Job Guarantee buffer stock nonsense - Part 2.

Continuing where I left off here, let’s now consider why JG reduces unemployment. Incidentally, if you find the arguments and ideas below hard going, don’t worry: as far as I know there is no economist on planet Earth who has any sort of grasp of these ideas. Though a possible exception is Malcolm Sawyer.

As mentioned in Part I, there is crude but nevertheless theoretically interesting way of abolishing unemployment. It’s to tell the unemployed their unemployment benefit is conditional on their walking up and down their street keeping it free of litter. And those refusing that work are deemed to have turned down a job, and are thus not counted as unemployed: so unemployment vanishes.

With a view to making that unemployment abolishing system more efficient, let’s first consider whether the subsidised jobs (JG) should be on what might be called “specially set up” schemes or employers like the Work Project Administration in the US in the 1930s or the “Job Creation Scheme” set up in the UK in the 1970s. The Alaternative is to allocate JG people to EXISTING employers.

Existing versus specially set up employers.

The reason specially set up employers don’t make much sense is quite simple, and is as follows.

The productivity of the above hypothetical street cleaners could obviously be improved by giving them a bigger variety of jobs and having them work with more materials, capital equipment and permanent skilled supervisory labour (which I’ll refer to as “other factors of production” (OFP). But there is a problem there, as follows.

As demand is raised, inflation kicks in in a serious way. The point at which it kicks in is given various names. I’ll use a popular one: NAIRU.

Now there is not much point in JG when unemployment is above NAIRU since employment can be raised simply by raising demand. I.e. JG really comes into its own at NAIRU.

But at NAIRU, a JG system cannot just order up oodles of OFP for JG people to work with: that OFP can only come from the existing or regular economy, the latter is (by assumption at capacity, or NAIRU).

So do we set up a JG scheme consisting of specially set up employers which employs virtually no OFP? Because if so, output would be ridiculously low. Plus one would then have two sets of employers, performing very similar tasks in some cases, with one set being efficient and the other being ridiculously INEFFICIENT.

Much better is to let EXISTING EMPLOYERS take on JG people. That way, those JG people are working alongside relatively normal levels of OFP, thus their output will be reasonable.

Why does “street cleaning” reduce unemployment?

It might seem that the above crude street cleaning solution to unemployment works because the relevant output (street cleaning) is given away rather than sold: i.e. no additional demand is required to bring the jobs into being. And demand is the big constraint on raising employment: it can cause excess inflation.

But, as pointed out in Part I, we’ve had an ASTRONOMIC INCREASE in the proportion of GDP “given away” over the last 150 years (i.e. a big increase in the public sector) and unemployment has not fallen in consequence. So the “give away” point is clearly defective.

Now the defect lies in that word “inflation”: excess inflation does not occur simply because demand rises. Inflation occurs when aggregate demand is excessive RELATIVE TO aggregate supply, labour supply in particular. And if the above crude “litter clearing” solution to unemployment were implemented, the reason it works would SEEM TO BE, first that the output is given away, so no extra demand is needed. Second, there is no reduction in labour supply to the regular jobs market. That is, those engaged in litter clearing have just as much incentive to seek regular jobs as when unemployed. Indeed, they arguably have MORE INCENTIVE.

But there’s actually yet another condition that has to be fulfilled for the system to work, and as follows.

Extra output must come JUST FROM JG people.

The cost of JG employees to the employer needs to be such that ALL EXTRA OUTPUT stemming from the JG system comes from employers hiring JG people rather than from their hiring more JG people plus more OFP. Remember: employing more OFP is not allowed.

So the price of JG labour has to be such that employers are induced to expand output PURELY BY taking on JG people. So, just to keep it simple, JG people really need to be allocated to employers for free.

But note that if the latter objective is attained (having extra output come from JUST JG people rather than JG people plus more OFP), that makes allocating JG people to PRIVATE SECTOR employers just as inflation free as allocating them to PUBLIC SECTOR employers. That is, if demand is raised, and private sector employers are induced NOT TO raise their demand for OFP, but to bring about an increase in production PURELY BY hiring JG people, then no extra inflation will ensue.

