Financing Economic Solutions to Unemployment and Accompanying Social Problems

This is a response to various economic posts here and elsewhere. We should all be tired of the hand wringing. 80% of our social and economic problems would disappear in a few months with a:

      •   Federal Job Guarantee, as part of a      
      •   Full Employment Fiscal Policy     

 
Here’s how:

Step One:   Rename your Political Party: “The No Excuses – Get to Work Party”.  Tag Line: “We want YOU to get to work!”  (No handouts will be involved.)

2)   Make the first plank: Full Employment: A Job Guaranty: “You want a job, we’ll give you a job, come hell or high water. No Excuses”

3)   Revise Federal Reserve Act so Federal Reserve Bank reports to the Treasury.

4)   Execute on national “To-Do List” (infrastructure; alternative energy; high speed rail; rehire every teacher, fire fighter, cop laid off in last 8 years; quintuple trade school and community college staff – free tuition, free elder and child care.) Fund through Treasury securities purchased by the Fed – either as loan or just have Fed “gift” it to the Treasury. Hiring people directly or through contractors. Minimum guaranteed wage: $10/hr with benefits. (40 hours or 20 hours per week.) Eliminate private sector minimum wage.

Added spending by newly employed workers, producing public sector goods and services, induces business people to hire MORE workers to produce private sector goods and services.

5)   Track wage inflation monthly, If it starts getting out of hand (say, approaches 4%), take action: increase taxes or decrease spending – only if necessary.

A Job Guarantee law should include automatic across-the-board tax increases that kick in automatically when certain monthly wage inflation targets are hit – say for 6 months in a row. These can include:
a) Income Taxes,
b) Sales / VAT Taxes
c) Asset Value Taxes (or Wealth Taxes)
That’ll cool things off pronto.

Inflation should not be an issue since newly issued money is offset by both public sector and private sector goods and services produced.

6)    Result: Everyone’s working and income inequality will diminish.

•  Expenditures for unemployment insurance: zero;
•  food stamps: zero;
•  Medicaid: virtually zero;
•  all sorts of welfare for this or that: zero.

If we really want to be punitive, cut welfare benefits for able-bodied folk not taking guaranteed job.

7)   What’s for dessert? “Now let’s get to work!”

Not that hard kids!!

“HOW DO YOU PAY FOR IT!!!!!??????” In order to implement a Federal Job Guaranty and Full Employment Fiscal Policy, it’s important to understand a few points of how the economic system works.  Perhaps it’s time to consider a model that reflects the ways things are as opposed to the way things were before 1971.

Modern Monetary Theory is: first i) an examination of how our monetary and fiscal economy works, and second, once that is understood, ii) the implications of policy prescriptions for solving our economic problems. In terms of our monetary system, four assertions are made:.

1) The US government is unlike a:

a. state,
b. municipality,
c. business, or
d. household,

in that it can issue its own currency.

2) A sovereign (Treasury combined with the Federal Reserve Bank), like the US, that:

a. issues,
b. borrows in, and
c. floats

its own currency, can NEVER run out of cash.

3) The sovereign, like the US, can:

a. issue currency to spend and buy anything the economy produces,
b. up to the productive capacity of the economy (adjusted for turnover/velocity),
c. without creating inflation.

In other words the US government can issue currency and hire any and all unemployed and underemployed folk. The constraint is the productive capacity of the economy, as measured by wage inflation. If prices do rise above an acceptable level, they can be controlled by i) raising taxes across the board (on income, sales/vat, and asset values), or ii) a cut in spending, but the Job Gty is always maintained.

4)   The US government debt is not a problem in any way, shape, or form. In fact, it can be repaid tomorrow without a negative repercussion. That would simply involve replacing government bonds with deposits at the Federal Reserve Bank with similar interest and maturities. The similar or even better risk/reward terms assure no change in investor savings/spending preference or desire to hold dollars.  Not recommending this course of action, just pointing out that it is possible.

Private Debt, by the way, can be a problem and is largely responsible for many of our recessions.

