The U.S. public sector CUT employment during the recession!!!!!

This is my chart of the week – copied from Warren Mosler’s site. The contents should be broadcast from the rooftops. I actually drew attention a few weeks ago to research indicating that U.S. states failed to spend stimulus money. But a picture or chart is worth a thousand words.

Of course the chart is misleading in that a more realistic chart would have a horizontal axis representing zero public sector employees. Put another way, the coloured lines in the chart shown here should really be more or less horizontal. Nevertheless, the chart makes its point.


Public versus private sectors.

The private sector cannot be blamed for cutting jobs in a recession: the private sector reacts to demand, and if demand declines, then the number of private sector jobs declines. That is unavoidable.

In contrast, it is precisely the PUBLIC SECTOR that is in a position to maintain, or even expand employment in a recession.

Excuses for not re-allocating surplus labour.

Some parts of the public sector are similar to the private, in that they also depend on demand. But that is not a good excuse for failing to re-allocate labour within the public sector in a recession.

Another possible excuse for the public sector failing to re-allocate labour in a recession is that the public sector is not as good at employing relatively unskilled labour as the private sector. While the people being re-allocated may well be skilled, the point is that the mere fact of their jobs becoming superfluous is an indication that there is an over-supply of their skills. Thus they are likely to have to work in a relatively unskilled capacity for a while.

But if the public sector CAN’T re-allocate these people, then I don’t see much hope for a large scale WPA, or “make work” or “job guarantee” scheme (as advocates of Modern Monetary Theory call it), because that would involve vastly more relatively unskilled people doing public sector type work.


The lesson to be learned.

The moral is that public sector managers need to be made to think up and have a list of peripheral or less important jobs or projects that need doing: jobs and projects that come into existence given a recession. And I’m not claiming the latter is an original idea: I seem to remember reading something about local governments in Sweden being made to have a list of peripheral jobs and projects that can be implemented, in a recession.

The phrase “jobs and projects” might sound like a tautology. However jobs can be increased without increasing the number of projects: by employing more people on existing projects. Those existing projects would not necessarily be finished more quickly – the additional labour could enable value to be added to the final output of those projects.

How to slash unemployment.

The unemployed are unsold labour. If something is unsold, it can normally be sold by reducing its price.

But reducing the price (in money terms) of ALL LABOUR is fatuous because that just reduces demand. And in any case, most labour is not unsold: it is employed even in a recession. I.e. there is no need to reduce the price of “sold” labour.

So how about reducing the price of UNSOLD labour, i.e. make the unemployed available to employers at a price well below the going rate / union rate / minimum wage, etc? That would cut employers’ marginal costs.

Assuming demand is raised by the requisite amount, employment would rise, on the courageous assumption that employers don’t replace too many EXISTING employees with the newly available subsidised employees.

But hang on. Why not just raise demand and not bother with the subsidy? The reason lies in a labour market characteristic that was highlighted by some recent research, namely that the unemployed are relatively UNSUITABLE potential employees. This point has always been intuitively obvious to those with an understanding of labour markets (0.001% of the population). But the latter research showed that employers in the U.S. say they have about as much difficulty now obtaining suitable labour from the ranks of the unemployed as before the recession.

In short, the above proposed subsidy would make up for UNSUITABILITY.

Put another way, the subsidy would counteract the fact that when demand is raised, the effect is simply to bid up the price of suitable labour, rather than result in more jobs for the unemployed.


Unsuitability of specific individuals changes.

To over-simplify the issue a bit, let’s divide the workforce into two groups: the suitable and the unsuitable. And let’s assume the suitable are employed and the unsuitable are unemployed.

If the stock of individuals making up the unemployed never changed (i.e. a given stock of individuals was permanently unemployed) then implementing the above subsidy would be easy enough: just attach the subsidy to all those individuals currently unemployed.

But it’s more complicated than that: someone can be unsuitable / unemployed because there is a temporary surplus of their skills in their travel to work area, and then find a few months later that there is demand for those skills.

So how do we stop employers claiming the subsidy in respect of individuals who are in fact suitable? Well it’s not too difficult in principle.

Just limit the time for which a specific individual can stay with a given employer on a subsidised basis. Perhaps limit the time to three months or so.

