Short Note on the Policy Target

Modern monetary theory (MMT) indicates that unemployment corresponds to a situation in which the non-government desires to hold net financial assets to an extent that is inconsistent with full employment given the government’s fiscal settings. Demand-pull inflation corresponds to the converse situation. In terms of policy, however, non-government net-saving intentions are a moving and unobservable target. Accordingly, modern monetary theorists propose the job guarantee as a more direct and effective policy approach. This has important advantages over neoliberal prescriptions when it comes to delivering desirable employment and inflation outcomes.

The neoliberal approach to full employment and price stability has been to abandon full employment; or, rather, to redefine it as the employment level associated with the ‘non-accelerating inflation rate of unemployment’ (NAIRU). In this approach, inflation is fought by deliberately creating unemployment through tight demand-management policies.

The MMT approach is to ensure full employment – in the sense that anyone who is willing and able to take a job at a living wage will be employed – through implementation of a job guarantee while using fiscal policy to moderate price pressures in the broader economy. Fluctuations in economic activity will lead to variations in regular employment and inverse variations in the take-up of the job guarantee. Rather than targeting a particular level of net spending, the government spends on a price rule. The government sets the program’s wage and benefits and allows the quantity of job-guarantee employment to vary as necessary to maintain full employment. As a result, the expenditure on the job guarantee will vary directly with take-up of the program and inversely with activity in the broader economy. Any inflationary pressure that emerges will require fiscal contraction to bring about a net migration into the job-guarantee program.

Whereas full employment (in the sense indicated above) can be precisely targeted via a job guarantee, the general price level cannot be precisely targeted under either the NAIRU or job-guarantee approaches. Only price controls could achieve that. To the extent the government spends on goods and services, it can exogenously set the terms on which it transacts. But since the rest of us (the non-government) also make spending decisions, there can be inflationary and deflationary pressures due to fluctuations in demand.

The fact that our spending and saving behavior is not entirely predictable, and susceptible to cyclical or even erratic movements, means that policy measures can turn out to be incorrect. If we spend more and save less than in previous periods, and this is not anticipated by policymakers, it might result in undue inflation. In the reverse case, there will be unemployment and possibly deflationary pressure. Even so, a rise in layoffs or inflation provides evidence that fiscal settings are not ideal.

A clear benefit of the job guarantee is that policy mistakes do not threaten full employment. The costs of being too aggressive on the inflation front are spread more evenly across the community. In contrast, an overly aggressive attack on inflation under the NAIRU approach results in mass unemployment. Even the NAIRU itself represents high unemployment, typically defined to be somewhere between 5 and 9 percent.

The job guarantee is not only superior in terms of employment outcomes but provides more effective inflation control. During generalized downturns, the program puts a floor under demand. During upturns, job-ready workers are available for hire by employers in the broader economy who face no wage competition from the job-guarantee provider. The program acts as an automatic stabilizer that is invoked immediately and precisely to the degree required to maintain full employment whatever the state of the economy.

In addition, fiscal policy, the preferred policy instrument of modern monetary theorists, is more easily targeted at areas of the economy where inflationary pressures are mounting. In contrast, monetary policy is a blunt instrument that impacts equally on booming and depressed areas of the economy. A higher level of economic activity can be made consistent with price stability under the MMT approach because of this superior targeting.

In sum, the MMT approach ensures full employment; the neoliberal approach does not even ensure the NAIRU level of unemployment. The MMT approach enables better targeting of policy to overheated areas of the economy; a reliance on monetary policy does not. Both approaches incur policy errors but the downside risk in the MMT case – low inflation alongside full employment with somewhat increased job-guarantee take-up – seems far preferable to the corresponding risk under the NAIRU approach, low inflation and mass unemployment.


9 thoughts on “Short Note on the Policy Target

  1. I would avoid the term ‘full employment’ since it has become a Humpty Dumpty word. Redefining ‘full employment’ to mean two cities worth of people on the scrap heap is a triumph of spin.

    It is much better to say that a Job Guarantee ensures that there is no involuntary unemployment of any duration.

  2. It’s a fair point, whether it is a good point is open to dispute. After all surely we could spin the definition of full employment back to the correct definition with some PR.

    That said, both “full employment” and “involuntary unemployment” sound wonkish we need more acceptable terms for the general public.

    I think I might have contradicted myself here – welcome to typing and thinking on the fly

  3. I tend to use “five million without work and two million short of work” when talking about the UK.

    I generally try avoid using the terms unemployment (as that is grounded at ILO unemployment in the current meme) and full employment (which is grounded at NAIRU in the current meme) when on general public discussion sites.

  4. “In sum, the MMT approach ensures full employment.” I doubt it. What’s to stop an unemployed person simply turning down the minimum wage work offered by JG, in just the same way as a thousands of unemployed individuals a day turn down regular minimum wage work?

    You could of course impose some sort of “workfare” sanction, i.e. “do this JG job else your benefits get cut”. But if you go for that option, why not apply the workfare sanction to regular (and doubtless more productive) minimum wage jobs?

  5. Thanks for your thoughts, Ralph. It’s great to see you here.

    I think there are a couple of aspects to the point you raise. Unemployment is usually defined as “without work but actively seeking work”. A person who declined a job-guarantee position would probably not be defined as unemployed under such a system.

    However, there is clearly a difficult issue here. If people refuse to take a job-guarantee position yet do not have the means to survive, what do we do about it? There are no doubt different views on this. Personally, I would prefer the job-guarantee positions to be voluntary and combined with some kind of welfare or basic income guarantee program. But I know there are others who argue it is a matter of mutual responsibility, and some degree of compulsion may be appropriate.

  6. The key point is that the ‘sanction’ (which I don’t see as a sanction, but just a natural consequence of a social contract) is only appropriate when there are more jobs than people.

    For my money Job Guarantee is just the state topping up of the number of positions so that the “There aren’t any jobs” argument is neutralised. I would go so far as to ensure that there is a local choice of jobs

    Once you have more jobs than people then you can identify the genuinely feckless over those who were just unable to get to a chair when the music stopped.

    My position is that the social contract at that point is that you gain access to resources provided by other members of society as long as you are doing something for society in return – which I define as ‘useful work’ – or are exempt on the grounds of age or infirmity. ‘Useful work’ has to be defined politically, but could included caring duties, studying or even busking in the street.

    I would see the positions deployed via the voluntary sector since they have the skills (or should have) to handle task based short term highly variable workforces.

    You then receive resources pro rata with the amount of useful work performed up to a defined maximum working week.

    Ultimately if you refuse the social contract, then the state should refuse its resources. How you survive then is up to you.

  7. I should point out that I’d prefer a universal pension (essentially Nationalisation of the minimum wage ) which I think eliminates the distortions you get on transition from JG to ‘normal’ work.

    I don’t like the ‘JG work wouldn’t compete with normal work’ line in the JG design. IME anything that requires the public sector to make a “wisdom of Solomon” decision is a bad idea. Instead it should be an intrinsic part of the design of the system.

    If you subsidise both normal work and JG work to the same extent then it doesn’t matter so much if they compete with each other.

Comments are closed.