As mentioned earlier, critics have argued that the program could become so large that it would be unmanageable. The central government would have difficulty keeping track of all the program participants, ensuring that they are kept busy working on useful projects. Worse, corruption could become a problem, with project managers embezzling funds. We will briefly look at some methods that can be used to enhance manageability.
First, it is not necessary for the national government to formulate and run the program. It can be highly decentralized—to local government, local not-for-profit community service organization, parks and recreation agencies, school districts, and worker cooperatives. Local communities could propose projects, with local agencies or governments running them. National government involvement might be limited to providing funding and—perhaps—project approval. That is the way that Argentina’s program, as well as the new program in India to some extent, is run.
To be clear, the level of decentralization will vary across countries and even across regions within countries. In some developing countries there may be no alternative to the central government–there may be few indigenous not-for-profits, and local government might be too ineffectual (for a variety of reasons). In some developed nations, the central government might be sufficiently competent and respected to run the whole program. However, in a place like the US, there is probably too much distrust of the central government—but, fortunately, the US has hundreds of thousands of local alternatives in the form of community service organizations and local governments.
In order to reduce the likelihood that funds are embezzled, the national government could pay wages directly to program participants. This can be facilitated by using something like a social security number—and paying directly into a bank account much as social security programs pay retirement. If project managers never get their hands on government funds, it will be difficult to embezzle them. To be sure, there will be some cases of fraud, such as paying to a social security of someone who is not working, or who is dead. Transparency is one way to fight corruption—public recording of all participants and all payments, through use of the internet, for example, with rewards for whistle-blowers. Argentina used the internet in this manner.
While there are privacy issues surrounding participation and income received, that is probably outweighed by public interest concerns. Even in the US it is common to make the wages and salaries of public employees available. Further, since our formulation of the JG includes uniform wages and benefits, there are no distinctions—all full-time employees receive the same amount—so there is less potential for embarrassment. Further, unlike welfare payments, the program is not means tested. As mentioned in an earlier blog, to the extent that participation in the JG becomes something of a “rite of passage” for young people (and, indeed, for people of all ages) the program won’t necessarily taint workers.
To cover management and materials costs, the national government might provide some non-wage funding to projects. In direct job creation programs, an amount equal to 25% of the wage bill has been common. The greater the payment, the greater the adverse incentive for project managers—who might create projects simply to get funding. For this reason, non-wage funding should be kept small, and the national government should require matching funds to cover non-wage expenses. And, again, all such payments should be transparent and publicly available—published on the internet.
While it is tempting to include private for-profit employers in such a program, adverse incentives are even greater. A private employer might replace employees with JG/ELR employees to reduce the wage bill. Worker cooperatives might work better. A group of workers could propose a project designed to produce output for sale in markets. The JG/ELR program could pay a portion of their wages for a specific period of time (say, for one year) after which time the cooperative would have to become self-supporting. If it could not stand on its own, the workers would have to move into regular JG/ELR projects. (Again, Argentina provides a useful example of successful co-ops included as part of the Jefes program.)
Obviously, there are many more management issues that must be explored. There are many real world examples of direct job creation programs funded by government. We can learn from mistakes made. Programs must be adapted to the specific conditions of each nation. There will be many trial-and-error experiments. One of the advantage of decentralization is that the whole program is not tainted by the failure of some experiments.
Look at it this way. We know that most new for-profit businesses do not make it. Firms fail every day. Yet, the “market system” is not tarnished by these unsuccessful experiments. Indeed, that is said to be the beauty of the “competitive system”—losers get punished. We should, and do, hold our government to a higher standard. We will never accept a failure rate of 50% or 75% by government, even though we accept—even welcome—such dismal results in the private sector. We readily overlook all the social costs generated by business failures (including those imposed on workers who lose their jobs because of management’s mistakes) on the belief that the relatively few successes compensate.
We should have the same attitude about JG projects—albeit with an expectation of much lower failure rates. We know the ideological opponents will seize on every single mistake, so we need to have many, many successes to counter them.
Still, some JG projects will not be successful—in terms of providing useful jobs that produce socially useful output. Some will have low rates of transition by workers out of the program. The project managers must be held accountable. Just as projects must be approved before they can receive government funding of JG workers, they must show results to continue to participate in the JG program. Constituencies (workers and communities served) must be part of the evaluation process. JG workers must be free to quit work at poorly managed projects to seek more fulfilling work at other JG projects.
