MMT 101: A Response to Critics Part 6

Policy Aspects of MMT

By Eric Tymoigne and L. Randall Wray

[Part I] [Part II] [Part III] [Part IV] [Part V] [Part VI]

From the theoretical framework discussed in the 5 previous installments, MMT draws specific policy conclusions about fiscal, monetary and financial policy. In this final post we address the policy implications.

In line with Keynes and Minsky, MMT recognizes that unemployment, arbitrary distribution of income, price instability and financial instability are central problems of market economies that require some government involvement for resolution. 

The nature of this involvement is, however, very different from the Bastard/IS-LM Keynesian approach that focuses on fine-tuning. The fine tuning takes the form of discretionary, temporary, and limited fiscal and monetary policies to deal with slumps and booms through proactive change in government spending, tax rate, and interest rate. The philosophy behind this orthodox approach of government intervention aims at avoiding direct intervention to achieve the goal (e.g. hiring to achieve full employment, or price controls to achieve low inflation), but rather using indirect “tools” while letting market participants push the economy toward desired goals by tweaking their incentives.

MMT does not agree with this approach. The government should be directly involved–  continuously–over the cycle, by putting in place structural macroeconomic programs that directly manage the labor force, pricing mechanisms, and investment projects, and constantly monitoring financial developments. Because those programs would be permanent and structural, rather than discretionary and specific to one Administration, they would be isolated from the political cycle and political deliberations. 

All this eliminates problems of lags, credibility, and time inconsistency that Friedman and others have complained about.

However, this does not mean that the government should apply a rule blindly when implementing its policy; discretion is still possible within each program to make sure that it works. For example, Social Security is a structural program but government employees still have large discretion to determine if someone qualifies for benefits. Human discretion is still possible within the set of rules and structures.

The Job Guarantee program is another example of this type of policy. But MMT goes beyond full employment policy as it also promotes capital controls for open economies, credit controls, and socialization of investment. Wage rates and interest rate management are also important.

More generally, it is not correct to associate MMT with textbook Keynesianism of the 1960s in the way Palley does.

MMT discards the interest rate as an instrument of policy and relies on fine tuning of government spending to maintain full employment and taxes to maintain budget balance […] Yet long ago, Milton Friedman (1961) raised the problem of inside and outside policy lags. The former represent lags regarding time taken to decide and enact policy change (Palley 2013, 27)

MMT does not promote fine tuning, but rather recognizes the role of a “rightly distributed” demand in addition to the level of aggregate demand (Keynes 1937), and aims at combating the inherent instability of market mechanisms.

More importantly, MMT does not rely on increasing aggregate demand in order to reach full employment; it disconnects full employment from economic growth and makes work a right.

The following discussion focuses on two specific aspects of policy advocated by most proponents of MMT, the Job Guarantee program and the central bank policy of a permanently zero or near-zero overnight interest rate.

MMT’s JG/ELR[1] proposal is not the Bastard Keynesian fine-tuning policy to which Palley refers. We are quite surprised that Palley still promotes a rather orthodox version of the Phillips Curve trade-off. Yet, his belief that full employment must generate rising inflation cannot apply to the JG program. Let us first look at the “labor market” effects of putting in place a JG program. We then turn to the “aggregate demand” effects.

According to Palley,

MMT proponents can be labeled “fiscal policy optimists”. The same holds for neo-Keynesians. Both believe that expansionary fiscal can shift the economy to full employment and keep it there, regardless of such outside factors as the distribution of income. This fiscal policy optimism is open to question. […] In the short-term, as in the Keynesian model, expansionary fiscal policy can increase demand and remedy the problem because government spending is a perfect substitute for private spending. However, higher government spending implies higher taxes to balance the full employment budget and that may have adverse supply-side tax effects that are not present in either Keynesian or Kaleckian models. […] The argument is full employment requires not just Keynesian demand management, but also structural policies that address labor market bargaining power concerns. (Palley 2013, 23-24)

As we will show, the JG program does not focus on stimulating aggregate demand to move the economy to full employment. Nor does it see government spending as a “perfect substitute” for private spending.

Rather, the JG is targeted spending that is designed to improve the structure of the labor market by developing a pool of employable labor while at the same time ensuring continuous full employment of those ready and willing to work. While it might be a policy option to increase taxes in step with government spending on wages in the JG program, this should be done only if inflation pressures arise. Inflationary pressures will already be dampened by the rise in taxes that occurs through the automatic stabilizers so a further increase of taxes (i.e. raising tax rates and/or imposing new taxes) may not be necessary.

Since most readers will by now be familiar with the structure of the JG program, we will be brief. The national government agrees to provide wages (and some non-wage funding) to employ anyone who is ready and willing to work at the program wage (plus non-wage benefits). We will leave to the side a full discussion of the setting of the compensation, but wherever that is set, it will become the de facto minimum compensation level since private employers would have to at least match it to retain employees. To minimize (temporary) disruption to the structure of private wages, government can set the JG at the current legal minimum wage.

We will also leave to the side a full discussion of the administration of the program, which could be run by the national government, or decentralized to state and local governments or to NGOs such as not-for-profit community service organizations. What is important is to embrace principles of democratic governance, transparency, and accountability—so the level of decentralization will depend on how best those principles can be put into place.

The JG program is quite explicitly a “rightly distributed” spending program in which government spending is directed precisely to those who want to work but cannot find a job. This places no direct pressure on wages and prices because the workers in the program were part of the “surplus” or “redundant” labor force and are still available for private employers (at a small mark-up over the JG program wage—the minimum wage).