The policy implications of these assertions are many.  So what to measure?  What to manage?  2 things:

   a)  Unemployment – as in keep it at ZERO at all times, and

   b)  Inflation – as in measure monthly and keep it at a low manageable and comfortable level at all times.  (3% to 4%?)

Easy Peasy!

Here are some resources to learn about Modern Monetary Theory (MMT is a name that stuck with this field of study. It’s a misnomer, however, in that it’s not necessarily Modern – it’s been around since the 1940s; it’s not just monetary – it involves both monetary and fiscal operations; and it’s not just a theory – it involves an explanation of how our monetary system works since we went off the gold standard in 1971.) YouTube some intro lectures from:

–  Bill Mitchell:  Demystifying Modern Monetary Theory

–  Stephanie Kelton – The Angry Birds Approach to Understanding Deficits in the Modern Economy

–  L. Randall Wray – Modern Money Theory: Intellectual Origins and Policy Implications

–  L. Randall Wray — MODERN MONEY: the way a sovereign currency “works”

–  Modern Money Network

–  Warren Mosler’s Soft Currency Economics

Some helpful blogs / twitter feeds:

–  Bill Mitchell – Billy Blog

–  New Economic Perspectives

–  Twitter – Stephanie Kelton

–  Real Progressives

The foundations of MMT are John Maynard Keynes, Abba Lerner, Wynne Godley and Hyman Minsky. Recent proponents are: Randall Wray, Stephanie Kelton, Warren Mosler, Jamie Galbraith, Bill Mitchell, and Steve Keen. Stephanie Kelton was appointed to the Senate Budget Committee by Bernie Sanders in late 2014 and she and Jamie Galbriath and Bill Black advised Sanders during his campaign. Collectively, they are a New Hope!

Recent books you can read are: The Deficit Myth (Prof Stephanie Kelton) and Modern Money Theory, A Primer on Macroeconomics for Sovereign Monetary Systems (L. Randall Wray) It’s a little technical but very clear.

There is considerable pushback from the mainstream on MMT. Folks can’t wrap their brains around it. (I’m talking the vast number of mainstream economist, including so-called “liberal economists”.)  I attribute it to people not being able to unlearn stuff they learned in their 20s. Especially if you based your career on it.

Hope that helps.

Job Gty Issues: The Empire Strikes Back!

The policy with the potential to solve a large percentage of our social economic issues has been steadily gaining momentum nationwide.  But the Empire is not going to give up its privileged position easily.  A recent article in the Wall Street Journal deserves refudiation (see Sarah Palin):  https://www.wsj.com/articles/the-dangerous-fantasy-of-a-jobs-guarantee-1542239737

RE: “… The sky-high costs … Defense is the only discretionary federal expense comparable …world’s largest employer…”
• So? The authors’ concerns about the “cost” of the program are totally misplaced as broken down by a gentleman and a scholar here: https://fflorescpa.wordpress.com/2018/07/28/financing-economic-solutions-to-unemployment-and-accompanying-social-problems/

RE: “… assume virtually no one currently employed would leave their job… 41 million workers earn less than the program’s minimum wage …”
• But this assumes that private sector wouldn’t react by raising wages on the bottom say quarter of the workforce. A very bad and misleading assumption.  The notion that private sector would just shut down and let 41 million workers walk away is preposterous.  A one-time upward adjustment in the bottom quarter of the wage scale can be expected.  (This is not inflation.)

RE: “… Finding work for 10 million people would be a herculean task. … how or even if the work could be assigned …”
• Not really. A large-scale ramp-up of public sector spending would be a simultaneous effort, alongside but not part of the Job Gty program. Public sector puts together a to-do list and starts executing on it.
• Really? We are getting all hung up on how the work would be assigned? There’s a lot of academic work already done on this.  Please do your homework. But as a start, may I suggest an Excel spreadsheet. And work can be funneled through local governments and not-for-profits.
• Governments would put together a To-Do list and start executing on it. Some jobs would require skills and not fall under the JG program. Others would. Politicians would run on how aligned their To-Do lists are with the desires of the voters. Not that hard Max!

