Neoliberal Supply Side versus Keynesian Demand Side Approaches to Unemployment

By L. Randall Wray

Excellent piece up by Bill Mitchell on the Neoliberal “work for the dole” scheme (called the Community Action Programme). Neoliberals first throw millions of workers out of their jobs with fiscal austerity. (Note: the UK is monetarily sovereign, so this is a policy choice–there is no economic necessity to adopt austerity.) Next, they tell those who lost their jobs that if they want to collect the unemployment benefits to which they are entitled, they’ve got to work for the dole–for much less than the minimum wage.

Tom Palley calls this British ELR.

Mike Norman’s readers are trying to correct Tom’s errors. Neil Wilson’s comments are particularly spot-on (as usual). The British program bears no resemblance to any ELR/JG proposal. I won’t repeat here the ELR/JG proposal nor compare it to the UK’s CAP.

Apparently Tom does not see any difference between a neoliberal supply side policy and a Keynesian demand side policy. The neoliberals blame the unemployed for their unemployment. They need a combination of punishment and destitution to properly motivate them. More compassionate neolibs want to train and educate the unemployed. But they still see unemployment as the unemployed’s fault.

By contrast, the Keynesians see aggregate unemployment as a problem of too few jobs. Certainly individuals may be unemployed because of personal characteristics–there is sorting in hiring–but the normal situation is that there are far too few jobs to go around.

MMT, following Minsky and ideas that circulated in the Great Depression, have come up with the ELR/Job Guarantee proposal. It offers a job to anyone–operating on the demand side to ensure a “perfectly elastic demand for labor” at the program wage. That in turn becomes the de facto minimum wage. The goal is to make it a living wage.

But Tom opposes jobs for the unemployed. He says they’ll then want “meals”, “electricity”, and, God forbid, “television”. Once they have jobs, they’ll have income they can spend, on food, electricity, and television. That would be a bad thing, in his view.

I’ll admit I’m a bit ambivalent about the last one given the offerings on the American TV networks. But if we let all other Americans purchase TVs it would be morally reprehensible to single out the poor to say they should not have the jobs that would allow them to purchase TVs if they want them.

The anti-JG critic’s belief is that it would be inflationary to give jobs to the unemployed. For some reason producers would not be able to meet additional demand for food, electricity, and TVs. Hence, the newly employed would get in a bidding war with the already employed. So, best to leave them hungry, cold and in the dark, and without entertainment.

To be sure, I have not seen critics of the JG/ELR opposed to allowing Wal-Mart or other private employers from offering jobs to the unemployed. For some reason, it is OK for Wal-Mart or Wall Street employees to bid for food and electricity and entertainment. Inflation that results from food purchases by low-paid workers in dead-end jobs in the private sector is apparently OK. And as well, it is perfectly fine for Wall Street’s fat-cats to buy petrol for their gas-guzzling stretch limos. That sort of competition for scarce food and energy and manufactured products is apparently fine to our inflation-worrywarts who hate the JG.

I’m not sure why. Seems to me that if one believes more employment necessarily creates an inflationary bidding war for scarce output, then one ought to oppose any additional employment, period. Some critics refer to sectoral effects and bottlenecks–which are supposed to be bigger problems when government provides the jobs than when the private sector does. (See my post last week for Forstater’s response to these critics and links to his papers)

For example, if we increased employment to produce more food, then surely when those new workers receive income they can buy the food they produced without sparking inflationary pressures. Or, new workers to produce TVs can buy their output of TVs. That wouldn’t be inflationary.

Fine and dandy. But new traders on Wall Street? New nightwatchmen at Wal-Mart? Burger flippers at Burger King? Not likely that they’re going to spend much of their own salaries on their own output. If we had a highly centralized economy we could allocate the new jobs “just right” so that output of everything that all the new workers would buy would be increased by just the right amount to exhaust their salaries. We don’t have that, thank goodness! Instead, we HOPE that as new Wal-Mart employees spend on the full basket of consumer goods, producers of all those goods receive price signals and start increasing production.

Presumably this is what critics have in mind–this is why we don’t have to stop Wal-Mart from hiring new workers. The “market” will react “optimally” to new demand coming from new workers in the private sector.

But why won’t producers increase production if we hire–say–a new ELR/JG worker to deliver (say) hot meals to the home-bound senior citizens? When that new worker spends her JG salary, are we supposed to believe that (mostly) private producers go on strike and refuse to react to any price signals that result? They won’t increase their own production and employment to meet the new demand? Why not?

And as they increase their own employment, the number working in the ELR/JG program is reduced. The number employed in the private sector increases. The logic of the JG program within an actual business cycle is that at precisely the moment bottlenecks would be reached the program has been shrinking and thus reducing government spending, which provides an additional automatic stabilizer to the economy; this means that even as bottlenecks arise inflation with a JG program is probably lower than it would be without it. Scott Fullwiler has the model, the simulations, and the “proof” that the JG enhances the stability.

Anyway, why won’t the market work–to allocate more resources to produce the stuff people are buying? After all, the JG/ELR wage becomes the minimum wage, so private employers can always hire workers away to meet the rising demand.

If the answer is “bottlenecks”–they simply cannot increase output without prices rising, then that would be true no matter who hired the unemployed. So we ought to fight against BOTH JG jobs AND Wal-Mart job creation.

Many critics argue that JG workers are inherently “unproductive”–as opposed to, say, Wall Street’s finest who are highly productive as they destroy tens of trillions of dollars of wealth, and force people out of their homes that eventually get bulldozed for lack of purchasers. On this neoliberal view, a nightwatchman who protects private assets at Wal-Mart is inherently productive; a JG nightwatchman who protects public assets at the local community center is inherently unproductive. A ditchdigger who lays a private sewage pipe is productive; a ditchdigger who lays a public sewage pipe is not.

I think all this has more to do with an ideological orientation than with economics. And I have never understood the critic’s response to the question: just how productive are the unemployed? We always just get dead silence when we ask it. Oh, very productive—learning how to get by without jobs. Some become quite adept—at stealing, robbing, pillaging. Almost as bad as Wall Street traders. That was a joke, folks. The economic losses due to unemployment swamp all other economic inefficiencies in our economy and every other one on planet earth. Yet, our neolib critics gleefully ignore them on the argument that actually hiring the unemployed and getting them to do something useful would be “inefficient”.

Getting back to the story. The market supposedly reacts properly to demand coming from private sector workers. Yet it will react only by raising prices when workers are hired into a JG program. Doesn’t make any sense to me. The market is supposed to react to rising prices no matter whether the extra demand comes from private sector workers (“productive”) or ELR workers (“unproductive”). As it increases employment in response to the rising demand, it pulls ELR workers (“unproductive”) into the “productive” private sector. Why do the critics who love market forces when it comes to private employment hate them when it comes to ELR?

Now, I think there are many things wrong with this view of the way markets operate. And I have not gone into other price-stabilizing features of the JG/ELR proposal. But I’d like a bit more consistency from the critics: if they hate job creation by the JG they ought to hate job creation by the private sector, too. By extension, they must hate all “job creators” equally—from Mitt Romney to the JG.

64 Responses to Neoliberal Supply Side versus Keynesian Demand Side Approaches to Unemployment

  1. “So we ought to fight against BOTH JG jobs AND Wal-Mart job creation.”

    Oh, but we do. Whenever private sector job creation gets “too robust”, we (acting through our government, usually the FED) step in to stop it. The FED has been unerringly successful in “taking away the punch bowl” before the party gets too rowdy.

