Pragmatic Capitalism

Capital for Living a More Practical Life


* This post was written in 2011 before Mr. Roche founded Monetary Realism, which was formed due to several disagreements Mr. Roche and many other former MMT proponents had with the school of thought.  For more info on the difference in views please see here.  For more on MR’s views please see here.

Yesterday’s story on the evolution of MMT sparked a raging debate as to the merits of the job guarantee that some MMT proponents have claimed is central to MMT itself.  Before we begin, I should note that Warren has been very clear that the JG is not central to MMT.  He said:

“You all are making way too much out of the jg.  it comes down to this:

with ‘state currency’
 there necessarily is,
 always has been, 
 always will be 
a buffer stock policy.

Call that the mmt insight if you wish.  so it comes down to ‘pick one’-

  • gold

  • fx

  • unemployment

  •  employed/jg/elr

  • wheat

  • whatever!

I pick ‘employed/jg/elr
 as it works best as a buffer stock based on any/all criteria for a buffer stock.

so yes, it’s an option.
 you are free to pick one of the others.”

Warren is very clear that he chooses the employment buffer stock.  This is also consistent with his writing in Soft Currency Economics where he says the JG is an “option” available to a country like the USA in which the currency issuer is sovereign and has endless supply of the currency in a FX rate system.  So that much is clear.  It’s not about having one buffer stock that is “central” to MMT.  It’s about using the buffer stock that we believe to be most beneficial.  Warren says it’s the employment buffer stock, but that doesn’t mean there aren’t other options that could potentially work….This really emphasizes the descriptive and prescriptive components of MMT.  Clearly, its descriptive components are factual and the way we use this understanding of the modern monetary system is up for debate.

Anyhow, Warren and I had a nice exchange and we agree far more than recent debate has likely implied.  We’re just sort of on a different page about how we should meet our goals.  I haven’t presented my position all that well and I am up against 20 years of academic work so it’s entirely my fault that I have published comments in public without having been more thorough and clear in my position.  Obviously, it’s created a lot of confusion.  Anyhow, here’s what I wrote to Warren:

Cullen: “Hi Warren.  My thinking is multifaceted, but along those lines.  I’m a risk manager.  My goal is not to shoot down the JG idea, but to evaluate potential long-term risks.

First, I completely understand the buffer stock argument and the currency supplier point.  But let me elaborate where my thinking is coming from….To me, prosperity is not just about giving people a job.  It’s about increasing real living standards by giving people more time.  The way that humans achieve this is through innovation, increasing productivity, etc.  To me, this is like the fountain of youth.  We live many more lifetimes than our ancestors did.  And not because because governments spend a lot of money (although they can certainly help).  These massive increases in living standards come from increases in innovation and productivity (which are MOSTLY pvt sector and profit driven).  So my thinking is rather basic.  Why obsess over FE (I am referring to low unemployment here) when the real goal is full productivity (which is a vague concept I know)?

My point is not against FE.  FE and FP would hopefully be two sides of the same coin.  My point is that perhaps it’s the wrong goal to have.  We know we can have prosperity with UE.  We don’t, however, know if the latter is possible (FE & long-term multi-generational prosperity).This doesn’t mean it’s not an ambitious or worthwhile goal and the lack of real life instances doesn’t mean it’s impossible, but it certainly makes it hard to prove.  This is the realm of the theoretical in MMT and it makes the case very hard for people to believe.  That doesn’t justify closed minded thinking (which I can certainly be guilty of), but it is not an unjustified position to maintain given that empirical evidence for a permanent prosperous JG is weak when looking at historical terms.

My position is equally theoretical of course since I am working under the idea that maximizing productivity is some holy grail that will lead to better living standards at X rate vs a potentially lower rate of Y under the JG.  Of course, I am working under the idea that the JG has the potential to have negative impacts through psychology, resource allocation, distribution of wealth, but those are hard to prove of course and I know the onus is on me to develop my thoughts here.  Don’t get me wrong, I fully appreciate the strength in your argument and I know I have not developed these thoughts enough, but I am just posing what I view as risks in the long-run.