There is a bias in societies like the US that the “market test” is the best way to distinguish successful from unsuccessful firms. Yet, as all economists know, the market does not work well in many important areas: public goods and other cases where social benefits and costs are not reflected in market prices. Even in the most favourable circumstances, “market efficiency” does not equate to “social efficiency”.
There are wide open areas in any economy where social costs can be reduced and social benefits improved by “extra-market” provisioning—by purposeful and organized action. Some of this is the proper role of government, some can be funded by government, and some can be done without government. But there is no justification for believing that the market can “do everything” and that the market test is the only test of value.
I will have more to say about this in a few weeks. In truth, every successful business required help. There is no such thing as a “self-made man” (or woman). And every failed business squandered the help provided by government and society more generally, at least to some degree.
So, yes, problems will be encountered in any real world JG program; some of these can be foreseen and others will surprise us. There will be failures. There will be some waste. The program design will need to be adjusted. There will be an element of trial and error.
But what must always be kept in mind is that the alternative—unemployment—is, arguably, far more socially wasteful.
Since unemployment is a systemic failure, aren’t the only questions that need to be asked
(i) how much monetarily are we to compensate these people for the loss imposed upon them by the economic system?
(ii) whether it is better to pay them do something useful and add to society or just pay them for sitting around doing nothing much?
Otherwise the economic system surely relies on starving some people out of the way (either to an early grave or another jurisdiction).
Isn’t the management of a JG programme from the federal point of view pretty much the same as the management of a benefits programme?
You work out whether somebody is entitled and pay them. Same issues with both really. One is means testing – which requires a lot of checking and rules, the other is whether they are doing some work that is of use.
Seems to me that the overhead of both is pretty much the same.
Here in the UK we’re implementing the ‘Universal Credit’ system which requires ‘real-time’ (ie every payroll period) work hours data to be collected from every employer in the country so that top up ‘tax credit’ benefits can be adjusted in real time as well.
Add ‘file a nil paid timesheet from non-private sector organisation and we’ll pay it instead’ to the rule-set and you have a Job Guarantee.
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Dear Professor Wray,
I’ve been an advocate of full employment programs since I read Harvey’s book several years ago.
But I have a few questions and a comment.
Would the counter-cyclical effect of a JG be limited due to a cap on non-wage spending?
Do you recommend that a JG also be supported by increased permanent public employment and public skills development programs as recommended in CofEE’s 2008 report “Creating effective local labour markets: a new framework for regional employment policy” ?
Also, a comment, by requiring matching funds by local entities this may prevent job creation in areas where the local government is unwilling to match funds. Of course funding to non-profits and worker cooperative would get around this problem. It seems that a JG allows choices for people whose local government is unwilling or unable to employ them. People can by pass their local government and request funds. As opposed to seeing this as circumventing local control it could rather be understood as allowing people the opportunity to liberate themselves from local elites, brute luck, and a local electorate which does not share their opinions. A JG would offer opportunities to people who are not in agreement with the local opinion. Thus, a minority group of people who are not budget hawks could be fully employed while their local government cuts spending to meet the desires of the majority. A JG thus adds options and does not limit them. Of course local business may dislike the competition, but who ever said business liked competition?
“Would the counter-cyclical effect of a JG be limited due to a cap on non-wage spending?”
You wouldn’t want the effect to be unlimited, so, literally, yes it would, thank goodness. If you mean would it be insufficient all by itself, the JG is not the only counter-cyclical mechanism in the economy, and there would still be room for discretionary tax changes.
The idea that a local government might opt not to participate is interesting. If such a thing is common, maybe the Federal or State government would have to make it an offer they can’t refuse. Tie it to other revenue-sharing programs, for instance. If the overhead allocation is sufficient, I don’t think this would be a big problem. I think most local officials would welcome a cost-free opportunity to expand their empires.
The program should not compete with private business, either for workers (except by setting a floor under wages) or for output. It is for people that private business is not willing or able to employ.
“there is no justification for believing that the market can “do everything” and that the market test is the only test of value.”
STRAW MAN ALERT !!!
Even the most ardent free market advocates acknowledge a role for government, and the existence of social costs and benefits not reflected in market prices. Only anarchists want no government. If you want to start a campaign against anarchy, you have my support.