    Perhaps (MMT says absolutely so) the expansion ended because of tighter fiscal conditions (not to say “fiscal policy”, because in most cases – 1990 being an exception – there was no change in policy, the reduction in the deficit was due entirely to automatic stabilizers reacting to private sector conditions); but the FED has been an activist agent, making things happen to choke off job creation, while the Treasury is simply watching things happen.

    • But you’re right, this is ideological in the same way that all economic disputes are ideologically based. Economists pick an economic theory to espouse from among the universe of such theories based on their personal ideology. Or, if they’re really good, and they can’t find one that they like, they invent one of their own, based, again, in part, on their view of the world.

      Classical (Austrian? I’m not sure of all the species) economists would oppose any policy, whether it be monetary, fiscal, political, or social, that tried to reduce unemployment to zero, because they believe that zero unemployment would result in unmanageable inflation. Their economic theory says so, and they chose to believe in that theory rather than yours because of their personal values, upbringing, education, and all the things that make a person who he is. Or maybe (like in my case) they were never exposed to your economic theory during their education. Maybe because your economic theory is not widely endorsed, they don’t consider it worthy of their attention. If they did investigate it, they might (like in my case) change their minds.

      Assuming they are not as open-minded as I, perhaps we ought to be thinking of ways to attract them to investigate MMT, rather than trying to antagonize them by describing them as “morally reprehensible”. Some people might be able to shrug off such accusations, but others who have a considerable investment in their current beliefs, such as a career and a Nobel Prize, are more likely to simply dismiss you. And the more of those Nobelists that dismiss you, the less likely it is that any policy-maker can afford to take you seriously, even if he likes your economics.

  2. I almost had a heart attack reading this. That is, I was laughing so hard that my heart couldn’t take it anymore. Great article, great article.

  3. ‘and, God forbid, “television”’

    What is of course even more amusing is that people on a Job Guarantee will want *less* television than those unemployed.

    There are many reports amongst the unemployed of the world that TV is more important than food – because it is a surefire way of killing all those hours of doing nothing. The other way of course is drink, which blots those hours out.

    If you read the Joseph Rowntree reports about poverty in York, UK from the early 20th century you find that the unemployed then drank lots of tea, beer if they could get it, and spent most of the day in bed asleep.

    Time is a great burden if you have too much of it on your hands. There is a reason it is used as a punishment in prison.

    When you hear the flog ‘em brigade complaining that the unemployed have Sky TV subscriptions, you know they really don’t understand the situation of these people.

  4. L. Randall Wray

    Neil: agreed. And, unfortunately, the TV has become the link to the outside world for most Americans and increasingly across the planet. It is not just entertainment, it is the main form of socializing. Such is the sorry state of “society” in the 21st century. I have heard exactly that complaint from my students when they see data that even “welfare moms” have cable: what are they doing spending their welfare checks on TV? Well, they’ve got kids and anyone who has them knows that TV is part parental relief, part educational tool, and part window onto the world shared by the kids with their peers.

  5. Paul Krueger

    People typically adopt beliefs using very simple, elemental forms of reasoning and then generate more elaborate post hoc rationales for them. You can knock down all those manufactured justifications without really affecting the base belief. To counter the base belief you first have to understand what it is and then go after it directly. I keep asking myself what base belief makes so many people dislike the JG. I’m not sure I have the complete answer and it could certainly be different for each individual, but I suspect it is something along the lines of “The money spent by the government is provided by hard-working taxpayers like me and I want them to spend my money wisely. Paying people to ‘do nothing’ is unwise and unfair to those like me who worked so hard to earn that money.” They perceive JG as a gift that the government is giving and while they are not opposed to charity, they believe that even charity must be deserved and the government is not the right institution to make that determination.

    Obviously MMT has a much different view of “where the money comes from” than do most people and so anyone who accepts other MMT principles should quickly get beyond that base belief and start to think about the larger economic problems that the JG could effectively address. But I suspect that even for many of those who otherwise understand MMT it is difficult to get over the perceived “unfairness” of the JG. In general, jobs are perceived as “earned” in our society, not just given out to anyone; the more deserving person wins the job (Federal Reserve jobs excluded of course). So you may have to convince people not only that JG makes economic sense, but also that recipients are deserving of those jobs and that the jobs themselves have real substance. People are willing to try some of the “work for the dole” sorts of programs precisely because they perceive that recipients are earning their money doing work of value.

    I recognize that the base belief I’ve been describing comes close to blaming the victims for their problems (i.e. they don’t have jobs because they haven’t done what it takes to earn them). I don’t personally subscribe to that belief, but to convince people who do you will need to argue that JG permits people to take more responsibility for their lives and that by doing so they will be earning their right to the job. If instead, they continue to perceive JG as handing out jobs to people unwilling to make an investment of their own to get one in the open job market, you will be in for a long battle. IMHO, you will need to address that particular fairness issue directly (and perhaps you have in some fashion that I’m not aware of), not just the economics.

    • I think the fairness issue is easily addressed when one understands the concept of leakages, and that the government’s responsibility in the context of sectoral balances is to run a sufficient deficit to counteract them. When it does not, the result is unemployment, and the unemployment is caused by government policy. Even if one individual is “undeserving”, he can reform himself and become deserving and win a job, but unless government policy changes he is only taking that job away from some other deserving person. The problem is not the number of deserving workers, it is the number of available jobs, which reflects the level of aggregate demand, which is controlled by (however unskillfully) government.

      Government caused the problem, and it is government’s responsibility to mitigate the harm it is causing. Even though its policy may be optimal in the aggregate, government remains responsible for the harm caused to individuals by its actions. It’s only fair.

    • I think there could potentially be large support for JG if those jobs were seens as transitionary to regular employment. We already help people with such things as elementary schools and other things, depending on country. It would be not too diffucult to understand that long-term unemployed need special help. Costs for this are actually surprisingly low so even if people did not understand where money comes from they might support it once they realized how little it costs. Employment program would enchance ‘employability’ of workers at the same time it cuts down waste of unemployment in capitalist societies. It is the sane thing to do.

      • You could sell it that way, and undoubtedly some JG workers will “graduate” to private sector jobs, but the overall number of jobs, and the overall number of JG workers, depends on the performance of the economy. Ideally, probably 2-3% of the workforce will be in JG, all the time. Not always the same people, but the same number of people, and thus the cost is going to be pretty well-determined. It will be the wages paid, plus whatever administrative costs are added on to pay for running things.

        There is a cost to having a non-inflationary capitalist, free economy, and that is that some of the goods we could have produced will not be, and the people who would have produced them are not employed producing them. The real question is who should bear this cost? Should it be entirely on the unemployed, or should it be shared by all who benefit from the freedom and prosperity of the non-inflationary economy?

  6. I’m new to MMT and have been slowly making my way through the primer and the other material on this blog and others. I find the logical approach and honest engagement with the material really refreshing, so I’d like to the authors for putting in the work. I’ve been wrestling with the implications of the job guarantee, and while I can think of a number of questions, I’ll start with this one:

    Say the government provides the $8/hr job to anyone who wants it, effectively creating a wage floor. All of the publicly-employed night watchmen and food delivery people take their new paychecks and use them to pay off their debts and purchase goods and services, thereby increasing the demand for those goods and services. However, many of the goods they wish to purchase (clothes, electronics, etc.) are manufactured overseas and because companies pay their employees much less (certainly much less than the $8/hr wage floor that exists domestically). Therefore, a large portion of the financial assets that the government added to the private sector actually leave the country and end up in the hands of the foreign sector. Now, if the domestic private sector is producing goods that the rest of the world wants, those dollars will return to the domestic private sector. But if manufacturers in the domestic private sector cannot compete with foreign manufacturers and therefore are not producing goods for export, then it seems that the value of the currency will fall that much more quickly. Our currency only has value insomuch as it can be exchanged for things of value, and if domestic manufacturers cannot create those things because they are out-competed, then what?

