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.  

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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Comments

  1. Politically or Public-Relations speaking I’ve never liked the term unskilled labour – it generally means hard labour – little things that the whole system is built on – laying pipes for plumbing/sewer – digging the holes to specification – laying railway tracks, and so on.

    Anecdotally, from my own physical build these things to me are skilled labour even if they are all typically blue collar jobs. Now on a lot of white collar type jobs I could handle myself quite easily due to my education.

    It’d be a long road for me to take one of these blue collar jobs on and complete it successfully.

    That said human beings aren’t static – we’re all capable of learning.

  2. Hey Mr. Roche!

    Moving closer to the Rocheian MMT Synthesis I would say!

    In the original piece you state: “So I say we should use our proven MMT understanding to implement policy approaches that get the economy operating at full productivity … ” Great. Policies, name ‘em, work ‘em out, offer them so that we may advance the economy to getting to your ends: Max FP (full productivity) & Max LS (living standards).

    Maximize FP & Maximize LS subject to no binding employment constraint? I am not sure where or if your proposal has an “employment” policy. If so I would love for that to be addressed as well.

    I look forward to hearing the alternative policy. I absolutely acknowledge your outlines/sketches/thoughts/hopes/surmising/etc. re “Maximizing Productivity” and “Maximizing living standards over a multi-generational period.” I do hold that a solid proposal for any policy action needs to be quite a bit more explicit than simply, vaguely and idealistically, calling out to FP & LS however.

    Advancing the (your) ball here is the “name of the game.” If the Rocheian MMT Synthesis is to have any legs whatsoever it needs an affirmative analysis. (Fair, I gander)

    I don’t buy the Goldman Sachs wage point and the wool analogy off of that as being even theoretically persuasive or a credible point against the JG/inflation issue. Just because even in a JG environment the wages on the top won’t be “reigned in” doesn’t mean there won’t be an effective price-stabilizing mechanism (maybe this is just my missing your point & apologies if so; I AM trying to hear you out here).

    Also, I find the claim that full employment and stable prices as “goals [that] entirely miss the point and steal the potential lives that future generations can live” to be quite whack. (sorry) I feel, alternatively, that getting to them lays the foundation for the future; and not current “knob” tweaking for some entrepreneurial ideation of FP. If one is to build a “middle class” one lays a foundation and doesn’t just invite “innovators” to the second floor.

    Like I have mentioned before – from Minsky – we have seen these pump priming attempts since the mid-60s; THEY are inflationary and they do not trickle down (I suspect you are not a “trickle down” guy but if you are offering a policy proposal that looks to increase productivity FIRST and then get to FE maybe later, then, to me, you are offering a “trickle down” policy proposal). Again, Minsky’s 1986 book takes this up quite well and Dr. Tcherneva is working on this now too I believe.

    You know me though, I very much look forward to Mr. Roche’s “The General Theory on Full Productivity, Involuntary Unemployment, and High Living Standards” !!! (let Dr. Wray, Dr. Mitchell, Mr. Mosler and the rest of us lovelies have a look !)

    The necessity that “something must be done in the slump” is agreed; but the fight continues, firstly, as to what should be done in the slump (i.e. what should be the direction of government intervention) and secondly, that it should be done only in the slump (i.e. merely to alleviate slumps rather than to secure permanent full employment). (Kalecki, 1943)

    Thanks Mr. Roche.

    • Crazy talk! I am not an economist. I am just a good investor with an above average common sense quotient and the ability to challenge conventional wisdom. Maybe I’ll do what Warren did and work with some other economists to build something? Either way, I look forward to develop my thoughts here. Very early stages of course. And your sentiments are flattering (but crazy). :-)

      As for this:

      “I don’t buy the Goldman Sachs wage point and the wool analogy off of that as being even theoretically persuasive or a credible point against the JG/inflation issue. Just because even in a JG environment the wages on the top won’t be “reigned in” doesn’t mean there won’t be an effective price-stabilizing mechanism (maybe this is just my missing your point & apologies if so; I AM trying to hear you out here).”

      Who spends all the money in this country? The rich! So who controls the market prices (at least to a large degree)? The rich! I think the top 20% do 50% of the spending or something like that. That’s why it’s hypocritical for MMTers to complain about OWS and income inequality and then portray the JG as having an embedded assumption of undifferentiated wages. This program wouldn’t contain skilled labor at all. It might even increase the disparity in income inequality (well, until the lobbyists jump in and boost the wage to $12, then $16, then $20, oh my!)….You can see where I am going with all of this.

      The JG has big big holes in it as it’s been presented.

  3. ”  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.”

    Obviously not MMT traders :) The U.S. government selling oil into the market acts like a tax removing currency from the system. Hardly expansionary, unless the removal of cash was exceeded by a reduction in Saudi savings. Looks like the move worked at cross purposes at best.

    Not sure the point that government purchases of labor would fluctuate counter cyclically with the economy agrees with you. The government would have a tough time selling labor rather than buying labor. The economy does have to fit into a sweet spot of either constantly expanding GDP or increasing saving desires for a JG to work at stabilizing prices without making changes to the wage rate.

  4. Something Neil Wilson said above caught my attention and I wanted to explore it in a separate discussion (FYI: we’ve been engaging in some prickly debate over at bilbo but I respect his intelligence and motives):

    “All the arguments here boil down to “I want these people to have less, so I can have more””

    Though I think this statement is overly presumptive with respect to personal motive, it made me realize that we may not be asking the right questions from the right perspectives.

