Critics of the Job Guarantee often seem to come from the right-libertarian quadrant of the Political Compass. Most recently, several respected participants in the debate have begun to describe themselves as Modern Monetary Realists (for example, here), partly to distinguish themselves on the Job Guarantee issue. Joe Firestone has provided an excellent broad-ranging series on the questions in dispute. My focus in this post will be much narrower, concerned with one particular aspect of the Modern Monetary Realists’ critique that remains unclear to me.
My concern here is with the position of the Modern Monetary Realists on full employment as such. Sometimes they seem to suggest that full employment should not be a policy objective on the grounds that unemployment and, by implication, slack labor markets are conducive to efficiency and high productivity. At other times, they instead make the claim that full employment could be achieved through means other than a Job Guarantee, or even that full employment would occur as a matter of course once other objectives (e.g. “Full Productivity”) were met. In my view, both these claims are unfounded. The latter, in particular, has no legitimate basis in economic theory.
A Short Note on Political Labels
Before addressing these points, it seems important, in view of the sometimes heated nature of the debate, to stress that I do not intend “right-libertarian” to be interpreted as a pejorative term. Nor do I mean to imply that the political perspectives of the critics are extreme. In the Political Compass, a person’s political position is given a value on the horizontal axis from left to right on economic issues between –10 (extreme left) and +10 (extreme right), with 0 being centrist. On the vertical axis, which concerns social issues, –10 indicates extreme libertarianism and +10 indicates extreme authoritarianism, with 0 again indicating centrism. To suggest that most of the critics seem to be in the right-libertarian quadrant says nothing more than that their positions on the graph usually are such that they are somewhere in the bottom right-hand quadrant, whether centrist, moderate or extreme. In other words, all I am suggesting is that the critics tend to have a certain level of preference for market-based over government solutions and are at least somewhat liberal on social issues. If I am mistaken in this, I apologize, but no offense is intended.
Further, personally I do not consider either “extreme” or “centrist” to be pejorative. These assessments are simply in relation to conventional attitudes. My own political position, as should be obvious, is measured as extreme left-libertarian. I am aware that there are people who think labeling somebody a “communist”, “Marxist” or “socialist” is an insult, but I am happy to identify to a large degree with any one of those labels and do not consider them derogatory other than in the minds of the ignorant and uneducated. In the same way, I do not intend “right-libertarian”, “conservative” or “moderate” to be taken as insults.
While in clarification mode, I should also add that although this post focuses on an area of disagreement with the Modern Monetary Realists, I consider the areas of agreement just as important. My view is that the proper understanding of monetary operations developed by Modern Monetary Theorists and shared by Modern Monetary Realists and others such as myself who don’t quite know how to categorize ourselves is enormously important in its own right. To the extent the Modern Monetary Realists succeed in disseminating this understanding far and wide, they will be doing a tremendous (and voluntary) service of great benefit to the general public.
Anyway, now back to an area of disagreement …
Full Employment as a Policy Objective
If opposition to the Job Guarantee is based on a rejection of full employment as a policy objective, the position seems difficult to justify on moral grounds unless at the very least an unconditional basic income were supported in its place. In comparison to a Job Guarantee, a basic income scheme would not have the same efficacy as a nominal price anchor and would also fail to deliver full employment to the extent the jobless preferred jobs to free time, but at least it would ensure that nobody was denied access to the necessities of life.
The apparent rejection, by some critics, of full employment as a policy target seems to be motivated by a view that unemployment and slack labor markets promote productivity. One argument may be that workers, faced with the ongoing threat of joblessness, will be intimidated into expending more effort on the job. It is far from clear to me that fear is more conducive to sustained high work intensity than income security and better workplace morale, but certainly this is an empirical question open to investigation.
There also seems to be a concern that workers will prefer their Job Guarantee positions to unattractive employment opportunities in the broader economy. From my perspective, if this were true, it would simply mean that pay and conditions needed to improve for workers to be enticed into jobs that were less enjoyable or fulfilling than the Job Guarantee roles. Available evidence suggests that monetary incentives are most effective in the case of menial or unpleasant work, so maybe just a pay rise would be sufficient to attract staff. But even if staff could not be attracted in some instances at viable wages, it remains to be explained why this would necessarily be a bad thing. There is little reason to suppose markets do a better job than democracy when it comes to determining socially productive activities. I have discussed this point previously (for example, here and here). For brevity, I won’t revisit the arguments in this post.
