Navigating the Jobs Crisis: Time to Try Government as Employer of Last Resort
Tuesday, 11/17/2009 - 9:24 am by Marshall Auerback | 20 Comments
In the wake of the highest unemployment rate in 25 years, the Roosevelt Institute asked historians, economists and other public thinkers to reflect on the lessons of the New Deal and explore new, big ideas for how to get America back to work. Marshall Auerback calls for government to step in as employer of last resort.
At 10.2%, unemployment is now at its highest level since 1983. Nearly 16 million people can’t find jobs even, though we are constantly being told that the worst recession since the Great Depression has officially ended. Yet instead of trying to revive the productive economy, most of the Obama Administration’s recovery efforts still remain focused on cardio-shock treatment for Wall Street. The President still seems curiously hamstrung by his Herbert Hoover-like devotion to fiscal rectitude: he wants to spend but not add “one dime to the deficit,” as he announced at his Congressional address on health care in September. He does this even though deficits are a natural consequence of slowing economic growth, falling tax revenues and higher social welfare payments.
To all of the “Chicken Littles” (including the president), who fret about “excessive” government spending, we would simply point out that it is far better to deploy government spending in a way that reduces unemployment instead of settling for having it rise as a consequence of this spending.
We therefore suggest a new approach: Government as Employer of Last Resort (ELR). The U.S. Government can proceed directly to zero unemployment by hiring all of the labor that cannot find private sector employment. Furthermore, by fixing the wage paid under this ELR program at a level that does not disrupt existing labor markets, i.e., a wage level close to the existing minimum wage, substantive price stability can be expected. A sizable benefits package should be provided, including vacation and sick leave, contributions to Social Security and, most importantly, health care benefits, providing scope for a bottom-up reform of the current patchwork health care system.
Government as ELR would not be introducing another element of intrusive bureaucracy into our economy, but simply better utilizing the existing stock of unemployed, who are now dependent on the public purse — especially the chronically long-term unemployed. The current system we have relies on unemployed labor and excess capacity to try to dampen wage and price increases; however, it pays unemployed labor for not working and allows that labor to depreciate and develop behaviors that act as barriers to future private-sector employment. Social spending on the unemployed prevents aggregate demand from collapsing into a depression-like state, but little is done to enhance future growth and demand, which can be done via the ELR by providing the currently unemployed with jobs, greater education and higher skill levels.
The ELR program would allow for the elimination of many existing government welfare payments for anyone not specifically targeted for exemption. It would also command greater political legitimacy, as society places a high value on work as the means through which individuals earn a livelihood. Labor would welcome the safety net of a guaranteed job, and business would recognize the benefit of a pool of available labor it could draw from at some spread to the government wage paid to ELR employees. Additionally, the guaranteed public service job would be a counter-cyclical influence, automatically increasing government employment and spending as jobs were lost in the private sector, and decreasing government jobs and spending as the private sector expanded. It would therefore remain a permanent feature of our economy. In effect, it would act as a buffer stock to put a floor under unemployment. The program helps maintain price stability whereby government offers a fixed wage that does not “outbid” the private sector, but simply creates a stabilizing floor and thereby prevents deflation.
A more or less “free market” system does not (and, perhaps, cannot) continuously generate true full employment. And no civilized nation should allow a large portion of its population to go without adequate food, clothing and shelter. One of the best features of the ELR program is that it creates a stock of employed people, rather than a buffered stock of unemployed, where social capital depletes rapidly, and several long-term social pathologies develop.
The way we’re approaching our labor force now isn’t working. It’s time to try something that can put as many Americans as possible into productive employment.
Roosevelt Institute Braintruster Marshall Auerback is a market analyst and commentator.
Evolution:
The universe always provides an alternative to the stongest swimmers. That is the inherent nature of the universe.
The weakest swimmers will set up a gate at the base of the current, and charge a fee for entrance. Over time they get fatter, dumber and slower, basking in the calm pool, charging higher and higher fees, all the while assuming those swimmers going upstream are incredibly stupid.
The strongest swimmers always have all kinds of alternatives, but they will run through that gate system, right up until all the mid-level swimmers are willowed out, then they will swim up another current, and leave the old gate system to consume itself to death.
In a recession, the best talent gets laid off first, in favor of the the politically connected, under the assumption that this talent, under duress, will develop new processes for the system. In a depression, the talent has left for another current.
When the old system has no other option, it will repeal Family Law and re-boot the system by paying Labor 51% return on the economy, or it will become extinct.