For that reason, employing workers in the JG program is no more inflationary than leaving them unemployed. Indeed, the JG should lower recruiting and hiring costs as employers would have an employed pool of workers demonstrating readiness and willingness to work, which should reduce inflation pressures.

Turning to effects on aggregate demand, many critics worry that if, say, 10 million people obtain jobs and thereby increase their incomes above their pre-employment levels, consumption would increase and drive up inflation. This seems to be a major concern of our critics.

By logical extension, they would also worry about a private-sector led expansion that created minimum wage jobs in the fast food sector. We find such a position to be overly defeatist—a “let the poor eat cake” response to unemployment and poverty.

This criticism is also often combined with the claim that workers in the JG would just “dig holes”, adding nothing to national output. Again, we see that as overly pessimistic—since a jobs program can be designed to produce desirable output, as the New Deal’s jobs programs did.

However, let us imagine that the JG program is extremely successful at creating jobs and income, so much so that the economy moves from slack to full employment of all productive capacity, resulting in rising prices. The presumed problem is that while JG workers get wages (and thus consume) they do not contribute any production that is sold (hence, does not absorb wages). The “excess” wages from newly employed workers induces spending to rise.

What could government do in that case? It would have at its disposal the usual macroeconomic policy tools: raise taxes, lower government spending on programs other than the JG, and tighten monetary policy.

Indeed, this is what it would do in the absence of the JG if the private sector achieved full employment through creation of 10 million new minimum wage jobs in the private sector. The only difference is that government would not be able to fight inflation by increasing unemployment—because the macro policies used to fight inflation would dampen demand but any worker losing a job could turn to the JG program for work.

What this means is that with a JG in place, the inflation-fighting adjustments to spending will occur among the employed rather than by causing unemployment and poverty. In other words, the costs of fighting inflation can be made to be borne at higher income levels. 

We are surprised that our critics appear to prefer to use unemployment and poverty to fight inflation, which forces the least able to bear more of the costs.[2]

Our position is similar to Keynes’s: “No one has a legitimate vested interest in being able to buy at prices which are only low because output is low.” (Keynes 1964 p. 318) So while Palley argues against creating jobs on the argument that those with jobs would have more income, and this could cause what Keynes called “semi-inflation” (increased demand drives up prices in those sectors with an elasticity of output below one), that is not a defensible position.

Normally, as Keynes said, a rise of effective demand “spends itself, partly in affecting output and partly in affecting price” and only if the elasticity of output approaches zero does a rise of effective demand cause “true inflation”. (Ibid p. 285) Below that point, there is no “legitimate vested interest” in keeping labor unemployed. Instead, inflation must be fought by alternative means.

It must be recognized that increasing the number of private sector workers in the fast food industry will cause the same sort of “semi-inflation”, raising prices in the same sectors that consumption by new workers in the JG program would affect.

It does no good to argue that hamburger flippers are “productive” (they flip burgers) while JG workers are not (they provide, for example, public services to the aged), because the “semi-inflation” will occur in all sectors where increased spending faces anything less than perfect output elasticity.

Hence, if our critics were consistent, they would always fight against job creation if any sectors that would experience increased sales to workers had less than perfect output elasticity. Their argument against the JG is a red herring. 

Note also that with a JG, the government’s budget would be made more strongly countercyclical, as government spending increases in the slump when workers move from higher-paid employment to the JG; the process is reversed in a robust expansion, where when the private sector hires out of the JG pool. These stabilizers might be enough to stabilize aggregate demand. After all, most unemployment in developed countries is cyclical in nature so unemployment is largely due to a lack of aggregate demand. The JG pool raises that demand (by paying wages) and so will encourage hiring. If not, government can use discretionary policy interventions. 

In terms of the central bank policy, MMT does see a role for a central bank, not in terms of fine tuning the economy but rather in terms of promoting financial stability. Using interest-rate manipulations to influence economic activity is problematic for at least three reasons.

First, the sensitivity of economic activity to interest rates is low overall, and declines as an economic boom emerges. This sensitivity is even lower now that gradualism and transparency have made it much easier for economic units to anticipate adverse changes in interest rates and to protect themselves against them.

Second, as Minsky notes, using the central bank for fine tuning and for financial stability are two incompatible purposes. Increasing interest rates during an expansion promotes financial fragility, and moving interest rates widely up and down to fine tune the economy creates instability in the refinancing operations of banks. The ultimate example of this is the Volcker experiment that killed the thrifts and promoted the growth of securitization and the originate-to-distribute model.

Third, changes in the policy rate affect the cost of borrowing, which affects costs of production and so prices. As such rising interest rates may lead to inflation if their growth is too rapid. Thus, MMT does not believe in the natural stability of financial market as Palley asserts:

Analytically, MMT’s “park it” approach to interest rates implicitly lets finance call the tune. In financial booms fiscal policy must turn contractionary, and the reverse holds in busts. This interest rate policy passivity is tantamount to believing that financial markets are stable and set interest rates and asset prices appropriately. The same belief is reflected in MMT’s confidence about freely floating exchange rates. This view is inconsistent with the assessments of both Keynes’ (1936) and Minsky’s (1992, [1993]) regarding financial markets, although MMT claims to represent a Keynes-Minsky perspective. (Palley 2013, 29)

Rather MMT argues that to promote financial stability via interest-rate manipulations is of limited effectiveness and can actually be destabilizing. Instead, government has a role to play through the promotion of safe underwriting (to promote what Minsky called hedge financing), the establishment of a banking structure that promotes long-term recurring relationships, and the regulation of financial innovations toward safe financial products. Loans made by private banks should be limited to creditworthy[3] borrowers who are scarce (but banks should be encouraged to look for them wherever they are and to avoid redlining).