Contrary to the arguments of the right-libertarians, a consideration emphasized in the academic literature is that Job Guarantee participants would be kept more “job ready” than the unemployed because of the maintenance of “good” work habits. If true, this would work against the notion that a Job Guarantee is bad for productivity.
But, in any case, all the arguments considered so far strike me as rather small fry, because they are essentially static in nature. They concern the intensity and proficiency of workers for a given level of technology or production technique. Far more important is the impetus for innovation and technical improvement over time. This relates to the dynamism of the system, and it is on this point that the productivity-centered critique of full employment and the Job Guarantee seems especially mistaken.
Unemployment and slack labor markets, by depressing wages, weaken the imperative for firms to reduce costs in other ways. In contrast, tight labor markets, by giving workers greater bargaining power and threatening labor shortages, create a strong impetus for technical innovation that temporarily sheds labor and dramatically reduces costs. These improvements in dynamic efficiency are more significant for productivity than the, by comparison, quite trivial gains that can be made through an intensification of the labor process under a given production technique.
In short, on the largely static considerations, the likely effects on productivity are ambiguous. There are tendencies operating in both directions. However, even if these factors mostly operated in the direction the critics suggest (I doubt this), they would be swamped by the negative effects of unemployment on dynamic efficiency.
Full Employment Through Other Means
Although right-libertarian critics at times appear to reject full employment as a policy target, at other times they seem to argue that non-inflationary full employment could be sustained through other means. More specifically, there seems to be a view that full employment would follow naturally from a focus on other policy objectives such as “Full Productivity”. If the mechanism they have in mind is the market, the notion is unfounded.
It is clear on the basis of Keynes, Kalecki, the Capital Debates and Neoclassical General Equilibrium Theory that a market economy will not necessarily tend toward full employment, and that, in general, unemployment cannot be eliminated solely through microeconomic measures. For Keynes influenced economists, unemployment is the consequence of demand deficiency. From the perspective of Neoclassical General Equilibrium Theory, the absence of a tendency to full employment is due to price changes having both substitution and income effects, either of which can operate in a way other than might be expected in a partial equilibrium framework.
Framed in terms of Modern Monetary Theory, unemployment occurs if the non-government net saving desire happens to exceed the budget deficit. If so, the unemployment will persist unless either: (i) the government is willing to enable the non-government’s net saving desire through a sufficient increase in the budget deficit; or (ii) the non-government alters its aggregate saving behavior in such a way as to render it consistent with full employment.
The first hope – deficit expenditure – cannot deliver sustained full employment in a non-inflationary manner unless the measures are targeted, for example through a Job Guarantee or, somewhat less effectively for price stability, planned public investment (a little more on the latter possibility below). Generalized deficit expenditure will usually result in bottlenecks before full employment has been attained. The policy challenge is further complicated by the fact that the non-government net saving desire is a moving target, and unobservable, making it difficult to gauge. To the extent the generalized deficit expenditure redistributes income, it will affect the non-government net saving desire.
The Job Guarantee would circumvent this problem by targeting employment directly rather than the net saving desire. The net saving desire could then deviate within fairly wide limits without causing significant inflation, because the effects on demand would be absorbed or countered by the automatic stabilizing properties of the Job Guarantee.
The second hope – a market-based automatic tendency to full employment – is also unfounded. As has already been mentioned, one implication of the capital debates is that there is currently no valid theoretical basis for the claim that the price mechanism will adjust non-government net saving to the level consistent with full employment. The same conclusion follows from Neoclassical General Equilibrium Theory. Although some Austrians might deny these theoretical results on the grounds that they derive from supposedly inappropriate applications of mathematics, this is not a convincing defense of the supposed automatic tendency to full employment. The mathematical analysis shows that even under conditions of perfect information, the tendency would not be operative. The reasons for this relate to fallacies of composition, not the presence or absence of uncertainty.