The only option is to develop and roll out new economies in virtual space, and the talented kids have been systematically surrounding the old geographic economy with their new virtual economies.
This government has controlled population breeding for some time now, breeding itself into lazy thinking. If it wants to survive, it going to have to learn to serve again. It’s current operation enslaves suspected talent to capital, exactly backwards. It’s a don’t do what I do, do what I say economy.
If the older generations want to get their economy back online, they have to pair up with kids, at random. The truly talented kids are not going to reveal their identity, so all the kids have to be picked up.
You know what they say about assumptions …
Posted by kevinearick | November 17th, 2009 at 10:08 am
Just be careful not to mention “justice” at all or you’ll get canned like Van Jones did.
And I wonder how many different acronyms there will be for ideas like this? Yours is ELR, Wray’s was JG the other day.
Posted by Zach P | November 17th, 2009 at 12:50 pm
Randy’s is better. Mine simply pays tribute to the originator of the idea, Hyman Minsky (whom Randy Wray studied under). In this country, anything with the word “government” in it seems to be viewed as something akin to “socialism” (God forbid). Actually, I like the Indian version: “National Rural Employment Guarantee Act”. You can get rid of the word rural and it would be a good name for the legislation.
Posted by Marshall Auerback | November 17th, 2009 at 12:56 pm
A big problem indeed in this country is that many people are reluctant to accept government assistance, because many people will perceive that as weakness and something shameful. The Reaganites succeeded in changing at least part of this country’s culture, I think, and definitely for the worse.
Posted by Zach P | November 17th, 2009 at 1:14 pm
Let’s have the, Can Do, Seabees contract and manage the Rebuilding of America. They are set-up, have the know-how and will hit the ground running. The blue and white collar unemployed can get to work immediately. Each state can make a list of what needs to be done.
As for funding, tell congress, “If you don’t want your unemployed constituents to have a job vote no, i f you do vote yes.”
Posted by Frederick Falkenberg | November 17th, 2009 at 2:26 pm
I agree that something like what many adherents of MMT are proposing in this vein and fleshed out in their professional articles and books, as well as many blog posts.
It seems to me that a political hurdle in the way of implementing this would be “whereby government offers a fixed wage that does not “outbid” the private sector.” Paying a living wage with the benefits proposed would not be comparable to the present minimum wage in the US, which is not even a subsistence wage and comes without benefits unless the employee qualifies for government assistance like Medicaid. It seems that people at the bottom would be drawn to this program instead of taking minimum wage jobs. This would not be lost on the powerful business lobby were this proposal offered as legislation.
While am in agreement with the JG/ELR proposals in general, the details concerning the wage/benefits package seem to be a real sticking point, even if other objections like “socialism” are set aside as spurious. America has not been ready for a robust safety net. and this seems to be far beyond anything ever contemplated.
It would be quite stretch, but one that would solve a raft of intractable problems. As Wray argues in Understanding Modern Money (1998), this is way to achieve the so far elusive goal of permanent full employment with price stability, which an understanding of how government finance actually works in a fiat system. Nixon closed the gold window on August 15, 1971, changing everything. Most “orthodox” economists’ monetary thinking is a pre-1971 hangover. We need to update that thinking with modern monetary theory (MMT), which shows how JG/ELR is doable without being “fiscally irresponsible.”
As Rahm Emmanuel famously said, “Never let a good crisis go to waste.” It just might be possible to pass this kind of legislation if it is put forward on a temporary basis due to the crisis, and later work to make it permanent.
Posted by Tom Hickey | November 17th, 2009 at 11:57 pm
I dunno. If I was “guaranteed” a government job at something like minimum wage, I’d be mighty tempted to guarantee that I did minimum work, unless the condition of my employment was that I was to be paid minimum wage for doing the work that I thought needed to be done.
These lofty job guarantee ideas seem to take for granted the two elements that I would consider the most vital — the motivation of the workers and the administration of the workforce and the work.
Now, I think this kind of policy would work if our public officials were better people than they are and if the unemployed were saints who would be congenitally grateful for the blessing of a subsistence. My own view is that you have to take people as they are and try to work some kind of improvement at the margin.
I’ve studied the political economy of work time reduction for 14 years and have been particularly attentive to the opposition to shorter working time. There’s this curse tossed at advocates that they “assume a fixed amount of work” — a lump of labor fallacy — when really we’d all presumably be better off if More Work was done. In what respect? If there already isn’t sufficient demand for the product of the work currently being done, why is More Work such an urgent necessity? And what of the work that just doesn’t count as work because it’s not paid employment?