We do, however, believe that direct credit controls can be useful to control lending for speculative behaviors, or to more generally fight inflation pressures. This is far more effective than trying to use rate hikes to reduce lending to speculators.

In terms of development policy, the Treasury and the central bank of a country should avoid issuing financial claims that promise the delivery of a foreign currency. That would include prohibition of “bailing-out” domestic financial institutions that have issued liabilities in foreign currency. Let private sector firms go through the bankruptcy process if needed. Governments have the means to use their financial power for internal development and to promote activities that employ local resources. As stated in the previous section, the limited availability of physical resources may limit what can be done by government policies.

Fiebiger and Lavoie are worried that using MMT leads to ill-suited policy advice given that the use of the consolidation hypothesis does not fit current institutional framework.

It must be accepted that most federal spending is financed by taking money from people within society (non-voluntarily for taxes) creating winners and losers. That is not an “illusion” and to insist otherwise is counterproductive. (Fiebiger 2013, 77)

If sales of Treasury securities do not “finance” spending but are issued “voluntarily” after spending to “stabilise interest rates”, then, the “fiscal cliff” should be a non-issue as according to MMT the Treasury deficit-spends first and then “voluntarily” issues bonds later as a part of monetary policy (to set the overnight federal funds rate target). (Fiebiger 2013, 71)

The counterpoint to this new MMT position is that one cannot start from the general case, based on consolidation, because it is antinomic to the real world and to existing institutions, and it would lead to mistaken advice and confusion […] For instance, as recalled by Fiebiger (2012A, 6), based on the consolidation assumption, one could argue that public-debt limits pose no threat to economic stability. (Lavoie 2013, 23)

We would argue instead that MMT reframes the nature of important economic debates. For example, most of the debates surrounding Social Security and Medicare are framed in terms of insolvency. Once one accepts that solvency is not an economic issue—government can always pay—one can reframe the debate in another way (Eisner 1998; Wray 2006).

There is a potential problem with Social Security but it is a demographic problem not a financial problem. Payments can be made at the time they are due just by crediting bank accounts, but the needed goods and services may not be available. The financial side and real side of the Social-Security problem are solved very differently, and putting funds in a locked box or a trust fund is not necessary, confuses the issue, and actually can make the real production problem worse.

As long as Congress upholds that social security payments are an obligation of the United States government, it will budget the necessary funds for Social Security and it will find the means to obtain the funds. One can then advocate for more profound reform of the system that would abolish the trust fund, remove the payroll tax, promote immigration of young workers, and policies that increase the productivity of workers.

Taxes may be advocated but not with a view of funding Social Security, but rather with a view of reducing purchasing power of those of working age in order to leave enough for retirees to consume. As Fiebiger noted, taxes are part of fiscal activism and create winner and losers. But discussing taxes in terms of means to pay for something confuses the economic role of taxes and leaves one open to conservative critiques that taxes are a burden instead of a means to fight inflation.

The language and logic used is important to frame debates and possibilities surrounding government programs.

Another example is the debt ceiling debate. It is not that it is a non-issue, as it can lead to instability in the current institutional framework. But the point is that it is not an economic problem, it is a political problem. The mechanics of the monetary system have been subverted by self-imposed constraints on government; presumably on the fear that monetary financing is inflationary because taxes are unnecessary once monetary financing occurs.

With the MMT framework one can reframe the debate away from the need to reduce our national debt, toward the need to abolish the debt ceiling because it is a relic of the gold-standard that contradicts other budgetary procedures of Congress.

MMT explains why one should not be afraid of removing the debt ceiling nor afraid of allowing the central bank to directly fund the Treasury; this would not directly promote price and financial instability and such changes do not necessarily promote careless spending. Taxes and bond offerings are still needed and budgetary procedures and political accountability are still necessary to make sure that government is involved in the economy according to the wish of its people and in a non-fraudulent and economical way.

More broadly, one can understand that budgetary procedures are of a political nature, and the point is to promote procedures that make the political process run well by promoting accountability and transparency, while eliminating procedures that are put in place on the basis of fear of unaffordability and bankruptcy.

The fact that government can spend an unlimited amount of money does not mean it should, and ultimately the choice of how much a government should spend is a political question. MMT aims at bringing that forward and at promoting political processes that allow the will of the people to be expressed as well as possible, free of unnecessary financial constraints.

Similarly, it does not make sense to argue that a government program cannot be implemented because the government ran out of money.

A sovereign government can always afford to buy anything for sale denominated in its currency so discussing the pros and cons of a government program should not be framed around financial constraints. Instead the focus should be considerations of equity, full employment, financial stability, and price stability.

[1] JG is Job Guarantee and ELR is employer of last resort; for the purposes of this essay they refer to the same proposal. The program provides a guarantee of a job to anyone ready and willing to work, and stands ready to be the employer of last resort in the sense that it will provide a job to anyone who has not found a higher paying job in the private or government sector.

[2] However, Palley has been caught on video complaining that if a JG provides jobs to everyone, the poor will be able to eat; see here.

[3] Creditworthiness is defined here differently from the way bankers use it: We advocate that banks should analyze the means used to service debts (how will you repay on time?) in addition to willingness to pay on time (will you repay on time?). (Tymoigne and Wray 2014).

42 responses to “MMT 101: A Response to Critics Part 6

  1. I’m really not sure how Thomas Palley reconciles his anti-inflation arguments against the use of Job Guarantee programs with the fact that Neo-Con governments actively take advantage of their ability to use the state to massively subsidize procedural unfairness in regard to the wages offered by many capitalist enterprises, for example:-

    Is Palley trying to tell us that these long established subsidies are a major inflationary problem?

