The Job Guarantee and Basic Income: Part 1

Ellis Winningham

The JG is Far More Than Mere Policy

I’ve been saying for years that we would do well to stop looking at things from the emotional political perspective, and start looking at things from the macroeconomic perspective. A perfect example of what I am talking about is SNAP which is a food assistance programme in the US.

Setting arguments aside about agriculture and subsidies, the purpose of SNAP/Food Stamps for the macroeconomy is to act as an automatic stabiliser, and not a poverty fighting programme that helps the poor. Those with a penchant for politics and nothing else dearly need to believe that the main purpose is to help the poor. But if you go into a political debate with conservatives discussing SNAP/Food Stamps from the “programme that helps the poor” perspective, you will inevitably get an unwinnable emotional, hate-filled ideological argument in return: “Moochers!”, “Lazy people who don’t want to work”, etc. What is the progressive counter argument then?

“Oh, you are a sociopath!”, “Nuh-uh! They aren’t moochers. Rich people are moochers!”. Spare me the unwinnable, endless bickering. It’s nothing more than childish, unintelligent political drama.

Those interested in truth and progress must enter the debate from the correct perspective: SNAP is an automatic stabiliser, and it is undeniable that when a recession occurs, government spending on SNAP increases, thus the deficit increases, and so does consumer spending on food. Consequently, all businesses and entities related to food supply (grocers, buyers, etc.) continue to receive an income, and the jobs of those who work for these businesses and entities are maintained. And again, I must caution those wedded to politics: It is quite obvious that many of the jobs maintained are those of low-wage, abused supermarket workers and the like. However, this is a separate subject entirely and irrelevant to my present discussion. Therefore, it is inappropriate for you to comment about it; a comment which will only serve to derail those seeking a deeper understanding of automatic stabilisers.

[And as a side note, political commentary concerning people no longer needing to work might as well be withheld, because I will deal fully with the reasons why human labour must and will continue later on in this series. Suffice it to say that regardless of the framework, whether it be capitalist or socialist, production is the essential foundation of any monetary economy. Goods and services must be produced, and this will require human labour.]

So, for a conservative to argue against SNAP from the correct macroeconomic perspective is to argue for the removal of the floor in consumer spending on food, for mass unemployment, and for a deeper recession should a downturn occur.

In the very same way, the actual purpose of the Job Guarantee is not to be a safety net nor a job creation scheme in and of itself

Modern Monetary Theory (MMT) contains an automatic stabiliser that is intrinsic to its framework. Any macroeconomic theory that seeks to challenge and overcome the mad idiocy of mainstream theory must include an answer to the Phillips curve and NAIRU. Let’s have a quick look at these two mainstream concepts.

The Phillips curve

Because the intent of my discussion is to facilitate an understanding with the general public, I am obviously not going into a detailed technical explanation. I must keep things in general terms that anyone can understand. With that understanding, the Phillips curve says that you cannot have a sustained condition of full employment without experiencing accelerating inflation at some point. Workers and capital will begin fighting over claims to the distribution of national income (GDP), which will lead to spiralling prices as workers demand higher wages and capital marks up prices to counter. In the end, we experience accelerating inflation. The way to stop it is to give workers the sack, sending them into a pool of unpaid unemployed workers. In doing so, inflationary pressures are attenuated.

NAIRU

“The Non-Accelerating Inflation Rate of Unemployment” (NAIRU), is the mainstream theoretical foundation for dealing with inflation that has been put into practice for many years. It says that there is a certain percentage of the workforce that must be kept in a constant state of unemployment, and if maintained, there will be no accelerating inflationary episode. So, using an arbitrary percentage as an example, if the NAIRU is 6%, and the central government keeps 6% of the workforce unemployed, then all is well. Reduce the unemployment rate below 6%, and accelerating inflation will eventually result. Therefore, NAIRU forms what we call a “buffer stock” of unemployed workers, and those unfortunate people are used to fight a perpetual war to prevent accelerating inflation. But, how does the central government reduce the unemployment rate?

The currency issuer controls the unemployment rate though net spending, and the reality is that the currency issuer is the central government, not the market. This is a statement of fact. If the budget deficit is too low, unemployment will result.