Well, in my researches on the lump of labor, I’ve learned that it has a lot of synonyms — the lump of work fallacy, the fixed work-fund fallacy and… wait for it… the make work fallacy! If the arguments advanced against work time reduction were valid — which they are not — the same arguments would also apply to an employer of last resort scheme! So the question really comes down to which would be easier and cheaper to administer and which would have the closest linkage to “real” jobs and thus be able to take advantage of (even while transforming) existing motivational and promotional structures?
In his Theory of Moral Sentiments, Adam Smith defines “what constitutes the real happiness of human life” as ease of body and peace of mind — not income and not material possessions. Thomas Jefferson expressed a kindred attitude when he wrote, “If we can prevent government from wasting the labors of the people under the pretense of taking care of them, they must become happy.” I can recite the concurring views of Benjamin Franklin, John Stewart Mill, Karl Marx, Alfred Marshall, Stephen Leacock, Thorstein Veblen, John Maynard Keynes, Bertrand Russell, Aristotle. Real wealth is disposable time.
But More Work (solely for the sake of creating employment) means more material throughput, more greenhouse gas emissions. This doesn’t mean there isn’t loads of vital work that needs to be done and isn’t currently being done. But at minimum wage? And as a “last resort”?
Posted by Tom Walker | November 18th, 2009 at 1:21 am
I agree the jobs are important… May I please ask, from where the money for the program comes from? What is your estimate, how much would it cost the goverment in the first year of the program, for instance? The costs would include the wages, program administration, training etc…
Thanking in advance.
Posted by Symcon | November 18th, 2009 at 10:13 am
There’s been estimates done by L. Randall Wray that this program would cost around $50bn. Of course, that was 10 years ago. Let’s quadruple that to $200bn. Remember, as well, that ELR would replace a lot of existing social welfare programs, so I am probably overstating the cost. In other words, I expect that this would cost less than the AIG bailout, and produce appreciably greater social benefits for the US economy. On the question of “living wage”, I agree there is room for some calibration here, but the idea is to get the program introduced with a minimum of disruption and incorporate it as permanent feature of government in a way that does not produce future inflation. Contrary to the manner in which we are caricatured, adherents of Modern Monetary Theory (MMT) do believe that there are constraints to government spending - notably inflation - not false, self-imposed constraints which stress “affordability”.
You will also note from other things I have written on this blog that I don’t share the concerns about the budget deficit. The recognition of the national accounting relationships which underpin modern monetary theory are not matters of opinion. These include (but the list is not exhaustive):
• That a government deficit (surplus) will be exactly equal ($-for-$) to a non-government surplus (deficit).
• That a deficiency of spending overall relative to full capacity output will cause output to contract and employment to fall.
• That government net spending funds the private desire to save while at the same ensuring output levels are high.
• That a national government which issues its own currency is not revenue-constrained in its own spending, irrespective of the voluntary (political) arrangements it puts in place which may constrain it in spending in any number of ways.
• That public debt issuance of a sovereign government is about interest-rate maintenance and has nothing to do with “funding” net government spending.
• That a sovereign government can buy whatever is for sale at any time but should only net spend up to the desire by the non-government sector to save otherwise nominal spending will outstrip the real capacity of the economy to respond in quantity terms and inflation will result.
As a matter of conceptual clarity it makes no sense to say the government can “save” in its own currency. It might spend and build assets (financial or otherwise). But running surpluses do not build up any store of “saving” that allows for higher spending capacity in the future. This is in contradistinction to the way a household, for example, functions. For them spending less on consumption than they earn amounts to saving which can then be stored to permit higher consumption than otherwise in the future.
Trying to draw an analogy between the national government which issues the currency and the household sector which uses the currency is flawed at the most elemental level. Of-course, it is a representation that lies at the heart of mainstream economics and is a powerful analogy for them to beguile the ignorant public.
Posted by Marshall Auerback | November 18th, 2009 at 10:27 am
Thank you very much for the answer.
I’m not sure why the ELR should be made permanent… I seems as soon as the country is out of the ressesion the ELR should be replaced by usual programs, similar the USA has today.
Posted by Symcon | November 18th, 2009 at 11:49 am
Symcon, the “usual programs” have never been enough, including during “good times”. And there will always be a need for public service work that the private sector will not do because it is not “profitable”.
Posted by Zach P | November 18th, 2009 at 12:31 pm
Thanks, Zach P.
