Wall Street: Investor or Game-player?

Below is a small excerpt from "What is Wall Street?", an article sent to me by one of my professors. It is a year old but still relevant and speaks on one of the major problems that helped contribute to our financial ruin in the United States, including the major losses in pensions of many Americans near retirement.

You can read the full article by clicking on the link above.

Here is the part I wanted to highlight:

Yet Wall Street’s role in financing new businesses is a small portion of what it does. The market for initial public offerings (I.P.O.s) of stock by U.S. companies never fully recovered from the tech bust. During the third quarter of 2010, just thirty-three U.S. companies went public, and they raised a paltry five billion dollars. Most people on Wall Street aren’t finding the next Apple or promoting a green rival to Exxon. They are buying and selling securities that are tied to existing firms and capital projects, or to something less concrete, such as the price of a stock or the level of an exchange rate. During the past two decades, trading volumes have risen exponentially across many markets: stocks, bonds, currencies, commodities, and all manner of derivative securities. In the first nine months of this year, sales and trading accounted for thirty-six per cent of Morgan Stanley’s revenues and a much higher proportion of profits. Traditional investment banking—the business of raising money for companies and advising them on deals—contributed less than fifteen per cent of the firm’s revenue. Goldman Sachs is even more reliant on trading. Between July and September of this year, trading accounted for sixty-three per cent of its revenue, and corporate finance just thirteen per cent.

In effect, many of the big banks have turned themselves from businesses whose profits rose and fell with the capital-raising needs of their clients into immense trading houses whose fortunes depend on their ability to exploit day-to-day movements in the markets. Because trading has become so central to their business, the big banks are forever trying to invent new financial products that they can sell but that their competitors, at least for the moment, cannot. Some recent innovations, such as tradable pollution rights and catastrophe bonds, have provided a public benefit. But it’s easy to point to other innovations that serve little purpose or that blew up and caused a lot of collateral damage, such as auction-rate securities and collateralized debt obligations. Testifying earlier this year before the Financial Crisis Inquiry Commission, Ben Bernanke, the chairman of the Federal Reserve, said that financial innovation “isn’t always a good thing,” adding that some innovations amplify risk and others are used primarily “to take unfair advantage rather than create a more efficient market.”

Pope John Paul II on Socialism

The role of the State is always a hot topic and often comes up in discussions I have with others or in the articles, blogs, etc. that I read.

Many or most people seem to know/believe that socialism is bad. Yet the reason they give is almost invariably that the Soviet experience went very very poorly and that the U.S. experience was clearly much better.

This seems to be de facto evidence of socialism's inability to be a system of organization and of capitalism/libearlism's triumph.

In my studies of both economics and Catholic Social Teaching, however, I have found that many people don't really know why the Church rejects socialism and they also seem to think that welfare or gov't intervention in the economy of any kind is 'socialist'. I also think that Karl Marx gets a bad name for the 'experiment' played out in Russia. That 'Marxism' wasn't what Marx had in mind and that doesn't mean Marx's version was good, but he certainly didn't advocate the authoritarian, police state that was the USSR.

In fact, he really just wanted freedom for the workers from their employers. He wanted better working conditions, choices, and wages for the workers--he wanted them to stop being exploited. He believed that Capitalism would eventually end in Socialism because of its own contradictory nature--accumulation leading to the immiseration of the working class. That said, he was, I believe, misguided in a few ways.


So why, exactly, is Socialism bad?

From Centesimus Annus 12-15 by Pope John Paul II on Rerum Novarum, socialism, and the state:

The commemoration of Rerum novarum would be incomplete unless reference were also made to the situation of the world today.

This is especially confirmed by the events which took place near the end of 1989 and at the beginning of 1990.

Absentee Blogger

I'm really sorry I haven't been able to post in a while. Last week was crazier than crazy and I don't see things letting up for a while, but I'm hoping to pop my head in here and there with a blog post.

But if you're just craving to know more about economics or Catholic Social Teaching there are a myriad of blogs and sources for you to go to! Check out the links on the right, my old blog posts, or the other blogs I follow.

Thanks again for reading!

Indifference to the Poor

Father Raniero Cantalamessa, preacher of the Pontifical Household, gave an address to the Caritas general assembly in May on the Gospel's Social Relevance. You can read the full text here, but I wanted to highlight one part of his address:

Perhaps the greatest sin committed against the poor is indifference, pretending not to see, “passing by on the other side”. (cf. Lk 10, 31). What Jesus objected to in the rich man who feasted sumptuously, was not so much the unbridled luxury of his lifestyle, as his indifference to the poor man lying at his gate.