    Again, thanks for the hard work that goes into this. Really looking forward to learning more.

    • The more Econ 101 answer than Randy’s below is that JG is no different in your example than anything else the government spends money on. You might as well say that buying an aircraft carrier causes all the machinists to use their additional income to purchase Chinese blenders, … trade deficit … dollar devaluation. Floating exchange rates is a key element of MMT implementation. The thing is, though, that the dollar devaluation tends to mitigate the trade deficit. Cheaper dollars means our exports are more competitive, and our imports more expensive. It’s a very large marketplace, big changes occur only slowly, and small adjustments continuously. And like Randy says, the size of the trade deficit reflects the desire of foreigners to hold dollars more so than their desire to buy or not buy American goods. It is foreign governments that hold the dollars or Treasuries, not people. If they didn’t want them, they could easily exchange them for something else, and someone who does want them will buy them. The FED, if no one else.

      What has occurred to me that is interesting is what would happen if all countries adopted MMT-inspired policies. You could not have the problem of country A’s currency being devalued because of its deficits when B and C and all the rest are also doing the same thing. It seems to me that currency values would tend to be more stable, not less. I’ve not seen any MMT commentary on that situation.

      • My example of the JG policy hurting the competitiveness of private sector employers in the short term is a little different from the idea of the government purchasing goods and services at the market rate. Maybe not economically, but I think its essential to fully understand the political implications of these policies.

        The idea that the system would automatically seek equilibrium is pretty fascinating. I think even if people understand the concept on a macro-level (which I think I do, though I want to see some more data to prove this), the trick will be convincing people to trust the system and not jump ship when potentially painful “small adjustments” occur.

  7. There are some very good reasons for supposing JG could be inflationary, as follows.

    If the economy has plenty of spare capacity, i.e. if extra demand won’t be inflationary, the best way to raise employment is to raise demand, not to reduce unemployment via JG schemes.

    In contrast, if there is LITTLE spare capacity, (i.e. if extra demand WILL BE inflationary), that’s where JG comes into its own.

    Unfortunately, if JG people are paid more than they’d get on benefits and/or if JG schemes purchase other factors of production, like permanent skilled labour, capital equipment, materials, then the latter constitute extra demand. And given the above assumptions, that will be inflationary.

    QED.

    • DogmaSkeptic

      “The best way to raise employment is to raise demand, not to reduce unemployment via JG” is a nonsense statement, equivalent to “the best way to raise employment is to not employ people”. How do you propose to magically “raise demand”? And if raised, how is that better at employing people than employing people? While you’re at it, provide an example for raising demand that’s better than employing the unemployed.

      • You missed the “if” clause. JG or not, when demand is insufficient then it must be raised. There are two ways for the government to do this: buy more things for itself (including labor), or tax the people less so that the people will have money to buy more things for themselves. Either one raises demand, and the additional sales cause producers to produce more, which means they must employ more labor, which means that the formerly unemployed become employed. Whether government employs people directly or leaves more money in the private sector and it employs people, the change in employment is the same. Which one is “better” at the margin is a political question more than an economic one.

    • Employing everyone is a way of raising demand. If demand and production go up, that should lead quickly to the private sector hiring people away from the JG labor pool.

      But the private sector can’t do everything anyway. We’re foregoing a massive amount of potential social output because of our primitive belief that private sector enterprise can respond effectively to every kind of social need.

    • If we are so close to full capacity that the additional demand due to JG (vs. unemployment insurance) puts us “over the edge” into inflation, then a tax increase is called for, so that the demand will not exceed the capacity of the economy.

      But, suppose we have unemployment insurance, and no JG, as we do today, and a situation of excess demand and inflation arises. Is UI automatically to blame for that? If not, then why would JG be to blame if we had that? Inflation is (theoretically) caused by ALL the demand in relation to ALL the supply, and you can’t logically single out any particular piece of demand and say that it alone is the cause of inflation.

      As full employment is approached, some factors of production will go into shortage long before others, and their prices will rise, and affect a rise in the general price level. The closer you get, the more shortages and the more increases. In time, producers of the things in short supply will respond to produce more, or inventors will create alternatives, and the price mechanism will resolve the shortage, but in the mean time it is not good to operate at a level that causes lots of shortages and price increases, which means that the policy choice is to avoid operating at a level closely approaching full employment.

      The question becomes, then, what is the responsibility of a government that creates unemployment as a deliberate policy choice? Is UI sufficient to discharge that responsibility? Given the adverse social consequences of unemployment, especially long-term unemployment not covered by UI, is there not a greater responsibility than simply sponsoring an employee-financed insurance scheme to provide a less-than-living-wage subsidy for only a portion of the distress? (Employers pay the UI tax, but it is a direct cost of labor and reduces cash wages in the same way that FICA or any other employment tax does.) To the extent that the criminal element thrives in an environment of high unemployment, does not the government have a responsibility, arising from its policy choices, even to the employed who are the victims of that crime?

      JG should be viewed in a larger context than simply whether its cost is more or less than the amount of additional demand needed at any given moment for a healthy economy.

      • Paul Krueger

        Golfer1john, let’s assume that I accept your “Government caused the problem, so it’s only fair that they should supply jobs” argument. I actually would nitpick that a bit because I think that failing to respond to a problem is not quite the same as causing it, but let’s let that go for now. The original point I was trying to make is that there may be all sorts of good macroeconomic rationale for doing a JG, but unless you can directly counter and replace the base belief(s) that keep people from accepting your arguments, you won’t convince them. If people have to understand sectoral balances, fiat money, and the rest of MMT before they will accept the fairness of a JG, then it won’t ever happen. And even if they DO understand all of that, there are plenty of examples of those who will continue to reject the arguments for JG. They will continue to cling to their base beliefs until you go after them head on. Your argument still hasn’t addressed the base conviction that I think many people have that jobs and the paycheck that goes along with it are (and should be) earned in some fashion and that this won’t happen with a JG.

        I’m not sure, maybe if the JG were implemented by giving all federal, state, and local governments the authority to hire some population-based number of workers at the JG wage which would be paid by the federal government you could get around the perception that JG is nothing more than a free jobs program. I’m not sure, but it seems to me that Warren Mosler suggested something along similar lines. People would have to apply and interview for those jobs, just like any other and perform well to keep from being replaced, just as they would for any other job, and it would make state and local governments responsible for creating the jobs and justifying the overhead necessary to support them (maybe part of the JG program could be some amount of federal reimbursement for some % of admin expenses). I think that might address some of the other implementation-related questions I always have about how JG jobs would be managed, organized, supervised, and who would handle the obligatory HR functionality that goes along with hiring people in the U.S. today.

        Of course you’d still have to get people beyond the “Who’s going to pay for it?” and “Governments do things inefficiently, so shouldn’t those jobs be in the private sector?” questions before you can do much of anything.

        • Paul Krueger

          Note that my reply was to an earlier post in reply to me, but the blog software saw fit to put it in the wrong place.
          Paul

        • Paul, it’s more than simply failing to respond to a problem. Government has a budget. Government chooses how to manage that budget. How they manage it determines the level of aggregate demand and unemployment. Government is responsible for the outcome. If there is unemployment, it was created by inadequate aggregate demand, and government’s budget is the marginal determinant of aggregate demand.

