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.

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