That way, if at the end of the three months the employer GENUINELY thinks some individual is unsuitable, the employer will be happy to let the individual go: so the subsidy will have served a purpose: it will have facilitated the employment of an unsuitable individual for three months.

In contrast, if the employer thinks the individual is SUITABLE, the employer will want to keep the employee. In which case the subsidy comes to an end.

The latter arrangement could be refined. For example the fact that an employer keeps an employee AFTER the subsidy expires indicates the employee was suitable BEFORE the subsidy expired. Thus it could make sense to charge such an employer for part or all of the three months worth of subsidy.

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Three MMTers and Milton Friedman say government borrowing is pointless.

The plonkers running Western economies have for the most part not grasped the distinction between micro and macroeconomics: in particular they think government, plus government income, spending and borrowing can be treated the same way as a household’s income, spending and borrowing.

In fact the two are as similar as chalk and cheese. (Incidentally, I’ll use the word “government” in the sense “government and central bank combined”).


Micro and macro borrowing.

Borrowing can make good sense for a microeconomic entity, like a household or business. For example, where such an entity wants to make an investment that makes sense, and the entity does not have enough cash, it will borrow. Nothing wrong with that.

However a country that issues its own currency (a “monetarily sovereign” country / government), is totally different. This “entity” has a limitless supply of cash: it can print the stuff. Borrowing is totally pointless. (Same goes for the Eurozone as a whole – though INDIVIDUAL COUNTRIES within the EZ are a different kettle of fish.)


New Economic Perspectives and Friedman.

The New Economics Perspectives site has just published an article by Dan Kervick (who I regard as very clued up) arguing that government borrowing is pointless. This argument is not new, but it’s good to see someone joining the “borrowing is pointless” chorus.

Milton Friedman in 1948 argued for a zero government borrowing regime. See paragraph starting “Under the proposal…” (p.250) here.

Friedman’s arguments were, first, that borrowing might be justified in war time when government spending relative to GDP is very high, and collecting very large amounts of tax might be impractical. However, so argues Friedman, this point is invalid in peace time, ergo borrowing is not justified in peace time.

Second, Friedman debunks the argument that borrowing is justified because, in his words, it is “less deflationary” than getting a similar amount of money via tax. As he rightly points out, simply printing money is even less deflationary.


Warren Mosler

Warren Mosler also argues for a zero borrowing regime. See second last paragraph here.

He does not give any detailed reasons, far as I can see. He says that “No public purpose is served by the issuance of Treasury securities with a non-convertible currency and floating exchange rate.” That is true, but that simple statement needs bolstering with some more detailed arguments, which I attempted to set out in a paper entitled “Government borrowing is near pointless”.


My Reasons

It is not possible to accurately summarise all the arguments in the latter paper. But briefly the main arguments are thus.

1. A popular argument for borrowing is the Keynsian “borrow and spend with a view to stimulus” argument. However, Keynes himself pointed out that printing money was a perfectly good alternative to borrowing it. But even that is too charitable an attitude towards borrowing. Reason is thus.

Where a government issues its own currency and borrows units of its currency, it is borrowing something which it can create itself in limitless quantities: similar to, and as pointless as a dairy farmer buying milk in a shop.

2. There is borrowing with a view to the purchase of assets, like infrastructure investments. One flaw in that argument is that infrastructure investment spending is small compared to total government spending, thus such spending can perfectly well come out of income.

Another possible excuse for borrowing to fund infrastructure is that the borrowing spreads the cost over the generations that benefit from such spending. That argument is nonsense because it is just not physically possible to consume real resources like concrete or steel produced in 2030 to construct roads and bridges in 2012.

3. Government borrowing smooths out the erratic timing of government expenditure and income from taxation? Sorry: just another flawed argument.

To illustrate, if all corporation tax is paid in January, government will on the face of it be short of funds towards the end of each year, which for “borrow” enthusiasts means government will have to borrow.

Not true: suppose the government just prints money towards the end of the year, would that be inflationary? The answer is “no”, because corporations know perfectly well that a significant chunk of their cash is going to disappear in January. That money is not “spendable” money. In fact the deflationary effect of abstaining from spending that money will pretty much cancel out any inflationary effect of government printing and spending money late in the year.

4. Given the hopeless arguments for government borrowing, what are the REAL REASONS for such borrowing? Well, the real reason is moral hazard, skulduggery, corruption - call it what you will.