We tend to set up a kind of double glazing between ourselves and the poor. The effect of double glazing, so much in use today, is to keep out cold and noise. It dilutes everything, deadens and muffles every sound. So it is with the poor: we see them on our TV screens or in the pages of newspapers or missionary magazines, but their cries are a distant echo that never reaches our hearts. We protect ourselves from them. In rich countries, the very words “the poor” provoke the same agitation and panic as the cry “Barbarians!” aroused in the inhabitants of ancient Rome. They built walls and sent armies to watch their borders. We do the same thing, in different ways, but history tells us it is all to no avail.

So the first thing to do in relation to the poor is to break through the double glazing, to overcome our indifference and insensitivity. We need to let our defences down and be overwhelmed by a healthy anxiety in face of the fearful misery there is in the world. As Pope Paul VI wrote in Evangelica testificatio, ”The persistence of poverty-stricken masses and individuals is a pressing call for conversion of minds and attitudes”. The cry of the poor obliges us “to awaken consciences to the drama of misery and to the demands of social justice made by the Gospel and the Church”[5].

In the incarnation of the Word, the “problem of the poor” has taken on a new dimension in history; it has become a Christological question too. Jesus of Nazareth identified himself with them. He who pronounced the words: “This is my body” over the bread, has spoken the same words with reference to the poor. He spoke them when, talking about what people had done or failed to do for the hungry, the thirsty, prisoners, the naked or the stranger, he solemnly declared “You did it to me” and “you failed to do it to me” (cf Mt 25, 31 ff). This is the same as saying: “You remember that ragged person who needed a piece of bread, that poor person holding out his hand – it was me, it was me!”

I remember the first time the full force of this truth “exploded” within me. I was preaching in a third-world country, and with each new scene of misery I saw - a child in a tattered dress, her face covered in flies; groups of people running after a refuse cart, hoping to pick up something dumped on the garbage heap; a body covered in sores – I heard a voice booming inside me: “This is my body. This is my body”. It took my breath away.

The poor person is Jesus, still wandering the world unrecognised. It’s a little like when, after the resurrection, He appeared in other guises – to Mary as a gardener, as a pilgrim to the disciples on the way to Emmaus, to the apostles on the lake as someone walking on the shore –, waiting for “their eyes to be opened”. On one occasion, the first person to recognise Him called out to the others: “It is the Lord!” (Jn 21, 7). Oh, if only we too, on seeing a poor person, would exclaim even once, with the same cry of recognition: “It is the Lord”, it is Jesus!

It is so important to not only see Jesus in the poor, but to see the poor as Jesus. We need to break down our double glazing, share the pain and burden of the poor, and ease that burden through acts of charity that go beyond simply giving them money or things. This is at the heart of living the Gospel, has been a constant message of Catholic Social Teaching, and is what we are all called to do as persons created in the image and likeness of God.

More on the History of Money

I don't know if these are boring you, but I am deeply fascinated by this topic, because it seems as if my profession has gotten it wrong for the past 100 years or longer. Most economics textbooks will tell you money sprang forth naturally from barter to solve the 'double coincidence of wants' problem made evident in Adam Smith's Wealth of Nations. Austrian economists and 'goldbugs' really seem to like this interpretation of the history of money, but the evidence seems to be against this view.

David Graeber, an anthropologist (not an economist), recently authored a book called ‘Debt: The First 5,000 Years’ and has made some waves in the media. I posted an interview on PBS a couple weeks ago.

Note that this history of debt/money is already very much a part of MMT and in line with the findings of A. Mitchell Innes almost a century ago. I can't wait to read his book, but until then, I recommend his post at Naked Capitalism in which he responds to a pro-Austrian economist who argued against his findings.

Full post here: David Graeber on the Invention of Money

Highlights:

First, the history:

1) Adam Smith first proposed in ‘The Wealth of Nations’ that as soon as a division of labor appeared in human society, some specializing in hunting, for instance, others making arrowheads, people would begin swapping goods with one another (6 arrowheads for a beaver pelt, for instance.) This habit, though, would logically lead to a problem economists have since dubbed the ‘double coincidence of wants’ problem—for exchange to be possible, both sides have to have something the other is willing to accept in trade. This was assumed to eventually lead to the people stockpiling items deemed likely to be generally desirable, which would thus become ever more desirable for that reason, and eventually, become money. Barter thus gave birth to money, and money, eventually, to credit.

Employment for All Debate: My Response to Darwin

Great response from DarwinCatholic. I’ll outline my response similar to his. [You can find my proposal and the first of this series here.]

Unemployment/Job searching

I agree that job searching is a good thing in the short term. My proposal is not meant to replace unemployment insurance or job searching. I think unemployment insurance should be made available to those who choose to remain unemployed and search for a job vs. being hired into the job guarantee program so that the worker can search for a higher paying job or one that more closely suits their interests or skill set.

