As inequality becomes more problematic and wages and inflation remain low the involvement of the government in the economy is becoming a more pressing issue. A capitalist economy does not appear, to many, to be optimizing living standards in advanced economies when inflation is low and inequality is increasing. This is arguably the most important issue of our time and one that Conservatives and Liberals will grapple over for decades to come.
While many solutions such as more progressive taxation and Basic Incomes have become increasingly debated, one policy idea that is growing in popularity is a Job Guarantee (JG). A Job Guarantee would provide a government granted guaranteed job at a living wage for anyone who wants it. Crucially, this policy is often sold as a “price anchor” in that it would resolve not only the problem of full employment, but ALSO price stability. This is highly controversial.
While modern Central Banks and governments have become adept at fighting deflation they are not so good at stopping the ensuing boom or coming close to having policy measures in place that halt or alleviate it. It’s not the downside in price stability that we’ve come to worry about so much, but the upside. While the JG serves as a good counter-cyclical deflation fighting policy (because it will provide jobs for people who lose them during recessions), its effectiveness in stopping high inflation is unproven. The worry is that a JG could serve as a price buoy instead of a price anchoras it would set a floor under prices during booms as well as busts.
A central tenet with Modern Monetary Theory (MMT ) is that you need the JG because the government causes unemployment. In essence, MMT says that unemployment is the result of a lack of net financial assets in the private sector. As Mosler says:
“Involuntary unemployment is evidence that the desired H(nfa) of the private sector exceeds theactual H(nfa) allowed by government fiscal policy.
To be blunt, involuntary unemployment exists because the federal budget deficit is too small.”
This is a controversial claim and one that appears empirically false since governments that run very large budget deficits during hyperinflations actually exacerbate unemployment in many cases. But the key point here is that the JG is a central element within MMT because they believe the government causes unemployment in the first place. They defend this claim by further arguing that the JG is not only a deflation fighter (because it employs everyone with a living wage), but also an inflation fighter. If this sounds like having your cake and eating it too I suspect that may be right.
The problem is that the JG does not serve as a price anchor, but serves as a price buoy. Robert LaJeunesse wrote an interesting book titled “Work time regulation as a sustainable full employment strategy” in which he explained the misguided thinking of the JG as a price anchoring buffer stock:
“During robust economic times, buffer stocks offer little prospect of abating wage pressures in the primary sector. Since buffer stocks target a minimum price of labor, an earnings floor if you will, and do not create a wage ceiling they will have little impact on the primary sector wage demands. Capitalists will be able to maintain a significant degree of labor market segmentation, allowing them to avoid hiring from outside the primary sector. As such they will avoid payroll expansion and attempt to squeeze more from existing workers in the form of longer hours and greater work intensification. One only has to look at the history of commodity prices (such as oil) to realize that buffer stocks do not place a ceiling on prices. Buffer stocks may mitigate price swings, but they tend to prop prices up rather than restrain them, particularly when the commodity is in short supply. Buffer stocks, therefore, do not serve as a price anchor but rather as a price buoy. That is, they represent an earnings floor rather than an earnings ceiling. Public and private sector employees alike will still face pressure to work long hours under a job guarantee – either to maintain insatiable consumption desires or to retain jobs that offer long hours on a take-it-or-leave-it basis. Such behavior would most certainly become inflationary as Mitchell and Wray (2005) concede when they write, ‘if the government decides not to deflate demand, the ELR pool still allows the economy to operate with higher aggregate demand and lower inflation pressures, although inflation can still result.'”
The problem in the labor market is one of money neutrality (a concept that MMTers very publicly reject). In order for the buffer stock to control the market it essentially has to be THE market. But labor is not like any simple commodity. It is a highly specific and specialized commodity. We know this from the remarkable wage discrepancies that exist in the world today. A job at Goldman Sachs is a commodity unlike anything seen in the rest of the labor market. So setting the price of low price unskilled labor doesn’t have a sufficiently uniform effect across the entire labor market to keep wages low when the economy is booming and Goldman Sachs is poaching from Bank of America, Boeing is poaching from Caterpillar, and Microsoft is poaching from Cisco.
To make this point clearer, arguing that the JG is a strong upside inflation deterrent is a lot like setting the price for natural gas and then claiming that you’ve stopped commodities from rising above a certain point. Clearly, that’s not true. You’ve set the price of natural gas relative to other commodities, but for instance, you haven’t stopped oil market dynamics from sending oil prices through the roof. And as you set the price of natural gas above its market price the market will seek out alternatives which will drive the price of other commodities higher.
A Job Guarantee is a price buoy, not a price anchor and that is its greatest risk.
* This article was written using a different definition of “full employment” than MMT implies. In the MMT paradigm full employment is zero involuntary unemployment whereas I was working from a more traditional definition of optimal use of resources.
Related – A Critique of Modern Monetary Theory
Mr. Roche is the Founder and Chief Investment Officer of Discipline Funds.Discipline Funds is a low fee financial advisory firm with a focus on helping people be more disciplined with their finances.
He is also the author of Pragmatic Capitalism: What Every Investor Needs to Understand About Money and Finance, Understanding the Modern Monetary System and Understanding Modern Portfolio Construction.