In the end, currency sovereignty is about maintaining the balance in the economy between the currency issuer and the currency users.  But we mustn’t forget that demand for the currency is multifaceted here (I think we differ here as well).  It’s not just based on the issuers ability to tax.  After all, there must be productivity available to tax and programs that eat into that over time have been proven to create increasingly unstable economic environments.  I am not saying that’s necessarily the endgame for the JG, but I am simply trying to consider the potential risks.

I hope that clarifies where I am coming from. ”


My take is JG leads to superior productivity gains, but it’s not ‘proven’
If I thought JG would lead to lower productivity, I’d be saying so and pointing out that real cost of a JG
Cullen: This is the real crux of the argument.  If you can prove this then the JG is a no brainer.  I can’t seem to come to agree with the idea that the upsides outweigh the downsides….

Think about the way the market sets the spread between the JG and what the private sector pays, and as for resource allocation, the ‘cost’ of the JG is the difference in consumption between unemployed and JG workers.  and in fact unemployed may actually consume more real resources, as they have more idle time for real resource consumption, which includes throwing rocks through windows, beating their wife and kids, breaking into houses, begging drinks, etc. etc.  The gains from jg vs unemployment on that ‘social side’ alone are probably worth it in terms of real resources.  And with the JG pool maybe 30% smaller than an unemployed buffer stock for the same price stability the real cost is that much lower as well.

Cullen: The devil is in the details.  These are really broad concepts that are nearly impossible to prove.  I am not denying that they could work, but since we know what CAN work (maximizing productivity with some low level of unemployment), why would we not focus on that?   That’s sort of my simplistic approach here….”

So a lot of this comes down to potential downsides of employing workers in the JG (some excellent questions were asked here) versus leaving them unemployed.  One of the big problems with the JG is that it has never been done in any mass scale that has resulted in prosperity over any multi-generational period.  So, it’s very hard to prove that the JG can work because it has never worked in the past.  What we know has worked is having an unemployment buffer stock.  We know for a fact that human beings can achieve enormous prosperity despite unemployed people.  This doesn’t make this the optimal position and it doesn’t mean we shouldn’t strive for full employment, but what if the approach of plugging in the unemployment hole via government workers is the wrong approach?  That’s all I am trying to convey here.  What if there is an optimal way to leverage the government’s currency supplier powers that doesn’t involve unproven and potential downside risks?   I am not claiming to have all the answers here and I certainly haven’t done the academic work that is required to back my stance, but I think the question is more than a legitimate one.

Perhaps most important though is the point that Edward Harrison makes today with regards to the JG.  This conversation is a total non-starter.  We might as well be arguing how we’re going to get to Mars tomorrow on the back of government spending.  If MMT is ever going to be taken seriously then it has to evolve within the scope of our reality.  This doesn’t mean it might not evolve to the point of having a government job guarantee, but a big part of gaining traction within the world of economics is establishing realistic policy proposals.

I often joke around about the Crusoe Island of the Austrians – that mythical island where people live prosperously without any government.  And that’s a happy story, but it’s totally unrealistic since it entirely misses the societal concept of the evolution of governments and the role they play within human life.  This idea of the JG is not much different and equally preposterous to most economic and political commentators.  That doesn’t mean it can’t happen, but I just happen to believe that my proposal to ignore the JG for now and focus on the operational aspects and the fact that WE KNOW we can achieve prosperity with a certain level of unemployment AND government spending, is far more palatable and will gain much more attraction over time than extremist ideas involving the potential quintupling of the government workforce.   For now, we don’t know if the employment buffer stock can work since there is no evidence of this being done over any sustained period leading to proven multi-generational prosperity.  That’s not merely a hurdle.   It’s a huge wall blocking MMT’s evolution.  If we’re to take the next steps we need to stop arguing about how to get to Mars and instead focus on how we can get to Washington….


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