So you could offer unemployment insurance for a few months or even up to year at which point the gov’t could remove the insurance in order to create incentive to join the program over free-riding unemployed. The guaranteed job at a low living wage would always be there for them, some could choose to remain unemployed, but it is their choice, thus eliminating all involuntary unemployment.

Make work/sticky jobs

The program is designed to pay workers a minimum living wage, to provide goods and services that would otherwise be unprovided, and to increase the skills and hire-ability of the workers in the program. That is, a major part of the program is getting them back into the private sector by providing them with the skills necessary to do so. So, no, there isn’t a future in the program, the future is out of the program; we really don’t want them in the program and should do what it takes to get them out.

I do think that there may be “lifers”, that is, those who like the job and the pay would never want to leave, but I wouldn't say it is a free-riding issue as might be the case of other welfare programs. It is a guaranteed opportunity to provide for oneself and one's family by working, not a case of getting something for nothing. Other welfare programs should fill any inadequacy of the job guarantee program in providing the minimum level of goods and services necessary to maintain the person's dignity that is his by virtue of him being a person created in the image and likeness of God. So I don't think free-riding will be an issue, and I don't think that "lifers" are a problem, either.

The program should increase their future earnings by preventing the deterioration of skills caused by unemployment and by providing them with new skills in sectors that are hiring.

Inflation

This is a much trickier area of argument and again it gets a little ‘wonkish’ so please stick with me. MMT is very correct in my view on how finances work and what money is, etc., but when it comes to inflation there is much less certainty. Though I do believe MMTers still have a better idea of how inflation works than most mainstream economists.

Darwin provides a neat example of how injecting reserves into an economy via government spending is inflationary. I have no bone to pick there, government spending of its very nature is inflationary. But I think he is ignoring or overlooking the deflationary tendencies/factors. Taxes are deflationary for example. They drain the economy of reserves (money). Net desired aggregate saving is also deflationary. Investment equals saving in the private sector (necessarily), but if the private sector wants to net save financial assets, which is expected to be the normal case, then this is also deflationary (the savings must either come from the public sector through federal government deficits or a trade surplus).

Drops in consumer spending are also deflationary. So when consumers are paying down debts and increasing saving in the wake of a crisis they bring about a deflationary tendency by lowering aggregate demand (note this is no different than saying they desire higher net saving). Also note that this deflationary factor shows up more often as slack in the economy rather than price decreases, that is, firms decrease output more so than they decrease prices.

Increasing aggregate supply also is deflationary as would be the case if unemployed workers are put to work in a job guarantee program.

Inflation is more complicated than ‘too much money chasing too few goods’. There are many tendencies at work. A simple closed economy example cannot nail down all the tendencies and cannot say which will outweigh the others.

Darwin also brings up ‘value’ which is much trickier than inflation to pinpoint. Is it subjective? Objective? Both? Neither? Material? Supernatural? Both? Neither? Valuable in that it serves needs? Wants? Both? Neither?...etc. Value is the question that has flummoxed economists since before Adam Smith. I would argue that the ‘value’ that Darwin introduces here is subjective (as opposed to objective), which is in line with mainstream economics but has some problems, not the least of which is that it is based purely in the mind on the imaginary, incalculable concept of ‘utility’ (hence its subjectivity).

So, I don’t reject Darwin’s argument that net gov’t deficits are inflationary, but I do disagree that the program I propose would bring about inflation let alone hyper-inflation. It is not simply more money chasing a less ‘valuable’ amount of goods. There are other forces at work. The program is designed to work as a buffer stock by fixing the price of low skilled labor and letting quantity float much like the gold standard did except that low skilled labor is a much more pervasive ‘commodity’ in American production and is the ‘commodity’ hit hardest by crises. The fixed wage would temper aggregate demand during booms by anchoring wages and the prices of goods whose production involve low skilled labor and would prevent large drops in aggregate demand during crises by guaranteeing a wage to anyone willing and able to work for that wage.

The nature of a buffer stock would help anchor prices just like the gold standard. The difference between a labor buffer stock and a gold buffer stock is that labor is more pervasive and important and also that it necessarily guarantees full employment just as a gold standard ‘employed’ all gold. So full employment and greater price stability is achieved.

This to me is a great ‘side-product’ of the program, whose main attraction to me is providing an opportunity for men and women to provide for themselves and their families in times when the private sector is unwilling to do so.

Socialist caluculation problem/Administration difficulties

Here I suggest that the jobs that the workers will do be based on their skills and the needs of the community. I recommend a county level administrator who can assess the skills of the workers and the needs of the community and even ask for applications from the community who know their needs better than an administrator would. To me, the biggest problem the job guarantee program faces is administration, much like all gov’t programs. There will no doubt be some politics involved and some skewed motives/incentives on the part of workers and administrators. My opinion, however, is that the administration difficulties are outweighed by the benefits of the program—full employment and price stability.