  2. Bayard Waterbury

    It would be so wonderful if we could get the Congress to understand and agree to the concept of JG programs. Think of how many uselessly wasted lives this could save, in addition to truly bringing bank our economy and our nation. Not doing this is a tragically wasted opportunity fosterd by massive ignorance and laziness. Everytime I hear anyone propounding economic policies based upon the completely sad and absurd economic theories endemic to the Friedman/Hayek school, I just want to vomit.

  3. “We will leave to the side a full discussion of the setting of the compensation, but wherever that is set, it will become the de facto minimum compensation level since private employers would have to at least match it to retain employees.”

    The statement about JG being a de facto minimum compensation level needs to be softened somewhat.

    It is possibly true for most of the population about which we’re concerned, full-time workers who need to support themselves and their families. However, there are other considerations than just compensation in deciding which job offer to accept, and some of the compensation involved in JG may be of no value to some workers.

    Students or second earners in the family, wanting a part-time job, for instance, are mainly only interested in the wage and working conditions. They wouldn’t qualify for JG anyway, but they may accept less than minimum wage from a private sector employer in exchange for flexible work hours and a pleasant environment, or even deferred compensation like 401(k) matching. Young full-time workers may also value such features as opportunities for promotion, or travel, and have no need for health insurance (still on their parents’ plan until 26) or child care, which are part of the JG package. They would gladly accept lower compensation (but a higher cash wage) than JG offers.

    With JG in effect, the minimum wage should be ended, or at least not raised any more, so as to provide more opportunity for those who don’t qualify for JG. With JG in effect, minimum-wage / no benefits employers will find far fewer candidates for their full-time offerings, and may find that they have to raise wages for part-timers anyway.

    • Golfer: i don’t understand your claim about young and parttime workers not qualifying for JG.
      JG takes workers as they are where they are, providing work to ANYONE who wants to work. Anyone of legal working age. Part time work is no problem.

      the only place i can see our claims need to be softened would be in the arts or in high risk gambling occupations where some are willing to work far below the JG (minimum package) wage because they expect high payoffs being punk rockers or bitcoin miners.

      • I hadn’t seen the detail about part-time JG for full-time students before. Anyway, even so, some of them might prefer a lower total compensation with higher cash wages. So there’s no floor on compensation.

        I’d have to think about the public purpose involved in guaranteed paying jobs for Harvard students whose parents can afford the tuition there. Maybe it doesn’t matter much.

        I like Neil’s Job Alternative Guarantee. Or a JOG – Job Offer Guarantee.

        My golf buddy had a Jag, said it was his mechanic’s retirement plan 🙂

        • A job guarantee has to be for all. It’s premised on a universal rights framework. Why shouldn’t Harvard students have the opportunity to work for a fair wage? If their parents pay than they probably wouldn’t make use of the program, but the vast majority of students who work part time have reason to. School is very expensive. The average debt for undergrad is almost 30k. And there are limits to how much you can borrow.

          Jobs with 401k, promotions, travel etc. which you suggest appeal to young people, already pay more than what is proposed for the JG. I can’t really foresee a situation in which someone would accept a job that pays less than a JG job unless the JG program is a failure. The whole point is that the JG offers meaningful work, suited to the skills of each worker, with decent work conditions at a living wage. I think the way most private employers will compete will not be more meaningful work (what’s more meaningful than protecting the environment or building infrastructure for the future?) or cushy work conditions (only tech workers get ping pong tables and free massage), so they’ll have to compete on wage.

          • If JG works, and there is full employment, those Harvard students will have private sector opportunities. But, like I said, it probably doesn’t matter. They are not the target audience.

            Most private employers will have to offer most of their employees a higher compensation package. Not all. It won’t be a floor.

          • A job guarantee has to be for all. It’s premised on a universal rights framework. Why shouldn’t Harvard students have the opportunity to work for a fair wage? If their parents pay than they probably wouldn’t make use of the program, but the vast majority of students who work part time have reason to. School is very expensive. The average debt for undergrad is almost 30k. And there are limits to how much you can borrow.

            I couldn’t agree more. If the JG program is based on a human right, then it must be open to all. No considerations of other people’s judgments about whether someone is entitled to a job offer should be relevant.

            Also, it costs nothing to make the JG wage equivalent to the minimum wage, and both to be set at a living wage, so why not? As far as setting it at $15.00 per hour is concerned, I don’t think it should be the same everywhere. I think it should be set at a living wage with fill firnge benefits for the least cost of living area in the United States and then cost adjusted for each SMSA region in the nation. That might produce a wage of $10.00 per hour in rural areas in some southern and mid-western States with a median of perhaps $16.00 per hour in average cost of living places, and perhaps $24.00 per hour in New York, Alaska, and Hawaii. Right now the national minimum wage is unjust to all because it is not a living wage; but it is particularly hard on people who live in high cost areas. And yes, the private sector will have to compete on wage levels. That will cause many businesses to end or to raise their prices. That doesn’t bother me. If a business can’t pay a living wage and make a profit than it has no business surviving. Certainly, the continued existence of such businesses doesn’t justify their continued exploitation of their workers. What’s the consequence of their failing? Only that their owners might have to get a job themselves. If they do have to get one, I’m sure they’ll appreciate knowing that the existence of a JG program guarantees them a living wage and good fringe benefits.

    • “They would gladly accept lower compensation (but a higher cash wage) than JG offers.”

      It’s perfectly within the gift of the private sector to make that offer. The market will then decide if that is the case.

