* 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.

Yesterday’s story on the evolution of MMT sparked a raging debate as to the merits of the job guarantee that some MMT proponents have claimed is central to MMT itself.  Before we begin, I should note that Warren has been very clear that the JG is not central to MMT.  He said:

“You all are making way too much out of the jg.  it comes down to this:

with ‘state currency’
 there necessarily is,
 always has been, 
 always will be 
a buffer stock policy.

Call that the mmt insight if you wish.  so it comes down to ‘pick one’-

  • gold

  • fx

  • unemployment

  •  employed/jg/elr

  • wheat

  • whatever!

I pick ‘employed/jg/elr
 as it works best as a buffer stock based on any/all criteria for a buffer stock.

so yes, it’s an option.
 you are free to pick one of the others.”

Warren is very clear that he chooses the employment buffer stock.  This is also consistent with his writing in Soft Currency Economics where he says the JG is an “option” available to a country like the USA in which the currency issuer is sovereign and has endless supply of the currency in a FX rate system.  So that much is clear.  It’s not about having one buffer stock that is “central” to MMT.  It’s about using the buffer stock that we believe to be most beneficial.  Warren says it’s the employment buffer stock, but that doesn’t mean there aren’t other options that could potentially work….This really emphasizes the descriptive and prescriptive components of MMT.  Clearly, its descriptive components are factual and the way we use this understanding of the modern monetary system is up for debate.

Anyhow, Warren and I had a nice exchange and we agree far more than recent debate has likely implied.  We’re just sort of on a different page about how we should meet our goals.  I haven’t presented my position all that well and I am up against 20 years of academic work so it’s entirely my fault that I have published comments in public without having been more thorough and clear in my position.  Obviously, it’s created a lot of confusion.  Anyhow, here’s what I wrote to Warren:

Cullen: “Hi Warren.  My thinking is multifaceted, but along those lines.  I’m a risk manager.  My goal is not to shoot down the JG idea, but to evaluate potential long-term risks.

First, I completely understand the buffer stock argument and the currency supplier point.  But let me elaborate where my thinking is coming from….To me, prosperity is not just about giving people a job.  It’s about increasing real living standards by giving people more time.  The way that humans achieve this is through innovation, increasing productivity, etc.  To me, this is like the fountain of youth.  We live many more lifetimes than our ancestors did.  And not because because governments spend a lot of money (although they can certainly help).  These massive increases in living standards come from increases in innovation and productivity (which are MOSTLY pvt sector and profit driven).  So my thinking is rather basic.  Why obsess over FE (I am referring to low unemployment here) when the real goal is full productivity (which is a vague concept I know)?

My point is not against FE.  FE and FP would hopefully be two sides of the same coin.  My point is that perhaps it’s the wrong goal to have.  We know we can have prosperity with UE.  We don’t, however, know if the latter is possible (FE & long-term multi-generational prosperity).This doesn’t mean it’s not an ambitious or worthwhile goal and the lack of real life instances doesn’t mean it’s impossible, but it certainly makes it hard to prove.  This is the realm of the theoretical in MMT and it makes the case very hard for people to believe.  That doesn’t justify closed minded thinking (which I can certainly be guilty of), but it is not an unjustified position to maintain given that empirical evidence for a permanent prosperous JG is weak when looking at historical terms.

My position is equally theoretical of course since I am working under the idea that maximizing productivity is some holy grail that will lead to better living standards at X rate vs a potentially lower rate of Y under the JG.  Of course, I am working under the idea that the JG has the potential to have negative impacts through psychology, resource allocation, distribution of wealth, but those are hard to prove of course and I know the onus is on me to develop my thoughts here.  Don’t get me wrong, I fully appreciate the strength in your argument and I know I have not developed these thoughts enough, but I am just posing what I view as risks in the long-run.

In the end, currency sovereignty is about maintaining the balance in the economy between the currency issuer and the currency users.  But we mustn’t forget that demand for the currency is multifaceted here (I think we differ here as well).  It’s not just based on the issuers ability to tax.  After all, there must be productivity available to tax and programs that eat into that over time have been proven to create increasingly unstable economic environments.  I am not saying that’s necessarily the endgame for the JG, but I am simply trying to consider the potential risks.