Discipline of workers is absolutely necessary to prevent shirking as in all private sector jobs. There must be ability to fire workers with conditions placed on re-hiring.

Convicted criminals could also be an issue in the form of limiting what they can do (they couldn’t work in a classroom as an assistant, e.g.), but ex-criminals can provide for society and indeed this program may help rehabilitate criminals who would otherwise not find work in society once outside of prison.

Dignity of the job guarantee program

I disagree with Darwin here that dignity of work is solely tied to a sense of providing value to society. I believe that the dignity of work involves providing value for society, but also in providing for oneself and one’s family and in the spiritual, moral development of the worker. I also believe this is what CST says as well.

I think that there are many, many “make-work” jobs that would provide substantial amounts of ‘value’ to society and provide the worker with dignity. I do think that there might be some that feel they are getting a check to do nothing valuable for society, but I believe that to be the case with some jobs in the private sector as well. I hope that through time and our example they will realize that there is dignity in all kinds of work, even picking up trash.

Structural Adjustment?

I don’t think that the long term unemployment we are experiencing is a structural adjustment; rather, I am strongly convinced that the drop in employment caused by the financial crisis is cyclical and NOT structural. In other words, the roughly 5% unemployed before the crisis are maybe structurally unemployed (mismatch of skills and jobs), but the increases in unemployment caused by the crisis are because of the drop in overall demand, not an Austrian sectoral re-balancing.


I really appreciate Darwin taking on the task of engaging in a debate over a topic I have studied more intensely than he has. He brought up excellent points and I’m glad to debate with someone willing to understand a new/alternative perspective. I, too, have benefited greatly from this conversation.

But now I want to know, what do you think?

A Colossal Hoax

U.S. bankruptcy that is...I've been saying this for a while now, but Susan Feiner from the University of Southern Maine wrote a nice article on modern money about a month ago that is probably a better explanation than what I offer.

From EconIntersect

Readers put on your thinking caps and learn something new about money.

Modern money—not the old fashioned, greasy kid’s stuff—follows uber modern rules, rules which have been misrepresented/misunderstood in the coverage of Washington’s debt-ceiling hysteria.

First things first: no matter how much money we’re talking about, there’s nothing there—not gold not silver. At best, a few reams of green paper.

Follow up:
For some folks the fact that there’s nothing there is intolerable. “How,” they wonder, “can money be so important, and so insubstantial?”

That’s modern money. When was the last time your pay (if you still have a job, there are 29.2 million unemployed or underemployed in the US today) was cash in an envelope? Like 99.9% of Americans you get paid by check or a direct deposit.

Someone working for your boss tapped on a keyboard (just like the keyboard I’m typing on now), to initiate a transaction that put ‘money’ in your checking account by taking ‘money’ out of your boss’s checking account.

That money is just a click, an electronic blip, your ability to keep bread on the table and a roof over your head, an ineffable nothing, and the root of all evil.

“Get out! No way! Susan, you’ve gone loony tunes.”

The United States is sovereign in its own currency. (Note to readers: this is just a fancy way of saying that the US is the only entity in the world that can create dollar denominated money. Japan and Mexican have similar monopolies on yen and pesos.) Our government creates, spends, borrows, and pays interest in dollars.

Clerks at the US Treasury enter numbers into computers that record plusses in federal agency accounts. When agencies spend—more keyboard clicks—other bank accounts are credited, then those account owners spend their money.

Next, people like you and me drive on roads, attend public school, drink clean water, fly on safe planes, and eat food checked for deadly bacteria. Myriad other necessities flow from Congressionally authorized Treasury clicks: fire and safety officers ready at a moment’s notice to come to our rescue, energy delivered via the nation’s grid powers our appliances, Social Security checks feed our seniors, and infectious diseases are checked when kids are vaccinated.

Of course people work (caveat: those 29.2 million people are still unemployed), businesses earn profits (well yeah, it’s a lot harder to do this when there are 29.2 million unemployed), consumers spend and banks’ lend.

But, as frustratingly insubstantial as it may seem, the wheels of commerce are greased by nothing more than these accounting clicks.

“You’ve got to be kidding me. My business has cash reserves of six months.”

“Sure you do. Is that reserve—coin plus currency—buried in the backyard? Or is it on deposit at a bank? If the former, send me your address! If the latter, baby you’ve got blips. You run your business by telling the bank what to do with your blips.”

As I said, money is nothing. Money is everything. And that’s true in spades for the federal government.

We are in a different place than is the government, because you and I will die. At that point, our estates will be settled: if our assets (positive blips) are greater than our liabilities (negative blips), then our heirs inherit. If the reverse occurs, then nobody gets anything. Ditto for business bankruptcies—paying off creditors requires asset liquidation.

There’s nothing comparable to death for the US. The national analogy—revolution or an invasion/occupation—would render dollars useless, no longer accepted for purchases or paying debts.