      IMV the Job Guarantee *replaces* the minimum wage legislation, and probably most of the redundancy legislation as well.

      Then we will see if alternative packages compete in the open market against a genuine alternative.

      And that is why when I present the JG, I present it as a Job Alternative Guarantee – a guarantee by the state that you will always have an alternative job offer on the table, and therefore ‘no deal’ is always an option in any job negotiation.

      Everybody should have a JAG.

  4. “Social Security is a structural program but government employees still have large discretion to determine if someone qualifies for benefits.”

    I don’t think this applies to the retirement benefit, but to the extent that it applies to disability it is a horrifying situation, and has given rise to a whole sub-industry of lawyers whose job is to get their clients, by intervention from the courts, the benefits that the law prescribes.

    I would much rather the Congress decide who qualifies, and the government employees have to follow the law.

    • golfer: right. that is what we have. the problem is that our SocSec employees are told Uncle Sam is running out of money so they need to deny as many claims as possible.

      In any case, the consequences are much reduced if you actually offer jobs. Upward of 75% of all people with disabilities would rather work, in any case–they just cannot find jobs. JG solves that. It is open to all who want to work. Take them as they are, where they are; adapt jobs to their abilities.

  5. How does JG mesh with Unemployment Compensation? Does it replace it or come after? Perhaps framing it as Workfare not Welfare is a better way to sell JG/ELR to hawks and doves. Values are as powerful a force as rational truth in politics. Helene Landemore talks about this near the end of her excellent new book Democratic Reason.

    • JD: the JG complements any “welfare” system including unemp comp. No need to eliminate it. Most people would rather work. I can see it socially beneficial to let some people search full-time for a job rather than accepting the JG immediately after losing a job. There is (and should be) a time limit on that; but you must offer the JG for those whose unemp benefits run out.
      I do not support workfare; there are many values held by hawks that I will not accept. Morals matter. We are all in this together. Many of the conservatives have quite repulsive values. I won’t revise my version of the JG to fit their morality (or lack thereof). Here is a very important piece:

      • There is actually a great deal of popular support for infrastructure investment in this country. Here’s a piece from The Hill from March I’m convinced by MMT’s JG proposal, but obviously something is very wrong with Congress when 72% of people across party lines already support an epistemic jobs solution, and still nothing happens. As I’ve said here before, all roads lead to electoral reform. To me, countercyclical infrastructure spending seems to be Occam’s razor on jobs creation. If we minted four trillion dollar coins to finance it, presumedly we would enter quite the boom period. Is there a rebuttal to the unwanted inflation it might cause in building materials, and the dampening effect on private construction industry jobs?

        • Joe Firestone

          Electoral reform is a chicken-egg thing. We won’t get it until Democrats dominate and we won’t get that until they’re much more successful in using power well when they get it at the Federal level. The road to electoral reform runs through the platinum coin. If the President has one large enough minted to begin to pay down substantial quantities of debt, he can take the debt issue off the table. At that point, the progressives will have much more leverage in the political system and it will be possible to get infrastructure spending, the JG and much else through the Congress, and enough credibility for Democrats to begin winning with large enough majorities to pass a constitutional amendment getting rid of Citizens United, and the gerrymander.

    • Joe Firestone

      Jon, Workfare makes work structured by a Government authority a requirement in return for income. Welfare is a benefit bestowed without the need for work. The JG is a voluntary program for people who want to work at jobs structured from the bottom up with the participation of the JG enrollees themselves along with local authorities and non-profit employers.

      JG can be framed in the following fact-value-based way:

      1. The recognition that unemployment is an artifact of economies that have chosen to establish State monopoly currencies, so that the very choice of the State to use “Modern Money” is the ultimate cause of unemployment.

      2. The recognition that since the State is the ultimate cause of whatever level of unemployment exists, it has an obligation to provide employment to people who are being deprived of the ability to work by the State’s choice.

      3. The recognition that people who want to work have a right to work if one accepts and supports FDR’s economic bill of rights.

      4. And the conclusion that a JG program is an effective means of fulfilling the State’s obligation and guaranteeing that right since it would provide a job offer to all who want to work and are physically and mentally capable of working.

      Now that’s a value-based argument, and I’ll stack it up against any right-wing talking points claiming that the JG is welfare and that we should have either nothing or workfare.

      Btw, Eric and Randy, this was a great and much needed careful rebuttal of the critics which will help us all. Thank you for doing it.

      • My conservative friends, who are not RWNJ, would turn this around and say that Modern Money caused the problem. Unemployment was less of a problem and less volatile before we went off the gold standard. I checked, and they seem to have a point.

        I agree, this was an excellent series, thank you Eric and Randy. I wonder if there could be a Cliff Notes version for non-wonks?

        • Joe Firestone

          “My conservative friends, who are not RWNJ, would turn this around and say that Modern Money caused the problem. Unemployment was less of a problem and less volatile before we went off the gold standard. I checked, and they seem to have a point.”

          The problem is that your conservative friends have neither a point nor any facts on their side. First, domestically we were off the gold standard since FDR took us off in 1933. Second, as long as we had a trade surplus, the low deficits during the postwar period were enough to produce low unemployment by offsetting domestic savings. The occasional budget surpluses did give us problems as evidenced by the spike in unemployment towards the end of Eisenhower’s presidency and other occasional spikes when we were close to or ran budget surpluses.