RE: “… Monitoring such a colossal program would be difficult and expensive. … …”
• Every grant would be accompanied by an auditor with strict rules and policies and the flexibility to publicize and prosecute abuses. (We can rename the policy the CPA Full Employment Act).

RE: “… a big box retail chain would want a community to prioritize a vacant lot next to one of its stores. … …”
• Rules would be in place on whose property would be cleaned up. If its city property, then it would be a worthwhile project. These decisions are done daily today. The author needs to get out more.

RE: “… temporarily unemployed workers would be diverted….no mechanism or incentive to put their workers skills….weaken the productivity of the economy … …”
• They would be diverted to productive jobs paying them a wage when the worker wants/needs a paycheck. What’s the problem with this?
• Really? Having unemployed folk working instead of sitting on the couch would weaken the productivity of the economy?
• Why do you assume no effort to align skills/desires with available work wouldn’t be included in the program. Sounds like a strawman argument.

RE: “… for a fraction of a job guarantee cost … develop new skills …”
•  Aaahhh. Here is the crux of the matter.  Many conservatives need to look down their noses at the less fortunate.  They fundamentally believe that all unemployment is a consequence of the unemployed skill, attitude, and behavioral shortcomings. The truth is, the poor and unemployed are always with us because of the shortcomings of their betters — highly educated, highly coiffed conservative economists and government policy makers living in nice homes, driving late model luxury cars, working in high government/think tank/academic positions — espousing economic policies which include large numbers of unemployed as a constant and a feature, not a bug in the economy.

Traditional conservative/monetarist/austrian economists espouse policies which feature a buffer stock of unemployed folk which expands and contracts with vagaries of the business cycle.  The Job Gty envisions the same buffer stock, but instead of having folks unemployed living in misery, they are productively employed in the Job Gty program, which expands in recessions and shrinks to perhaps nothing during the booms.

Easy Peasy!

 

Tariffs!

The impetus for imposing a tariff is the fact that we don’t live in an economy with a Job Guarantee as part of a Full Employment Fiscal policy.  If we implemented a Job Guarantee, we wouldn’t need a tariff to keep folks working.  But,

•  The Job Guarantee jobs would probably provide lower value-added service jobs compared to higher paying heavy industrial jobs.

•  Maintaining a high trade deficit is providing foreign folk a claim on our grandkids’ output.  But why should they care who owns the capital (or has a claim on it) when they come into the world naked and ready to work.  Why should they care who gets the output of their labor: a Chinese family or the rich guy in the town over.  It doesn’t matter to them. (see blurb on Intergenerational Equity: The Kids are NOT Alright! The Truth about The Federal Debt and Intergenerational Equity )

Moreover:

• A tariff is a tax on everybody else. Why should everybody subsidize the few industrial workers and companies in steel/aluminum?

•  It will also cause retaliation, and massive disruption in production/distribution with Canada and Mexico.

•  If someone wants to send us cheap stuff, we would be crazy not to take it.

Right now we have the worst situation: high trade deficit, no Job Guarantee, resulting in low labor utilization –> unemployment/misery.

The solution:

–  Job Guarantee (see the blurb:  Financing Economic Solutions – Job Guarantee ),

–  High public investment in higher education (with an emphasis on STEM and trade schools) to maximize the level of people output, and

– Free Trade.

Easy Peasy.

The Kids are NOT Alright! The Truth about The Federal Debt and Intergenerational Equity

Is the Federal Debt a Total Nothingburger?    These are the things that should be measured and managed. (It’s not what you think.)

“AAAaaaaaahhhhh!!!!!  Zimbabweee!!!!!!!  Weimer Republicccc!!!!!!  Wheelbarrows full of Cashhhhh!!!!”  We’re hearing the cries all over again.  The scaremongering over the Federal Debt and its potential for leading to hyperinflation.  What the Nervous Nellies don’t elaborate on is a credible scenario outlining what exactly will go wrong.  Four FACTS need to be spelled out and understood:

1)  The US government is unlike a:

1.  state,
2. municipality,
3. business, or
4. household,

in that it can issue its own currency.

2)  A sovereign (Treasury combined with the Federal Reserve Bank), like the US, that:

1. issues,
2. borrows in, and
3. floats

its own currency, can NEVER run out of cash.