I hope that clarifies where I am coming from. ”


My take is JG leads to superior productivity gains, but it’s not ‘proven’
If I thought JG would lead to lower productivity, I’d be saying so and pointing out that real cost of a JG
Cullen: This is the real crux of the argument.  If you can prove this then the JG is a no brainer.  I can’t seem to come to agree with the idea that the upsides outweigh the downsides….

Think about the way the market sets the spread between the JG and what the private sector pays, and as for resource allocation, the ‘cost’ of the JG is the difference in consumption between unemployed and JG workers.  and in fact unemployed may actually consume more real resources, as they have more idle time for real resource consumption, which includes throwing rocks through windows, beating their wife and kids, breaking into houses, begging drinks, etc. etc.  The gains from jg vs unemployment on that ‘social side’ alone are probably worth it in terms of real resources.  And with the JG pool maybe 30% smaller than an unemployed buffer stock for the same price stability the real cost is that much lower as well.

Cullen: The devil is in the details.  These are really broad concepts that are nearly impossible to prove.  I am not denying that they could work, but since we know what CAN work (maximizing productivity with some low level of unemployment), why would we not focus on that?   That’s sort of my simplistic approach here….”

So a lot of this comes down to potential downsides of employing workers in the JG (some excellent questions were asked here) versus leaving them unemployed.  One of the big problems with the JG is that it has never been done in any mass scale that has resulted in prosperity over any multi-generational period.  So, it’s very hard to prove that the JG can work because it has never worked in the past.  What we know has worked is having an unemployment buffer stock.  We know for a fact that human beings can achieve enormous prosperity despite unemployed people.  This doesn’t make this the optimal position and it doesn’t mean we shouldn’t strive for full employment, but what if the approach of plugging in the unemployment hole via government workers is the wrong approach?  That’s all I am trying to convey here.  What if there is an optimal way to leverage the government’s currency supplier powers that doesn’t involve unproven and potential downside risks?   I am not claiming to have all the answers here and I certainly haven’t done the academic work that is required to back my stance, but I think the question is more than a legitimate one.

Perhaps most important though is the point that Edward Harrison makes today with regards to the JG.  This conversation is a total non-starter.  We might as well be arguing how we’re going to get to Mars tomorrow on the back of government spending.  If MMT is ever going to be taken seriously then it has to evolve within the scope of our reality.  This doesn’t mean it might not evolve to the point of having a government job guarantee, but a big part of gaining traction within the world of economics is establishing realistic policy proposals.

I often joke around about the Crusoe Island of the Austrians – that mythical island where people live prosperously without any government.  And that’s a happy story, but it’s totally unrealistic since it entirely misses the societal concept of the evolution of governments and the role they play within human life.  This idea of the JG is not much different and equally preposterous to most economic and political commentators.  That doesn’t mean it can’t happen, but I just happen to believe that my proposal to ignore the JG for now and focus on the operational aspects and the fact that WE KNOW we can achieve prosperity with a certain level of unemployment AND government spending, is far more palatable and will gain much more attraction over time than extremist ideas involving the potential quintupling of the government workforce.   For now, we don’t know if the employment buffer stock can work since there is no evidence of this being done over any sustained period leading to proven multi-generational prosperity.  That’s not merely a hurdle.   It’s a huge wall blocking MMT’s evolution.  If we’re to take the next steps we need to stop arguing about how to get to Mars and instead focus on how we can get to Washington….


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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  1. again, please don’t disregard all the simulations that Scott Fullwiler, Ed Nell, Ray Majewski ran–after all they used the major macro model out there (Fair). I’ve shown the countercyclical impact of ELR on prices using a Kalecki model. My work shows that inflation emerges from pro-growth, pro-investment strategies and government spending other than that on the ELR. There is a recent UMKC graduate, Mike Murray, who is doing ELR in an input-output framework that deals with output allocation. His paper will appear in upcoming volume. In the absence of a real world example to study, we can simulate and model these effects and that evidence cannot be discounted.

    • I disagree. The evidence absolutely can be discounted. You’re building models based on the same sort of thinking that goes into efficient market models. The problem with models like this is that you don’t know what’s wrong with them until they break. And the problem in any JG model is the praxeological effect. No one knows what the true behavioral response will be. You’re assuming a Chicago School style of rational choice. It’s a colossal error! Economists have built broken models based on these false assumptions time and time again.

