Friday, 27 January 2017

Job Guarantee is getting nowhere because its advocates are incompetent.

Job Guarantee (JG) is the idea that there are a infinite number of jobs to be done, thus a way to cut unemployment is for government take on some of the unemployed and have them do some of those jobs.

The idea has been implemented in numerous countries thru history: for example the so called “Work Progress Administration” (WPA) in the US in the 1930s had the unemployed (among other things) construct thousands of buildings, bridges, roads, etc. Indeed, Pericles implemented the idea in Ancient Greece around 2,500 years ago.

Pavlina Tcherneva is an academic and leading advocate of JG. Her ideas are set out in a paper entitled “Full Employment Through Social Entrepreneurship…” (Levy Economics Institute of Bard College, Policy Note 2012/2). Unfortunately her ideas are a mess: which (to repeat) is why JG is getting nowhere.

After a few introductory sentences, she says:

“When it comes to fiscal stimulus, the conventional approach always centers on tax cuts, investment subsidies, accelerated depreciation, contracts to firms with guaranteed profits, and extensions to unemployment insurance and food stamp programs. Though the specific preferences for certain policies may differ from one political party to the next, the objective remains the same: boost private investment and growth by all means possible and jobs will hopefully follow.”

Well the first problem there is that given a recession, governments do not respond just with FISCAL stimulus: they respond (or at least central banks respond) with MONETARY stimulus as well. And it’s not just in the above paragraph that Tscherneva concentrates on “fiscal” to the exclusion of “monetary”: the concept “monetary stimulus” does not appear in her article.

Anyway, I’ll put that right in the paragraphs below by referring for the most part to stimulus in general rather than specifically to fiscal stimulus.


Next, since when are those who implement stimulus desperately concerned about “private investment”? The purpose of stimulus is simply to bring the economy up to capacity. The authorities (e.g. central banks) are not desperately concerned whether private firms do that by implementing a large amount of investment or not. For example if there happens to be a large amount of capital equipment lying idle (in a particular industry or in the economy as a whole) then it makes sense to take on a relatively large number of the unemployed and do a relatively small amount of investment. Doh!

Tscherneva then continues with this odd paragraph:

“This way of thinking about the problem, however, is precisely upside down. Growth declines when investment and consumption fall. Investment falls when sales fall. Sales and consumption fall when employment falls. To reverse this vicious cycle, policy must begin by fixing the unemployment situation, which will then lead to a recovery in sales and consumption, which in turn will improve business conditions and profit expectations, all of which will boost investment and growth. Growth, in other words, is a by product of strong employment, not the other way around. How do we launch a virtuous cycle? One of the most effective ways is through direct job creation in the public sector.”

Well it’s true that “sales and consumption fall when employment falls”, but that doesn’t prove that falling employment is the CAUSE of falling sales and consumption. Correlation does not prove causation.

It’s widely widely accepted in economics (and indeed by most  street sweepers) that the causation is: demand for goods and services causes sales, consumption, employment and investment. And a fall in demand will cause a fall in the latter items. Thus it’s a bit of a mystery as to why “direct job creation in the public sector” (i.e. JG) is a solution for excess unemployment given that a straight rise in demand can reduce unemployment.

Of course it’s true that if we implement  a JG scheme, that involves spending, which in turn will boost employment both on JG schemes and elsewhere.

But to the extent that a straight rise in demand (i.e. stimulus) can get more people into work and producing the stuff the people really want rather than the less useful stuff that is often produced on “make work” JG schemes, by bother with JG?

Incidentally I said “less useful” because if something is REALLY USEFUL it will be produced on a REGULAR basis by the public or private sectors. It’s the (relatively speaking) less useful stuff that is produced by JG schemes.

Conventional stimulus.

A few paragraphs later, Tcherneva says in reference to conventional stimulus, “This is all well and good, because, unlike austerity measures, such policies will halt a severe economic decline by improving cash flows to firms and overall aggregate demand. But they are not policies that produce true full employment or long-run stability.”

