Thursday, September 1, 2011

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].


  1. Great. I will show this interesting debate in my blog written in Portuguese (, may I?

    Best regards,
    Pedro Erik

  2. Thank you Pedro! That would be great!