Bankruptcy is simply not possible. As long as the debts owed by the US government are dollar denominated debts, we can always create all the dollars we need.

Yep, you’re right. Creating dollars ad infinitum could cause repercussions. But that’s not what we’re talking about. The topic is bankruptcy … running out of the money needed to pay our dollar denominated debts. That is impossible, short of a self-destructive decision not to pay the debt.

The inflation boogie man can be put to bed, as well. If we create money to retire debt, we are “printing money” that has already been spent. (That’s what debt is: money - oops, blips - that has been spent.) It has already supplied whatever inflation it could. Offsetting those blips that have already been spent cannot produce any inflation. This is what the “mobs” are missing.

If you’re just about to pull out your hair because you are thinking …. “this woman, what a dimwit, if we created all this ‘money’ no one in the world would lend us a dime” .…, relax.

The interest rate the US is paying on its debt is at a historic lows. Globally, cash rich (oops, make that blip rich) investors are queuing up to lend to us. In fact, on August 1 (the day before we hit the debt ceiling) the world’s investors were paying America for the privilege of lending us money. Negative interest! I am not making this up. Markets ain’t worrying ‘bout federal borrowing or money creation.

And you shouldn’t be either. Le deficit es mort. Viva le deficit.

Discretionary Problem

A major problem with fiscal stimulus (government spending increases or tax decreases) is their discretionary nature. "Well, duh" you might say, but it does seem overlooked at times so I thought I'd write a post about it.

First, for those who might need a primer here, 'fiscal stimulus' refers to the federal government's ability to stimulate overall demand in the economy by increasing its spending or decreasing its taxes. Note the opposite is also true--gov'ts can 'destimulate' by decreasing spending or increasing taxes. There are two levers: taxes and spending. They can be used to increase demand or decrease it (there is debate over how effective each are, but that debate is outside the scope of this post and in fact part of the discretionary problem).

Our congressmen and president often disagree on composition of spending and levels of spending as well as on types of taxes and levels of taxes in general, but that problem comes to the fore when there is need for fiscal stimulus in times of low overall demand (the signs of which are unemployment, underutilized capital,...you know, just a bad looking economy...like the one we have now).

The time it takes for Congress to agree on stimulus measures and then the time it takes to implement those measures are major obstacles to the timeliness and benefits of the stimulus. The stimulus measures passed by Bush and Obama were largely ineffective because of their size, composition, and speed of implementation. All things that discretion create or worsen.

Spending and tax levers can be effective business cycle stabilizers, but the discretion government holds over them largely eradicates this potential and this is one of if not THE major argument of those who would rather government stay out of trying to 'fix' the economy. [This discretionary problem is also found in setting monetary policy and is why there is a debate among economists over whether the Central Bank should follow rules or use their own discretion to set interest rates].

Part of the attraction of my job guarantee proposal is that it eliminates a large part of the need for this discretion, first of all, by guaranteeing full employment and secondly, by tempering aggregate demand. Deficits (through both levers) would adjust to hold down aggregate demand in booms and prop it up during busts...automatically, without discretion.

Discretion would still hold sway over tax levels and types and over the composition and levels of government spending (and indeed over the program itself), but the need for discretionary fiscal stimulus would largely be eradicated. Politicians would be relieved of the burden of curing the economy and could focus on more important things such as deciding appropriate tax levels for different income groups or what government should even spend their money on to begin with, as well as social policies, international relations, etc.

I think that sounds pretty nice, what do you think?

Employment For All Debate: Darwin's Response

Darwin has posted his response to my proposal for a job guarantee program where the Federal gov't acts as an Employer of Last Resort to ensure full employment and impart greater price stability on our economy than the current system.

I will hopefully respond to his response shortly. In the meantime, I recommend the previous post on an alternative to Obama's inadequate job proposal.

Obama's Jobs Proposal Inadequate

Highlights from L. Randall Wray and Stephanie Kelton's critique of and alternative to Obama's jobs proposal via truthdig.com:

On Thursday night Barack Obama will deliver his highly anticipated jobs speech. At this point, only those closest to the president know exactly how he intends to help spur the economy and create jobs, but reports suggest that he is mulling a $300 billion jobs package that includes more of the same—a one-year extension of the payroll tax cut, a continuation of unemployment benefits, some additional spending on infrastructure and tax incentives to encourage businesses to hire and invest in new capital. Too little of what will work and too much of what won’t for an economy that’s teetering on the brink of a double-dip recession and a president who is running out of time to deliver jobs.

There’s little doubt that extending unemployment benefits will help those who are struggling to find work. But continuing the payments we’re already making doesn’t add a single dollar of new demand to the economy. Nor does extending the payroll tax cut, which simply allows workers to keep the extra 2 percent they’ve already been getting. There will be no boost in consumer spending from these measures, although they account for more than half of the $300 billion plan the president is said to be considering. For the same price tag, the president could do something truly different—he could eliminate unemployment altogether.