Well if conventional stimulus can reduce unemployment from say 10% to 5% then conventional stimulus brings big benefits, doesn’t it? The fact that it does not take unemployment down to 1% is not an argument for chucking out that “10% down to 5%” benefit!! You might as well argue that because your vacume cleaner doesn’t get every last bit of dirt up off the carpet that therefor vacume cleaning is a waste of time.

She then continues (in reference to conventional stimulus):

“They are status quo policies, because they represent the only thinking we have about fiscal policy eftectiveness today. They have been tried with generous funding at one point or another in the postwar era and have still failed to make much progress in helping to solve some of the most important economic problems of modern society, such as poverty, income inequality, short and long-term unemployment, instability, and deteriorating incomes.”

Well no one ever claimed that fiscal or monetary stimulus would do much to improve “income equality”!!! Stimulus basically just increases GDP and numbers employed. As to excess inequality, the causes of that lie elsewhere: e.g. the fact that chief executives over the last three decades or so have chosen to award themselves vast pay increases relative to the pay of the average worker. The exact reason why that has happened are in dispute. But no one (apart from Tcherneva and perhaps some other JG enthusiasts) claims it’s the fault of stimulus.

And what’s that about “deteriorating incomes”? Incomes have not deteriorated over the last few decades, though there are groups (e.g. the low paid) who have not enjoyed much of an INCREASE in incomes in real terms. I.e. (and to repeat the point made in the paragraph just above) the lion’s share of increased incomes in the US (though not in some European countries) has gone to those at the top of the pile.

Are you starting to get the impression that Tcherneva is less than 100%  clued up? I am. Plus one reason why the large majority of economists don’t think much of JG is pretty obvious: if Tcherneva’s article is typical of the sort of literature produced by JG enthusiasts (which it is) most economists will give up reading them after the first couple of pages. But let’s soldier on.

A few sentenes later she says:

“The status quo policies described above are policies that prime the pump; that push a pro-investment, pro-growth agenda without explicitly targeting unemployment. Indeed, priming the pump is seldom sufficiently aggressive to get us anywhere dose to full employment. And when it is, it tends to be inflationary, which is why policy intervention generally aims to keep the economy below its full capacity, in what Keynes called a "quasi-slump."

Well the idea that conventional stimulus policies do not “explicitly target unemployment” nonsense. What induces governments to implement stimulus if not excessive unemployment! 

A few paragraphs later. Tscherneva says that JG acts in  a counter-cyclical manner. Brilliant: that’s about the first thing she gets right.

She then suggests that JG be run by the “non-profit” sector! But a few sentences later she says:

“The particular vision I offer is one that involves the participation of the nonprofit and entrepreneurial sectors”  And entrepreneurial sectors?? Hang on: is that the private sector or what?

Then later she says “The nonprofit model I describe above does not preclude infrastructure investments or improvements.   Indeed,  there is considerable evidence that large-scale public  investment projects are sorely needed in the United  States….”. So JG people work for private sector infrastructure and engineering contractors and so on? Well that rather contradicts the above suggestion that JG be confined to the “non profit” sector. Indeed, the phrase "non-profit" appears in the title of her paper. This is just a first class muddle.

My own ideas on JG are up and running.

In contrast to the above mentioned vociferous but incompetent advocates of JG, I am pleased to say my own ideas on the subject are actually up and running in the UK. In 1991 I published a work suggesting that there were two things wrong with the then JG schemes operating in the UK. First those schemes were confined to the pubic sector. I suggested that, in contrast, JG people should be allocated to PRIVATE SECTOR employers as well. That idea is has been in effect in the UK for several years in the form of the Work Programme (though I’ve no idea how much attention the UK authorities paid to my 1991 work when setting up the Work Programme).

Second, I argued that JG people be allocated to EXISTING employers rather than to specially set up schemes or projects (along the lines of the WPA).

Of course I am not suggesting the Work Programme is anywhere near perfect. Indeed, the administration costs are high, and may may be so high that the whole thing (and JG in general) is a waste of time, a possibility I mentioned in the 1991 work.

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