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 – is far preferable to the corresponding risk under the NAIRU approach, low inflation and mass unemployment.