          As for people understanding the economics of MMT, I agree that until they do it will not happen. People do understand other economic theories, at least on a basic level, though, and they can understand this one just as well. MMT’s task now is one of education and persuasion, more so than theory development.

          I think when people see what JG workers do, they will see that their paychecks are “earned”. At least as much as unemployment benefits are “earned”. And if you paint the picture of full employment, and the things that go with it like vastly reduced “welfare” programs, even those opposed to a “free ride” will like JG better than what we have now. Education and persuasion.

          • Paul Krueger

            Golfer1john, the government, in general, cannot know in advance how the private economy will perform in the next period of time, how much desire to save there will be, and what the level of net exports will be, so we cannot completely hold them responsible for providing just enough additional aggregate demand to make up the difference. They are in that sense reactive to events of the previous period. That’s what I meant about them being responsive. And in general, fiscal policy doesn’t react that quickly to events, which is one of the reasons that JG is attractive; namely, it is an automatic fiscal reaction that responds in real time.

            Sure, some people understand some economic theories to some extent, but getting the general population to understand MMT to the extent that this group of blog readers does is, um, unlikely. I’ve been trying to educate a couple dozen motivated, intelligent, friends and relatives with a series of tutorials and although we’re making progress, it’s really slow going. I just don’t expect real understanding from the general population any more than they understand the economic theories under which the country is currently being run. No, they generally act on a combination of simple base beliefs that they’ve held for a long period of time. They **might** change those if enough people in authority tell them differently, but that would require a critical mass of the economists and politicians to understand (or at least accept) MMT. While that’s slightly more plausible, I’m not holding my breath on that one either. There is virtually no public conversation about economics that doesn’t include statements or assumptions of fact that MMT would say are completely false. I’ve suggested to NPR that they should consult with and include MMT economists such as Randy, Bill Black, and Warren Mosler in their economic reporting, but if that has happened I sure haven’t seen it.

            I still like the idea of putting the JG into the hands of various levels of government. They would have to ensure that those projects could be started and stopped as dictated by the number of people available, but doing that makes it slightly more likely, imho, that people would accept that work as something valuable. And if the work ever rises to the level where people want it to be a more “regular” function of the government, then they can agree to fund it themselves or farm it out to the private sector. In that sense, the government JG becomes something of an incubator for new “real” jobs.

            I agree that if we ever got a JG going (however that happens) that people would get used to it and like it. Contrast that to health care systems. The Europeans love theirs if you believe polls and olympic opening ceremonies, but Americans are scared to death of doing something similar. But we had the same attitude towards social security and medicare and seem to like those now.

            • MMT economists seem to know that we need higher deficits today. Why is it that government “cannot know” that? Yes, Congressional action is not immediate, but we have had some very speedy responses to the GFC and other events, the reduction of the FICA tax being one of them. It is possible for government to react in time to make a difference. But, even supposing it is difficult, and it is unreasonable to expect that they always get it right, who else should be held responsible for their mistake?

              • Back to the fairness thing, it is the people laid off (who ARE deserving of having a job, as evidenced by the fact that they used to have one) who are paying the price for the government’s poor management of the economy. How fair is that?

                I’m not advocating that government officials be prosecuted or anything like that, simply that the government should have in place something like JG so as to mitigate the ill effects of their economic policies, whether intentional or unintentional.

              • “MMT economists seem to know that we need higher deficits today.”
                Not so, as I understand MMT. MMT would tell you to totally ignore government deficits and just look at output and stock flows. Who cares if the government debt is 800000000000000000000 thousand kajillion trillion dollars? As long as the economy is humming, every one is fully employed, and inflation is under control, the government deficit is a meaningless number.

              • John O'Connell

                Ray Phenicie,

                I’m not saying that a particular size of the deficit should be some sort of economic target, just that based on the current state of the economy, an MMT-based recommendation would be to try to increase it by reducing taxes and/or increasing spending or transfer payments. Warren Mosler puts it this way: Taxes are too high for the size government we have.

                An important point for current economic conditions is that efforts to reduce the deficit by raising taxes or reducing spending are likely to result in the opposite effect, a larger deficit and reduced employment. I’m not sure the converse is true, that reduced taxes would result in a larger deficit, for instance. MMTers often say the deficit is not determined by government, but by the non-government sectors’ desire to save. Either way, the proper policy is to try for it.

            • As to health care systems, I’m sure relatively healthy people in Europe or Canada like their health care system, because they don’t see the cost coming out of their income, but when they become seriously ill many come to the US for treatment, because they would die before their health care system got around to treating them. Instead of rationing by price, they ration by availability. Which system any random individual would be happier with is hard to predict. Maybe we should have a choice? Any American is free to move to Massachusetts, or move out of Massachusetts, if they really care about health care systems. Or petition their own State legislature to have a mandatory or single-payer system, if that is what they want. Why is that not a good way to do it?

  8. Speaking of Mitt Romney.
    Can you get this guy out of Europe (and Israel) fast?
    The guy is a walking disaster zone.

  9. B Booher,

    My take: once the value of the currency drops, the problem is solved: you won’t be able to buy all the stuff abroad and will have to buy it here. Manufacturing jobs will show up again, pool of JG employees will decrease. It is self equilibrating.

  10. L. Randall Wray

    Booher: Two problems with your analysis. First of course it is NET IMPORTS, not imports that is relevant to your analysis; and net imports are small relative to the size of the US economy and even smaller relative to global GDP (OH I know that will rile up the neolibs!). Adding the JG will likely increase total US GDP by 1-3 percentage points (depending on assumptions). So the impact on net imports would be quite small. But second the dollar is wanted abroad NOT (mostly) for exchange but to buy Treasuries as safe and liquid assets. Our net imports satisfy some of this desire. It is practically insatiable, anyway. (Oh, yes, now I’ll get all the Thirlwall’s Law types riled up.)

  11. L. Randall Wray

    Ralph, I fail to see much logic in your argument, so the QED is unjustified.

    I don’t see any logic in this: “If the economy has plenty of spare capacity, i.e. if extra demand won’t be inflationary, the best way to raise employment is to raise demand, not to reduce unemployment via JG schemes.” At best it reflects your unstated values.

    Second, no logic in this: “Unfortunately, if JG people are paid more than they’d get on benefits and/or if JG schemes purchase other factors of production, like permanent skilled labour, capital equipment, materials, then the latter constitute extra demand. And given the above assumptions, that will be inflationary.” Doesn’t follow at all, for reasons discussed in my blog. JG shrinks as private employers ramp up production (as JG workers can spend more than they did when they were unemployed on lower benefits).

    • Hi,

      Re your paragraph starting “I don’t see any logic…” I’m saying that where employment can be raised in the conventional manner (increasing AD and/or increased spending on the regular public sector), that will create more REGULAR jobs. And regular / unsubsidised / normal jobs are preferable to JG jobs (not that I’d totally rule out JG at very high unemployment levels, like those that currently exist).But the REAL ROLE for JG is in taking unemployment down from the supposed minimum of 3-5% to near zero.

      In your last paragraph you say “JG shrinks as private employers ramp up production..”. Yes, that would happen in a scenario where extra AD does not cause excess inflation. But in the scenario where there is a “real role” for JG, i.e. where extra AD DOES CAUSE excess inflation, then the demand stemming from JG will cause excess inflation.