Thus, when the central government reduces its budget deficit (net spending) it reduces the level of employment of workers in the private sector. In the case of NAIRU, the affected workers are sent into a state of unpaid unemployment where they will remain until the private market decides to hire them.

MMT’s answer to NAIRU is “NAIBER” (The Non-Accelerating Buffer Employment Ratio), more commonly known as, “The Job Guarantee”.

The Job Guarantee Macroeconomic Stabilisation Framework

BER = JGE/E

Above is the Job Guarantee expressed as a mathematical identity, which says that the Buffer Employment Ratio (BER) is equal to Job Guarantee Employment (JGE) divided by Total Employment in the economy (E). It is a fact that when the currency-issuer manipulates the economy through fiscal policy, workers move between the pool of employed and the pool of unemployed.

In general terms that the public can understand, what this means is that a pool of employed workers (JGE) is created and maintained. Contrary to NAIRU though, when distributional conflicts arise between workers and capital causing increasing inflationary pressures, and the government reduces net spending to counter, the workers enter the Job Guarantee pool where they both continue to work and get paid for that work whilst inflationary pressures in the private sector are reduced. Since, as Bill Mitchell says, this maintains a situation of “loose” full employment and since inflationary pressures are attenuated, the Job Guarantee renders mainstream Phillips curve concerns obsolete.

Automatic Stabilisation: overview

When the central government moves the BER through fiscal adjustments; that is, by increasing or reducing its budget deficit, the ratio between JG employment (JGE) and total employment in the domestic economy (E) moves up and down. So, based on economic conditions, the number of Job Guarantee workers as a percentage of total employment goes up and down, and with it, the central government’s budget deficit also goes up and down. Workers flow into the Job Guarantee during an economic downturn, and workers flow out of the Job Guarantee and into private sector work during an economic expansion. All the while, the central government’s budget deficit automatically goes up and down to maintain a constant state of full employment.

Thus, the Job Guarantee is an automatic stabiliser. I will further discuss automatic stabilisation in greater depth a bit later in the series.

Summing Up

Both NAIRU and NAIBER must manipulate human labour. The reason why, is because all modern monetary economies require production, and production still requires human labour input to realise output. There’s no way around that.

So, there are only two choices: You can avoid inflation by maintaining a pool of unemployed labour that has a market value of zero, or you can maintain a pool of employed labour that has a fixed value greater than zero.

Keynesian pump-priming will not do. It is unacceptable because there’s no price anchor/stabilisation mechanism present. As net spending drives aggregate demand upward, unemployment will decrease. Just prior to the point of macroeconomic efficiency; that is, full employment, sector bottlenecks will ensure that the currency issuer must act to stifle aggregate demand to control rising inflationary pressures. In doing so, the currency issuer will cause unemployment to rise.

So again, you have only two choices: Maintain a pool of unemployed workers with a value of zero as the buffer stock, or maintain a pool of employed workers with a value greater than zero as the buffer stock. There is no third option, because without a JG, the first option (unemployment) manifests automatically – it is the default.

Thus, the actual purpose of the Job Guarantee is not to be a job creation scheme or a worker safety net, rather, it is an automatic stabiliser. For it to function as an automatic stabiliser in practice, you will need workers and all workers that the market does not want who are willing and able to work and want a job must be bought up and paid a fixed wage by the currency-issuer.

The Job Guarantee is intrinsic to MMT and cannot be removed. Without a Job Guarantee, the economy will continue to operate inefficiently and in a unstable manner with unacceptably high levels of wastage. The Job Guarantee is not a choice, it is a necessity both on paper and in practice.

Source: This article appeared on the Facebook page of Ellis Winningham.

Ellis Winningham is an economist, guru and educator with an acerbic wit and keen intellect. He aligns himself with those who promote Federal Government programs to end wage suppression. As federal taxes don’t fund spending, it is possible to fully implement programs that level the playing field and lift the 99% out of perpetual cycles of poverty that are brought about by austerity. He has worked with the U.S. Federal Reserve and understands first-hand about “money and currency” creation for sovereign currency nations.