The job market is much worse than the official numbers suggest. Officially, we’ve got 14 million unemployed Americans looking for jobs—about four job seekers for every job vacancy. But those 14 million Americans are also competing with 8.8 million part-time workers who are hoping to land a full-time job. Since the recession began, employers have cut so many hours from the workweek that it is equivalent to the loss of a million more jobs. Add to that the roughly 2.6 million people who gave up looking for a job, and you’ve got about 25 million people needing more work and an economy that is creating no new jobs.

Whatever the president promises, it is certain to be too little, too late. Indeed, as Eric Tymoigne has shown, by some measures job performance since the start of the “recovery” has been even worse than during the Great Depression. At the rate we’re going, it will take nine years to return to the pre-recession employment level; by contrast, in the 1930s the jobs lost in the aftermath of the Great Crash had been fully restored within seven years. The difference was the New Deal, which created jobs for 13 million Americans. President Obama has never displayed any Rooseveltian sense of purpose and he will not propose any comprehensive job creation programs like the New Deal’s WPA and the CCC.

The problem is that the president believes we can cure our jobless problem by providing the proper incentives to the business community. And here he is committing one of the few big policy blunders from Lyndon Johnson’s War on Poverty. Like Johnson, who focused on retraining the unemployed for jobs that did not exist, Obama has focused on incentivizing the businesses community to hire workers to produce for customers that do not exist. Time and again, Obama has shown that he will only tinker around the edges, relying on the same tired supply-side initiatives that will not work: more incentives to build business confidence, subsidies to reduce labor costs and to promote exports, and maybe even tax cuts to please Republicans.

Economists and policymakers alike appear to believe that if we can only improve the outlook of our entrepreneurs, they will suddenly begin hiring. And the Republicans warn of the depressing effects of Obamacare, Dodd-Frank regulations and EPA restrictions that damage the sentiments on Wall Street.

The truth is simple and contrary to these views. Business will not hire more workers until it has more sales. Consumers will not spend more until they’ve got more jobs. A private-sector recovery requires 300,000 new jobs every month. But the private sector doesn’t need 300,000 new workers per month to meet prospective sales.

The new jobs can only come from the federal government—the only economic entity that can afford to hire. Obama’s 1 million infrastructure jobs is a nice down payment, but it is only three month’s worth. New workers will create the sales that firms need to justify new hiring. Still, we must think bigger if we are to create 20 million jobs.

When it comes to the health and welfare of a nation, there is no economic policy that is more important than job creation. And yet decades of experience, in nations across the globe, provide ample evidence that while the private sector plays an important role, it cannot by itself provide employment for all who want to work.

There is a way to do that: The government could serve as the “employer of last resort” under a job guarantee program modeled on the WPA (the Works Progress Administration, in existence from 1935 to 1943 after being renamed the Work Projects Administration in 1939) and the CCC (Civilian Conservation Corps, 1933-1942). The program would offer a job to any American who was ready and willing to work at the federal minimum wage, plus legislated benefits. No time limits. No means testing. No minimum education or skill requirements.

The program would operate like a buffer stock, absorbing and releasing workers during the economy’s natural boom-and-bust cycles. In a boom, employers would recruit workers out of the program; in a slump the safety net would allow those who had lost their jobs to continue to work to preserve good habits, making them easier to re-employ when activity picked up. The program would also take those whose education, training or job experience was initially inadequate to obtain work outside the program, enhancing their employability through on-the-job training. Work records would be maintained for all program participants and would be available for potential employers. Unemployment offices could be converted to employment offices, to match workers with jobs in the program, and to help private and public employers recruit workers.

Funding for the job guarantee program must come from the federal government—and the wage should be periodically adjusted to reflect changes in the cost of living and to allow workers to share in rising national productivity so that real living standards would rise—but the administration and operation of the program should be decentralized to the state and local level. Registered not-for-profit organizations could propose projects for approval by responsible offices designated within each of the states and U.S. territories as well as the District of Columbia. Then the proposals should be submitted to the federal office for final approval and funding. To ensure transparency and accountability, the Labor Department should maintain a website providing details on all projects submitted, all projects approved and all projects started.

To avoid simple “make-work” employment, project proposals could be evaluated on the following criteria: (a) value to the community; (b) value to the participants; (c) likelihood of successful implementation of project; (d) contribution to preparing workers for employment outside the program.

The program would take workers as they were and where they were, with jobs designed so that they could be performed by workers with the education and training they already had, but it would strive to improve the education and skills of all workers as they participated in the program. Proposals would come from every community in America, to employ workers in every community. Project proposals should include provisions for part-time work and other flexible arrangements for workers who need them, including but not restricted to flexible arrangements for parents of young children.

