MMP Blog 49: Should Growth Drive Jobs, or Jobs Drive Growth?

By L. Randall Wray

Sorry for the hiatus, but a family emergency is consuming all of my time. I hope to be able to post something next week—to move to finish up the MMP blog. Meanwhile I offer the following.

In an article yesterday in Reuters, Edward Hadas discussed an excellent piece by Pavlina Tcherneva. And, by Jove, he got it. It is much better to create the jobs and then let growth follow, rather than to try to pump up growth in the hope that some jobs might trickle down. That is all the more true when you’ve got 25 million people who need a full-time job. Let me quote the first part of his article; go here for the rest.

“Politicians and other leaders have watched the job destruction with something like horror. They shouldn’t have been surprised. The unending fight against inefficiency leads to a natural employment asymmetry. As technology advances, businesses and governments usually find it easier to cut than to add jobs. Some businesses can progressively expand headcount, but in tough times there are more employers looking for ways to use less labour.

Most politicians and economists believe that GDP growth is the cure. It is considered not only the highest economic good but also the best way to create jobs. In search of higher output, governments run huge deficits, while central banks pass out money for free. The policymakers often invoke the name of John Maynard Keynes. But they twist the great economist’s ideas. As Pavlina Tcherneva points out in a recent article in the Review of Social Economy, Keynes thought “the real problem” governments should address during the Great Depression was “to provide employment for everyone”. In Keynes’s view, output follows jobs, not the other way around.

Keynes’s own preferred solution was for governments to organise projects with a high “elasticity of employment”. “There are things to be done; there are men to do them,” he said. “Why not put the two together? Why not put the men to work?” The best way for governments to create jobs quickly is still to hire people directly. A look at the dilapidated infrastructure of the United States suggests that Keynes’ prescription is still relevant.

Enthusiasts for small government might want to privatise such programmes, but they should still agree with the true Keynesian principle: it is better to pay people to work than to pay them not to. Programmes which protect the unemployed and disabled serve a valuable social purpose and payments for early retirement may be defensible, but programmes which create jobs are far preferable to either.

This Keynesian message has largely been lost in the current official policy mix, which aims at growth and hopes for jobs. Policies which support the financial system, put money in consumers’ hands and cut bloated government bureaucracies may eventually encourage job creation. Four years into the Lesser Depression, however, these highly indirect methods are at best working slowly.”

He’s right. And Pavlina has been producing a series of great papers on this topic. Read his piece and then go to www.levy.org. And her most recent paper on Keynes’ Approach to Full Employment (just published in the Review of Social Economics)  is a must-read.

31 Responses to MMP Blog 49: Should Growth Drive Jobs, or Jobs Drive Growth?

  1. Golfer1john

    Sounds like chickens and eggs to me. If the first dollar comes from government buying something or from government hiring somebody,it’s a dollar of increased aggregate demand either way. Or from a business borrowing a dollar or paying a dollar less tax and using it to buy something or to hire someone or to pay a dividend, for that matter. Growth and jobs go together, in both up and down cycles. The real challenge is to get government to move in the right direction, not to worry so much whether they step on the gas a little or let up on the brake a little.

    • I tend to disagree. With unemployment at 25 million we should not be spending money on any old thing since that,could just foster cronyism. Get the jobs first. I have the same problem with tax cuts,to the wealthy. That money may just end up in some rich guys bank account as savings. Better to fund a job with the money. That will lead to consumer demand for sure and therefore AD. I also think we have had substantial deficits these past three years and we still have not recovered. Better to use the deficit to fund the JG and put the crooks in jail.

      • Golfer1john

        “any old thing” … who advocated that? I see lots of suggestions here for worthwhile infrastructure spending that is not crony capitalism, unless the Progressives here have cronies in the construction business.

        What tax cuts to the wealthy have been enacted since the GFC? The only tax cut has been 2% off the FICA, which is a regressive tax, and so that cut went disproportionately to the non-wealthy. The really wealthy don’t work, and pay no FICA at all.

  2. Clonal Antibody

    Randy,
    My condolences on your bereavement. My heart goes out to you.

    Thank you for taking the time to write this.

    • Hugo Heden

      Randy.. don’t know what to say. My heart too goes out to you.