      If my points above are valid, then it is difficult or impossible to implement JG (in the scenario where there is a “real role” for it), other than by paying a wage equal to benefits, and employing no permanent skilled labour, capital equipment or materials on JG schemes. And that makes such schemes very inefficient.

      However, there is a possible way out of that bind: use benefit money as an employment subsidy with which to subsidise the unemployed into work with EXISTING employers (as per the so called “British ELR”). That way there is no need to purchase extra skilled labour, capital equipment or materials: JG labour just works alongside the EXISTING latter factors of production. As it explains in the introductory economics text books, there is an optimum combination of different factors of production for any form of economic activity. Having relatively unskilled JG labour work WITH decent amounts of other factors of production will result in better output from that labour.

      The latter bit of reasoning is very shaky as it stands. But I’ve gone into the theory in more detail in a paper at the link below. That paper is perhaps not very readable or well worded. I might re-do it sometime.

      http://mpra.ub.uni-muenchen.de/19094/

      • L. Randall Wray

        “And regular / unsubsidised / normal jobs are preferable to JG jobs (not that I’d totally rule out JG at very high unemployment levels, like those that currently exist).”

        That is not logic. It is ideology. A burger flipper or wealth destroyer (AKA Wall Street Trader) is inherently preferable to Meals on Wheels? Reflects a right wing orientation, nothing more.

        You say “In your last paragraph you say “JG shrinks as private employers ramp up production..”. Yes, that would happen in a scenario where extra AD does not cause excess inflation.”.

        You’ve completely missed the dynamics. In any case, extra AD caused by firms hiring burger flippers can also cause inflation. So you are against job creation, period?

        I’ll just point out for you the obvious. In the US our high inflation periods outside major wars have always come with high unemployment. Your explanation? Would you have in those cases opposed all job creation? Advocated higher unemployment?

        • Randy,

          In comparing a Wall Street crook with someone who delivers Meals on Wheels, you are comparing the WORST of the private sector with the BEST of the public sector. That is a biased comparison.

          Moreover, notice that in the passage of mine to which you refer, I said nothing about private or public sectors. I simply referred to “regular” jobs. And surely it is true, isn’t it, that regular jobs (public or private sector) are more productive than a typical JG / ELR / WPA type job? E.g. to take some typical moderately skilled regular jobs, isn’t a nurse (in a public or private sector hospital) or a car worker more productive than a typical JG job?

          As Malcolm Sawyer pointed out, JG jobs are jobs which, but for the employment subsidy inherent in JG, would not exist (whether we are talking about public or private sector JG). Ergo such jobs are jobs which employers (public and private sector) do not regard as amazingly productive. But I’m not saying JG jobs are necessarily so unproductive as to be a total farce.

          Re your claim that I have “missed the dynamics”, you don’t specify which “dynamics” I’ve missed, so I can’t answer that point.

          Re your point that extra inflation can stem from extra demand for burgers, I’ll run thru the argument again. I’m saying that JG comes into its own where the economy is at capacity. Indeed, many JG ethusiasts (I think including Bill Mitchell, Warren Mosler and you) have said as much. I.e. the REAL ROLE for JG is getting unemployment down from the supposed minimum 3-5% level to near zero.

          However, at that 3-5% (or “NAIRU” or “at capacity”) level, any payments made to JG people over and above benefits will be inflationary: such payments are an injection. Same goes for any money spent on capital equipment, permanent skilled labour or materials for JG schemes.

          Your answer to that is “extra AD caused by firms hiring burger flippers can also cause inflation. So you are against job creation, period?”

          My answer to that is: yes, at the “at capacity” level of employment, extra demand for burgers (or anything else) WILL BE inflationary. But that does not prove I’m against “job creation” period. I AM OPPOSED to increasing AD when the economy is at capacity and excess inflation would ensue – as are 95% of the economics profession. So I’m hardly saying anything outrageous there.

          To summaries, there is a problem with JG which the more naïve / enthusiastic JG advocates need to face up to. It is that at the “at capacity” level (where JG comes into its own), anything spent on JG over and above benefits will be inflationary. So there is a BIG PROBLEM there.

          The solution to the problem is to find or work out what the ANTI-INFLATIONARY characteristics are that can be worked into JG to give it an overall “non-inflationary” effect. I could expand on that point, but that would take too many words for a blog comment.

          Re your final point about the co-existence of high inflation and high unemployment, about 99% of the economics profession can’t think of a solution for high inflation that does not involve damping down demand a bit and just grinning and bearing the unemployment that results. Sorry: I haven’t got a magic solution for that problem. If I did, I’d deserve ten Nobel prizes.

          As to whether in that situation I’d “oppose all job creation” as you put it, the answer is “no”: I’d favour expanding the JG system.

          • Charles Clark

            It seems to me that jobs “created” by tax cuts are “subsidized”, in fact I suspect all jobs are “subsidized” in one form or another (especially college professors). For Marx “Normal” jobs would be the ones that earn a profit for someone (owners), which is close to the view of many conservatives. The main difference seems to be jobs created to fill needs and those which generate profits (which could fill needs but that is not their main purpose). If the economy is doing well than the latter will prevail, as our system is run to generate profits, thus they will pay higher wages. But to force people not to work because the social mechanism used in capitalism to create employment is not working well enough (generating profits) seems very unfair to those excluded. But to argue that mass unemployment is due to scaricty or other supply factors goes against all evidence. We saw this in the 90s when Europe had high unemployment ad the OECD did that massive “jobs study” which didn’t even look (as I remember) at demand, just silly things like the tax wedge.

          • Let’s think about an economy at 3% unemployment, chugging happily along, and how a JG would be implemented at such a time.

            Let’s say everyone agrees that simply raising aggregate demand by the amount of the JG wages would be inflationary. Maybe everyone won’t agree to that, but let’s just assume they do. (Economists are good at assuming.) ;)

            Then might everyone agree to a tax increase in an amount equal to the JG wages? In that way, aggregate demand would not change, but the unemployed people would be better off, and some others of us in the employed population would be better off by virtue of the work done by JG workers (which in MY version of JG would be mostly poor people, currently recipients of charity) and almost all of us would benefit from the reduction of some of the scourges that accompany poverty, like high crime rates and drug usage. On the down side, some of us would pay higher taxes.

            What might happen at first could be that growth slows and the JG pool becomes 3.5% instead of 3%. Because JG workers would pay more taxes, and some welfare costs would drop, creating a smaller deficit and fiscal drag. So the “JG Tax” would have to be reduced a bit.

            Seems to me this would be a good way to do it. Too bad we don’t have the opportunity now.

            • Golfer1John,

              Good point. I was making the assumption above (to keep things simple) that as JG expands, it cannot expand to some extent at the expense of regular employment. Certainly I’d be wary of displacing regular jobs with JG jobs since regular jobs will always tend to be more productive than JG jobs.

              But if it turns out that getting three people into JG work involves sacrificing one regular job, that obviously might bring net benefits.

  12. See mmtwiki’s article

    “Full Employment along with Price Stability”

    for more on why a JG should be less inflationary than current system. (Google it – I can’t link, because that gets me stuck in the spam filter.)

    Ralph: At the point in time when the JG is *introduced* there may be price disturbances. (As far as I can tell, this is the effect you’re noting.)

    But when any such fluctuations have come to rest, JG should be less inflationary than current system. See the mmtwiki-article.

  13. Randy, this is the best blog article you’ve written on this topic in the 12+ months I’ve been reading this blog. Keep up the good work.

