It’s very common in post-keynesian circles to hear that unemployment is somehow caused by the government. The general story goes along the lines that unemployment occurs when the government doesn’t supply enough net financial assets to the private sector to allow it to net save (ie, it doesn’t spend enough). I saw Peter at Heteconomist making this exact argument in a recent blog post stating:
“Unemployment occurs when all of us in aggregate (the non-government) try to save more and spend less than is consistent with full employment given the government’s fiscal settings. The government is uniquely positioned to solve the problem because its spending injects extra demand and financial assets into the economy. Its spending adds financial assets in the form of additional bank balances.
When government chooses not to do this, there is unemployment. That is why it can be said to be a government policy choice.”
He goes on to defend this position claiming that it’s essentially the private sector’s net financial asset position against the government that steers this dynamic:
“We as the non-government, in contrast, cannot orchestrate an increase in overall spending power on our own.”
I think there’s several things wrong with this perspective. First of all, the natural state of capitalism is for there to be some involuntary unemployment. I don’t care how much profit and saving the private sector generates, smart capitalists, in the aggregate, will never hire every last person who wants a job because the simple fact of the matter is that the economy never operates at a level of equilibrium that would make it prudent for capitalists to do so. Further, smart capitalists will almost always maintain an economy where there is some level of involuntary unemployment because the capitalists will always try to net save for themselves which will inevitably result in an environment where there is deficient demand to even justify such an employment picture in the first place. Capitalist entities are in the business of generating a profit and retaining earnings. They aren’t in the business of operating at a loss just so their customers can net save against them. Capitalists, and the entities they operate, are profit hoarders who will try to net save. Therefore, there is no level of government spending that will suddenly make capitalists turn into charitable operations where they operate an economy that has 0% involuntary unemployment in perpetuity. To misunderstand this is to misunderstand the very essence of the capitalist system.
Second, this isn’t about government “choosing”. This is about the capitalists choosing to be the profit hoarders that make them operate at the high level they do. Government can’t will full employment into the minds of capitalists simply by issuing more t-bonds into the economy. This has literally never happened in the history of the USA. Even when the government ran a deficit that was an eye-popping 30% of GDP (that’s 3X the peak in the recent recession for those keeping track) in the 40’s the unemployment rate only dipped to 2.5%.
Lastly, it’s patently wrong to say that the private sector cannot “orchestrate an increase in overall spending power on our own”. In fact, that’s the entire point of endogenous money – to allow the users of the banking system to be able to tap into an elastic money supply so they can increase their spending power on demand. A bank does not reduce its spending power when it issues a loan so we seem to be seeing a case here where some post-keynesians are far overstepping with this idea that net financial assets are the key piece of the economic puzzle. In fact, NFA makes up a rather meager piece of the overall domestic private sector’s net worth (just 4% if you don’t include the Fed’s holdings or the other various government holdings such as Social Security) so the whole concept is rather flawed to begin with….And this doesn’t even touch on the fact that the private sector’s balance sheet doesn’t require net saving against the government in the first place because it’s made up mainly of claims against itself which don’t always balance out to book value and don’t need to in the first place.
Of course, we’ve had these discussions before so there’s no reason to get bogged down in this stuff, but I see this with sort of thinking with increasing frequency and it doesn’t help push the policy debate forward. There are excellent arguments for using the government to reach full employment. But they are not pushed forward when based on accounting tautologies. They are really moral arguments that get to the point of understanding the essence of a capitalist system with the understanding that profit hoarding capitalists will not likely generate a sustained environment of zero involuntary unemployment. This is a moral and political point. Not an accounting point or even an economic point.
So the question really becomes – should we use government as an entity to hire the remaining unemployed who the capitalists will not hire with the understanding that it is a human necessity to have a job in a monetary economy? But again, that’s a moral question and not one whose foundation is grounded in accounting tautologies that some post-keynesians overstate the importance of.
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.
Comments are closed.