Tuesday, January 26, 2010

Where is the logical niche for "make work"? Part II.

Having demolished “government as employer of last resort” schemes in Part I (see below), I’ll try building something from the rubble. (These schemes are referred to as “WPA” here.)

As shown in Part I, efficient WPA schemes amount to the same thing as normal public sector employers. The inference would seem to be that one might as well allocate WPA employees to existing public sector employers – though of course the obvious problem is that there would be far more WPA employees than existing public sector employers could cope with.*

But there is a solution to this problem, and it comes from a flaw in the popular claim by WPA enthusiasts that WPA is not inflationary, whereas increasing demand IS.

As pointed out in Part I, WPA comes into its own in dealing with unemployment where the latter is relatively low (at or near NAIRU, for those who want to invoke NAIRU).

Given low unemployment, the factors of production needed by WPA other than unskilled labour (i.e. skilled supervisory labour, capital equipment and materials) a CANNOT BE NICKED FROM THE EXISTING ECONOMY.

This is because we have assumed low unemployment: a scenario where the existing economy is already working AT CAPACITY. Any additional demands for materials or equipment (or removal of skilled labour) will be inflationary.

Indeed it is perfectly reasonable assumption that where public sector WPA scheme results in a given shortage of a given selection of “other factors of production” (OFP), the inflationary effect will be exactly the same as where an increase in demand results in the same OFP shortage. I.e. THERE IS NO DIFFERENCE IN THE INFLATIONARY EFFECT, GIVEN A FAIR COMPARISON, AS BETWEEN EXPANDING THE PUBLIC SECTOR AND EXPANDING THE PRIVATE SECTOR.

Having concluded above that WPA employees might as well be allocated to existing public sector employers, the paragraphs immediately above would seem to suggest that this conclusion can be extended to the private sector: i.e. the conclusion would seem to be that WPA employees ought to be subsidised into work with ALL employers (public AND private sector) – with “WPA” as such disappearing.

(Indeed, the Jefes program in Argentina, a program which current advocates of WPA always like to quote, actually allocated a proportion of those concerned to subsidised employment with private sector employers. See bottom of p.7 here.)

But where is the economic logic in this? Or put another way: having subsidised WPA employees into work with existing employers, what is the difference between the two sets of employees, “normal unsubsidised” and “subsidised”?

Answers in Part III in a day or two.

* Indeed, and in this connection, we have had the disgraceful and farcical spectacle of State Governments in the U.S. (and other local authorities in other countries) sacking existing public sector librarians, teachers and street sweepers etc, while governments (central and local) have been producing a bizarre selection of WPA type “shovel ready” schemes of one sort or another. To add insult to injury, no doubt a few of the "shovel ready" jobs involved librarianship, teaching and street sweeping! It would have been a darned sight better to have spent the “shovel ready” money making sure existing regular public sector jobs were not destroyed by the recession, would it not?

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