  14. “[JG workers] will be put to work … performing all manner of public service. Cutting pulpwood, repairing bridges and causeways, digging storm drains… [They will conduct] an honest day’s labor while providing a valuable service to the community — and at [no] expense to Mr. and Mrs. John Q. Taxpayer.” I took that from the film, “The Shawshank Redemption,” and adjusted it for JG. It’s the angle that needs to be taken to get people to support JG. Call it the “Work For A Living Initiative”. It has to be something Republicans will be afraid to not support.

    • Ah, but remember that in “The Shawshank Redemption” the prison workers competed directly with private sector contractors to do those jobs. The private sector business owner was squeezed so hard by this that he resorted to bribing the warden so that he would not bid on certain projects. This highlights how important it is to have a well-designed JG program that would not directly compete with the private sector. If JG puts people to work building widgets for less than the factory down the street, it will be directly responsible for destroying that factory. I recognize that this is a political argument rather than an economic one, but for any JG policy to survive it has to be politically acceptable.

      • No, that’s an economic argument, too. To the extent that JG workers compete with private sector workers, or JG employers compete with private sector employers, JG simply substitutes one worker for another. When the widget factory down the street goes out of business, there will be unemployed widget makers in the same number as JG widget makers, with no effect on demand or employment. JG workers must do things that are not now being done, either in the private or public sector.

  15. @Ralph Musgrave

    Bill Mitchell puts a lot of emphasis on the way the JG differs from old-time Keynesian demand management in that it “hires off the bottom” instead of the top. If government increases AG by cranking up a lot of big, complex programs (I’m thinking, like, Mars missions), it competes with the private sector for things like engineering talent, computer experts, materials specialists, etc. This can quickly and easily lead to market distortions and other inefficiencies, including wage inflation in the affected specialties. The JG doesn’t do this, because it is focused on providing entry-level jobs to people performing low-tech community services – which are nice to have, but not necessarily essential. As in: we clean the park twice a week in recessions. But once a week is really good enough at full employment.

    Cheers

    • Government projects should be based on the need for their product, not on the economic situation. You don’t do a Mars mission in order to increase aggregate demand, you do it because of the benefits it will bring into being. Any other government activity is the same. You don’t build roads just to employ road-builders, you do it to improve transportation.

      JG is different that way. Whatever JG workers do, it is mainly for the purpose of employing them, not primarily for what they will produce, although they will do good things. But they must be things that we can do without when they are hired away into the private sector, not essential public services and not even optional projects that would have to be abandoned when the workers are no longer available. I think the best example of what JG workers should do is work that is now done by volunteers in charity organizations, such as food banks or Habitat for Humanity. When the economy improves and the JG workers disappear, so also the need for those services is reduced.

    • Hi Dale,

      I think Bill Mitchell over-states things here. It’s not true to say that “old-time Keynsian demand management” consists of Mars missions and similar, which require thousands of people with PhDs. Keynsian demand management consists (or at least in my view SHOULD CONSIST) of boosting most sectors of the economy, not just NASA.

      Thus if AD is increased by boosting everything from education to roads to car production, etc etc, there shouldn’t be much of the “distortion” to which you refer.

      But having said that, it is of course true that any sort of JG / ELR / WPA system will TEND TO “hire off the bottom” as Bill puts it.

  16. What jobs are “productive” and what jobs are “unproductive”?

    I think that some support for Basic Income Guarantee type of proporals stem from the viewpoint that jobs in general are quite unproductive, along with viewpoint that we have enough *stuff* already. Let’s face it we do enermous amounts of dublicate work. Think of all journalists reporting same news countless time over. Teachers teaching the same stuff to small groups of people over and over. Engineers developing essentially the same petrol engine one for each company at least. They all do it because they get paid to do it, not even thinking whether it makes any macroeconomic sense.

    Fragmentation of existing markets is one way to create more employment: you just divide existing markets among more sellers so that average seller income comes down. Think of the door-to-door salesman. Or yet an another newspaper that takes sales away from other newspapers. It does not seem very productive to employ people this way.

    What about insurance company bureucrats whose only job is to determine who gets help and who does not? Wall street traders who trade financial instruments among themselfs in a zero-sum game but charge high fees nonetheless? The add industry? Telesales? Company bureucrats? People enganged in nonsensical legal battles? Do they do anything productive?

    We work in general in quite unproductive ways.

    • Yes, fascism is so much more efficient ;)

      The reason we have and promote competitive markets is that they result in lower prices, which benefits consumers, and while we are all consumers, relatively few of us reap the profits of production. (If you can remember when there was only one phone company, you might not be so concerned about how productive it was.)

      Many of your examples of unproductive jobs have been, and continue to be, under assault from competitive businesses trying to improve productivity. The insurance company bureaucrat, for instance, has mainly been replaced by computers that determine who gets benefits and how much. If you talk to a person about that, they are judged mainly on how many callers they deal with per hour, not on the decisions they make because they can’t make decisions of any importance. It’s all programmed into the computer.

      I kind of like the ad industry, when it is not too intrusive. It pays for some of my entertainment, and occasionally tells me something useful to me, for “free”. And all the rest exist because somebody is getting value from them.

      But, yes, you can get rid of as many lawyers as you want :)

      • Of course, markets could be competitive in multitude of ways. On the other end of the spectrum we have monopoly and that is of course no good for innovation. On the other end we could have – and often do have – millions of people doing the same job all over again. That is just how our system works. When one wants to answer question ‘why do we work so much but still receive so litte?’ these sorts of consideration raise to the forefront. And it also puts demands for JG jobs to be especially ‘productive’ to different sort of light.

        • PZ and Golfer1john – - -

          You both commented on the affects of monopoly on innovation. PZ specifically said: ” … we have monopoly and that is of course no good for innovation.”

          There should be caveats for such a statement. Golfer1john referred to the old AT&T monopoly:

          “The reason we have and promote competitive markets is that they result in lower prices, which benefits consumers, and while we are all consumers, relatively few of us reap the profits of production. (If you can remember when there was only one phone company, you might not be so concerned about how productive it was.)”

          It may not be clear to some (I was a little confused) so I will amplify my thoughts raised by this discussion. The old AT&T may have produced a lower rate of cost cutting and innovation in introducing new products than a multi-player industry, but it is hard to conceive of any greater array of very high cost scientific discoveries than came out of the old Bell Labs, led by transistors, computer operating and programming systems and lasers among many fields of research.

          However, the exploitation and production of many uses at low cost was advanced by the break-up of the old Ma Bell. Competition to apply the research was made more efficient by competition.

          The modern day corporate objective of profit maximization in the short term would never have produced many of the discoveries and inventions that came from the Ma Bell monopoly structure which had a multi-year, multi-decade outlook.

          The discussion of the role of monopoly in the progression of productivity is perhaps more nuanced than is evident in the comment stream here. Monopoly creates an environment where very long term objectives can be pursued; and that can lead to major discoveries and inventions for which applications have not yet been developed. This, of course, assumes that the monopoly is not operated with the objective of maximizing quarterly profits.

          When it come to the rapid, efficient and low cost implementation of these discoveries, a multi-corporate competitive environment is most likely to be far better than the monopoly. This environment is very innovative for application of discoveries, whereas the monopoly may have an advantage in the development of the original discoveries. That type of innovation (basic research) will not have the same patient sponsor in the dog-eat-dog competitive marketplace.