I don’t think it’s straw man. I’ve seen conservative politicians and pundits claim this or something similar many times. Economists are more careful about this, but there’s no way the Federal Government would have done all the outsourcing it’s done over the past 30 plus years at a cost much in excess of what civil servants would have cost if people didn’t believe something like the above proposition.
Something similar? Yes, I would say that most things the free market can do acceptably should be done by the free market. The price mechanism is the most efficient and effective way to allocate resources to their highest use. I hear politicians say that often, too.
This is not the same as advocating EVERYTHING to be done by the free market. I have never heard a politician advocate doing away with the police and the courts, and allowing free market vigilantes to enforce the law and mete out penalties. (Maybe the SEC would be a good beta test candidate, though 😉 National defense is another, and there are others. The Constitution lays out several powers delegated to the Federal government. I know of no proposed amendments to remove any of them. In fact, the trend has been a transfer of power from the people and the States to the federal government, ignoring the 9th and 10th amendments.
If I may be allowed a criticism of Prof Wray’s style, I think he sometimes weakens his arguments by over-generalizing, using absolutes when clearly the absolute is false, and the truth is writ in shades of gray. My comment is more about his style than about whether central planning is better or worse than a free market.
It’s not clear to me who are the “project managers” to whom you refer, or that matching funds (from where?) should be required for non-wage costs.
If you’re thinking of current local government managers, I would not want them “creating projects” because of this program. If the local government wants to do a project, they should do it regardless of the existence of a JG, and it should be justified and funded like all their other projects.
I have in mind existing organizations already doing the projects, but struggling to do more for lack of volunteer labor. If they are properly vetted, I’m not worried about giving them funding for the overhead of the additional JG workers and activities.
As for matching funds, remember we are talking about a program to be funded by a monetarily sovereign government but carried out by monetarily non-sovereign entities. They have not the option to simply spend more money, they must have an income from somewhere else, either taxes in the case of a local government, or donations in the case of a non-profit. Requiring them to (net) spend money to implement this program surely will reduce their willingness and ability to participate, and more so when funding is harder to come by, which is when the program is most needed. Matching funds is a pro-cyclical idea, tending to defeat the effect of a counter-cyclical program. Independent audits would be a better way to monitor for fraud, and as a side effect would eliminate any requirement for public disclosure of the names of JG participants. The auditors should be paid by the Federal government, not by the auditees, as is the common practice in commercial audits, so as not to duplicate the conflicts of interest in that system.
1. Yes there are other countercylical programs in addition to the JG. And yes it might be necessary to raise taxes or cut non-JG spending if inflationary pressures arise due to excessive AggD. However as a general observation, virtually all developed capitalist economies operate with excess capacity and so this would rarely be needed.
2. The matching funds element is only a proposal for the NonWage costs–to prevent, say, a nonprofit from getting lots of new federal govt paid for equipment, buildings, autos, etc. If they really need these things, they ought to put up some of the funds. If they cannot do so, they should create jobs with very low nonwage costs. Our first priority is jobs, second is providing community service. We want to keep the incentives aligned.
3. We will see how many ideologically motivated commentators will object that the mkt test is the only one that matters. In my experience, it is always a major claim made. Am waiting for Ralph’s response (-). I find it necessary to continually point out that narrow “mkt efficiency” is not the only test. And I never hear our free marketeer friends acknowleding that most new firms fail–that is to say that most “market experiments” are failures. thus, that a few govt failures should be accepted. Rather, they seize on every single govt failure as “proof” govt can do nothing right.
4. I do not agree that we should expect local govt to undertake every possible project of positive social value using its own local tax revenue. That will not work for fairly obvious reasons. So yes I would let them propose JG projects. If they prove useful then there could be local citizen pressure to convert these to regular public employment. However, I do prefer not for profit projects by local community service organizations. It might not prove sufficient.
4. “I do not agree that we should expect local govt to undertake every possible project of positive social value using its own local tax revenue.”
Nor do I. Local governments operate, like our Declaration of Independence says, “with the consent of the governed”. Just as I cannot afford every possible product of benefit to my family, local governments will not have consent to raise taxes enough to afford every possible project of positive social value. People will prioritize, and do what they feel are the most beneficial and, yes, cost-effective projects. I have a feeling that even with JG and full employment, there will still be a list of project proposals of positive social value that aren’t getting done, because they lose out to other projects of greater social value that can be done with the same resources. My econ 101 teacher said that economics is the science of unlimited wants and limited resources.
