Tuesday, 8 May 2018

Can the Job Guarantee act as a counter cyclical device?

Advocates of JG claim it can work as a counter cyclical measure. Unfortunately there’s a problem they’ve overlooked, as follows.

Where demand for all the usual stuff produced in a 21st century economy falls (public sector and/or private sector stuff), clearly unemployment rises and there’s a recession. The cure for that is to RAISE spending on the latter bog standard stuff, if you’ll forgive a statement of the obvious. I.e. it is certainly true that counter-cyclical measures of some sort are needed.

But there’s a problem in trying to cure a recession by spending fresh money on what for want of a better phrase might be called “non bog standard” stuff, e.g. JG schemes. The problem is that assuming the non bog standard expenditure cures the recession, in the sense that the JG scheme brings unemployment back down to its pre-recession level, then the economy has PERMANENTLY changed its shape, or make up. That is, a number of normal or “regular” jobs will have been replaced with JG jobs, which is not the object of the exercise.

The same would apply if, to take a silly example, recessions were cured by paying people to dig holes in the ground and fill them up again (a suggestion actually made in jest by Keynes).

Of course if a recession is cured after a year or two by expenditure on bog standard stuff reverting to its pre-recessionary level, then JG provides temporary jobs as a stop gap while the recession lasts. But that’s not a clever ploy because at the start of a recession it is impossible to say how long it will take for expenditure on bog standard stuff to revert to its pre-recessionary level.

Conclusion: the best cure for a recession is the simple obvious one, namely to get spending on bog standard stuff back to its pre-recession level. I.e. as I pointed out here, JG comes into its own in getting unemployment down to below NAIRU, or below the level of unemployment at which excessive inflation kicks in, if you don’t like the NAIRU acronym.


  1. Nobody seems to understand this.

    The purpose of a job guarantee, or the promise of the government to hire people to dig holes and fill them back up again, is to prevent recessions in the first place.

    Unemployment is reflexive in nature, i.e., unemployment results in more unemployment as people, fearing unemployment, cut back on spending thereby causing more unemployment, the very thing which they fear.

    A government promise to keep people employed takes away that fear. Remove the fear of job loss and you will have effectively removed job loss.

    1. The feed-back mechanism you suggest, i.e. fear of unemployment causes a cut in household spending which itself raises unemployment doubtless has some validity. But I don’t see that that invalidates my basic point, namely that given a shortage of spending on bog standard stuff (public sector produced goods as well as private sector goods) why not increase spending on those goods rather than JG schemes or hole digging? An important point here is how QUICKLY different types of spending produce jobs. Where JG is much quicker, then I agree there is a good case for JG.

    2. Well the problem with spending on whatever you have been producing previously is that maybe you don't want to keep producing that anymore. I think the Austrian types call that mal-investment.

      I mean should a government keep buying just as many tanks after the war ended as during it? A Job Guarantee allows for a smoother transition into new production.


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