      In disbelief

      – H

      • Professor Wray

        I can barely imagine how your life has been the last few weeks and I hurt when I try. I hope I nor anyone else I care about has to find out for real.

        The story about your wife was a beautiful piece of writing. You obviously considered yourself a very lucky man and Im sure she felt the same way

        Good luck going forward

        • Dear Randy,
          Please accept my deepest condolences. May your strength prevail to help you through this difficult time.
          Adam Kaczynski, Sydney

  3. Golfer1john

    “Policies which support the financial system, put money in consumers’ hands and cut bloated government bureaucracies may eventually encourage job creation. Four years into the Lesser Depression, however, these highly indirect methods are at best working slowly.”

    Supporting the “financial system”, aka bailing out the banksters, was not intended and should not be expected to encourage job creation. It was supposed to resolve a “liquidity crisis”, which maybe is actually a solvency crisis and is still going on, but all it did is prevent the financial system from seizing up completely.

    “Put money in consumers hands”??? Oh, is that the 2% payroll tax reduction? Yeah, that should be enough to save the 48% of homeowners in AZ who are underwater, for sure.

    “Cut bloated government bureaucracies”??? Since when is a spending cut supposed to encourage job creation? What economics teacher is responsible for that belief? This guy is supposedly trained.

    Policy has been more austerity than stimulus, since the end of the feeble attempt at putting a few $Billion into the crony capitalists’ pockets. Obama’s spending record is more austere than any president since 1980, except Clinton. To condemn strategies that haven’t actually been tried seems a bit premature, “at best”.

    • Yes, eventually it may do,it. But it has not happened yet, has it? Why do you and others resist what seems a clear and simple way out of this mess?

      • Golfer1john

        I don’t resist. I support JG. I just think this argument is more political than economic. A dollar of AD is a dollar of AD.

        As for “eventually it may do it”, no I don’t think so. What the author criticizes has been 1/3 irrelevant, 1/3 counter-productive, and 1/3 correct action but far too little. More of the same will give us more of the same results: a muddle-through growth rate and stubbornly high unemployment, even by the fictitious government measures.

  4. “The best way for governments to create jobs quickly is still to hire people directly.”

    Really? That’s the best way? Government jobs?

    How about paying for projects, and allowing the private sector to do the hiring? How about paying Chicago to hire more police and teachers, both vitally needed. How about paying private industry to do research and development on the hundreds of diseases that plague us?

    How about paying private industry for alternative-energy research and development? How about paying people to attend college so more people would be eligible for the ever-more-complex jobs in our ever-more-technological society — and wouldn’t be burdened with college debt?

    How about eliminating FICA, while increasing Social Security and Medicare, so the public would have more money to spend, thereby increasing the business profits necessary for hiring?

    One of the fundamental differences between Modern Monetary Theory and Monetary Sovereignty is MMT’s belief that “full employment” is best achieved by the government being (their words) the “Job Guarantor,” i.e., hiring people directly. MS disagrees.

    I offer a bit more discussion of this at: http://rodgermmitchell.wordpress.com/2012/01/01/why-modern-monetary-theorys-employer-of-last-resort-is-a-bad-idea/

    Rodger Malcolm Mitchell

    • RMM,

      I agree with you the the U.S.Gov could do so many ‘public purpose’ projects if the people allocating funds understood the difference between monetary sovereignty and monetary non-sovereignty (MS) or currency issuers and currency users (MMT).

      But maybe there are plenty of people that would be happy to do small local things for a basic wage with benefits? Maybe they’d be happy to have a basic living (the JG + benefits) doing projects in their local community?

      Couldn’t we do the same things that you offered AND offer a JG? i.e. the BIG purblic purpose projects and also the JG?

    • Many, perhaps most, of those JG jobs would be at the local level through nonprofits. There is nothing wrong with those other programs but the objective here is to put people to work. I would like to see free community college. And SS taxes are merely stupid. But first things first put those 25 million to work. Think of the lost GDP with unemployment of 25 million. I will say,though I am not particularly interested in fumdimg private business for something the will rip us off for with a patent. And we can make grants to states too. Lets add single payer health care to the list.But what have you against putting people to work?

