No, The Government Didn’t Cause Unemployment

There was a big blogosphere kerfuffle in the last few weeks between some Modern Monetary Theory (MMT) people and a bunch of economics and finance people I greatly respect (Simon Wren-Lewis, Jo Michell, Steve Keen, Frances Coppola, etc). MMT was, at times, pushing an extremist and combative narrative that I found deeply misleading so I wanted to discuss this a bit as it appears that some people are being misinformed while reputable economists and finance people are being unnecessarily attacked in the process.

For the uninitiated, MMT is an extremist economic movement mostly supported by Marxists, Socialists and Democratic Socialists and they have some rather unusual views. I find some of those views interesting and useful (I’ve even promoted some of those views here, especially after the financial crisis when big deficits made a lot of sense), but I think other parts are taken too far.

Part of that aforementioned kerfuffle was related to a central topic in MMT – the idea that the government creates unemployment. This is a bold claim and one that I think is not just wrong, but demonstrably wrong. The MMT argument, in a nutshell, is that the financial system is imposed on us. So, the government establishes property rights and taxes and that forces people to obtain an income denominated in the national currency. If you can’t obtain a job and income then you’re unemployed and the MMT people would say that the government caused this by imposing property rights and taxes on you.

Specifically, MMT often uses a story where the government issues business cards in a room full of people with a government enforcer at the door and requires everyone to obtain those cards. If you don’t obtain cards then you are unemployed. Therefore, by imposing this system on people they have caused the unemployment. Seems to make sense. But it’s wrong for 3 very basic reasons.

1. The government doesn’t need to spend a single dime for us to have “money”. We have an endogenous money system. What this means is that the government sets and regulates the unit of account (the dollar) and then banks can create all the money they need to meet loan demand. Loans create deposits which are money. The government doesn’t need to create a single dollar for the rest of us to have money. But in the MMT world the government MUST create money. In their world it’s as if money can only be created by the government. This is empirically wrong. In fact, the vast majority of money in the financial system is created by banks.
2. This theory also ignores an important causal implication here – which party actually causes the unemployment? After all, if you have no useful skills then you’re not unemployed because the government imposed it on you. You are unemployed because you can’t sell your labor to other people. In a capitalist economy this is precisely why there is some level of unemployment. MMT essentially tries to argue that it is the government’s fault (and implicitly, the rest of society’s fault) that you can’t find a job. This appears misleading at best and dangerously wrong at worst.
3. This isn’t legally accurate. If the government was responsible for unemployment then you should be able to sue the government and make them give you a permanent income and/or job because they are liable for causing your unemployment. However, you cannot, at present, sue the government and force them to give you a full-time job and income. To date, no one has been able to successfully make this case in court resulting in a permanent full-time job/income as a result of government liability. So the crux of MMT is inconsistent with the actual legal precedent in the USA.

Of course, this makes perfect sense. If Joe Schmo has talents and wants an income, but doesn’t want to work because he’s feeling a little lazy this year then he can’t just sue the government for an income and job because Joe is the cause of his own unemployment. The government didn’t cause Joe to be unemployed. Joe chooses to be unemployed. A similar argument can be made for involuntary unemployment. For instance, if you attend college majoring in turf management for 4 years and you can’t find employment when you graduate then you don’t get to turn around and sue the government because you have no talents that match up with existing job opportunities. You get the point….

And that gets to the crux of the system we have imposed on ourselves. We have imposed a capitalist economy with a Constitutional Republic in the USA. People compete for incomes by proving that they have something valuable to add. In this system, Americans have determined, by law, that if you want to sit on your butt for your whole life or spend your time obtaining worthless skills, that it is not necessarily everyone else’s responsibility to make sure you have an income that can fund your bad choices. Saying that the government is the cause of every negative externality that results from rules they impose is a very slippery slope and an extremist view that no one needs to take.

Anyhow, I like a lot of what MMT says. It’s a useful theory in many ways, but they also have a tendency to overreach on certain topics by backward solving every problem from the perspective of government. It results in a sometimes extremist view of the world that misrepresents the way things actually work.