UK graduate, Cait Reilly, objects to her new JG job.

Subsidised temporary employment is not a bad way of dealing with unemployment. The advocates of Modern Monetary Theory tend to call this form of employment “Job Guarantee” (JG).

The story in brief is thus. A graduate already doing volunteer work for a museum was told she’d have to work instead in a shop - stacking shelves and sweeping floors. (h/t to Mark Wadsworth)

The graduate didn’t like the shelf stacking assignment, so she’s suing the government department that allocated her to it.

What the graduate has going for her (seems to me) is that she was ALREADY doing something useful. So why the need to re-allocate her?

On the other hand, there is much to be said for private sector JG: the empirical evidence is that those who do private sector JG have more successful subsequent employment histories than those doing public sector JG. See here.


Plus there is a good argument for not allowing JG employees to stay with a given employer for too long: it tempts employers into abusing the system - that is employing people who are in reality normal productive employees on a subsidised basis. (For more on this, see under heading “11. Fraud and other rules governing TES” here.)

The graduate complained she was being forced to do “futile, unpaid labour”. Invalid argument: she was doing unpaid labour anyway!!!!! As to whether the shop work was “futile”, she may have thought that as a graduate, stacking shelves was beneath her dignity, but other than that, the work was certainly not futile: she was doing something that paying customers actually want – helping run a shop that supplies goods that ordinary people want. Moreover, the shop concerned (Poundland) caters for the less well off – not millionaires.

So my judgement is thus. If Ms Reilly has only been in the museum job for two or three weeks, have that job registered as an official JG job, and let her stay there for two or three months. On the other hand if she’s already been in the museum job for two or three months, she’ll have gained some valuable “museum experience”, and it’s time for to move on and see something of the less effete, brutal world of commerce.
 

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Stop press: Cait Reilly puts her side of the storey.

The economics of immigration: nonsense in The Guardian.

The hardcopy version of this Guardian article on immigration has a truly inspiring couple of sentences in extra bold type just beside the article. Plus the extra bold couple of sentences have oodles of blank space just above: so Guardian journalists / editors must think the two sentences are unusually profound.

The two sentences say, “GDP goes up with immigration. So if you’re asking what’s ‘best for Britain’, in the politician’s terms, that’s your answer.”

Well it’s pretty stark staring obvious that the more people there are in a country, the larger is GDP. And that’s true even if the new arrivals are far less productive than existing inhabitants (which they aren’t: the two groups are roughly speaking equally productive).

Exactly what the advantage of more car parks, factories, housing estates, etc is for one of the most heavily populated countries in the World, I’m not sure. You certainly won’t find any explanation in this Guardian article.

This apparent inability of Britain’s political left to work out the different between changes to GDP and changes to GDP per head has been going on for some time.

The government’s submission to the House of Lords enquiry into immigration in 2007 (when Labour were in power) is also based on the above bit of nonsense. On p.11 of this work, they cite a paper produced by the National Institute of Economic and Social Research (NIESR). But if you look at the small print of the NIESR paper, you find that it also simply makes the banal point that increasing the population increases GDP.  

And we pay taxes to fund the NIESR!

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The effect of temporary subsidised employment on employability.

Temporary subsidised employment (TSE), like the Job Guarantee, and the training that is often associated with TSE hopefully raises or at least maintains the employability of those concerned. But is this the actual effect?

These two studies done in Switzerland claim that TSE in the private sector produces significant benefits. In contrast, the benefits of public sector TSE are not as good. As to training, the benefits are not as good as private sector TSE.

TSE does not seem to bring benefits for those with a good chance of finding work anyway (not a big surprise, I suppose).

The above two categories “private sector TSE” and “public sector TSE” do not capture the actual nature of the various TSE schemes in Switzerland with 100% accuracy. But they are a more or less correct characterisation. Anyone interested in precise definitions will have to look at the papers.


1. “A Microeconometric Evaluation of Active Labour Market Policy in Switzerland” 
http://ideas.repec.org/p/iza/izadps/dp154.html


2. “Does Subsidised Temporary Employment Get the Unemployed Back to Work?”
http://ideas.repec.org/p/iza/izadps/dp606.html


Some other bits of empirical evidence are as follows.


3. Booth, A.L., Francesconi, M. and Frank, J. (2000), ‘Temporary jobs: Who Gets
Them, What Are They Worth, And Do They Lead Anywhere?’ Discussion Paper 00/54, Institute for Labour Research, University of Essex.


http://dtserv1.compsy.uni-jena.de/ws2005/wisosoz_uj/25747702/content.nsf/Pages/5FC6494774878700C1257125005FB932/$FILE/Booth,%20Alison%20L.%20%20Francesconi,%20Marco%20%20Frank,%20Jeff%202001%20Temporary%20Jobs%20%20Who%20Gets%20Them,%20What%20Are%20Th.pdf


This paper showed that those prepared to do temporary jobs (not necessarily subsidised jobs) fared better in subsequent employment histories than those not prepared to do temporary jobs. This effect was more marked for women than men.


