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MMT, full employment, and the limits of power

by Zwackus Wed Nov 28th, 2012 at 04:34:36 AM EST

In my previous diary, Once more into the fray, taxes, deficits, and MMT, an interesting discussion developed on the social and economic limits to the ability of the government to create full employment.  That is a really interesting topic which was only partly addressed in the discussion, and I'd like to invite the ET community to return to that topic for a more focused examination of the topic.

front-paged by afew

Given that I am more the amateur economic provateur than a true master of theory and data, I think it might be best for me to posit a few basic questions that seem to be at the heart of the issue, and to then outline my narrative understanding of the situation.

  1. In the normal parlance of mainstream economics, "Full Employment" actually means a low unemployment rate - the rate at which there are enough unemployed people looking for work that workers cannot take advantage of their scarcity and bargain for higher wages, thus causing "bad" wage/price inflation.  Is a situation of actual full employment, where anyone who wants a job can get one, possible in ordinary (barring Total Mobilization for war, etc.) circumstances?

  2. Would true full employment cause sufficient economic problems to make it truly undesirable? What would these problems be, and why are they actually bad?

  3. It is often said that true full employment would cause inflation, but the examples typically cited are in monopolistic sectors with inflexible demand.  Would state ownership/severe regulation of such sectors make a substantial difference on the inflationary effects of full employment?  What sectors would need to be controlled?

  4. Employment is not, of course, a generic national statistic, but rather the aggregate of different people having jobs in different places in different sectors of the economy.  In what sectors would targeted government spending be able to most easily create employment?  Are those actually sectors where unemployment is a severe problem?

  5. Assuming MMT is correct and budget deficits are necessary for a properly functioning economy, is there any good reason why the government service sector should not be fully funded so as to provide a maximum level of service through widespread employment?  That is, is there any good reason why something like the teacher/student ratio should be restricted by available money?

  6. Following from 5, would maximum levels of government service employment be enough to maintain sufficient levels of economic activity in the rest of the economy to maintain something close to full employment?  Would there be specific sectors that need extra help?

  7. Economic sectors involving national infrastructure networks, particularly those which require regular maintenance for safety and reliability, seem to be continually guilty of employing far too few people to really do proper maintenance.  Safety and reliability are not efficient, and are thus the first things cut in any drive to but the budget or improve profitability.  Obvious examples are road and rail, electrical distribution networks, and communication networks.  The Internet backbone might also fit into this category.  How could government funding be best deployed so as to encourage/mandate/force higher levels of employment for regular maintenance and repair in these sectors?

  8. It has been proposed that many sectors of the rural economy suffer from serious problems finding sufficient workers, because the people with the necessary skills and motivation don't live where the jobs are.  Is this a real problem, and what could be done about it?

The way I see it, with there are enough big, unfunded services and national-scale projects that could be pursued which would put a sufficient dent in unemployment rates that, through basic spending multiplier effects, the rest of the economy could be dragged along.  Fully funding education (so that, for example, the teacher/student ratio is always at the level considered best for education, and is never budget constrained), healthcare (enough doctors and nurses everywhere to make it cheap and affordable, and health-maintenance add-ons like nutritionists, massage therapists and whatnot to improve the quality of life for everyone), fire and emergency response, and other basic government services would be an obvious start, but that's not all.  There are also a variety of ambitious public infrastructure projects that are tossed around but never funded systematically - power transmission infrastructure upgrades, securing the grid against high-level solar flares, high-quality passenger and freight rail, putting together a system to protect the Earth from asteroid strikes, systematically restoring rives and estuaries, and whatnot.  Further, expanded funding for science keeps smart people in jobs, and space research and technology could theoretically open up all kinds of doors for future economic activity, while also keeping a whole range of scientific and manufacturing people employed.

But what do I know?

I think rural employment has wide regional variations.

For example, in the UK the labour intensive parts of the farming sector (e.g. fruit picking, etc.) have evolved through a particular arc:

We'll start with a baseline where this temporary seasonal work was done by a combination of locals (who either undertook other work during other seasons, or scraped by in the black economy and/or the dole) and travelling workers, some of whom were like the locals, others were teenagers and students filling in on a temporary basis.