          What caused Nixon to complete the transition to a floating fiat currency was France’s demands to exchange dollar credits for gold. We would have run out of gold so Nixon closed the window. But few understood the implications of this shift to a fully fiat currency and they kept managing fiscal policy as if were still on the gold standard. That situation is what exists today, and it is why we have allowed high levels of unemployment to exist since 1970 by targeting deficit reduction from time to time under Nixon, Carter, Reagan, and Bush. The same thing would have happened under Clinton with his idiot budget balancing and surplus running when we had trade deficits. But Greenspan and the financial sector saved Clinton by blowing a giant credit bubble. The recession was postponed until the last few months of Clinton’s terms with Bush inheriting it. But then Bush ran very large deficits and the economy got better again, though not for ordinary folks, until the credit bubble burst in 2007 – 2008.

          In short, the cause of high unemployment is lack of the kind of proactive fiscal policy that Modern Money allows and reliance on the Fed to manipulate the economy. These things result in bubbles with too little creation of Net Financial Assets (NFAs).

    • I think there could be a lot of conservative support for a “workfare 2.0” labeled JG. Progressives here seem to think workfare is a dirty word.

      • Joe Firestone

        If it’s “workfare” it will be coercive in a way that the JG isn’t. Look at what’s happened in Britain. The financial caused the crash same as everywhere else that causes high unemployment and high deficits. The financial people who were bailed out then insist on austerity for everyone else, so then government programs are slashed ruining the recovery and killing jobs for more people. Then, suddenly the dole for victimized working people is suddenly no longer justified for the long-term unemployed and the victims get punished further with “workfare.” It all makes me sick and so does the term “workfare.”

        How about some “workfare” for the banksters. Prosecute them for fraud and when they’re convicted, we can then give them some “workfare,” in prison so they won’t be a burden on the rest of us.

        • Did not workfare people have the option of staying home and not getting paid, the same as JG? What was (more) coercive about it?

          • Joe Firestone

            In the UK, it replaced other welfare options, and also the jobs at which people are required to work are jobs solely defined by Government bureaucrats without participation of the program participants.

            • If you’re selling JG in the US, based on the US workfare experience, is it still a bad word?

              • YES! Workfare is repulsive and the opposite of a Jobs Guarantee. There is nothing voluntary about workfare. Workfare says, dont like this minimum wage demeaning service sector job we found for you?, fine “stay home and don’t get paid” and we’re going to let your children starve. Minimum wage is insufficient to feed a family or pay bills. that’s why we have welfare. It used to be, prior to welfare reform that we recognized that single mothers had more important things to do than work menial fast food jobs and so we supported their families. But workfare forced them to go to work to get welfare benefits. It’s far too close to slavery. It subsidized the wages at profitable corporations. Walmart doesn’t have to pay a living wage because their employees are on food stamps.

                A job guarantee is the opposite. A job guarantee is (or rather would be) the government paying a real living wage that’s enough to support a family. If you don’t chose to take it, the government wouldn’t starve your family.

                • Well, anyway, the point is that 2.0 is different from 1.0. Sell to conservatives the notion that it’s not “the dole” or make-work, and sell to liberals that it’s not slavery like 1.0 was.

                  • I wish the best of luck in selling to conservatives. It is important to not that it isn’t the dole or make work, and since that’s an attractive feature it should be sold. But it’s not 2.0 of workfare. If that’s what it becomes, I am entirely uninterested in it as a project. This is not a reform of workfare or even a reform of welfare, this is work. Workfare was never about creating meaningful independence or dignity. It was always about supporting the rise of the service sector. It was a neoliberal labor market reform. Any time it’s used as an analogy to what we want the JG to be, a public sector program that pays a living wage, it discredits JG in the eyes of everyone who should be fighting for it. Suffice it to say while selling the program, “remember when Clinton said it was the end of big government and welfare as we know it and that made people happy?, our proposal could actually deliver a society where no one needs welfare”.

                    you might be interested in “Punishing the Poor” by Loic Wacquant, it’s fantastic and covers the effects of workfare very well.

  6. We would be at full employment right now if the FICA tax did not exist, no?

    • The question is a little too vague to say. Do you mean if FICA was abolished yesterday, we would be at full employment today? Or if you mean that FICA had never existed, then did Social Security also never exist? Or if FICA had been abolished (how long ago?), and nothing else changed? If the latter, and about 3 years, then I’d say probably yes.

      • Tyler: eliminating payroll tax is desirable for a number of reasons. It is a regressive tax. It continues the conservative “I paid for it therefore I deserve it” ideology. It raises the cost of USA labor vs rest of world. and it depresses demand. So far, 4 strikes and you are out. Whether or not it would move us to “full emp” at a point in time if we eliminated it, that by no means ensures continuous full emp. We need the JG.
        Golfer: it amazes me that conservatives who supposedly love “freedom of choice” are so quick to try to FORCE people to work for welfare. All humans deserve 2 fundamental rights: the right to adequate food, clothing, healthcare, and shelter and the right to a job. I do not care how lazy people are or how bad the choices they have made might be, they deserve to be treated at least as well as our dog lovers want pets to be treated. We must take care of our own. No matter what. And beyond that, anyone who wants to work should be guaranteed a job at a living wage. These are separate but obviously complementary human rights. The neocons hate the JG but love to reduce the status of the poor to neo-slavery, mandatory working for the dole. That is not “free to choose”. Mandatory work for adequate food, clothing, healthcare, and shelter is repulsive. All humans deserve this minimum. We can argue about what that minimum is, and about the best way to supply it. Work for the dole is a violation of human rights.

        • JG and/or workfare supplies the job that you say is their right, and a wage to go with it, so that they can afford all the other things. I don’t see the difference in terms of their moral standing, and I don’t think many conservatives would see a moral difference. Will JG still pay those who could work but refuse to work? There is a different proposal that would do that, the Basic Income Guarantee, and it conforms to what you say are basic human rights. JG does not.