      Unfortunately, the only true way to know if a JG is workable is to implement one and find out. Only then can we actually test the theory, because, yes, this is almost entirely theory! Implementing it in an economy as large, diverse and complex as the USA on any large scale would be beyond irresponsible. And yes, as a citizen of this country who cares deeply about its well-being, there is no way I could ever back such a policy without substantial empirical proof of its effects. Perhaps over time these programs will develop in smaller comparable countries, but until there are real workable models then I am afraid that the models are built on quick sand….

      I hope your work continues to progress and grow. I hope it reaches a point of convincing evidence. I really do. But I do not think we are there. Sorry to be so stubborn….

      • Cullen, this argument essentially rules out a JG in the US ever, since even success is a smaller economy has little or no relevance for an economy on the scale of the US. There are virtually never empirical tests of economic policy before implemented. This is just saying that we might as well stick with the invisible hand of market forces, which is itself on that has virtually never been tested at least since the introduction of state money.

        This is just not in accord with the way economics is practiced and used as a policy instrument in most developed countries that have economic available.

        • So, we should take a model that has been hugely successful in creating prosperity and wealth and implement a policy that potentially permanently alters the model (without any real empirical evidence and proof that the new model is superior)? I just don’t see how this can be seen as rational? I know I am being difficult, but this just doesn’t make any sense to me….This is not to say that the current system is perfect, but this sort of policy shift implies that it is largely broken….

          • REally, depends on the vantage one is viewing that model from, Cullen. Even Marx agreed that industrial capitalism was a milestone in human progress, even as he was criticizing what he saw has its shortcomings.

            I think that you are way overstating the case from your side, as well as the weakness of the weaknesses of the MMT position regarding the JG. This is just going to remains ideological rambling though until you or someone else works up a paper specifically addressing the arguments advanced by the MMT economists in their publications.

            • “Ideological ramblings”? This is the second and last time another MMTer calls me an ideologue. It’s clear that some people don’t even know what an ideologue is.

              Ideology – n, visionary theorizing

              Ideologue – n, an impractical idealist

              Tom, YOU are the one doing the theorizing here. It is also visionary. But my vision is grounded in the reality that is the USA and its economic ACTUAL performance. There is no theory in my position. Additionally, I am not being impractical or idealistic. YOU are being impractical by not even acknowledging the substantial risks in this program.

              I am merely stating what should be common sense – such a program has never been implemented and so cannot be discussed in terms of “optimal output” without much more substantial proof and real-life evidence.

              I think it’s about time to turn the comments off here before I get called any more names….Have a good night.

        • @Tom,

          I would hope that Cullen, like myself, would be encouraged by any national economy that tested MMT. I recognize economics is a very imperfect science that relies, by the standards of the hard sciences, on very shallow extrapolation and tenuous analogy. At the very least, they would serve as incubators to validate ideas, much as Krugman has used Iceland’s example of default. I find it irksome that economics is so reliant on backfitting data.

          The next time the UN creates a country we should stipulate that they agree, from time to time, to have their economy completely revamped to fully test new economic theories ;-)

          • I am not an irrational person. At least I don’t think so! I will certainly take any new data and evidence as it progresses and grows and consider it with a very open mind. I am not trying to be closed minded here at all. If anything, I am incredibly open minded about the JG. I am just not convinced. I am really sorry….

          • The reason that there is are few empirical studies in macro is forst due to the scale and secondly due to the fact these kinds of decisions are political. Countries doen’t like being experimented with any more than people do. Not going to happen. The way policy is shaped is on modeling and simulation, using as much data as possible and extrapolating the rest.

      • I agree with you. I wish MMT theorists would devote more of their time to ideas that could be implemented piecemeal and/or formulate stages that can be evaluated as the whole evolves. If I’ve missed where this is laid out I apologize and would like references. People will need to see this stuff work somehow before the country commits.

        Another one of my big problems with MMT, but a problem I think is much more tractable if only somebody would set their mind on it, is to figure out a way to formulate how MMT fits with behavioral finance. I think MMT should have a lot to say about policy and regulation with respect to speculation, credit bubbles, and the dynamics (esp. hysteresis) that I surmise must impact stocks and flows in a much more non-linear way than I’ve read in MMT so far. The more MMT can accurately predict the more respect it will garner.

        • As I understand it, there are about 30 MMT economists in the world at present. That is not a large resarch group, considering they also have day jobs like teaching or in finance.