4.  Calmfors, L., Forslund, A. and Hemstrom, M. (2002), ‘Does Active Labour Market Policy Work? – Lessons from the Swedish Experience’, Institute for Labour Market Policy Evaluation, Uppsala.
http://www.ifau.se/upload/pdf/se/2002/wp02-04.pdf


This confirms the Swiss finding that TES – i.e. “learning by doing” – yields better results than formal training.


5.  Bolvig, I., Jensen, P. And Rosholm, M. (2003), ‘The Employment Effect of Active
Social Policy’, Discussion Paper 736, Institute for the Study of Labour (IZA), Bonn.
http://ftp.iza.org/dp736.pdf


This pretty well confirms the above studies, with the surprising additional claim that training actually IMPAIRS employability.

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Afterthought (11th Jan). Here is another paper by Calmfors & Co with a more pessimistic take on the benefits of TSE and similar labour market programs. Title of paper: “The effects of active labour market policies in Sweden: What is the evidence?”. See:

http://mitpress.mit.edu/books/chapters/0262012138chap1.pdf


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I love Mervyn King (in a Platonic sort of way).

Mervyn King, governor of the Bank of England said, “If there is a need for genuinely safe deposits the only way they can be provided while ensuring costs and benefits are fully aligned, is to insist such deposits do not coexist with risky assets.” Quite right.

He also said, “Of all the many ways of organising banking the worst is the one we have today”. Right again.

The big problem in using deposits (made safe thanks to the taxpayer) to fund risky investments is that this is a subsidy of commerce. And it is a HUGE subsidy.

That can be put another way. If you invest directly in shares in corporation X and it goes bust, you lose some or all your money. But if you put money into a bank account, and the bank uses your money to buy shares in corporation X, or makes a loan to the corporation and it goes bust plus the bank goes bust, you are safe. You keep your money.

It’s a free lunch! And of course the taxpayer pays for the meal.


Two types of bank account.

My favourite solution to this problem is to require depositors to come clean: make them choose between two alternatives. First they can have 100% safe accounts, or second, they can have what might be called “investment accounts” (for want of a better phrase).

Money put into safe accounts would NOT be invested in anything remotely risky: perhaps it could be deposited at the central bank. Those accounts would have a government guarantee, but they’d earn little or no interest.

In contrast, money in investment accounts WOULD BE invested in commerce, mortgages, etc. A decent rate of interest would probably be earned, but there would be no taxpayer funded rescue if the bank went belly up.


Regulation is simplified.

The beauty of the above system is that bank regulation is simplified. As regards investment accounts, there’d be no more need for more regulation than applies to the stock exchange. If you buy shares it’s largely a case of “buyer beware”: same principle would apply to those wanting investment accounts.

As to safe accounts, the money has to be lodged at the central bank, or perhaps invested in government stock. That is dead simple. It is easy to check up on and audit.


Would lending would be constrained?

An apparent problem with the above system is that if a significant proportion of depositors opt for safe accounts, then funds available for banks to lend might seem to be reduced, which might seem to constrain economic growth. And banks can be relied on to shout this argument from the rooftops. (You can tell how concerned banks are about economic growth from the wonders they’ve done for economic growth over the last four years – ho ho.)

Anyway, the answer to the above economic growth argument is that if you implement a taxpayer funded subsidy for any activity (bank lending to business, or anything else), that activity will expand. And conversely, if the subsidy is withdraw, then the activity will become less popular.

However to argue that constraining loans by banks constrains economic activity is nonsense in that there are alternative ways of funding businesses: shares, bonds, etc. Thus to the extent that the latter funding methods made up for reduced bank lending, there would be no reduced funding for businesses.

But even if total funding for businesses did decline, that in no way stops government boosting aggregate demand when appropriate and maintaining full employment (in as far as governments have the competence to do this - and clearly they are not 100% competent in this regard.)

Moreover, where total funding for business DID DECLINE, it is false logic to argue that GDP declines. That reduction in total funding for business, if it occurred, would simply result from the withdrawal of an unjustified subsidy.

And subsidies DISTORT ECONOMIES and lead to a GDP REDUCTIONS. So unless someone can prove that there is market failure which leads to a sub-optimum amount of funding for business, then any reduction in such funding as a result of withdrawing the above subsidy will lead to AN INCREASE IN GDP, not a DECREASE.

