A JOB GUARANTEE IS NOT A “PRICE ANCHOR”, IT’S A “PRICE BUOY”

* This post was written in 2011 before Mr. Roche founded Monetary Realism, which was formed due to several disagreements Mr. Roche and many other former MMT proponents had with the school of thought.  For more info on the difference in views please see here.  For more on MR’s views please see here.

One of the terms we keep seeing regarding the MMT Job Guarantee (JG) is this concept of it serving as a “price anchor”.  The idea that is always attached to the JG is that it will provide full employment and price stability.   This is right in theory and entirely unproven in reality.  Yes, the government could really hire everyone they wanted to and they can really set the price of just about anything.  That’s the power of being the supplier of currency.  But with regards to the price stability issue, the term “price anchor” is misleading as it gives the impression that the JG can serve as a highly effective way to contain inflation over the course of the business cycle (some MMTers have even gone so far as to make wild claims that the JG could eliminate inflation altogether!).  More likely, the JG would serve as a good deflation fighter and only a “soft ceiling” (per Warren) or marginally better inflation fighter than what we have today (sounds good in theory, right!?).

Of course, modern governments have become particularly adept at fighting off deflation so the deflation fighting effects of the JG shouldn’t be heralded too much.  After all, we’ve had one case of deflation in the last 50 years and it was more than short-lived.

It’s not the downside we’ve come to worry about so much, but the upside (today is a rather unusual circumstance given the 100 year balance sheet recession storm).  Modern governments have nearly perfected the art of “printing money” in order to offset negative shocks to the economy (by “perfected” I mean, avoiding deflation and nothing more).  Unfortunately, what they’re not so good at is stopping the ensuing boom or coming close to having policy measures in place that halt or alleviate it.  While the JG serves as a good deflation fighting policy, its effectiveness in stopping high inflation will still rely on the boys switching the policy levers at Fed, Treasury and Congress….In this regard, I think the JG is severely lacking and requires something greater involving counter-cyclical policy (not men with perfectly trimmed beards making predictions!).

I don’t want to get off track, but in my opinion, the entire JG discussion misses the point (so I am not even really against the policy as much as I just think it’s aiming at the wrong bulls eye).  Modern day economists seek the holy grail of macroeconomics which has come to be price stability and full employment.  These two features of modern macro are held up on pedestals as if giving a person a job and a steady wage is all one needs to live a happy and prosperous life.  I say these goals entirely miss the point and steal the potential lives that future generations can live.  What we should seek is the way in which we maximize our living standards.  In doing so we reach the true holy grail of macroeconomics – the thing that every human seeks – the fountain of youth, hence, more TIME.  After all, it is only through increased productivity, innovation, creativity and ultimately higher living standards that we are able to attain this (see here for more).

I keep saying that the idea of full employment and price stability miss what our real goal as a society should be – full productivity (leading to full employment) focused on maximizing living standards over a multi-generational period.  So I say we should use our proven MMT understanding to implement policy approaches that get the economy operating at full productivity rather than trying to fill in an economist’s model by putting a “100%” in the full employment box (which may or may not mean greater living standards in the future).  The counter-argument in MMT is that you need the JG because it will help contain inflation over the cycle by serving as a “price anchor”.  Of course, I am divorcing price stability as a secondary goal (it’s not “central” to my thinking though that doesn’t mean it’s unimportant) so I don’t know if that makes me non-MMT or not (perhaps it does)….Nevertheless, I think the inflation fighting argument is vastly overstated because the JG doesn’t serve as a price anchor at all.  It serves as a price buoy.   

Robert LaJeunesse wrote an interesting book titled “Work time regulation as a sustainable full employment strategy” in which he explained the misguided thinking of the JG as a price anchoring buffer stock:

“During robust economic times, buffer stocks offer little prospect of abating wage pressures in the primary sector.  Since buffer stocks target a minimum price of labor, an earnings floor if you will, and do not create a wage ceiling they will have little impact on the primary sector wage demands.  Capitalists will be able to maintain a significant degree of labor market segmentation, allowing them to avoid hiring from outside the primary sector.  As such they will avoid payroll expansion and attempt to squeeze more from existing workers in the form of longer hours and greater work intensification.  One only has to look at the history of commodity prices (such as oil) to realize that buffer stocks do not place a ceiling on prices.  Buffer stocks may mitigate priceswings, but they tend to prop prices up rather than restrain them, particularly when the commodity is in short supply.  Buffer stocks, therefore, do not serve as a price anchor but rather as a price buoy.  That is, they represent an earnings floor rather than an earnings ceiling.  Public and private sector employees alike will still face pressure to work long hours under a job guarantee – either to maintain insatiable consumption desires or to retain jobs that offer long hours on a take-it-or-leave-it basis.  Such behavior would most certainly become inflationary as Mitchell and Wray (2005) concede when they write, ‘if the government decides not to deflate demand, the ELR pool still allows the economy to operate with higher aggregate demand and lower inflation pressures, although inflation can still result.'”