Put another way, the basic cause of excess inflation is excess demand for OFP BOTH FROM public and private sectors. But if that excess demand can be avoided (in either sector), then there is no reason not to extend JG to the private sector, as indeed has been done in the case of the UK’s Work Programme and other similar schemes in Europe over recent decades.

To summarise, the idea that JG works because it concentrates on “give away” activities is actually nonsense. The reason it works is rather that (if properly structured) it induces employers to get extra output JUST FROM JG people – not from permanent skilled people, and second, JG people have the same incentive to seek regular work as when unemployed.

Further arguments for private sector JG.

1. The private sector is better at employing relatively unskilled labour than the public sector, i.e. average skill levels are higher in the public sector.

2. In that the purpose of JG is to maintain skills, the bigger the VARIETY of employers and jobs to which to allocate JG labour the better.

3. The empirical evidence is that post subsidised employment record of those who have done subsidised private sector jobs is better than those who have done subsidised public sector jobs.

Hello professional economists: did you know governments can print money?

I’ve lost count of the number of times I’ve seen articles and papers by so called professional economists which assume that increasing the deficit means increasing the debt.

As Keynes and Milton Friedman pointed out, and as I’ve pointed out a trillion times on this blog, a deficit can be funded by debt OR BY NEW MONEY.

The latest high profile economist I’ve noticed who doesn’t get the latter very simple point is Carmen Reinhart. But then given the nonsense than emanates from her and Kenneth Rogoff, that’s not surprising.

In this letter to Paul Krugman, she asks Krugman, “What is the foundation for your certainty that as peacetime debt hits new records in coming years, the United States will be able to engage in  forceful countercyclical fiscal policy if hit by a large unexpected shock?  Furthermore, do you really want to find out the answer to that question the hard way?”

Well the “foundation of my certainty” is that a monetarily sovereign country like the US can simply print money to fund “countercyclical fiscal policy” if no one wants to lend it money.

Now the knee jerk response to that from the assortment of clots, idiots and thickos that infest Planet Earth is “inflation”. And the answer to that is that as long as the amount of money created and spent is enough to escape a recession, but no so much as to cause excess unemployment, then “problem solved” as they say.

Why borrow?

Moreover, there’s not even any point in borrowing something you can produce yourself for free is there? That’s one reason why Milton Friedman and Warren Mosler have suggested that governments should NOT BORROW AT ALL!!!!!  That is, the only liability they should issue is money (monetary base to be exact).

What’s the relevance of “peacetime”?

Moreover, noticed a bit of trickery in Reinhart’s question: that word “peacetime”?

US debt relative to GDP is still nowhere near HALF the level that existed in the UK just after WWII (well over 200%). Now that doesn’t suite the Rogoff and Reinhart thesis, namely that high debts are some sort of disaster. So they try their best to confine the discussion to periods other than those just after wars.

But even that won’t wash: the UK’s debt during the 20^th century AVERAGED around 100% of GDP: above the 90% threshold which R&R claim to be a big problem.

Pathetic, ins’t it?

Michael Boskin makes excuses for Rogoff and Reinhart.

When one Ivy League academic economist is in trouble, the others can be relied on to come to the rescue. After all, one doesn’t want one’s profession to look silly, does one?

And Michael Boskin (econ prof. at Stanford) tries to come to Rogoff’s rescue.

Boskin starts by saying that deficits are justified in a recession, but not otherwise. Agreed. And doubtless every clued up Keynsian would also agree.

In other words, given NO RECESSION, it irresponsible for a government to fund itself to any great extent from borrowing: what it should do is to fund its spending (or at least the large majority of it spending) via tax. (I deal with the EXACT proportion that should be funded via tax vis a vis borrowing in a non-recessionary environment in a footnote below.)

Boskin then tells us that notwithstanding Rogoff and Reinhart’s flawed research, there are other researchers who have shown that high levels of debt depress economic growth. He does not tell us who the latter researchers are, so that claim can be taken with a pinch of salt.

But let’s assume these “researchers” exist and that they’ve found the evidence that Boskin claims. Unfortunately their discovery is quite possibly a complete non-discovery, and for reasons alluded to by Boskin himself. It’s that governments sometimes borrow for totally unjustified reasons!!!!

That is, politicians sometimes fund government spending from borrowing PURELY SO AS to ingratiate themselves with voters – because voters notice tax increases more acutely than they do the effects of more government borrowing. And do doubt that irresponsible borrowing impairs growth.