3. My econ 101 teacher was a huge free marketeer, and he often pointed out that 4 out of 5 new businesses fail in the first 5 years. The only thing he said more often was “there is no free lunch”. This is creative destruction, and is the essence of capitalist free market advancement. It is not a failure of the system, any more than the hundreds of light bulb designs that failed before Edison invented a light bulb that worked. I”m having trouble picturing a “failure” of a JG project. OK, if you build a bridge and it falls down, maybe, but I don’t think bridge building is an appropriate JG project anyway. Since the main objective is to employ people, the only way to “fail” is if you gave a project and no workers showed up. I guess it comes down to the idea of what projects should be part of JG. It’s difficult to fail if your objective is sending JG “volunteers” out to work with Habitat for Humanity, or the food bank. Corruption, I suppose, could be considered a failure.
1. I was thinking we would still need lower taxes, even with JG. If we lost 5 million $50,000 jobs in the recession, replacing them with 5 million $8 an hour jobs is not enough to get back to where we started.
Golfer: please sue your econ 101 teacher. Looks like sheer unadulterated nonsense was taught to you. that explains a lot! (-)
Free lunches and low hanging fruit are everywhere. Grab them. That is what econ ought to teach.
Randy,
What do you know about the corruption surrounding Indias JG program.? That was a topic on one of the blogs I read the other day. I cant remember exactly where right now.
Every other JG program and their troubles will be used against the idea here at home. I like the idea of direct pay via SSN. No middle men touch the money.
Hi Larry R. Wray,
Like Greg B. above, I’d like to get any insights you may have India’s JG. The article I think he is referring to is:
http://ipsnews.net/news.asp?idnews=107379
(h/t MNE)
Obviously, reports of corruption come as no surprise. And I understand India’s economic and political environments are not comparable to the US, but any info/links you may have would be helpful.
Randy’s look at the JG is in this post is very realistic, I think. But when considering the problems that will certainly arise, it’s very important to always have in mind the costs of using an unemployment buffer stock. Bill Mitchell’s very good on this here:
http://bilbo.economicoutlook.net/blog/?p=17740
and in other links in the above post.
The cost is just staggering and there’s no way the possible costs of the JG that come to mind even begin to approach in severity the costs Bill describes.
Randy, Glad you’re “waiting for Ralph’s response”, though I’d prefer it if the minus sign was converted to a plus. Also you’ll be pleased to hear that the fuse-box in Ralph’s house went up in a cloud of blue smoke a few days ago, so I’ve had less time than usual to pick quarrels on the internet recently. Anyway, most of your points seem pretty uncontroversial, but I have a few comments.
First re dealing with embezzlement, I agree that plenty of use can be made of the internet. Use can possibly also be made of cell phones / mobile phones. In Nigeria every other person has a mobile phone now, and much of the embezzlement of social security money has been cut by crediting peoples’ phones with social security money.
However, another undesirable practice (or form of “embezzlement”) is using productive JG employees for long periods as substitutes for regular employees whose wage would normally be funded by the non-profit etc. That was a problem under CETA as I mentioned a few days ago. I don’t think your post said much about that. A way round that problem is to prevent any given JG employee staying with a given employer for more than a few months (though there are plenty of refinements to that “few months” rule that could be added).
Next: your point near the end of your post about public goods, social benefits and costs, market prices, social efficiency, etc. Obviously the market does not value public goods correctly, as you say. But we already have a system for dealing with that: it’s called democracy. That is, anyone can campaign for, and/or vote for having a bigger proportion of GDP allocated to public spending.
So I have doubts as to whether those setting up JG systems have a right to overrule those democratic decisions: i.e. assume that the electorate has voted incorrectly and that public goods are STILL UNDERVALUED.
That’s why I’ve always assumed when discussing JG that the marginal product of labour in public and private sectors are the same. And that in turn is just one of the arguments for having JG operate as much in the private as public sector. Though obviously you oppose JG operating in the private sector.
Re the millions of jobs which non-profits etc can allegedly produce, COFFEE once did some research into this (I can’t quote chapter and verse). The response they got from non-profits, local government, etc was that there were strict limits to the amount of relatively unskilled and temporary labour they could use.
The response of the COFFEE researchers was bizarre: instead of accepting the empirical evidence that they themselves had collected, they accused the non-profits etc of not being imaginative enough. Personally I live in the twenty first century, not the thirteenth: that is I accept what empirical research shows, unless it is contradicted by other empirical research.