      • Jonf,

        I think you’re missing Rodger Malcolm Mitchell’s point. He’s saying that it can be done without the JG. Maybe he doesn’t think “full employment” can be achieved, but I’m pretty sure he means, and I know he argues, that reducing taxes and increasing government spending “enough” would cause unemployment to fall very low (similar to how Warren Mosler talks about taxes being the thermostat of the economy). If you think he is against putting people to work then you’re unfamiliar with his blog: http://rodgermmitchell.wordpress.com/

        This is where MMT steps in to talk about the anti-inflationary effects of the JG. Then RMM responds that since we’ve been off the gold standard there has been no correlation between increasing the money supply and inflation. And so on. Check out his blog.

        • I don’t think so. He was pretty clear about it. I am saying the JG would be better than the other means. Spending can increase employment, but, as noted above, it takes a good long while and it is likely we will experience inflation long before it gets there. Giving money to private business in many case just leads to more cronyism. But I will agree if there is nothing else. And as a supplement to the JG for infrastruture jobs, ok. But I would much prefer the JG over tax cuts or crony capitalism. I don’t know what Mosler wants but last I knew he supported the JG. The JG will lead to deficits if that is what you are after. So lets get the jobs first. I noted above and I think Reuters did too, that all these deficits these last three years has not employed 25 million people. What a success, eh? Maybe it will one day get down to 6% in 2016, if you believe the budget office and Mitt Romney. Great – – NOT. Sorry but it’s late.

          • “I don’t think so. He was pretty clear about it.”

            What are you talking about?

            I think you need to read more MMT and MS. Your last comment is all over the place.

          • Jonf,

            Just to be clear… when I RMM’s view is “similar to how Warren Mosler talks about taxes being the thermostat of the economy” … I meant SIMILAR, not exact.

            Mosler and MMT contend that taxes/government spending levels should reglate inflation. RMM says monetary policy (interest rates) should regulate inflation.

            Again, read up on it. It’s pretty clear what each are saying. Though I think it’s not so clear which one is more correct.

    • RMM,

      What makes you so confident that private industry will decide to fully employ those willing to work? It is only by coincidence that their investment decisions will be bring about sufficient levels of effective demand to provide for full employment. Sure, if the government decides to commit large sums of money to projects, and bids them out to the private sector for implementation, you will see economic growth and most likely a fall in unemployment. But, you can’t ignore the growth dynamic here. What happens next? Once the projects are complete, and the economy has added a considerable amount of new capital formation, will the inducement to invest remain sufficient to maintain full employment? Maybe. But, I’m not that optimistic. Neither are my friends (see Kalecki, Domar, Vatter and Walker, Wray, to name a few).

      Now, you may not like the JG because it conjure images of legions of government workers in olive drab garb, digging ditches and cutting trails, and whatever “make – work” you might imagine. But, anyone who has bothered to read MMT proposals for the JG knows this is only one of many possible implementations. And the fact remains that by force of logic, you cannot deny that the most certain why to create a job is to hire somebody. Given that we live in a world written in money contracts, the only entity capable taking on that risk wholesale is the sovereign issuer. Period.

      • Mitch,

        You asked, “What makes you so confident that private industry will decide to fully employ those willing to work?”

        What makes me confident that private industry can do anything better than government? For every problem in economics, the most direct answer is: “Let the government do it.” But government and business both are composed of people, whose personal motivations usually are different from the purpose of the project. Some things government does better; some things private industry does better.

        I have no doubt that the U.S. government has the ability to hire every man, woman and child in America and to run every project in America. I just believe that private industry is more efficient at hiring and supervising people than is government.

        I explain my beliefs in a bit more detail at: http://rodgermmitchell.wordpress.com/2012/01/01/why-modern-monetary-theorys-employer-of-last-resort-is-a-bad-idea/

        Rodger Malcolm Mitchell

        • Roger,

          Look, I don’t dispute that often times private companies are more efficient than government bureaucracies in the administrative side of things. But, my point was that private companies have a fiduciary responsibility to maximize profitability. Whether or not they decide to hire enough employees to ensure full employment is secondary to that primary mission. So, if you want to maintain full employment against the “waves of optimism and pessimism” that drive the business cycle, then you need something like the JG.