I.e Boskin’s argument (and indeed R&R’s) is as illogical as saying that because driving with too much alcohol in your blood is excessively dangerous, therefor driving PER SE is excessively dangerous.

Interest rates.

Boskin also tries to bolster his argument by citing evidence that high deficits and debts tend to lead to high interest rates. That evidence may easily be correct. But the explanation is very mundane. It’s an explanation with which advocates of Modern Monetary Theory (MMT) tend to well versed, and it is as follows.

Recessions are caused by inadequate private sector spending, i.e. too much private sector saving (that’s saving in the sense of accumulating money rather than accumulating physical investments). I.e. in a recession, there is a POSITIVE DESIRE by the private sector for more “net financial assets” (NFA) as MMTers tend to say. And if someone has a positive desire for something, they’re not going to charge anything much for holding the item in question. I.e. interest rates will be low.

In contrast, in a non-recessionary environment, the private sector DOES NOT HAVE a desire for more NFA. Thus the only way a government will be able to get the private sector to hold more NFA (and not spend it) will be to offer a decent reward to the private sector for doing so. I.e. interest rates will tend to rise.

So . . . given that there is always a proportion of the World’s governments who behave irresponsibly (i.e. borrow heavily in a NON-RECESSIONARY environment – just when they shouldn’t), it’s no big surprise that if you take a sufficiently large sample of governments thru history, you’ll find an association between borrowing and interest rates.

Is Krugman “irresponsible”?

Boskin then ends by claiming that Krugaman in this debate says repayment of debt can be left for 10-15 years and that that, according to Boskin, is “beyond irresponsible”. Well what Krugman ACTUALLY SAID was this:     

“It was irresponsible to be running deficits when the economy was at full employment..” (see around 3 minutes). Well that’s exactly the point I made above wasn’t it?

Moreover, Krugman says over and over again in this debate that the REAL PROBLEM will come in ten to twenty years’ time when health care and similar costs will rocket, and those costs, if they are incurred, will have to be funded not by borrowing, but by extra tax. Now that doesn’t sound to me like the words of someone who plays fast and loose with borrowing, deficits or debts.

In other words far from being “beyond irresponsible”, Krugman agrees with the point I made above, and with which Boskin seems to agree, namely that substantial deficits are justified in a recession, but not when the economy is at full employment.

As to whether Krugman really does say in that debate that debts can be left for 10-15 years, he certainly did not say that in the first 20 minutes. And if Boskin wants us to believe the remarks he attributes to Krugman, then Boskin needs to tell us exactly where in the debate Krugman says that.

Normal procedure by academics who attribute words to others is to let readers know EXACTLY where they can find those words. And I’m not wading thru the full 50 minutes of that debate just to find a quote which Boskin says is there.

What’s wrong with long term debt?

And finally, even if Krugman does say that current debt levels can be left in place for 15 years, what if it? As already pointed out, assuming the private sector WANTS TO HOLD a bigger stock of NFA for the next 15 years than was the case 20 or 30 years ago, so what? If that’s what the private sector wants, it won’t charge any significant interest for holding that debt. So where’s the problem?

Conversely, if the private sector goes into irrational exuberance mode in three years’ time, far from it being irresponsible to leave existing debts in place for 10-15 years, it would be irresponsible to desist from reducing those debts in three or four years’ time.

In short, it is nonsense to try to specify in advance how big debts should be any given number of years in the future: the size and pace of increase or decrease in those debts will depend on what the private sector is doing at various points in the future – that is whether the private sector is in subdued mode or irrational exuberance mode.

Footnote: why a significant deficit is needed even at full employment.

Assuming a country aims for the standard 2% inflation and actually achieves that, then the monetary base and national debt will decline in real terms at 2% a year. Assuming (for the sake of simplicity) that those are to remain constant relative to GDP, then they will need to be constantly topped up. And that can only be done via a deficit.

To illustrate with a back of the envelope calculation, if the debt and base are to remain at 50% of GDP, and GDP is constant, then the deficit would need to be 2% x 50% of GDP, i.e. 1% of GDP.