In truth, the $300 billion the president might propose Thursday is more than enough to jump-start our economy if it is really targeted to job creation. We can estimate the total program cost at $20,000 per worker, times 15 million workers. That adds up to a $300 billion gross cost, less savings on unemployment compensation (roughly $150 billion), welfare and food stamps, as well as the social cost of depression, divorce, abuse and crime. A direct job creation program modeled on the New Deal’s WPA could create 15 million jobs for less than $300 billion net spending, while also providing the infrastructure and public services required to bring our nation into the 21st century.

And because the job guarantee is designed not to compete with other employment options, the program would not result in the bidding up of wages (and prices) as workers were absorbed into the buffer stock. This is because the job guarantee program would hire only those that the market was not yet ready to employ. Because the program would not intensify competition for workers, it would not lead to wage-push inflation. It would, however, help to stabilize output and employment by establishing a floor on wages.

The program should be permanent, offering a good job at a basic wage to anyone who wants to work. With recovery, the number of jobs required in the program would quickly shrink, as the private sector would ramp up hiring as sales to consumers rise.

By keeping the program in place even once the economy recovered, we’d ensure continuous full employment, with the job program acting as a “buffer stock” that absorbed workers laid off when the private sector contracted and as an employment recruitment pool when private sector hiring resumed. In this way, full employment is maintained through the thick and thin of the business cycle.

Only jobs will create the infrastructure we need to compete in the 21st century. And we cannot restore the security needed to turn around expectations, to get the sales the private sector needs, with anything less than a nationwide universal jobs program.

The $300 billion “investment” in a direct jobs program would be the best way to prove that President Obama is committed to resolving the jobs crisis.

Employment for All

A friend I have met in the blogosphere, known as DarwinCatholic (or sometimes just Darwin) has agreed to engage in a debate with me over a federal job guarantee program.

It's a policy I feel very strongly about, because I feel that not only is it possible to achieve both full employment and price stability (low inflation) in the U.S. but also that an ‘employer of last resort’ (ELR) or ‘job-guarantee program’ is the key to obtaining those goals.

Here is my very truncated argument (it is very difficult to make this argument in a short blog post, but I'm gonna give it a shot):


1) Full employment is desirable.

Okay, obvious I know, but this goal isn't just desirable for the obvious reasons (greater economic prosperity and efficiency, lower crime, higher education, less poverty, etc.) it's also desirable because man develops as a person through his work. As Pope John Paul II said, work enables a man to become “more a human being” for “virtue is something whereby man becomes good as man” – Centesimus Annus pp.9. Denying someone an opportunity to work, to feed his family and develop as a person is a grave evil that should be avoided if doing so doesn't bring about other greater evils.


2) Price stability is desirable.

Okay, this one may not be quite as obvious, but is still pretty obvious. We want price stability because it brings about greater overall stability to the society. Not knowing how much your dollar is going to be worth tomorrow adds to the already uncertain conditions we live in and would make the economy much more volatile. High inflation also erodes the value of savings, thus punishing savers. Price instability is not near as grave an evil as unemployment, but the results of price instability can be, so it too should be avoided if it all possible.


3) The Catholic Church has in several instances mandated societies to provide for decent work for all willing and able to work.

In Rerum Novarum, Pope Leo XIII wrote, “Among the several purposes of a society, one should be to try to arrange for a continuous supply of work at all times and seasons.”

In Quadragesimo Anno Pope Pius XI wrote, “But another point, scarcely less important, and especially vital in our times, must not be overlooked: namely, that the opportunity to work be provided to those who are able and willing to work.”

In Caritas in Veritate, Pope Benedict XVI wrote, “The dignity of the individual and the demands of justice require, particularly today, that economic choices do not cause disparities in wealth to increase in an excessive and morally unacceptable manner, and that we continue to prioritize the goal of access to steady employment for everyone.”

4) Economists have long thought that achieving both is very difficult if not impossible.

They call this the Phillips Curve. As unemployment goes lower and lower, inflation gets higher and higher. The opposite is also true. This relationship has held pretty well, with shifts in the curve occurring frequently, often times upon the onset of a recession. So full employment, that is everyone willing and able to work having a job, is NOT possible without accelerating inflation. Instead economists have shot for a low level of unemployment they called the NAIRU (non-accelerating inflation rate of unemployment) that would bring about the lowest unemployment possible without stimulating increasing inflation. This NAIRU has also shifted over the years, although economists don't really know what the number really is. They can only guess based upon the evidence they receive, which is why the number is constantly being revised.

Somewhat ironically, despite this perceived impossibility, the Humphrey-Hawkins Act of 1978 gave the Federal Reserve Bank the dual mandate of full employment and price stability.