          And the JG proposals I’m aware of do not suggest that the government (federal) administer each project. They simply suggest that it should provide the funding. The solutions, then, are left to those closest to the issues at hand – i.e. local municipalities, NGOs, etc.

  5. Thank you Professor Wray, for taking the time to post given the circumstances. My condolences to you and your family.

  6. Randy, welcome back and sincerest condolences on your great loss.

  7. Dan Kervick

    Welcome back Randy. Best to your children.

  8. Good to hear from you Randy. We’ll be here when you are ready to return.

  9. JK and RMM:
    Let me boil it down further. You say:
    “How about paying for projects, and allowing the private sector to do the hiring? ”
    That is the kind of thing that we have been trying for these past four years and it is the definition of trickle down. The JG would be much better IMO. I’m sure you remember how there was a web site tracking the stimulus spending and jobs created. Spend millions and get one job. Give me a million next year and I will guarantee to put at least 20 people to work around my town in non profits. Give me a few weeks head start and I’ll go arrange it.
    This doesn’t have anything to do with Mosler or inflation unless you mean the JG will hire without inflation. Say again, you want to spend for infrastructure in addition to the JG ok by me. (maybe some other direct job creating stimulus too.) But general funding to keep business in profit, no. It is ineffective – look what happened in four years.

    • Jonf,

      “That is the kind of thing that we have been trying for these past four years . . . “

      You’re being deceived by the fallacy that if a problem isn’t totally resolved by an action, then the action was no good. (i.e., why spend on cancer research? There still is cancer.)

      I suspect every nonpolitical economist agrees, if the government had not applied stimulus programs, the recession would have been much worse.

      As for JG, I wrote a post on it. You can see it at: http://rodgermmitchell.wordpress.com/2012/01/01/why-modern-monetary-theorys-employer-of-last-resort-is-a-bad-idea/

      Rodger Malcolm Mitchell

      • Aw Roger. The Great Recession unemployed is not totally resolved, not at all after four years, not even close. We still have well over twenty million unemployed. And now even Romney agrees it will be close to that in 2016 (his 6% plus the underemployed or the “real” unemployed) That could have been resolved in the first year, or at least the greater part as there will always be some stock of JG workers. And that is the follow on that is a positive good. Once the economy cycles down again, and it always does, there are still jobs through the JG. We don’t need to go after another stimulus and start from the bottom again. It is an automatic stabilizer. The other positive most ignore is it takes the cronyism out, or greatly reduces it. Cancer research? And lots of other programs? I’m not opposed to them (except I object to paying high prices for drugs once they get the patent on our money and I really don’t care to contribute to high paid CEO salaries or profits). So my first goal is for jobs. For jobs, the JG is the way to go. It puts people to work immediately and gives them a minimum wage, a way to make a living. Who knows the positive that kind of thing has on people’s lives and the economy. I think it should be supplemented with infrastructure jobs, another on the shelf program perhaps through the federal government, but that is another discussion. How much GDP have we lost dithering around these past four years? And if you look back, when is the last time we had really full employment? Maybe never. What was the loss for that? It is true this is a hard sell. Can’t even sell it on an MMT blog.

  10. Diop Omowale

    What are the differences and or similarities between MMT and the American School of economics advocated by men such as Dr. Webster Tarpley?

  11. Hi,

    just a thought about what some job guarantee supporters sound like once you’ve read a little labour history from the great depression.

    My reading of Edward Hadas’ Reuters article evoked another era – not modern thinking about the value of individuals and their rights, but of the pre war treatment of labour in the aggregate. Always working class, and of course most were working class, bodies, muscles constituting labour power, not the educated middle classes searching for jobs invoked now.

    This gives a flavour of the history of job creation in 1930s Britain http://news.bbc.co.uk/2/hi/uk_news/scotland/7842448.stm. The idea of ‘bloated’ government only adds to the Tory sounding outlook of Hadas’ article. I wonder if there are similar feelings from 1930s US.

    Since the Thatcher period government direct work (including council work) – everything from scientific research to road building – has been treated as bloated, sufficient that every ounce of spare protective capacity has been squeezed out under threat of privatisation. Wages have suffered and this also depletes the stabilizing effect of government spending.

    So spare a thought for the contradictory meanings ‘job guarantee’ can mean to our political elites, and to the victims it can also create.

    Jim