To be specific, voters attribute tax increases to governments and politicians to a far greater extent than they attribute interest rate rises to governments and politicians. Thus it always pays incumbent politicians to run up national debts, and leave the consequent mess to their successors to sort out. 


And finally.

So if three MMTers (Warren Mosler, Dan Kervick and me) all say the same, namely that government borrowing is pointless – not to mention Milton Friedman - I challenge anyone to contradict us!!!!

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P.S. (28th April). Another MMTer with similar views is Bill Mitchell. He said, “A sovereign government within a fiat currency system does not have to issue any debt and could run continuous budget deficits (that is, forever) with a zero public debt.”

H/t to “Peter” on the New Economics Perspectives site.




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It’s official: academic economists are not too interested in reality.

I like this post by Simon Wren-Lewis. The first two sentences say, “Internal consistency rather than external consistency is the admissibility criteria for microfounded models. Which means in ordinary English that academic papers presenting macroeconomic models will be rejected if some parts are theoretically inconsistent with other parts, but not if some model property is inconsistent with the data.”

Later he says “In Real Business Cycle models, all changes in unemployment are voluntary. If unemployment is rising, it is because more workers are choosing leisure rather than work.”

So there you have it. The rise in unemployment over the last five years has nothing to do with silly lending by banks. If I’ve got this right, it’s all down to those lazy workers choosing leisure as against going out to work.

Can’t these economists just be given the job of counting the number of angels dancing on pin heads?

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Skidelsky is in a muddle on debt forgiveness.

Skidelsky says the system is gummed up with bad debts (particularly in the case of banks), so debt forgiveness is needed.

Wrong. Forgiving debts just encourages irresponsible lending and borrowing in the future (as if we haven’t had enough of that already in recent years). Moreover, why should the average citizen make sacrifices to rescue incompetents – in many cases, RICH incompetents? Of course there is the point that the larger banks have wheedled their way into a position where they are too big to fail (TBTF). So those particular creditors have been helped, and may need more help. But the TBTF problem should never be allowed to arise: we need to cut TBTF banks down to size, and/or structure them so they can be put through bankruptcy and administration in an orderly way. Anyway, the quickest way out of a recession is just to give citizens money to spend (and/or raise public spending). As long as the stimulatory effect of that is enough to counteract the deflationary effect of letting incompetent lenders and borrowers go bust, then the problem is solved. There is no need for special taxpayer subsidised “debt forgiveness” programs.

General stimulus combined with letting incompetent creditors go the wall could easily result in an economy based less on lending and borrowing than is currently the case, but what of it? In the UK, the size of the banking industry relative to GDP has increased a WHAPPING TENFOLD relative to GDP over the last forty years (see p.3 here). Anyone know what we’ve gained from this? Is economic growth any better than forty years ago? Nope.

Skidelsky needs to study Modern Monetary Theory and Mosler’s law. The latter is in yellow at the top of Warren Mosler’s site.

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Taxation destroys civilisation – at least it can do.

I love this description that appeared in a comment on Warren Mosler’s site about how tax helped destroy the Roman Empire. Any classical scholars like to pass judgement on whether the description is accurate?

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In the terminal collapse of the Roman Empire, there was perhaps no greater burden to the average citizen than the extreme taxes they were forced to pay.

The tax ‘reforms’ of Emperor Diocletian in the 3rd century were so rigid and unwavering that many people were driven to starvation and bankruptcy. The state went so far as to chase around widows and children to collect taxes owed.

By the 4th century, the Roman economy and tax structure were so dismal that many farmers abandoned their lands in order to receive public entitlements.

At this point, the imperial government was spending the majority of the funds it collected on either the military or public entitlements. For a time, according to historian Joseph Tainter, “those who lived off the treasury were more numerous than those paying into it.”
Sound familiar?

In the 5th century, tax riots and all-out rebellion were commonplace in the countryside among the few farmers who remained. The Roman government routinely had to dispatch its legions to stamp out peasant tax revolts.

But this did not stop their taxes from rising.

Valentinian III, who remarked in 444 AD that new taxes on landowners and merchants would be catastrophic, still imposed an additional 4% sales tax… and further decreed that all transactions be conducted in the presence of a tax collector.

