Saturday, 20 May 2017

Pavlina Tcherneva suggests that sales don’t create jobs!*?*!??

If you want to know why the Job Guarantee or “government as employer of last resort” idea is getting nowhere, reason is that the more vociferous advocates of the idea are incompetent  – which is not to say I oppose the JG idea. It’s an idea with definite possibilities, as long as the current leading advocates of the idea are sent to Siberia.

Tcherneva is one of those “leading advocates”. In this article (entitled “Full employment through social entrepreneurship: the non-profit model for implementing a job guarantee” published by the Levy Economics Institute) she starts by questioning whether “expansionary fiscal policy” as she calls it, creates jobs. (I actually referred briefly to this article a few weeks ago, but a closer look at it will do no harm.)

Her first para says (I’ve put her words in green italics), “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.”

Why “hopefully”? If households are given more money, whether via the above mentioned tax cuts or unemployment insurance, the empirical evidence is that they spend a significant proportion of their newly acquired wealth (gasps of amazement). And that spending creates jobs – how else are relevant goods and services produced other than by people working, at – er – “jobs”?  A large majority of the economics profession believe that fiscal stimulus increases demand and jobs. They are right.

As to the “guaranteed profits” point, that’s irrelevant. Certainly some corporations sign guaranteed profits contracts with government, while other contracts involve a fixed quote for a specific task. In the latter case, relevant firms may then make a profit or loss depending in how well they estimated the cost of the task. But the important point is that when government places orders with firms for goods and services, jobs are created. Or at least a large majority of economists think jobs are created. Tscherneva evidently thinks otherwise.

Modern Monetary Theory.

Another strange aspect of Tcherneva’s above point is that she claims to back Modern Monetary Theory (MMT). But stimulus as proposed by MMT is not much different to stimulus under conventional policies. That is, one of the main forms of stimulus under conventional arrangements is government deficits, while MMTers tend to go for the simpler “just create money and spend it (and/or cut taxes)”. But given that central banks have created money and bought up most of the extra government debt created over the last few years, stimulus over the last few years has in effect taken the above mentioned form that MMT advocates!!!

A total re-think.

Anyway, since sales don’t create, or may not create jobs, Tcherneva claims we need a total re-think here. Her second paragraph reads:

“This way of thinking about the problem, however, is precisely upside down. Growth declines when investment and consumption fall. Investment falls when sales fail. 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 finally boost investment and growth. Growth, in other words, is a by-product of strong employment, not the other way around.”

So apparently if we create lots of JG type jobs – planting trees, picking up litter, charity work, etc – then by some unexplained magic, millions of hi-tech manufacturing jobs, etc will appear from nowhere. This bizarre!

To re-phrase Tcherneva’s argument, she is saying that given a grossly excessive amount of unemployment, instead of giving households money and having government spend money on normal public sector jobs (as per conventional stimulus) we should pay the unemployed to do relatively unproductive and low paid JG type work. There is of course a problem there, and as follows.

If pay for JG work is for the sake of argument half the average wage (and certainly most proponents of JG rightly advocate relatively low pay for such work – e.g. the minimum wage) then there won’t be a huge addition to aggregate demand. Thus relatively few PRODUCTIVE jobs will be created as a result.

In contrast, if demand is boosted in the normal manner, the average job created will be an average sort of public or private sector job paying around the national average wage. More output per job! So why go for the “Tcherneva / JG” option?

In other words, as long as we are talking about a GROSS DEFICIENCY in demand, then normal demand increasing measures (increased deficits, interest rate cuts, etc) are best.

In contrast to GROSS deficiencies in demand, there is the question as to what to do about the 5% or so of the workforce who remain unemployed even at so called “full employment”. Well certainly there is a case there for JG type jobs. To take a crude example, it is theoretically possible to dispose entirely of that “5% unemployment”: just tell the unemployed their unemployment benefit is henceforth conditional on walking up and down their street keeping it free of litter, with pay being equal to unemployment benefit. Anyone refusing the work would no longer be counted as unemployed on the grounds that they had refused work. Hey Presto: unemployment vanishes!

Of course that is a very crude JG system and doubtless we can do better. But it illustrates that the basic role for low paid JG type work is (contrary to Tcherneva’s suggestions) dealing with the above 5%, not dealing with the grossly excessive amounts of unemployment, which we saw for example in the recent recession (which is not to say there isn't a case for expanding JG a bit during recessions).

Tcherneva’s third para.

This reads, “How do we launch a virtuous circIe? One of the most effective ways is through direct job creation in the public sector. John Maynard Keynes spoke of "on-the-spot" employment (Keynes [1982], 171; Tchemeva 20]2b), while Hyman P. Minsky proposed the employer of last resort (ELR) (Minsky 1986). In both cases, the objective is to bring the job contract to the worker in distressed areas and regions with high unemployment, and to attain true full employment over the long run. One modern proposal inspired by Keynes and Minsky is the job guarantee (]G), in which the public sector provides a voluntary job opportunity, in a community project that serves a public purpose, to anyone who is willing and able to work but unable to find private sector employment.”

As regards “distressed areas”, developed countries have had policies in place since the 1930s, if not earlier, to create work in distressed areas!!!! In fact there’s a very large industrial estate covering several square miles just North of where I live in the UK which was started in the 1930s with precisely the latter objective in mind. That’s the “Team Valley” estate, which is now a hive of economic activity. And those efforts to create jobs in high unemployment areas continued after WWII in the UK and elsewhere.

Moreover, if one of the objectives of JG is to deal with distressed areas and ignore the rest of the country, that’s news to me, plus it will be news to most advocates of JG.

If Tcherneva put her “JG / distressed area” idea to the unemployed in distressed areas their response would probably not be couched in entirely diplomatic language. What people in high unemployment areas want primarily is normal, regular private and public sector jobs. No doubt they wouldn’t object to a few “non-profit / charity / JG” type jobs. And no doubt there’s a case for more JG jobs in distressed areas than other areas. But people in distressed areas do not want EVERY JOB or even every other job to be of the “charity / non-profit” type.

Plus the idea that the charity / non-profit sector can absorb a significant proportion of the unemployed in high unemployment areas is plain delusional.


Well that’s the first three paragraphs of Tcherneva’s paper dealt with. Or rather I’ve dealt with SOME OF the flaws in those paragraphs. Any reader with half a brain will have spotted other flaws.

I won’t be wasting time reading any more of this article. Hopefully I’ve gone some way to establishing the point made at the outset above, namely that some of the leading advocates of JG are not too clued up.

However Tcherneva, like many economists, is good at churning out pages of technical sounding text complete  with references to suitably impressive economists like Keynes and Minsky (mentioned above). That sort of stuff fools 99% of the population and about two thirds of fellow academic economists. So doubtless her job and career are safe.

1 comment:

  1. Right on the ball, Ralph.
    This is another utterly pathetic article by Pavlina Tcherneva.
    The last 3 paras are even more b****cks than the start, e.g.
    “new nonprofits are organized in an entrepreneurial fashion all the time in order to fill new needs like environmental cleanup, sustainable agriculture, and urbanfarming”
    “the knowledge networks and innovations of a rapidly changing nonprofit and social entrepreneurial sector can be tapped for ideas and improvements in program design”.


Post a comment.