3)  The sovereign, like the US, can:

1. issue currency to spend and buy anything the economy produces,
2.  up to the productive capacity of the economy (adjusted for turnover/velocity),
3.  without creating inflation.  and

4)   The US government debt is not a problem in any way shape or form. In fact, it can be repaid tomorrow without a negative repercussion. That would simply involve replacing government bonds with deposits at the Federal Reserve Bank with similar interest and maturities. The similar or even better risk/reward terms assure no change in investor savings/spending preference or desire to hold dollars.  Not recommending this course of action, just pointing out that it is possible.

Even professional economists have trouble with these assertions.  Why?  Because they are trained to look at the economy through a certain lens, and the world changed in 1971 and 1973 and the profession didn’t update its lens prescription.  (See blurb:  Financing Economic Solutions to Unemployment and Accompanying Social Problems  )

What About the Kids ?!

One major fear that the Nervous Nellies try to impose on us is the maternal/paternal instinct to not burden future generations with the debt of our profligacy.  The truth is just the opposite.  The best gift we can give our great grandsons and daughters is an economy with large base of wealth populated by highly skilled, working people adding to the goods and services produced and to the productive capacity of the economy.

“But what about the Federal Debt????!!!!  Our kids will have to be taxed and burdened just to make the interest payments???? AAAaaaahhhh!!!!!”

Here’s the way to look at this.  Think of 2 scenarios:

A)  Austrian World– a highly libertarian world with minimum govt, gold standard, everything is privatized (roads, bridges, aircraft carriers, nuclear missiles), no minimum wages, and very little Federal Debt, Private Debt, and Money for that matter.

B)  Democratic Socialist World – pretty much where the US and the rest of the developed world is now (or should be).  Big Federal Debt, Private Debt, Reserve Deposits, and Money Supply.  The big Federal Debt has been accumulated partially through the implementation of a Job Gty as part of a Full Employment Fiscal Policy (see: https://fflorescpa.wordpress.com/2018/07/28/financing-economic-solutions-to-unemployment-and-accompanying-social-problems/ ).

Wealth and Having your Pie and Eating It Too

In analyzing the 2 scenarios it’s important to understand a few points:

–          What is Wealth?  I would define it as all of the valuable assets of the economy: useful developed land, buildings, machinery and equipment, inventory, useful stuff the kids can consume, and knowledgeable and skilled people who can produce more desirable stuff.   It’s the Pie.  I would surmise that the pool of wealth would be larger in Democratic Socialist World since although Austrians/Conservatives/Monetarists deny the existence of unemployment in an economy with no minimum wage, the truth is, it exists, and represents a massive wasted resource and lack of production and productive capacity.  All these additional people working producing goods and services (ZERO unemployment) in Democratic Socialist World results in a larger pie.

–        The effect that “Stakes” have on the pool of wealth.  Other than direct and equity owners, who holds these stakes? Holders of:

• Debt(Federal and Private),
• Reserve Deposits,
• Bank Deposits, and
• Other Money

These holders have ZERO effect on the pool of wealth.  Let that sink in.  “What???  How can this be?  It has to be paid off!!!!!!!!”  Well yes and no.  Think of it this way:  First of all, the Federal Debt is interchangeable with Federal Reserve Deposits, and the Fed certainly has no problem having its deposits redeemed. (Would you worry about your Visa bill if you had a printing press in your basement.)  Second, it matters who has to pay on the stakes and who holds them.  (And in any event, you have to finish your stake before you can eat the pie ;> )

In Austrian World, who owns the Wealth?  Rich folk.  The owners of the property. (I’d like to own the aircraft carrier!)

In Democratic Socialist World, who owns the property?  Rich folk.  BUT!  Other liability classes have a larger stake in it – directly or indirectly:

Liability	Stake Holder
·         Federal Debt Securities:                →	Bond Holders
·         Federal Reserve Deposits:            →	Banks
·         Private Debt:                                   →	Banks and other Financial institutions (secured  or unsecured),
·         Deposits and Money:                    →	Rich Folk

“The POOR, POOR rich folk!  They have to share the ownership of the Wealth with the other stakeholders!   Aaaahhhhh!!!!!!”