Under such a debilitating regime, both rich and poor wished dearly that the barbarian hordes would deliver them from the burden of Roman taxation.

Zosimus, a late 5th century writer, quipped that “as a result of this exaction of taxes, city and countryside were full of laments and complaints, and all… sought the help of the barbarians.”

Many Roman peasants even fought alongside their invaders, as was the case when Balkan miners defected to the Visigoths en masse in 378. Others simply vacated the Empire altogether.

In his book Decadent Societies, historian Robert Adams wrote, “By the fifth century, men were ready to abandon civilization itself in order to escape the fearful load of taxes.”
Perhaps 1,000 years hence, future historians will be writing the same thing about us. It’s not so far-fetched.


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Banks should maximise profit, and should not have to consider environmentally responsibility, equity, etc.

The conference in Edinburgh last week on banking was organised by Friends of the Earth and was entitled “Just Banking” with “scales of justice” logos plastered all over the literature handed out. The implication of the latter, plus the actual titles of several of the meetings was very much geared towards environmental, ecological and equity matters.

However, several of the more enthusiastic supporters of the above objectives had little grasp of how to achieve their desired objectives at minimum cost.

That is, the latter “enthusiasts” have no grasp of the Tinbergen Principle. Jan Tinbergen was an economics Nobel laureate, and his principle (or at least my preferred variation on it) states that for each policy objective, one policy instrument is required, and one only. I.e. the above “enthusiasts” were advocating policies that would have resulted in more than one policy instrument for each objective.


The environment.

For example, one way of inducing banks to invest in environmentally responsible ways is to make them consider the environmental effects of each investment decision. That involves a HUGE amount of person-hours, bureaucracy, form filling and so on.

Moreover, the latter imposition on banks fails to deal with investments that are NOT bank funded!!!

A vastly cheaper way of cutting CO2 emissions, for example, is simply to tax carbon based fuels, as is already done. In Britain, about 60% of the retail price of petrol and diesel is tax. (Personally I’d be happy to see the retail price of petrol and diesel doubled.)

And the latter sort of tax AUTOMATICALLY makes CO2 emitting investments less profitable: it will divert investment (bank funded and non-bank funded) away from petrol and diesel consuming activities and towards other forms of economic activity. Job done. No need for any extra bureaucracy.


Equality.

At least one speaker at the Edinburgh conference claimed that banks should promote equality. I’m baffled. I cannot for the life of me see how banks do much to this end, laudable as equality is.

We ALREADY SPEND BILLIONS promoting equality: progressive personal taxes, social security, state education, etc. That is, using Tinbergen phraseology, we already have “policy instruments” to deal with inequality. And presumably we have chosen the most efficient instruments. Further policy instruments are a waste of time – never mine further and probably LESS EFFICIENT instruments.


Bubble blowing versus productive investments.

Another popular criticism of banks is that they invest and lend relatively safe ways, e.g. in property rather than in productive activities.

Well given that those who deposit money in banks want their money back, banks are bound to do go for relatively safe investments, aren’t they? If you want to take a risk with your money and potentially make bumper profits, then invest direct in the stock exchange, set up your own business, pay a visit to Las Vegas, or put your money on a horse – the options are numerous. No one is stopping you.

But don’t ask to have to have your cake and eat it: that is, don’t expect an institution to invest your money in a risky and potentially profitable way, at the same time as expecting your money to be 100% safe.

Indeed, therein lies one of the basic flaws in the existing banking system: depositors are promised 100% safety thanks to the taxpayer, while banks can lend in relatively risky ways. The solution to that problem, as advocated on p.7-8 of this submission to the Vickers commission, is to force depositors to choose between 100% safe deposit accounts and “investment” or “risky” deposits where they get a decent rate of interest, but stand to lose their money if it all goes belly up.



Fatuous statement of the obvious: we need more money put into productive investments.

Obviously a country will be better off if more capital is put into productive investments. That just begs the $64k question: “which investments are productive?”. Anyone who has a sure fire answer to that question will quickly make a billion.

Simply diverting money from property to allegedly productive industries other forms of investment will not automatically raise GDP. Some of the latter or “other” investments will be winners and some will be losers.

It looks like the UK is not too good at making finance available to small businesses compared to other countries. So there is probably SOME MERIT in putting this right. But I doubt that in itself will transform economic growth.