Since at least the Capital Debates, it has been clear that a reduction even in real wages will not ensure an increase in aggregate employment, and relatedly a reduction in even the real rate of interest will not induce private investment sufficient to underpin full employment. I discuss these points in more detail in a previous post.
It is possible to get an intuitive sense of some of the reasons for the absence of an automatic tendency to full employment. Some of the following intuition relates to the Capital Debates, but some of it involves other considerations. For intuition specifically relating to the Capital Debates, see the previous link.
Under conditions of complete wage and price flexibility, it is clear that the effect of nominal wage reductions on aggregate demand would be ambiguous. Consumption demand of workers would be likely to fall. Consumption demand of rentiers would be likely to rise. Investment demand might or might not increase depending on expected profitability, which, as the Kalecki Profit Equation shows, is a function of aggregate demand. It is actually quite likely that wages and prices would simply fall more or less in proportion, leaving real wages mostly unaffected. However, the theoretical results of the Capital Debates indicate that even if real wages fell, there could be no presumption that employment would increase.
The remaining possibility for an automatic tendency to full employment rests with the real rate of interest and its influence on private investment. Here, again, the Capital Debates have made clear that there is no basis for supposing that changes in interest rates can induce private investment at a level sufficient to underpin full employment.
Interest rates can certainly have an impact on aggregate demand, but the impact is uncertain and probably weak under many circumstances. In “normal” times (i.e. not during a period of household deleveraging), a reduction in the rate of interest might well encourage higher consumption demand from those with mortgages. To the extent rentiers suffered a reduction in income, lower interest rates might impact negatively on their consumption demand. In particular circumstances, the direction of the effects may be reasonably predictable. In general, the overall impact is ambiguous.
Even if under particular circumstances private demand expenditures happened to respond positively to lower interest rates to such an extent that the economy neared full employment, the likely consequence (in the absence of central planning or a Job Guarantee) would be inflation. The reason for this is that an increase in private consumption expenditure acts in the same way on prices as government consumption expenditure, and private investment acts just like public investment. Stronger consumption demand, whether private or public, will result in bottlenecks and wage pressures before full employment is reached unless investment activity keeps pace with the growth in consumption expenditures and more or less matches their composition.
In other words, for full employment to be attained (in the absence of a Job Guarantee) without coming at the price of high inflation, there would need to be a balanced expansion of productive capacity, brought about through private and public investment, in line with the composition of consumption expenditures. There is nothing in the price mechanism to engender such balanced development. Yet, in the absence of a Job Guarantee, the requirement of balanced growth is more pressing, because there is not the margin for error that would be provided by the automatically expanding or contracting pool of Job Guarantee workers.
The relevant point for present purposes is that the most effective option, short of a Job Guarantee, would be a policy approach anathema to right-libertarians; namely, planned socialized investment. Socialized investment was Keynes’ preferred approach. It would help to keep consumer demand more or less in line with productive capacity at a level consistent with full employment output, as well as eliminating the violent fluctuations in aggregate investment activity. In fact, a certain degree of planned excess capacity would provide wriggle room in the event of unexpected fluctuations in non-government spending patterns.
It seems unlikely that right-libertarian critics of the Job Guarantee have much appetite for planned socialized investment. That leaves them with a reliance on private markets. On the basis of existing theoretical knowledge, there are simply no strong grounds for claiming the price mechanism can deliver full employment, let alone full employment with price stability.
Unemployment is a government policy choice. It is brought about through a deliberate curtailing of demand below the level necessary to deliver full employment. No amount of wage and price flexibility can be relied upon to eliminate the resulting unemployment.
Full employment could be achieved through generalized deficit expenditure, but it would be inflationary. Planned socialized investment could enable less fluctuation in aggregate investment and more balanced growth at more or less full employment output. However, the Job Guarantee provides the surest means to price stability alongside full employment. For those on the left, this could be combined with a much more extensive role for the public sector, including planned socialized investment. For the right-libertarians, the Job Guarantee actually provides conditions most conducive to laissez faire in the rest of the economy. If it was the political will, death and mayhem (figuratively) could be let loose in the broader economy while workers were sheltered through a Job Guarantee, an unconditional income, or both. After all, it is capitalists who make the profits. The deal is, they take the risks, not workers.