But that of course leaves out economic growth. If growth averages say 2% a year, one would need yet more deficit (another 1% of GDP worth). So total deficit needed on the above assumptions would be equal to 2% of GDP.

The economic illiteracy of Rogoff and Reinhart.

The mistakes made by R&R are so numerous that it’s difficult to keep up with them. But here is just one, which I’ll examine in detail. It’s this passage of theirs:

“Nevertheless, given current debt levels, enhanced stimulus should only be taken selectively and with due caution. A higher borrowing trajectory is warranted, given weak demand and low interest rates, where governments can identify high-return infrastructure projects. Borrowing to finance productive infrastructure raises long-run potential growth, ultimately pulling debt ratios lower.”

Unfortunately the latter idea seems to be supported by Martin Wolf, who I thought was bright enough to know better.

So Rogoff’s basic claim is something like: “productive public sector investments expand GDP and repaying a given amount of debt from and expanded GDP is clearly easier than repaying from a smaller GDP”. Sounds sensible doesn’t it? Well it’s actually nonsense.

First, the decision to go for what R&R call “high return infrastructure investments” SHOULD NOT have anything whatever to do with whether an economy is in recession or not. Indeed EXACTLY THE SAME goes for private sector investments.

That is, if an investment makes sense or is “high return”, and the economy is NOT IN RECESSION, that investment should still be made, shouldn’t it?

Why do recessions occur?

Recessions occur because the private sector saves too much (i.e. spends too little). Incidentally, that’s “save” in the sense of accumulate money rather than accumulate physical goods or investments like houses.

So in that scenario, government has to net spend more to make up for private sector caution. And that in turn results in the private sector accumulating savings: in the form of government debt or extra monetary base (and it doesn’t matter which, as pointed out by Milton Friedman, Keynes and numerous other economists).

But note that phrase “accumulating savings”: the deficit gets at the fundamental cause of the recession, that is, what the private sector regards as an inadequate level of savings.

Now suppose the private sector after a while decides that its savings are commensurate with a rate of spending that brings full employment (and that could be due to increased private sector confidence or the aforementioned extra savings or both). In that scenario, government can stop running a deficit, and simply leave the level of debt or monetary base where it is.

There is no need to “repay” the debt, and just leaving the debt where it is costs government nothing (assuming the REAL or inflation adjusted rate of interest is around zero, which is where it currently is in the case of the US, Germany, Japan and the UK).

Another alternative is that the private sector gets OVER-CONFIDENT, and it is indisputable that the private sector goes into “over-confidence” mode from time to time. In that scenario, government will need to rein in private sector savings. I.e. it will need to raise taxes and grab savings off the private sector.

But that’s not “repaying a debt” in the normal sense of the phrase. It’s simply a case of government saying to private sector entities, “give me some more money else you go to prison”. And moreover, that extra tax DOES NOT COST the private sector anything in the sense that it’s simply a measure which is implemented to as to stop the private sector OVER SPENDING, the result of which would be excess inflation, which in turn would make the private sector WORSE OFF.

And that all applies REGARDLESS of whether output per head is increasing due to R&R’s “high return investments”. That is, EVEN IF output per head was not expanding at all because for example the pace of technological improvement had temporarily ground to a halt, the above points about savings, confidence, etc would still apply.

Ergo . . . Rogoff’s point about “high return” public sector investments is looking increasingly irrelevant.

The final nail in Rogoff’s coffin.

Next, let’s suppose government does actually spot some “high return” investments, and borrows money to make such investments. Will that do anything for the recession?

Well, assuming government just borrows and invests, the result will be that interest rates rise. And a reasonable assumption thee is that government investment will just crowd out private sector investment. So the IMMEDIATE effect on aggregate demand and employment will be ZERO. I.e. the investment is of no immediate use for exiting the recession.

Of course, where government DOES BORROW and invest (or simply expands its non-investment type spending) with a view to exiting a recession, the central bank is highly unlikely to ACTUALLY LET INTEREST RATES RISE. So the reality is that if government does borrow so as to invest in “high return” public sector investment, there will indeed be a “recession exiting” effect.

But as just intimated, that has ABSOLUTLY NOTHING to do with whether the money borrowed is spent on investments or non-investment type spending.

Conclusion.

Rogoff’s “high return” investment point is a COMPLETE IRRELEVANCE.