You could argue that the above evidence is contradicted by the experience of Jefes under which very large numbers were put onto JG type work without too much difficulty. But my answer to that is that given catastrophically high levels of unemployment, there is an ample supply of entrepreneurial and skilled labour amongst the unemployed. So getting people to run JG projects is no problem. However, given catastrophically high levels of unemployment, much the best solution is a straight rise in aggregate demand, not JG. That is because regular jobs (public and private sector) are more efficient than ELR/JG jobs.
“using productive JG employees for long periods as substitutes for regular employees whose wage would normally be funded by the non-profit”
I’m not familiar with the nuts and bolts of CETA funding and operation, although I vaguely remember the acronym. Perhaps it allowed more opportunities for embezzlement than JG would do.
People who would be in JG for a long time mostly need training, not just any old thing to do. They are not likely to be coveted as regular employees by non-profits.
I can’t imagine a JG employee staying for a long time in a JG job if he is a suitable substitute for a regular employee. He would be one of the first to be hired out of JG by a regular employer, at a higher wage. I guess he could be paid extra “under the table”, but that behavior seems more likely for a private sector employer than for a non-profit.
Golfer, There would certainly be a TENDENCY for relatively productive JG employees to quit fairly quickly for regular work. On the other hand, in many countries, unemployment benefit and various “in work” benefits for the lower paid are so high, that that those in the bottom third or so of the pay scales have little incentive to seek more productive work than they are currently engaged in.
So my guess is that rules need building into the system that dissuade employers from holding on to JG employees for too long.
“given catastrophically high levels of unemployment, much the best solution is a straight rise in aggregate demand, not JG. That is because regular jobs (public and private sector) are more efficient than ELR/JG jobs.”
No, it’s because you want a vibrant economy with a small pool of JG workers, where more people can get jobs they aspire to, and not be relegated to work that employers are not willing to pay for.
Golfer, Valid point. But it doesn’t contradict my point, namely that efficient jobs are better than inefficient ones, all else equal. I.e. if unemployment can be reduced by simply raising demand, that’s the best way to do it rather than create JG jobs because, 1, the jobs created are more efficient, and 2 (your point) you get a bigger variety of jobs which as you say, enables more people to get the jobs they aspire to.
Ralph,
Hi, I’m new here and still learning all the details of mmt. Question: What in your opinion is the best way to “simply raise demand?” And why?
Vic,
I won’t answer for Ralph, but in general there are two choices: lower taxes or raise spending. Your preference depends on what you think of the size of government. Is it doing all it should be doing, and perhaps more? Or is it failing to address some of its proper responsibilities? It’s a political question, not an economic one. Mosler puts it this way: Taxes are too high for the size government we have.
It’s been a long time, but there is something else here.
“IF unemployment can be reduced by simply raising aggregate demand” …
Right now, that condition is satisfied, and aggregate demand should be raised. Most of the currently unemployed orunderemployed could become employed without a JG.
However, as the economy approaches full employment, further increases in AD can become inflationary. At that point is when JG comes into its own. It allows FULL employment with price stability, if coupled with the proper level of taxation to limit AD and prevent inflation.
It has nothing to do with what jobs are more efficient. JG is needed to eliminate the portion of unemployment that cannot be eliminated simply by raising AD without also causing inflation.
It is also true that after JG is implemented, there will be times in the business cycle that AD should be increased by government policy. (Also times when it should be decreased.) You can tell when these times occur by the size of the JG labor pool.
John,
“there will be times in the business cycle that AD should be increased by government policy”
Does MMT address the business cycle phenomenom as something that can be fixed or is it a law of the economic universe? Can it be steadied?
I think MMT implicitly assumes a business cycle, or at least the possibility of a changing environment. The sectoral balance equation implies the possibility of changes in the savings desires of the non-government sector, and thus a change in the government’s position. JG assumes fluctuations in the size of the JG labor force, which would be caused by changes in the economy, whether cyclic or otherwise.
JG, as a better automatic stabilizer, would help dampen the fluctuations, but there is no asumption that they would be eliminated completely. Policy actions will very likely be needed as well, at least until some “optimum” level of taxation is reached. And even then, if we make a social decision to change the level of government spending, there would be a need for an offsetting change in the level of taxation.