5) So despite the desirability of full employment and price stability and the mandates given by the US gov't and the Catholic Church (which granted doesn't really carry much sway in the US), economists believe the goals to be incompatible. The best they think we can accomplish is some low rate of unemployment with some low rate of inflation.

I say, however, that it IS possible to achieve both and that to do so, the government would have to play an active role as an employer of last resort providing a job to anyone willing and able to work at a living wage.


6) To understand how this is possible, one first has to understand money. I argue that money is not a commodity like gold, but a token or debt/credit relation, a promise to pay, and has been for the past 4000 years at least. There have been periods in history where gov'ts fixed the currency to a commodity, but what made it the acceptable form of money used in that nation was the government's demand for it in payment of taxes, not the weight of metal in the coin. (Read here and herefor more on the history of money).

In nations where the gov't doesn't fix their currency to a commodity or another currency, that is, in nations with a sovereign fiat currency, there is no constraint to government spending. The issuer of the currency defines the currency and cannot go bankrupt or default on its obligations.

So going bankrupt or spending more than it "brings in" is not a reason we can't have full employment. I also argue that there is nothing inherently wrong with deficits. I argue that they don't crowd out private spending by raising interest rates (the central bank controls interest rates), they do not burden future generations, and they do not lead to financial ruin or a weak currency.

Deficits are expected to be the norm due to the private sector's desire to net save financial assets. To do so, the private sector must run a trade surplus (exports>imports) or the government must run a deficit.

Deficits can be too high, however. When they are too high they can be inflationary, so it is still necessary to show how inflation wouldn't ensue with such a program.


[This part gets kinda wonkish, so stick with me!]
7) The job guarantee program would act as a 'buffer stock'. That is, it would anchor prices by fixing the price for low-skilled labor and let the quantity of said labor in the program float.

I argue that the gov’t doesn’t have to pay the market price when it buys goods and services. If it offers a lower price suppliers may refuse to sell to the gov’t inciting a deflationary cycle, if the gov’t offers a higher price an inflationary cycle may set in.

It would not be wise to try and fix the price for everything it buys (the effects of which would be quite destabilizing and have major distributional changes). Instead it could fix the price of an important commodity letting the quantity float which would also mean the gov’t deficit would float with it. By fixing an important price, one that enters as a major cost in the private sector, the gov’t would impart some price stability to the economy and by letting the deficit float counter-cyclically the gov’t would fill any demand gap created when private sector spending is too low.

The best commodity to fix the price of, I argue, is low-skilled or unskilled labor. This will stabilize private sector wages and thus costs and prices. Employment in the program will increase when private sector employment decreases. When private sector spending picks back up, employees will be hired out of the job guarantee program back into the private sector.

The recommended wage for the program would start with the minimum wage and be ratcheted up until what is deemed a living wage is reached. Starting at a minimum wage and ratcheting it up to a living wage minimizes the one-time adjustment and subsequent adjustments in all other relative prices.

Such a policy guarantees full employment, a counter-cyclical deficit to fill any demand gap left by the private sector, and impart greater price stability than the current system.


8) Like any gov’t program, such a program is not without challenges. It is unwise to assume that gov’t would ever be perfect, we humans are not, so why would an institution created by us be perfect?

The ELR is not slavery, only those willing and able to work will be hired. It is not meant to replace welfare, but will likely replace a large amount of unemployment insurance and some other welfare spending as people earn their way out of need. ELR workers can be fired with restrictions placed on re-hiring; there will need to be discipline. This program will not resolve all economic problems, but will likely improve a great deal of them.

There are plenty of different jobs ELR workers can perform: companions to the elderly, classroom assistants, safety monitors, neighborhood cleaners, low-income housing restorers, day care assistants, library assistants, environmental safety monitors, artists or musicians, and many, many more. These jobs may not all ‘produce’ as much as they are paid and I have many arguments to address this, but is it not better to offer someone a job at a living wage who will produce something rather than give someone unemployment insurance for nothing?

I argue that it would be best to run the program at the county level with the Federal gov’t simply writing the check. I believe this is in line with the CST’s principle of subsidiarity.

Admittedly this a very non-orthodox approach to economics, but is one which I believe to be far more accurate than the mainstream’s belief that reaching the two goals of full employment and price stability is impossible. The key I believe is in the understanding of money and gov’t finance. This program does not favor ‘bigger government’ but rather a government that proactively works for the common good according to the principle of subsidiarity. Understanding how modern money works is neither republican nor democrat. Once it is understood how modern money works it seems natural to come to the conclusion that the gov’t should have a job guarantee program. Whether gov’t should be active in other areas is a matter left to further debate and is outside the scope of this argument.

It is impossible to address all the objections to the program in such a short post, so I’ll turn it over to my fellow debater to object and point out weaknesses and then respond to them.

You can read his response here. [Link will be posted shortly].