Historically, a significant number of the travelling farm workers in the UK were actually from Ireland. In some ways, these are the first wave of immigrants.

The second wave came from the original EU periphery (e.g. Portugal, Spain) and the third wave from the new EU (e.g. Poland).

What ties the first 3 waves together is an economic model, where the travelling workers spend the off-season (absent other work) "back home" in an area where living costs are significantly lower. This allows the farm bosses to pay less and has seen the exit of the local workers and travellers and teenagers/students from the rural economy.

All this has been amplified by the arrival of fourth wave illegal immigrants who are often controlled and exploited by handlers who bring them into the country and "manage" them in rural work. Naturally enough, such exploitation has depleted real wages even further.

santiago has been doing research in the USA and finding different issues - so I conclude there are wide variations.

by Metatone (metatone [a|t] gmail (dot) com) on Sun Nov 25th, 2012 at 07:57:50 AM EST
On your first point, yes.  Full employment is possible and was in fact achieved in most of the United States during the late 1990's.  It was possible at that time, in most parts of the that country, to get a job that paid a living wage if you wanted one.  This was also a period of relative peace in the United States and characterized by budget surpluses, which means a contracting government rather than an expanding one for the purpose of creating employment.

So, 2, no it would not cause problems.  The "Clinton years" are looked at nostalgically in the US as the high point of US economic history.

During this time, none other than Fed Chair Alan Greenspan derided the idea that you had to have inflation when unemployment was essentially zero.  Zero unemployment was Greenspan's explicit objective, and his quantity-theory-of-money argument was that a growing economy means an economy with more things chasing fewer currency units, and thus deflationary, not inflationary.

It is a well established fact in economics that creating jobs in transportation infrastructure and construction provide very high job multipliers, which means for every job funded by a government expenditure, at least 4-5 additional jobs are created in the economy through residual demand.  However, most economists, regardless of political stripe, agree that, long term, the best return in terms of jobs and economic output for an investment of additional resources is always education, particularly early, pre-kindergarten education.  

The main reason a student teacher ratio should be constrained doesn't have to do with money constraints but rather with the fact that student teacher ratios are not a very good indicator of educational success generally. Rather, currency expenditures per student are.  Some places need more teachers, but other places need more of other resources.  A country with very high educational achievement currently, however, can expect less benefit from additional investments in education.

I don't think it is true that safety and maintenance are lacking in general, but rather in some specific places.  That this is true can be seen by the fact we are objectively safer now than ever before.  Faults in this respect are going to be location specific.  I don't think we can even say that reliability is less.  Additional resources in such areas just increases overhead and are only beneficial in times of low employment.  They will be significant drags on economic activity if expected during periods of high employment as well, which is likely to happen as standards develop by applying too many resources during high employment periods.  How to encourage sufficient maintenance of public infrastructure has been a constant economic problem, however, due to the principal-agent problem.  That's why privatization (or as it is called now, "public-private partnerships") have been so popular and so controversial in various places and times.  Privatization works when government operators are either too incompetent, corrupt, or politically paralyzed to fund the appropriate maintenance, but in other contexts it is just as often the private operators who are so and there is no reason to believe that one is generally better than the other.

On your last point, direct, rather than general, government expenditures to increase employment in needed areas such as transportation infrastructure in a given geography, rather than general programs to increase employment for an entire class of worker, is the best solution and would avoid the problem of increasing labor costs in areas where labor availability is already a problem while unemployment remains high in other places.

by santiago on Sun Nov 25th, 2012 at 09:26:19 AM EST
Electrical power generation and distribution should be moved towards the top of the agenda, as the cost and efficiency with which these tasks are performed have large impacts on the rest of the economy. For the US one goal should be to maximize the generation capacity from wind power through feed-in tariffs and improvements to the grid and another should be to move towards a more robust infrastructure, especially in areas of high population density, through a systematic program of moving infrastructure underground, and through the upgrading and electrification of the national rail system.