The commodity buffer stock comparison has weak points, but one recent example of this sort of buffer stock idea surrounded the release of reserves from the Strategic Petroleum Reserve in the middle of last year.  I spoke to several analysts and traders who, at the time, said the move was a desperate attempt to pull prices down and stimulate the economy.  President Obama pulled hard on that buoy and released a small amount of this buffer stock into the market, but he couldn’t pull the prices down for long.  Capitalists got back to being capitalists and market dynamics took control once again as prices floated higher.   The labor market works a bit differently, but contains some of the same problems that specific commodity price targeting would.

The problem in the labor market is one of money neutrality (a concept that MMTers very publicly reject).  In order for the buffer stock to control the market it essentially has to be THE market.   But labor is not like any simple commodity.  It is a highly specific and specialized commodity.  We know this from the remarkable wage discrepancies that exist in the world today. A job at Goldman Sachs is a commodity unlike anything seen in the rest of the labor market.  So setting the price of low price unskilled labor doesn’t have a sufficiently uniform effect across the entire labor market to keep wages low when the economy is booming and Goldman Sachs is poaching from Bank of America, Boeing is poaching from Caterpillar, and Microsoft is poaching from Cisco.

To make this point clearer, arguing that the JG is a strong upside inflation deterrent is a lot like setting the price for wool and then claiming that you’ve stopped commodities from rising above a certain point.  Clearly, that’s not true.  You’ve set the price of wool relative to other commodities, but for instance, you haven’t stopped oil market dynamics from sending oil prices through the roof.  Now, if the government set all prices in the labor market then we’d be having a different conversation, but the JG would cover roughly 3-5% of the unskilled laborers at a point approaching full capacity.  Because this buffer stock will have been dwindled down to largely low-skilled workers whose convertibility into private sector jobs is likely negligible, it will have an equally negligible impact on the broader wage scale.

So the upside benefits will be relatively muted regarding price stability during an economic boom (when we’re nearing traditional “full employment”).  Additionally, the job guarantee pool at 3-5% of all unemployed will be so small and non-convertible into widespread private sector jobs that it won’t come close to impacting prices and wages (when it’s most needed) to the extent that private sector jobs will (which will see substantial wage pressure during a boom period as skilled laborers compete for the other 95-97% of jobs).   As Mitchell and Wray say, this would most certainly add to aggregate demand during the boom times which would lead to higher inflation.  Ultimately, we will still rely on men with perfectly groomed beards pulling levers regardless of whether we have a buffer stock of unemployed or employed so the fact that the employed buffer stock acts as a price buoy and not a price anchor is quite substantial.  Given the fact that modern governments have become particularly adept at fighting deflation, I think the price stability case for the JG is vastly overstated (not to mention that the policy, in my opinion, is off target).

Importantly, none of this even touches on the various other risks involved in such a program.  I have contended that there is potential for such a large government program to become overrun by other problems (corruption, praxeological issues, lobbyist/political controls, regulations, mismanagement, lack of productive work, various forms of moral hazard, etc) creating sizable risks.  The fact that its impact as a superior price stabilizer is muted is further cause for concern.  In addition, the goals of targeting price stability and full employment don’t necessarily maximize our true target – full productivity.  And perhaps most importantly, the idea that the JG is embedded in MMT as a “central” piece of the theory distracts from the core proven concepts and gives the impression that you cannot understand modern money without understanding a massive government spending program that is unproven in the real-world (on any scale as would be introduced in the USA) and entirely theoretical.

* See my list of broad JG concerns here.  

** This article was written using a different definition of “full employment” than MMT implies.  In the MMT paradigm full employment is zero involuntary unemployment whereas I was working from a more traditional definition of optimal use of resources.  Sorry for the confusion.  

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Cullen Roche

Cullen Roche

Mr. Roche is the Founder of Orcam Financial Group, LLC. Orcam is a financial services firm offering research, private advisory, institutional consulting and educational services.

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