The previous post drew some interesting responses including a post by Cullen Roche over at Pragmatic Capitalism. (H/t to Trixie.) This response started as a comment and got too long, so I thought it would be better to turn it into a new post. First, I will respond to a question posed by Philippe. Second, I will respond to Edgaras. But there will be some overlap. The points can also be considered in relation to Cullen’s argument, since the comments were motivated by his post. Finally, I’ll respond to an aspect of Cullen’s post that didn’t crop up in the specific responses to Philippe and Edgaras.
1. In relation to my statement that the non-government cannot orchestrate an increase in overall spending power on its own, Philippe asked:
Say a bank extends credit by making a loan and creating a new deposit. … This is an increase in overall spending power, isn’t it?
Private loans, if spent, certainly add new demand and income to the economy.
The question is, first, whether private lending will occur in such a way as to enable the economy to converge on full employment (however defined) and, second, whether it will do so sustainably.
The answer to the first question is no, in general. There is no general tendency for this to occur.
The answer to the second question is also no. Not only does the private loan not add to net financial assets (NFA) in the initial instance, but the spending it enables, by adding to income, causes an endogenous increase in tax revenue, a movement of the government toward surplus and the domestic private sector toward deficit unless there happens to be an offsetting movement in the external sector. The domestic private sector is likely to become increasingly indebted over time. The unsustainability of this process was foreseen by Godley and Wray (for example, here) and others a decade or so before the onset of the crisis.
So, we in the non-government are not in a position to orchestrate an increase in our own overall spending power. We can borrow if we think we have the capacity to service our debt. In isolation, the effect of this over time is to reduce NFA and withdraw spending power, including our capacity to engage in sustainable private credit creation.
2. Edgaras asked how, “ignoring the job guarantee”, unemployment is a policy choice, and in particular how the government injecting net financial assets (NFA) could help achieve true full employment.
I didn’t actually ignore the job guarantee in my previous post, so it will come back in at the end of this section. Even so, the question as posed will be answered.
The effectiveness of injecting additional NFA depends on the targeting of the government spending (or tax cuts). If the government just hands over money to the wealthy without strings attached, there will be no (or very little) benefit in terms of demand and employment.
But a currency-issuing government is in a position to dictate the terms on which it spends and to decide on what it spends. Public consumption and investment add directly to demand and output. Transfers to the poor and middle class add indirectly to demand.
Such government spending and transfers not only add to NFA (‘spending power’) but add it in the areas of the economy where it is most likely to be put to good effect. Good effect includes not only spending but saving to pay off debt accumulated in the past.
Now, Edgaras appears to accept this, but asks whether government net spending on its own (without a job guarantee) could achieve true full employment (meaning that there is only frictional unemployment). The answer is yes, but in the absence of comprehensive wage and price controls, this could only be achieved alongside prohibitive inflation, or else through the use of other extreme measures, such as, for example, paying capitalist employers directly for hiring workers or heavily subsidizing them to do so.
Needless to say, such a policy is not suggested by modern monetary theorists or my post. It is clear that true full employment alongside low and stable inflation in the absence of comprehensive wage and price controls is best delivered with a job guarantee (JG). And with the job guarantee, full employment would be achieved irrespective of the level of NFA, the budget deficit or private-sector behavior.
But that does not mean that it is desirable just to let the economy go to pieces and send everyone into the job guarantee. The aim would still be to minimize the size of the JG cohort, subject to the intention of removing price pressures in the broader economy. Minimizing the JG cohort subject to the inflation constraint requires government net spending that is consistent with our spending and saving behavior. If we are willingly going into private debt to spend and this appears to be sustainable for the time being, the government can allow its budget to move into surplus endogenously. But since there is no tendency for us to spend and save in a manner consistent with any particular level of employment, it is up to the government to adjust NFA (and its composition) in such a way that our behavior is rendered consistent with strong employment in the broader economy and, of course, true full employment with price stability thanks to the job guarantee.
3. Regarding Cullen’s post, in addition to the points above I would add the following question and observations:
Does Cullen believe the economy automatically tends to the NAIRU or any particular rate of unemployment?
Calling the NAIRU in some sense “natural” under capitalism, as Cullen does, might connote such an automatic tendency.
I doubt he means this, because such a position was not sustained in the ‘Keynes and the Classics’ debate or the capital debates or in neoclassical general equilibrium theory.
And if he doesn’t think there is such a tendency, then we are in basic agreement over the lack of a tendency for private-sector activity to push the economy toward full employment, whether this is defined in the neoliberal way as the NAIRU or the MMT way as true full employment.
If, as is my guess, he agrees that there is no such tendency, then his remaining point seems to be that capitalists prefer there to be a positive amount of unemployment. As somebody influenced by Marx, I obviously completely agree with him on that point. Marx, after all, stressed the functional role of the reserve army of labor in disciplining the wage-determination process.
There is no doubt in my mind that capitalists loathe full employment. However, since I am also influenced by MMT, my view is that capitalists can loathe it all they like. A currency-issuing government has the capacity to implement the policies necessary for true full employment and price stability irrespective of what capitalists think of it. When such a government decides not to use this capacity, it is a policy choice.