Responses to Comments on MMP Blog 45: The JG and Developing Nations

I am responding quickly because the Minsky-Levy-Ford conference in NYC starts today.

Q1: Philip: I’ve been thinking a lot about the problems with imports and the like because it directly affects, for example, Greece should they exit the euro. If they do so, their large dependence on imports will likely lead to a serious inflation. Another concrete example of heavy dependence on imports is (apparently) Argentina. A large amount of the inflation there — which, to my mind, could undermine the credibility of the Kirchner government if allowed run too long — is apparently due to the cost of imports. Is the most elegant solution to this not to work on the supply-side?

A: Agreed, especially for developing nations that do not produce much that is in demand outside their country. This is particularly true of nations that rely on subsistence agriculture. The JG can be used as a tool for development, including development of exports and/or tourism.

Q2: Hepionkeppi: Inflation in Argentina is an enigma, government says one thing and then the media claims “no, real inflation must be double”. But as Paul Krugman says this would mean GDP deflator would have to double as well and that would mean all the growth in the Argentina for the last decade would have been mirage. There would have not been growth at all. “A large amount of the inflation there is apparently due to the cost of imports.” I would think it would be the other way around, that high nominal price pressures in domestic economy depreciate the currency, and that raises the cost of imports. Maybe these pressures could be the result of cost-of-living adjustments (COLA) in the labour contracts? Who knows. More research would be needed. And I would think that in the presence of these kinds of COLA contracts not even JG would bring price stability. Or in the presence of powerful unions outbidding each other. Continuing price pressures could lead to oversized JG pool, as inflation eats away value of government debt, “outside wealth” in MMT, or right-wing backlash, as they seek any reason to make life harder for the poor. Inflation would be the perfect excuse.

A: Agreed: automatic indexing can be a big problem—it builds inflation into the system. This was the Brazilian problem. It was a major point made by Bresser in his analysis of Brazilian inflation—especially indexing of government payments (government employees plus contractual payments for everything). Breaking this cycle is painful. Note we do not advocate automatic indexing of the JG wage; rather, periodic adjustment. The more frequent the adjustment, the less effective it is at stabilizing wages and prices.

Q3: Golfer1john “Jefes workers produce uniforms for the government. ”Why a JG/ELR program to produce uniforms for the government? If there are clothing manufacturers in the economy, why not buy from them? Apparently there were none before, and the government uniforms were imported? Could the government not simply advertise that it would pay extra for domestically produced uniforms, and a uniform company would be started? Maybe this company could then produce clothing for the domestic market as well, at a competitive price.

A: This is horses for courses: developing nations typically do not produce everything that is required—indeed, in some cases they produce little beyond food for subsistence. The “private sector” is typically very small. It makes sense to use the JG to replace imports by producing things that are needed domestically. School uniforms for kids can be an important product; in such situations reducing imports can be critical. In Argentina the clothing sector had been foreign-owned and in the crisis the owners just abandoned the factories. See the excellent documentary on worker take-overs. Co-ops became an important movement and many Jefes projects were organized as co-ops. It is a good experiment.

Q4: Golfer1john: The floating exchange rate is critical in giving the monetarily sovereign government policy space to pursue full employment. More specifically, is it not actually a willingness to allow the exchange rate to deteriorate that gives them this policy space? But, isn’t a falling exchange rate harmful, too, perhaps just as harmful as domestic inflation? And would not the policies to prevent it, such as tariffs, import controls, and capital controls, be harmful, too? I can see that if every country emphasized full employment, and provided the deficits to support it, then exchange rates would all suffer equally, which is to say they need not change much at all. Is that where we need to be going? Can this stuff work, really, in one country at a time? Especially a really large and relatively free economy like the US, where tariffs, import controls, and capital controls are unlikely to be used

A: Impossible to make a general statement on whether falling exchange rate is “good” or “bad”—depends on situation. It helps the export sector, but does tend to be inflationary. Note Australia deals with wide flux of its exchange rate and thus terms of trade (as do most commodity exporters that float). Read Bill Mitchell on this. Note also many developing nations do not float. I have tried to offer an analysis of JG even for these nations. If they do not float, imports and thus pressures on exchange rates are a much more serious problem. Finally, although I did not discuss it here, capital controls are available and probably should be used by small developing nations.