Thursday, 4 September 2014

Unimpressive paper by Bill Mitchell and Martin Watts on JG.

Job Guarantee (JG) is simply a new name for an idea that has been around for centuries, namely the idea that government can act as employer of last resort. The idea was put into effect, for example in the US in the 1930s in the guise of the “Work Project Administration”. The idea was even put into effect in Ancient Athens 2,500 years ago.
Anyway, Bill Mitchell and co-author produced a paper on this subject at the end of last year.  The first odd aspect of this paper is that it uses the term “NAIRU” in the conventional sense, i.e. the sense employed in dictionaries of economics or economics text books.
That’s in stark contrast to the bizarre sense in which Bill Mitchell normally uses the term NAIRU. That’s something like “a wicked evil plot by employers or neo-liberals to do down the working classes”. I may be exaggerating a little or taking the p*ss just a little there, but if you don’t believe me, then Google NAIRU and “Billyblog”, which is Bill Mitchell’s blog. You’ll see what I mean.
Anyway, I’m all in favour of sticking to dictionary definitions, so Bill’s use of “NAIRU” in the conventional sense is welcome. Moving on….
The basic argument in this paper is as follows.
1. Any economy faces capacity constraints. The authors of the above paper go into a lot of unnecessary detail on the question as to whether after a recession, capacity is permanently reduced, i.e. whether there is a hysteresis effect that stems from recessions. And that effect, so the authors claim, can come because of two factors: first a permanent deterioration in skills, and second, inadequate investment (due to the recession) by employers.
The existence or otherwise of that post-recession capacity reduction is actually irrelevant to the subsequent argument, as will hopefully become obvious.
2. The authors then try (in section 4.3) to deal with a criticism of JG (made amongst others by myself) namely that unless JG type work is going to be hopelessly inefficient, such schemes have to employ some capital equipment, materials and have some permanent skilled labour as well as the relatively unskilled labour which is what JG employees tend to be.
Now there is a big problem there as follows. Assuming the economy is already at capacity, government cannot simply place orders for extra capital equipment and materials: if it does, aggregate demand (AD) will rise to above the “capacity” or “NAIRU” level, and inflation ensues. Worse still, JG withdraws permanent skilled labour from the regular workforce. Thus to get JG going, AD has to be raised to above the capacity level, meanwhile aggregate supply has been reduced because permanent skilled labour has been removed from the regular workforce. Excess inflation is bound to ensue.
The authors’ answer to the latter dilemma is plain bizarre. They say, However the implementation of the JG exploits the spending capacity of a currency - issuing  government, which is not constrained by expectations of future aggregate demand . This stands in contradistinction to the spending decisions of private firms that are guided by profitability considerations and constrained by endemic uncertainty. In other words, the JG creates its own productive capacity each time it takes on a new worker.”
Now let’s run thru that passage, starting with “JG exploits the spending capacity of a currency - issuing government, which is not constrained by expectations of future aggregate demand..”
Well it’s not just JG that exploits or can exploit the “spending capacity of a currency issuing government”: dozens of economists and groups of economists with no interest in JG believe in “exploiting” that spending capacity. Keynes did. Milton Friedman did. Present day advocates of full reserve banking like Positive Money do.
In short, the fact that governments can print money and spend it, is irrelevant to the issue here. Put another way, we don’t need JG in order to implement the above “exploitation”, which is what the authors seem to suggest.
Next, there’s the bit about “spending decisions of private firms being constrained by endemic uncertainty”. So AD is constrained by that “uncertainty”? Is that what the authors are saying? If so, how come AD is sometimes excessive and causes inflation?
In short, the whole idea that when an economy is at capacity, there won’t be an inflationary effect when government prints money and orders additional capital equipment and materials for JG schemes is just pie in the sky.
To elaborate on that, when the economy is at capacity, firms JUST CANNOT produce more: reason is that they face labour shortages, shortages of skilled labour in particular. If additional demand DOES APPEAR (and it makes no difference where that demand comes from) inflation will rise. The extra orders may come from other countries, the orders may be from government trying to set up a JG scheme: it makes no difference.
As to the hysteresis effect mentioned above, that’s irrelevant. If that effect IS OF significant proportions it just means NAIRU is a bit higher than if the hysteresis effect is of negligible proportions. That does NOT AFFECT the basic theoretical arguments dealt with just above.

So is JG scuppered?
Well no. The reasons briefly are as follows.
JG clearly works and the reason why is best illustrated by considering an ultra-simple or crude JG scheme as follows. Government simply tells the unemployed that their benefits are henceforth conditional on walking up and down their street keep it free of litter. Hey presto: unemployment vanishes.
Of course the latter JG jobs are very unproductive. But forget that. The important question is WHY DOES THAT JG SCHEME WORK (admittedly in a strange sense of the word “work” )? Reason is that there is no increase in AD and no reduction in aggregate supply (because the JG people will still seek normal employment). Indeed, given the unpleasant nature of the work, they’ll probably seek normal jobs MORE ENTHUSIASTICALLY than when offered unemployment benefit.
Now let’s move on from the latter near ridiculous form of JG work to JG work which involves some capital equipment and permanent skilled labour. How to supply JG with the latter factors of production? The answer is just nick them from the private sector, rather than increase TOTAL DEMAND for capital equipment and materials. That is: cut AD and reinstate that AD in the form of orders from government for capital equipment and materials.
That will certainly reduce output in the private sector, but taking the economy as a whole, output of capital equipment and materials remains constant, while the total number of people employed will rise because of the extra employees in the form of JG employees. Ergo GDP ought to rise.
But that’s NOWHERE NEAR the end of the argument. For example there is the question as to whether JG employment should take the form of what might be called “specially set up” employers, which is what the above authors seem to envisage and which is also largely the form that the WPA in the US in the 1930s took, or whether JG employees should be placed with EXISTING employees. The answer is the latter for reasons I spelled out here.
There is also the question as to whether JG employees should do just public sector type work, or whether JG employees should be subsidised into work with PRIVATE SECTOR employers. The answer again is the latter. See same paper.

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