Put another way, there is an OPTIMUM amount to be invested in any business or in a nation’s entire business sector. The amount invested can be too much as well as too little. Untill someone shows that the above subsidy is justified because of market failure, the assumption must be that removing the subsidy will result in us moving from excess investment to something nearer the OPTIMUM.

Now bankers: get out of that one.



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The cure for excessive and irresponsible lending is to encourage more lending (ha ha).

Let’s celebrate the New Year with a good laugh at the imbecility of those in high places.

We have a credit crunch caused by excessive and irresponsible borrowing and lending, and the response of the authorities is – roll of drums – to cut interest rates and implement QE so as to encourage more borrowing and lending.

You couldn’t make it up. I’ve said that before. But I intend saying it again . . . and again . . . . and again.

Economics is complicated, and it’s easy to get bogged down in the details and lose sight of the bigger (and hilarious) picture.

If the cure for imbibing a poison is to take more of the poison, how about forcing those with lung cancer to smoke 50 cigarettes a day? Please leave more suggestions along these lines in the comments section. I like a few laughs every day.

Note that Modern Monetary Theory (MMT) would not have made the above mistake. That is, in a recession, MMT advocates simply creating new money and spending it into the economy (and/or cutting taxes). MMT, far as I can see, has little to say about interest rates.

Abba Lerner, often seen as the founding father of MMT, certainly advocated the above “create money and spend it” policy. Unfortunately he also advocated tinkering with interest rates, NOT as a means of influencing demand, but on the grounds that the authorities have a better idea as to what the optimum rate of interest is than the market. I think he was wrong there.

Politicians and bureaucrats know better than the market as to what the optimum rate of interest is? I’d love to see the evidence. I think Lerner went wrong there.


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National debt is not normally a “burden” on future generations.

There’s been much debate recently on the net as to whether debt is a burden on future generations. It was sparked off by Krugman, who claimed that basically a burden cannot be imposed by the current generation on future generations. I agree (see here and here).

But see also: Noah Smith, and three Worthwhile Canadian Initiative posts, here, here and here. The debate seems to be inconclusive.

When trying to solve a problem, always cut out the extraneous, i.e. reduce the problem to its simplest form. Then add the extraneous if you like afterwards.

So let’s take a desert island with a few people living on it. Assume the island economy enjoys full employment and that for a currency, they use Cowrie shells. Assume “government” consists of a periodic meeting of islanders. Plus we’ll assume a closed economy to start with.

They decide one day that the island needs a pier for its fishing boats. So government borrows from those who feel like lending. Plus government imposes a tax on all islanders to fund interest on the bonds (and repayment of capital, if the bonds are to have a limited life).

The pier is built.

Now how does this impinge in the next generation? Well assuming bond holders donate their bonds to their offspring, there is no overall burden for the next generation because the children of bond holders inherit bonds (i.e. the right to receive interest and/or repayment of capital), while others inherit the obligation to pay taxes to fund interest on the bonds (and/or repayment of capital).

The assets and liabilities inherited cancel out. So as far as debt and bonds go, there is no net burden for future generations.

Moreover it is a plain impossible for any sort of “burden” to be endured in say 2030 that contributes to the building of the pier in 2012. To cut down a tree in 2030 and use the timber to build a pier in 2012 involves time travel, and that’s not on.


Inheriting investments.

Having said bonds as such do not cause a net cost or benefit for the next generation, the next generation do of course inherit the pier. So overall, far from their being a “burden” on the next generation, there is a BENEFIT for the next generation.

However, the latter “benefit” depends on government spending money on an investment, like a pier, rather than on a consumption item, like increased pay for the island’s police. In the latter case, there’d be no burden or benefit passed to the next generation.


Debt owed to foreigners.

An exception to the “no burden” rule occurs where government spending is funded by foreigners (As pointed out by R.A.Musgrave, in the American Economic Review in 1939. He is no relation.)

Obviously if the pier is built by people from some nearby island, who then demand repayment of the debt in X years time, then that is a real burden on the debtor island in X years time.


Pensions.

Another exception proposed by Nick Rowe, which I find unrealistic, would occur if the oldies in each generation managed to get youngsters to work extra hours and buy bonds off the oldies. (See Nick’s hypothetical “apple economy” here).

This actually occurs to some extent with pensions. That is, many people store up wealth (perhaps including government bonds) during their working life. They then effectively sell the bonds to younger people on retirement in that youngsters are storing up wealth to fund their own retirement. However, absent government bonds, people would make provision for their retirement ANYWAY. They’d just use different assets and/or they’d go for pay as you go schemes, or “unfunded” schemes as they are sometimes called.