          If existing welfare programs were to be eliminated under JG or workfare, so that those unable to work (or unable to find private sector work) will have no food or clothing or shelter or medical care, then you have a point. I don’t think workfare did that, nor should JG do that. Existing programs should remain in force. Medicaid, Food Stamps, Section 8 housing, etc. were not discontinued under workfare, and should not be discontinued under JG.

          And all the rest of us are FORCED to work IF we want to be paid. It is a choice we make, every day. Government’s responsibility is to not restrict the job opportunities by mismanaging the currency. If it would do that, then we would truly all be “in it together”.

          And I’ve never heard a neocon, or anyone on any mainstream media for that matter, discuss the JG, mush less express hatred for it. Liberals want higher minimum wage, higher and longer-lasting unemployment insurance benefits, but never mention a job guarantee. I think JG would be quite appealing to conservatives who understand MMT. It has been appealing to 100% of those I know, but it is a small sample. And, as you can see from your critics, liberal and conservative economists alike usually misunderstand it.

    • And, of course, depending on what you mean by “full” employment. Without a JG, it will never be 100% full.

  7. Does MMT assume real aggregate demand (AD) is unlimited?

    • I don’t think any real demand can be unlimited. Even if it’s “free”, people don’t want more than they need or can store. And if it will continue to be free, there’s no need to store it.

      Within reasonable bounds, demand is a function of price. Also a function of the consumer’s income. I think that if MMT had to assume something, it would be that whatever limits exist are limits of real production, not demand.

  8. Lot’s of good stuff on semi-inflation in this article that is really powerful refutation on complicated material. But, I just wanted to chime in on the compensation for the JG program.

    It cannot be the current minimum wage. The current minimum wage is absolutely unacceptable and impossible to live on. It’s unfair and no one should be paid so little. To suggest that it is tolerable to start off will destroy any credibility the proposal has with those who would benefit the most from it and should be fighting for it. Both minimum wage and JG wage should be 15 an hour, maybe more in high cost areas and I’d maybe accept less in really low cost areas. Try supporting yourself on 10/hr right now, it’s next to impossible. Lots of people who have good office jobs and are salaried have no way of knowing. You need 400 a week to support just oneself and that’s if you’re sharing a cheap apartment.

    We should not assume that the JG will just set the effective minimum wage. It is not free to switch jobs. There are all sorts of reasons, rational and irrational that would stop someone from getting a higher paying, better JG job. None of those reasons justify employers paying below a living wage. Maybe over the long term when the JG program is successful, well-known and familiar, we can get rid of the minimum wage, but until then, all workers deserve a fair wage.

    • When they get specific about it, most supporters of JG specify a cash wage a little higher than the current Federal minimum (I’ve seen $8 and $10), PLUS health care and child care. So the total package for full-time work can come to $35 – 40K or so, perhaps more depending on how many kids and where you live.

      Not every worker needs a living wage. Sometimes the spouse or parent makes enough for the whole family, and the additional worker just wants some extra spending money, or to augment savings, or to stay “in the game” for a future return to career-oriented work. Such workers should not be frozen out of the system by requirements for “living wage” as legal minimum compensation.

      • Well, everything get’s really weird without single payer heath care. Everyone should healthcare. It’s not a benefit. It’s a right. If you had a JG where quality healthcare was a benefit, but other businesses didn’t offer it (and they wont even under the ACA, due to various loopholes), the JG will be in a very precarious position. Other businesses can be forced to compete with a JG on wages, but it would be very difficult for any private employer, teamed up with an insurance company to compete with the federal government when it comes to health insurance. JG doesn’t make any sense without a health care guarantee. Likewise with childcare. Let’s treat it like a public good for everyone no matter where they work. A full time job at 10/hr yields something like 19K. That’s livable for someone who’s single, but not if you have kids. That’s still below poverty level for someone supporting a family of 4, health care and child care or not. A JG shouldn’t put anyone in poverty.

  9. I spent most of my career in hospitality, running conference centers, hotels, inns, and restaurants. Our staff were mostly non-career types, students on their way to a career, people in transition between jobs, and first jobs for youth. We did have some career staff, and they were a joy to work with. I always had the attitude when a staff member told us they were leaving for a better job—congratulations, I’m happy for you! But at the end of the day, I have guests that need food and lodging. The show must go on.

    If the labor pool is such that anyone can stay home and be paid by government say $10 an hour. I can tell you from experience MANY aren’t going to clean guest room toilets or endure rude guests in the restaurant for $12 an hour. Also, if everyone on the staff of a hotel were making as much as the GM (in a budget hotel, say, $40,000) that hotel will have no guests, it will go out of business, and then the whole staff can stay home on the $10 an hour dole. The restaurant and hotel industry would be decimated. Unintended consequences? Or callousness? Or maybe that industry should die? Who decides? I think all of society not just progressives or conservatives. There is research going on that diverse groups make better decisions than the smartest people in the group.

    Service jobs used to be an honorable profession. Even as a hotel executive, I never minded taking a turn on the dish machine, fixing a toilet, checking a guest in, or carrying luggage. Nowadays, everyone wants to sit behind a computer and make $70,000 a year and surf the web at free will. The reality is, people have to grow the food, deliver the food, serve the food, build the equipment, service the equipment, make the energy to run the lights, clean up after the party, and it’s hard sometimes back-breaking work. I know I’ve had physical therapy for back pain.