But wait!  Who are these stakeholders?  Who owns the Federal Debt Securities?  The Banks? and the Deposits and Money?  Oh Yea.  Rich folk.  We do.  (Well some of us.)  Just like in Austrian world.  It’s the same folk!  So what’s the diff?
The important thing is the size and the quality of the Pool of Wealth or the Pie.

That’s the point.  Most of us and our grandkids are born into this world helpless and naked.  Hopefully by the time they turn 21, they are ready for some work and a desire to get a Piece of the Pie.  So they work at a competitive wage and get their share – under both Austrian and Democratic Socialist Worlds.

QUESTION: Do they care who owns the Pie?  Do they care who has a stake in the Pie? If the pie they are buying with their labor has liens on it and the original owner and the second lien holder is getting wiped out?  Of course not.  They care about what they are getting for their labor.  PERIOD.  Would they care if some of the Federal Debt Securities or Private Debt are held by a Norwegian Sovereign Wealth Fund or German or Chinese industrialist?  I would argue – no.  (I worked for a European company in the US for many years.  The visiting managers from the home office were very nice – and liked to get drunk at lunch time.)  If you were buying a piece of machinery at an auction, do you really care about who got the proceeds of the sale – the owners, the banks, the trade creditors, the lawyers?  Probably not.  You care about how much you are paying and if it’s a good deal for your purposes.  And that’s how our grandkids will think.

Foreign holders of both the ownership and stakes do create a complication.  They have a claim on the wealth and the output.  “Aaaahhhh!!!  Working as slaves for the Chinese!”  (Have you seen the Amazon Prime series: “The Man in the High Castle”?   I recommend it.)  But again: So?  Does our 21-year-old really care if he or she has to work for the Germans or the rich guy 2 towns over.  I don’t think they care.  And if the domestic output is being exported, does our 21-year-old care?  Probably not.  He has dollars and can buy imported products since the exported goods are earning foreign currency- giving the dollar added foreign exchange value, or his elders will sense the opportunity and set up a domestic company to produce for the youngins’ consumption.

Inflation

“But what about inflation?”  What about it?  Why would you have inflation if the pie of goods and services has increased. And it’s important to remember that inflation is too much money CHASING too few goods.  So more money produced does not necessarily result in a devaluing currency (See: Multi Trillion Dollar QE and minimal inflation in the last 10 years.)  Would you have more inflation in Democratic Socialist World compared to Austrian World.  Probably.  Austrian World would probably be blessed/cursed with deflation based on fixed currency amount offset by growing productivity and population growth.  (I would really look forward to the monthly meetings with my boss to negotiate my wage decreases.)  But inflation can easily be controlled in Democratic Socialist World – only if needed –  through across-the-board, temporary, and equitable taxes:

• income,
• sales/VAT, and
• asset value.

If all the stakeholders decided to also get a piece of the pie at the same time, true, the price may rise, but why would that happen?  And if it does, a general inflation would ensue, including wages as the nominal price of labor output rises corresponding to the wealth inflation (since the ratio of a unit of labor equaling a unit of wealth does not change).  So no real dilution occurs.  Rich folk retain their share of the Pie either through direct ownership or through a stake.  (I’ll take mine medium-rare please.)

Whose Watching the Kids??

So, what to measure?  What to manage?  2 things:

   a)  Unemployment – as in keep it at ZERO at all times, and

  b)   Inflation – as in measure monthly and keep it at a low manageable and comfortable level at all times.  (3% to 4%?)

So, will the kids be alright?    It depends.  In Austrian world they may grow up in a dystopian world with very high unemployment, no minimum wage, little education except for the wealthy, and wealth inequality fitting for a dog-eat-dog feudal monarchy. (See: Game of Thrones)   In Democratic Socialist World they will join a world with a larger pool of wealth, ZERO unemployment, plenty of public goods and services, and a highly trained and motivated work force.  And no huge burden of debt.  (Unless they are the grandkids of the rich folk. “Aaaaaaahhhh!!!!”)