The “different assets” obviously have a similar “getting youngsters to pay” effect as selling government bonds to youngsters. Same goes for pay as you go pension schemes, that is, in the case of these schemes, at any point in time, youngsters fund the pensions of oldies.

So when government incurs extra borrowing, there will be no burden on the next generation unless the effect of the extra borrowing is to increase the AGGREGATE amount that people decide they want by way of pensions. And personally I don’t see extra government borrowing having much of that sort of effect.


The interest less than GDP growth argument.

Another superficially attractive argument that features in the above mentioned debate arises out of the possibility that GDP growth exceeds the interest that government pays on bonds.
Suppose interest is simply added to the debt. And assume that the bonds are very long term – i.e. centuries before maturity. In this scenario the liability that the bonds represent will ultimately decline to a negligible portion of GDP.

From this it might seem that a government can borrow in 2012 and distribute goodies to its population, while the “payback” is essentially non-existent. It looks like a free lunch for people in 2012. (Incidentally, much the same superficially attractive argument applies where inflation erodes the value of bonds to near nothing in ten or twenty years time.)

The flaw in that argument is of course that stuff produced in 2012 and distributed by government cannot be produced other than by blood, sweat and tears expended in 2012 (or earlier). 

There is no free lunch here.
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P.S. (23rd Jan). This argument has now gone viral. It’s generating more heat than light I think. It may well be what sparks off World War III. See the following:

http://www.angrybearblog.com/2012/01/educating-dean-baketr.html
http://consultingbyrpm.com/blog/2012/01/krugman-almost-renders-landsburg-and-me-speechless.html#comment-31742
http://shewingthefly.com/2012/01/22/taking-the-biscuit-paul-krugman-edition/#comment-745


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Employer of Last Resort, buffer stocks and price anchors.

The folk who advocate having government as employer of last resort (ELR) often claim that ELR employees form a “buffer stock”, which works in the same way as the physical buffer stocks that governments sometimes maintain to iron out fluctuations in the price of physical commodities.

The alternative to ELR is unemployment, and of course both the unemployed and ELR employees act as a buffer stock – in that the buffer stock analogy has any substance, which I don’t think it does.

As regards preventing sudden FALLS in the price of labour, does the above so called buffer stock achieve this? The answer is “no”, because it’s very difficult to get the price of labour to fall: as Keynes rightly pointed out, “wages are sticky downwards”.

As regards INCREASES in the price of labour, does the alleged buffer stock prevent an excess rise in wages given excess aggregate demand? Nope.

In fact wages and prices can rise much faster than is acceptable long before the so called buffer stock runs out. Which makes the so called buffer stock very different from conventional buffer stocks. That is, as long as government has a finite stock of some commodity in its buffer stock, it can sell that stock and ameliorating price increases. The same does not apply to the ELR or unemployed so called buffer stock.

Thus the whole buffer stock analogy is flawed.


Are ELR employees a better buffer stock than the unemployed?

Well there is bound to be a FINITE difference between the two, but I doubt the difference is significant.

For example it can be argued that ELR employees are more employable than the unemployed because the former have their work habits maintained, plus they may learn or at least maintain skills while doing ELR work. But there are flaws in that idea.

First, as regards the idea that the unemployed lose or partially lose the ability to turn up to work on time because of a year or two’s absence from formal employment, one has to wonder how teenagers manage to enter the labour market, given that they have never in their lives had to turn up day after day, 50 weeks a year at some place of work. Same goes for women who take fifteen years off work to raise kids, and then re-enter the labour market.

However, the evidence is mixed here. Webster claims the unemployed are not “scarred” by their period in unemployment. Others claim there is a scarring effect.

Second, it is questionable on the face of it whether the sorts of activities that ELR typically involves are a good preparation for regular jobs. At worst, ELR consists of street sweeping and leaf raking, which are clearly not a good preparation for regular work. And indeed, this “on the face of it” conclusion is backed by some evidence.

A study of Swiss temporary subsidised work found that temporary subsidised jobs with EXISTING private sector employers DID improve subsequent employment histories for those involved. In contrast, the subsequent employment histories of those doing the above typical ELR jobs was ACTUALLY IMPAIRED by such employment. (Note, incidentally, that I’ve advocated temporary subsidised jobs with EXISTING employers, public and private, on this blog over the last few days.)

Third, the chance of skills being maintained while doing ELR work is not good. This is because people are unemployed PRECISLY BECAUSE there is a surplus of their particular type of labour or their skill in their neighbourhood.

I.e. if there is an excess supply of plumbers in town X, an ELR scheme will be hard pressed to find large amounts of plumbing work in the town that really needs doing.

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