    I’m a huge fan of MMT, advocate for it almost daily, but I think the JG needs a red team to vet the context. Is the rollout for 3 million people? If so, that’s a lot different than for 300,000. To me JG is an administrative nightmare for the non-public sector. Just a new server being trained in a restaurant sucks management time like crazy. In the nonprofit world, do we really need 1,000,000 more people cold calling for donations? Do you want a non-teacher tutoring your child after work? I would like better service at the DMV, though.

    Recently, government botched a reasonably simply roll-out of a healthcare exchange. I gotta tell you I don’t have a lot of confidence on a jobs program for 3 million people. If the easiest, best, solutions to unemployment were done first, like counter-cyclical infrastructure spending in a public/private partnership, then JG were rolled out to finish putting the country back to work then all these structural and administrative bugs could be worked out—with credibility.

    I agree with Golfer, there is a solution here that conservatives and progressives can agree upon, but it will take politics, diplomacy, dialogue and deliberation, and everyone in the room. IMO.

    • Thanks for your thoughtful comment. I work in hospitality too! I’m a server, with tips, I make about 15 an hour, give or take, but mostly take. I disagree though about pay. It is true, as you put it, that “people have to grow the food, deliver the food, serve the food, build the equipment, service the equipment, make the energy to run the lights, clean up after the party, and it’s hard sometimes back-breaking work.” But it’s not true that those people can’t be paid 40K a year (also 15/hr is still under 30K). Why shouldn’t they be paid that much, they grow our food! What’s more honorable than that?

      As far as I can tell, your primary concern is that this decimates the industry. Well, I suppose 10% of the Hotels and restaurants might not make it if they have to offer their employees work that beats a JG’s offer of dignified work at a living wage. So? I say that it’s callous to allow businesses to exist that pay so little and offer so little to their employees. If a job isn’t productive enough, worth doing enough, that it can pay 15/hr, then that person should probably be installing solar panels and fighting invasive species instead of flipping burgers. Maybe that means the drive thru is closed at 3 am, well so be it. Maybe restaurants are a bit more expensive and we eat in a bit more; it’s healthier and improving the environment, educating children, all that stuff is more important anyways. Maybe some of the people making 70K (especially the ones making 700K) and surfing the internet at the corporate offices might make do with a little bit less in our new more egalitarian world. I hardly think it’ll be the death of eating out. Let’s not forget the demand effects of a full employment economy!

      As for roll out concerns, let’s also not forget why the healthcare exchange failed. It was a private sector partnership. It was supposed to be all about progressives and conservatives working together to iron out the bugs. Yeah, it failed, because it was a dumb idea to begin with. We don’t need a health care insurance exchange, we need health care! Medicare works well enough. The military handles their payroll. The government has a proud history of employing millions and can do so again. I agree it will take a while to figure out how it will all work out, but there are a lot of ideas about innovative grant writing arrangements with NGO’s. Infrastructure programs wont cut it anymore. Most people don’t have the experience to build roads and trains and tunnels. Most people don’t want to. Private sector partnerships actually have a horrible track record. The long term unemployed have waited long enough.

  10. As you no doubt know, there are really two hotel industries. Leisure travelers are quite price-sensitive, but business travelers are not. Until video conferencing is as effective as face-to-face, at least part of the hotel industry will survive at $15 an hour. The City of Seatac just passed a $15 minimum wage. It will be interesting to see what happens.

    JG proposals call for Federal funding and local implementation and management. That will provide the environment for hundreds of different approaches to the details, which should result in the kind of decision-making you advocate. I think JG will only be adopted along with MMT, and the implementation will only get off the ground after some budget adjustments that reduce unemployment quite a lot, so the size of the program will not resemble the number of currently unemployed and underemployed. And the size of a local implementation will be quite manageable.

    I don’t think JG should be a subsidy for private sector jobs or for the DMV. If I were king, JG jobs would be anything that is staffed today by volunteers. Habitat for Humanity, soup kitchens, homeless shelters, food banks, etc. No cold-callers begging for donations, the JG is not funded by donations.

    Infrastructure spending is not an appropriate JG activity, it’s an ongoing responsibility of government, not something that starts and stops with business cycles. If it’s needed, then do it regardless of the state of the economy, and don’t stop because the economy got better. Use taxes to adjust aggregate demand.

  11. Here’s what I don’t understand and strikes me as a hole in the whole argument – isn’t the interest paid on bonds going to show up as income for the bondholders, which can then be spent into circulation? If that’s true, as the total amount of interest payments rise as more bonds are issued, the amount of non-inflationary deficit spending the government can engage in will fall due to it already having spent more and more money into the economy via those interest payments – unless the bondholders save 100% of their income. Payments to the bondholders will also have a redistributive effect, the exact opposite of the kind we’re looking for.

    In other words, MMT policies will only work in the long term if the government ceases selling bonds and allows the interbank interest rate to fall to the zero lower bound permanently. Not that Mosler hasn’t already advocated this, but not for this reason. I’m a hundred percent sold on everything else about MMT but this keeps nagging me. Am I correct?

    • Yes, interest on bonds is income for the private sector, but most bondholders are unlikely to spend much of it. It goes to the Fed, which sends it back to Treasury, it goes to foreign governments who use it to buy more bonds, and it goes to pension funds who, if their holdings are growing, use it to buy more bonds. Mostly it increases savings in the private sector, not spending. When interest rates were higher, some bonds held by individuals were held by “widows and orphans” who would spend the interest, but today individual bondholders are probably almost all rich people looking for safety, not income. So the problem is much smaller than the total amount of interest paid.

      But even if it were large, spending should not be limited by the amount of interest paid. Government should pursue the agreed public policy regardless of the business cycle. Taxes, not spending, should be used to control aggregate demand and inflation.