or communities want to bring into being.

    Implementation – how to go about moving this (JG or JIG) towards reality? Perhaps a forum (discussion board) and an invite to leaders that might help generate some action towards the goal?

  8. Now I’m wondering what the “proof” is that unemployment is a buffer stock in current fiat.

    It sounds nifty, because its an nice progression from there to say that employment is a morally superior buffer stock to unemployment, among other things.

    But the price of unemployed labor and the corresponding stock of unemployed labor is not actually targeted as the pivot point for general pricing control. It’s a residual. That makes it different from the other things on Warren’s list.

    So what’s the proof?

  9. @JKH,

    “pivot point for general price control”…. can you expand on this? What do you see as the current true targeted pivot point please?

    Resp,

  10. Agree with JKH that employment is dissimilar from other buffers.

    In other buffers, in time of excess, when prices would otherwise fall and unsold inventory build, govt takes all quantity by providing a bid to match the lowest offer, and then sells quantity into the market at the lowest offer in order to control prices from rising to quickly toward tops. Buffer stocks of agricultural produce have often been used to protect farm prices from volatility that would harm farmers, for example. Govts have also used gold and fx as buffers wrt managing their currencies.

    But with the JG the price (floor wage) is set and does not vary. So it is a price anchor rather than the usual way buffers are handled.

    Warren doesn’t list it, but some people suggest that govt use energy resources as a buffer, which the US govt sometime does with the strategic oil reserve.

  11. Matt,

    I think I see the current pivot point for pricing control being the CPI (or some set of similar inflation measures), with the corresponding buffer stock notion being more NGDP itself, and its pricing, rather than unemployment. For example, in the case of policy tightening, I see the implementation effects of the current regime for monetary and fiscal policy tightening being dissipated rather broadly, so that the effect on unemployment is only one such outlet. Unemployment is pretty much a buffer for employment, by default, in the same way that JG would be a buffer for private sector employment through construction and more proactive design. But I’m struggling to see the same pivot point in terms of the pricing of the actual buffer itself, in either case, as you would see in, say, a gold standard regime (although I’m not terribly familiar with the operational details of a gold regime). I think the gold price is dynamically central to inflation control in a way that the pricing of either unemployment or JG isn’t.

    I think Tom’s point may be similar.

    But I haven’t thought this through fully, so maybe the comparison is closer than that.

  12. Unforgiven, thanks for joining the discussion in recent threads and for your feedback. I very much appreciate it.

    In answer to your question, I’m not sure of the best way to turn the JG or JIG into reality other than to keep trying to spread the ideas around both on and off line, and hope that a mass movement for meaningful change continues to build from below. Even if some politicians could be convinced such a policy is a good idea, they couldn’t survive in politics unless garnering mass support from the general community. Hopefully the Occupy movement can continue to build. Other than participating in that and similar actions, and engaging with people, I think we just have to keep plugging away trying to get the word out.

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