          The other aspect of the old monopoly sponsored Bell Labs is that it was an open organization, publishing their research as it was produced and welcoming the world to their “home.” As a young scientist working for another large corporation I remember making visits to Bell Labs to learn about what they were doing with lasers. I was taken right into their labs, saw experiments in progress, received direct instruction in technique, got to review fresh results not yet published and had laid in front of me details of what were objectives, hypotheses, current successes and failures, etc. Most of the visits were devoted to work in progress and not yet published. I worked for a corporation which was another major industrial and technology research and development company, but arriving at the front door of the green copper roofed “temple” in Murray Hill in the late 1950s and 1960s was a far more awing experience than visiting just about any other place in the technology world.

          The benefits of competition are produced in the marketplace. Benefits of monopoly, when they exist, derive from long-term benefits to society. Of course, the objectives of the monopoly have great bearing on the possibility of long-term benefit. With the corporate objectives of the old Ma Bell, there were benefits. Not so much so with our modern banking monopoly which is focused on quarterly profits, increasing executive bonuses and extracting the last dollar possible from competitors and society in general. Where is the long-term plan for these oligarchic firms, other than to remain the last vulture surviving the final carcass stripping orgy?

          Why did we have a different goal management structure 50-60 years ago? My leading candidate is the tax code structure that existed then. When large profits and high incomes were taxed at draconian levels, those making money avoided paying taxes by reinvesting profits in future growth rather than taking cash to the corporate bottom line and to extravagant executive compensation.

          Sorry to have taken this rant so far from the central theme of the article and the discussion. It is basically a summary of my life experiences which comprise an “Atlas Shrugged” antithesis

  17. This is a great article and discussion. What I see everyone talking around and not explicitly emphasizing (sorry if someone did emphasize and I am merely revealing my sloppy reading) is the following:

    In the regime where JG is employed to reduce unemployment below 3-5% the risk of increased inflation resides mainly in the situation where JG is paying for something for which there is no (or little) demand. In that case more money is put into play for a supply that is not matched to demand (under matched). That’s the old Milton Friedman situation of “too much money chasing too few goods.”

    I think it is obvious that pouring money into public works projects that increase general wellbeing without increasing supply of goods for consumption (at a cost to the consumer) can create inflationary pressures.

    Let me give an example:
    If we have a society that is producing $1 million of goods and services for consumption and is expending $900,000 in production costs (thus making $100,000 profit), the $1 million in sales cannot be realized unless the extra $100,000 comes from somewhere. This can come from some combination of increased private and public debt, which is an expansion of the money supply.
    Now let’s assume that the unemployment rate in this society is 3% at some point in time.
    This means the unemployed could increase the output by $30,000 (3%), assuming an equal productivity factor for every employed person, including this final 3%. And if the same attributed cost assumptions are made (maintain 10% profit) then only $27,000 is added to the demand side and the ratio ($1.03 million/$927,000) is still the same and there is no increase in inflationary pressure.
    But if the same 3% is added to public good projects for which users pay no fees, and no comparable increase in salable goods and services result, then the same $1 million of marketable goods and services are produced but now the demand side has increased to $927,000. More money is now bidding for the same goods and services.
    All this can be accomodated by an offsetting decrease in the total debt added (was $100,000 and now $73,000). But if the debt increases are not reduced (either by deceased spending and/or increased taxes, for the public sector; or by either decreased borrowing and/or increased savings for the private sector) there is clearly increased inflationary pressure from the JG expenditure provided.
    Note 1: Example of project with a possible associated increase in total goods and services provided for a fee – transportation infrastructure improvement. Example of project with less possibility of associated increase in the total goods and services provided for a fee – public parks improvements.
    Note 2: The money does not have to come from increased debt (increased credit). In monetarily sovereign societies the money can be created by the sovereign as needed. But whether debt or coinage, creating the right amount of money to meet economic needs without creating a greater amount than is needed (and increasing inflation) is what I call the “right-sizing problem”.

    I think the discussion here has been talking all around these points without ever laying them out in my extremely simplistic terms.

    So I offer my simpleminded thoughts to the discussion. I hope that any who think I am on the wrong track will take the time to explain why.

    • The problem is more like the society is capable of producing $1M, but produces only $900K because the people want to save $100K of their incomes, and they only buy $900K, so the extra $100K of goods doesn’t get produced, and 10% of the population is unemployed. Then the government can step in with a deficit of $73K and thus employ 7% more of the people. Then there is only 3% unemployment.

      (Profits has nothing to do with it. Profits are income to owners of capital, just as wages are income to suppliers of labor. Owners of capital spend part of their incomes and save part, just like laborers do.)

      If the government ran a deficit of $100K, everyone could be employed, but there would be shortages of various things, including specialized types of labor, and the theory goes that there would be inflation.

      Except, if that last $27K of deficit were spent on JG. Total demand would increase, as the JG workers spent their paychecks, and producers of whatever they were buying would hire more workers, the JG pool would decrease and income taxes would increase, reducing the deficit. That’s different than if the government had spent that last $27K on a road-building contract, or if they had reduced taxes by $27K and the people had spent it on whatever, both of which would have increased total demand without producing additional goods for sale. Whatever the people (whether taxpayers or road-builders) had tried to spent their extra $27K on, the producers of that stuff would not be able to meet the demand, because they couldn’t hire additional workers, because everyone is already employed. They could steal workers from other employers and thus shift the problem from here to there, but the bidding war for workers (or other resources) would result in inflation.

      JG does not remove workers from being available for private employment, so that if demand increases the private sector still has a pool of new workers to draw from, and need not increase wages over what they are already paying in order to steal them away from anyone. (They will have to pay more than JG pays, which means that if JG wage is set too high it could also result in inflation, but only a one-time adjustment, not an ongoing thing.)

      Your note 2 is right on, although MMTers state the inflation problem without the fanfare that they apply to other issues. People who MMT wants to persuade must understand that MMT recognizes the inflation problem, and if it is stated too quietly they tend to miss the point.

      I’m not sure I understand your note 1. Whatever government buys, whether a road or a park improvement, contributes to aggregate demand. Government spending is part of spending, in GDP. Wages paid to government workers or contractors have the same effect as wages paid to private sector workers or contractors. There is a difference in that private sector workers mostly produce things that are sold to others, and public sector workers produce things that don’t get sold to anyone. I suppose there may be some “multiplier” implications to that, but they are second-order effects and are already accounted for in measuring the current state of things. Government spends 25% or so of GDP now, on things that don’t get sold to anyone, and changing that to 28% is not going to make a difference in prices when unemployment is high and factory utilization is low.

      • Thanks for the extension of the discussion.

        I have struggled with problem of how to account for the production of things that are “free” (like the parks and recreation stuff) in a “book of accounts.” I will take your discussion back into my fog and web filled mental research lab and do some more work.

        Thanks again.

        • In a market setting, the value of something is measured by what a buyer is willing to pay for it. Or, in the aggregate, what buyers in total are willing to pay for the total production of it.

          If it is “free”, and some people do use it, such as a public park, it still has some value. The easily measurable substitute for the price is its cost. Hopefully the government, especially a non-monetarily sovereign government like a city or state, or a Euro country, has made a good judgement about whether the project was worthwhile, and the cost closely approximates the value. Even a monetarily sovereign government should pay attention, because the project does remove real resources from the economy, so it should have a higher value than the alternative uses of those resources, even if the economy is not at full employment.

          But, the effect on GDP is the cost, what the government spent to do it. It doesn’t matter that the output wasn’t sold. Whatever they spent was income to someone in the private sector, and added financial assets to the private sector.