As I understand there are ‘public service jobs’ today as well, for instance ,gov-t jobs, municipal jobs etc. Maybe we can increase productivity there? Or hire private companies to do the same? My concern is : because the gov-t seems can manage to make any initiative be costly and very low productivity, the ELR may become just ’sinecure’ for people who are getting good wages for doing close to nothing (at taxpayers expense).
Posted by Symcon | November 18th, 2009 at 2:10 pm
Privatization leads to nothing but increased costs, reduced service, reduced quality, etc. Ask any municipality that has had its water privatized…or look at the huge costs of our current wars, which are almost completely privatized, minus the actual combat.
And you seem to be regurgitating the Republican Party line about the ‘inefficiency of government’, so I doubt’s you’ll be swayed by anything said here unless you give up your Reaganesque blindfold.
Posted by Zach P | November 18th, 2009 at 2:16 pm
Maybe I should explain: I’m not american,I live in Canada, and I’m from the former Soviet Union.
I’m genuinely interested in opinions to find out how this world crisis could be turned into the ‘good times’.
You don’t agree, the ELR could become costly and inefficient thing during ‘good times’, do you? There will be many jobs which pay good wages during good times. Why will you need the ELR, if a person can get a job on the market which pays more ?
Posted by Symcon | November 18th, 2009 at 2:33 pm
Ah, I see. The point of a system like this is that even in the ‘good times’, there is no true full employment…I believe the measure of full employment in a good economy is around 5% unemployment. 95% employment does not equal full employment to me. As well, businesses need revenue to employ people.As has been demonstrated on this blog, our federal government faces no such constraint, and can employ people when businesses cannot or will not. This way, everyone can have a job and make a living, no matter what’s going on in the economy. There will not always be jobs in “the market” for every single individual, because not only will “the market” depend on revenue to hire, businesses will also not likely perform services or manufacture goods that aren’t profitable, but are still needed by society, like I mentioned before.
For example, America really needs carbon-free renewable energy. It is not yet profitable to replace all of our energy sources with clean energy for a variety of factors. But it is still needed by our country, profitable or not. Why can’t our various governments start up the factories to produce this energy and site it on their properties, like the federal government did during WW2, converting existing production to wartime goods and buying all of the output?
Posted by Zach P | November 18th, 2009 at 4:20 pm
Symcon, the reason that JG/ELR should be permanent is in order for the government to established a stable price for labor. This is important in Wray’s argument for achieving full employment with price stability. Wray makes this argument in relatively simple terms in Understanding Modern Money (1998), which is available for perusal on Google Books.
Importantly, MMT is based on national accounting identities rather than economic theory based on assumptions. Wray also sets this forth in detail.
MMT is neither progressive nor conservative. The same principles apply. Government spending increases non-government the financial assets, and reducing taxes does, too. Progressives would emphasize spending and conservatives reducing taxes to increase the net financial assets of non-government. But the principle is the same.
Posted by Tom Hickey | November 18th, 2009 at 4:21 pm
Interesting post today at Bill Mitchell’s blog on employment guarantees. It answers a lot of points addressed Marshalll’s post and in the comments, using real world examples.
http://bilbo.economicoutlook.net/blog/?p=6143
Posted by Tom Hickey | November 18th, 2009 at 5:18 pm
Yes, and Bill Mitchell is proposing a similar Job Guarantee program in Australia. Tom Hickey’s points are correct, Symcon. My experience of people who have come from the former Soviet Union is that they tend to idealise the free market structures we have here in the US. Our system has never established anything close to full employment. This provides a mechanism with which to achieve it. It’s something that will take people already on the public sector “payroll” via welfare and put them to work, creating a buffer stock of employed labour, which will be far more useful to the private sector. That’s the reason you want it to be a permanent feature of government. It is there to enhance the workings of the market, not destroy it.
Posted by Marshall Auerback | November 22nd, 2009 at 10:56 am
Thanks a lot, Mr Marshall Auerback.
Posted by Symcon | November 24th, 2009 at 7:13 pm
Shock horror ! Parts of Auerback’s article have been copied and pasted from an article by Warren Mosler. For example these passages appear word for word in both articles:
“The ELR program allows for the elimination of many existing government . . . .
And: “Furthermore, by fixing the wage paid under this ELR program. . . . . .
Warren’s article is here:
http://moslereconomics.com/mandatory-readings/full-employment-and-price-stability/
Posted by Ralph Musgrave | January 20th, 2010 at 2:39 am