    The so-called “Haves” like Cullen and I obviously place a different personal priority on inflation compared to an unemployed guy with no income at all. But all three of us understand that both hurt people and hurt the economy to varying degrees. And I recognize how much I still have to learn about the breadth of economic and social theories and data when I say that I don’t really know what model-ready metrics exist and have been validated to measure economic and other societal damage caused by inflation or unemployment in any fair interchangeable manner (which I suspect must be highly non-linear). If it’s not clear what I’m getting at, please bear with me because if what you think is I’m addressing something like NAIRU or other competing ideas (most seem like BS to me) I’m not. I’m actually trying to stand arguments for those types on their head in some ways. I’m not trying to find a model right now that predicts inflation for any level of employment or vice versa. I want to better understand the true costs (or possibly even benefits) of inflation and unemployment as if we could set either one independently.

    The most fundamental motivation, when push comes to shove, that people like Neil give to support the JG is that millions of our fellow citizens should not be forced to suffer for the “failure” of the system to supply enough jobs. We have to do SOMETHING even if it is unproven and a bit risky. To some extent, for people like Neil the tentative benefits of the supposed buffer stock reconciliation of unemployment and price stability are probably secondary though a great selling point as well as an academic tour de force if it proves to be correct.

    Likewise, Cullen and I are very quick to scream inflation with very little distinction as to whether we are talking about spiraling out-of-control inflation or high, yet stable inflation, recognizing that while the first is terrible, both are problems. Moreover, some of this inflation concern is immediate and some is long-term. Cullen primarily addressed the immediate to mid-term concerns above. The long-term effects, if any, come only after long-term side effects of a sustained JG program accumulate, e.g., JG-exploiting organizations “game the system”, the JG distorts incentives and work practices, etc.

    Whether you’re an inflation or unemployment hawk, I believe it is most prudent to take a pragmatic position that acknowledges that political compromises may have to be made and that we should always try to limit complexity that doesn’t return “sufficient” benefits to society (in statistics, one penalizes complex models using a Bonferoni statistic for which economic policy seems to offer no analog). One then has to ask, how do we measure those benefits of return and the costs of complexity? What is the net cost (or benefit) to society of an inflation rate of 2%? 4%? 10%, etc.? Likewise, what is the net cost (or benefit) of unemployment rates of 3%, 5%, 10%, etc.? I realize I’m oversimplifying things a lot and that the trending or volatility of these elements (especially with inflation) can have a large impact but let’s just pretend steady state for now.

    What’s better for society, to have a sustained unemployment rate of 5% and an inflation rate of 4% or a sustained unemployment rate of 3% and an inflation rate of 8%? It’s not clear to me that we know how to answer these questions or that anybody wants to focus on it. But if we have to make choices potentially affecting these numbers we should spend more time understanding their true cost (or benefit) before we do too much quibbling about which competing theory best describes the relationships between them. However, I realize this is probably a very difficult calculus to really do. So we have to start with some qualitative common sense and experience.

    I want to give my personal perspective which influences as my biases. I’m 50 years old and grew up in a blue collar home and later became a successful entrepreneur. My wife is from a poor family. I’ve seen both unemployment and inflation directly affect poor, middle class, and rich over the years. I remember the stagnant high inflation 70’s well. Inflation has always seemed to me a persistent nuisance. Obviously the impact of inflation depends on the ability of wages and investment return to keep up. My personal sense is that deleterious effects of inflation increase roughly linearly, probably until you get near some avalanche point for hyperinflation, that I have never seen in my lifetime in the US.

    Unemployment, from my perspective, presents different linear and non-linear regimes. I realize things have changed in many ways regarding income distribution, the growing persistence of an underclass, the value of various forms of work, union membership that I do not seek to address now. Nevertheless, it has been my observation that as long as the unemployment rate has been under 5-6%, any able-minded person who really wanted to work and put in a good effort could expect to find work within the normal time allotted for unemployment insurance. There’s plenty of employment turnover in this regime and it can be argued, as Cullen has, that we might not be doing many people real good, and may in fact be harming them and/or society, by giving them a JG here.

    As a high-tech employer (where unemployment is usually less than half the overall rate) I have found that it becomes increasingly difficult to get good people when the overall unemployment rate gets to 4% and it seems to get exponentially worse as you go below that. Moreover, the costs for recruitment and turnover increases and the sense of entitlement one sees hurts productivity. But for me, those are problems that force one to be a better employer and well worth living with to have a good economy.

    Where things really get difficult is when unemployment starts to go above 6-7%. The effects seem to compound non-linearly into a curve that breaks steeply when people start to drop out of the workforce (which is why we should probably use the employed population percentage rather than unemployment rate). Staunch conservatives will still argue that any person who really tries to find work can, even if they have to clean toilets or collect aluminum cans. And we all have heard the stories where such adversity produced more valiant and successful people. But the Great Depression and our current depression have proven that this a ridiculous position to take on the whole. Otherwise, we have to argue that depressions produce lazy unreasonable people just when they need work most.

    I don’t see how we can weigh the needs and costs of anything approaching a good, much less optimal, public policy without understanding the true net costs and benefits of inflation and unemployment. As a person skeptical of all economic theories, especially untested ones, I think we have to consider how the pragmatic 80-20 rule applies to any price buffer program lest we bite off more than we can chew. I would argue that some level of significantly higher inflation is a price worth paying to enable every able-minded person who wants work to be able to find a job under the parameters I discussed. At the same time, this is where economic models should compete to predict and better understand the interrelationships otherwise my fear is we are only kicking the can of a deeper underlying socio-economic ill down the road.

    • Make sure you get Randy’s latest video, “Randy Wray does MMT 7″ coming out from Vivid Video. It’s 2 hours of sexy non-stop economic action that will engorge your head and make it explode!