          In fact, if they build a park and charge admission for it, the admission charge works just like a tax, removing financial assets from the private sector.

          • However, if the government then puts the park in a public/private partnership with the private partner responsible for maintenance and improvements then the charging of admissions results in recirculation of the moneys through the private sector (with the exception of taxation). The government, thus relieved of the future financial responsibilities, can then move on to create other worthwhile investments. Handled in a similar manner things of value (because people will pay for them and invest in their maintenance and improvement) can be created and the value of the original government investment can be multiplied many times.
            Case in point: the internet.

            • Fascinating.

              Why did the government have to be involved at all, if it would be possible for the private sector to make a profit at owning and operating it? Probably because of the capital costs. Does the government then retain ownership? How does it ensure that the private operator acts in the public interest, and how is the private operator chosen (or, rather, how do we ensure that political cronyism is not the criterion)?

              The Internet wasn’t done on quite this model. ARPANET was a joint venture of DoD, some computer companies, and some universities, who all received value from it in its initial iteration. Like any network model, the more organizations that got on it, the more attractive it was to other organizations to get on it (and help pay for it), and that’s how it grew.

              • I was managing a corporate project 1990-91 to establish the first commercial applications of telephony technology for remotely connecting computers. We were exploring the just emerging internet but had to focus on dedicated phone lines (T-1 and higher) because there was no commercially operable and dependable world wide web.

                Before about 1990 there was no significant network outside of DoD and a group of Universities. By 1992 commerical access was really getting started and then exploded within a couple of years.

                Although there were some government funded research grants and some university researchers active in the 1950s, the DoD start-up activity in this area was during the Kennedy administration and ARPANET was operational in the late 1960s (within the DoD) and expanded to research institutions and University use by the 1980s. Virtually everything for the first 25 years was government funded, via DoD contracts and NSF grants. I expect that Bell Labs probably did some basic research that may have been supported in part with Ma Bell money, but that was relatively minor if it did occur. All other corporate work of which I am aware was under DoD contract.

                When we were looking at long distance computer connectivity 1990-91 (and developing some of the first prototype equipment and software ever created for the purpose), we didn’t talk to anybody at Bell Labs. Our primary expert resources were at Cornell University.

                In Europe as well the early work was government funded. Tim Berners-Lee, widely recognozed as one of the fathers of the internet who developed the html coding language in 1989, worked at the CERN Laboratory, a multi-government funded facility.

                Another father of the Internet, Marc Andreesson, who developed the first graphical browser in 1993, originally called Mosaic and later changed to Netscape, did the work while supported by funds from the 1991 Gore bill (that’s right, Al Gore, widely ridiculed for having said he contributed to the development of the internet) at a government supported lab at the University of Illinois.
                I think the internet is a great example of long-term government investment that eventually got to the right time and place to become a cornerstone of the global economy, after a hand-off to commercial interests in the early 1990s.

              • John L.,

                In the early 1980′s I was using the Internet to exchange emails with my customers, including an insurance company as well as a defense contractor and a university. Of course, all our email systems were mainframe-based, as there was no world-wide web yet, nor any web browsers.

                By 1990, all my large customers had Internet email connections, and many of the smaller shops as well.

                Long-distance computer connectivity was not invented in 1990-91. SNA had been around for nearly 20 years by then, connecting computers around the globe via both land lines and satellite, though only in private networks, sometimes in-house and sometimes operated by a VAN.

                What made Al Gore’s statement about having invented the Internet so laughable was not that he didn’t actually co-sponsor a bill to help enable the world-wide web, which he did, and not that he exaggerated his role in the process, which politicians do routinely, but that he didn’t know the difference between what he said and what he did.

              • I used an internal e-mail system within IBM all the way through the 1980′s. There were some connections outside the company but they were limited. That system was not the internet which did not have a general commercial presence until the next decade. There was an extended web-like university network in the 1980′s but commerical use wasn’t there for national security reasons.

                I bought a day one PC (1984) and there was no interconnectivity available at that time or all the way through the rest of the decade. It was 1993 that I believe I was able to get my first dial-up connectivity (possibly 1994).

                So, you are correct. There were corporate internal networks, mainframed based, in the 1980s which were abandoned (or phased into) internet communications in the 1990s.

                I think we are both talking about the same history timeline but that is not clear without writing a more complete historical review of computer networks.

                This discussion has brought back memories of some of the most interesting work I have done during my lifetime and also reminds me of some of the most frustrating corporate politics during the evolution of computer networking. IBM almost went out of business in the early 90s because they couldn’t see (at the top) the way computer networking was going.

                I still remember not having development projects continued in 1991 and 1992 that were anticipating the emergence of general use of the world wide web (we didn’t call it the interent in those days) because top executives deemed it “counter-strategic.” We had already prototyped multi-location computer center (main frames) consolidation over dedicated T-1 lines by 1991 which several major corporate customers beta tested, loved and wanted to buy. After CEO to CEO contacts were made requesting IBM to proceed to build and support the product the final decision at the top level was to kill the idea because it “was not in the long-range plan”.

                I personally lived a part of this history and left IBM in disgust in the middle of 1992.

              • Yes, I used the same IBM email system (PROFS). It had IP connections to customer VM systems, over which the emails flowed. There was also the IBM Information Network, which customers could connect to via SNA, and exchange emails and other things. My large customers used that to send dumps electronically to IBM, or let IBM logon to their system to view the dumps, rather than cutting a tape and sending it in. But the connections to customer VM systems were TCP/IP, not IBM IN.

                I think IBM blew it earlier in the 80′s, when they opted not to produce products that exploited RISC processsing, which was developed at Watson Research Lab, and when they twice decided not to buy Microsoft, because of fears that those moves would eat into their very profitable mainframe sales. My big defense contractor spend millions with SUN because IBM refused their pleas to market a competing engineering workstation.

                But, they survived and the mainframe business is healthier than ever, and their RISC-based machines are doing well, too.

              • Yes, good old PROFS.

                And IBM mainframe business did survive and prosper but it was touch and go 20 years ago. You wouldn’t believe all the terrible startegic decisions IBM made in the 10 years 1982-92 which cme to a festering head 1992-93. Things started to change when I left in the middle of 1992 (when I left, so I must have been the problem? -:) ). But things really changed when John Akers (1993) and Ellen Hancock (1995) left and I can testify that they were significant parts of the problem. They had a buggy whip vision and horseless carriages were ready to roll.

                This discussion has brought back a lot of memories.

                • Yes, Akers was a horrible manager and leader, but Gerstner truly changed the character of the company. It’s not your father’s IBM any more, or even our IBM. Too bad.

  18. Do we not already have a combination of a Basic-Income Guarrantee (welfare) and an Employer-of-Last-Resort: (enlisting in the military)?

    I guess it’s not really an employer-of-last-resort, because people can’t freely leave the military at their will, and only the younger people can freely join. Plus, there’s something morally wrong about making people risk their life in exchange from a guranteed job.

    Nevertheless, it seems we’re closer to a BIG and ELR than most people realize.

    • I think most people realize that we do have welfare and a volunteer military, and that they sort of kind of do part of what BiG and JG would do. Those proposing more would say that they are still insufficient, both in the amount of income (in the case of welfare) and in the eligibility requirements.

  19. Jacob Richter

    This dichotomy, unfortunately, has become nonsense. Neither capital “supply” nor consumer demand provides a substantive basis for economic approach. I’m surprised that Post-Keynesians won’t admit that the heart of the matter is supply side from the perspective of labour and its bargaining power, supply-side economics for the masses.

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