The capping of electrical costs from wind generation, due to the merit order effect, would be the equivalent of a significant tax cut for all and is the sort of 'self liquidating' investment towards which good public policy should aim and moving urban electrical distribution underground in storm prone urban areas would minimize lost production due to power outages greatly reduce cleanup costs. The additional economic activity which this would generate, including the 'multiplier' of which santiago spoke, is just what is currently needed in the USA. Combining such programs with increased public support for education and health care delivery would move the economy towards growth and full employment.

The biggest obstacles to pursuing such a plan are the power of incumbent fossil fuel suppliers and the power of the financial 'disservice' industry. The public needs to become aware of the difference between a 1960 style financial service sector which primarily provided inter-mediation between available capital and needed productive investments and the present 'disservice' industry, which primarily provides rent extraction to drive ever further rapidly increasing and socially destructive disparities of wealth. In the current environment anything that might have once been considered 'good public policy' now seems utopian.

My sense is that shifting $200 to $300 billion/year from increased tax revenue from the wealthy, reduced defense expenditures and decreased tax expenditures on current economic incumbents might be sufficient to accomplish the needed boost towards sustainable growth and all of these proposals support reductions in greenhouse gases.

As the Dutch said while fighting the Spanish: "It is not necessary to have hope in order to persevere."

by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Sun Nov 25th, 2012 at 11:48:46 AM EST
My sense is that shifting $200 to $300 billion/year from increased tax revenue from the wealthy, reduced defense expenditures and decreased tax expenditures on current economic incumbents might be sufficient to accomplish the needed boost towards sustainable growth and all of these proposals support reductions in greenhouse gases.

The way I see it, there is absolutely no need to frame the issue in terms of "take money from X" and "spend it on Y."

Taking money from particular social, income, or economic groups via taxation is something that should be done of money has accumulated in the hands of that group in a detrimental fashion, and that money would be better destroyed than left with them.

Money should be created and spent when there is a worthwhile project that needs funding, and the larger economic conditions are conducive to its completion.

There is no necessary connection between the two.  They serve entirely different purposes.  They might both be worth pursuing, for their own reasons, but those reasons are not and should never be connected.

Breaking the mental connection between taxing and spending in the mind of the public would be one of the greatest narrative accomplishments of the modern era.  So much opposition is needlessly raised to worthwhile projects because people think their hard-earned credit units are being given to somebody or something they don't agree with.  The sooner that crutch can be kicked out from the austerian-feudalist lie, the better.

by Zwackus on Sun Nov 25th, 2012 at 10:30:27 PM EST
[ Parent ]
Breaking the mental connection between taxing and spending in the mind of the public would be one of the greatest narrative accomplishments of the modern era.

I agree, but we ain't there yet, or even near. Increasing taxes on the very top end is needed to start to work against the ongoing detrimental skewing of wealth distribution. Cutting defense spending is needed because so much of it is just devoted to killing foreigners in the interest of keeping the MIC going and tax expenditures on fossil fuel hinders the development of renewables. if we try to accomplish those goals by speaking a language which those with whom we are negotiating do not comprehend is just Quixotic. Building a base of support for sane policies should include education in the basics of some of the concepts from MMT, such as three sector national accounting and its ramifications. It should also include delegitimating the existing neo-classical economic models and demonstrating that alternative formulations explain events far better - starting with Steve Keen's work and MMT.

As for MMT, how can it not be better to incorporate language and models of money and banking that actually correspond to what is everyday practice? The only justification that comes to mind is that almost all current economists were trained with models and concepts that systematically misrepresent actual practice. But why should we not expect that professionals who have earned higher academic degrees are not capable of learning and adopting better practices and approaches when they emerge? -- aside from the probability that some of the representatives of the wealthy interests that donate to universities and political parties understand well the advantages of retaining a system that makes most unable to conceptualize the very things that would do those interests the most harm and use financial pressure to maintain their preferred models, language and conceptualizations.  

As the Dutch said while fighting the Spanish: "It is not necessary to have hope in order to persevere."

by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Mon Nov 26th, 2012 at 01:35:13 AM EST
[ Parent ]
Good points all, but I'm not negotiating here with neoclassical economists, and neither are you.  I'm trying to build and refine my own positive rhetoric in favor of sound policies, for use primarily within the larger community of American lefty activists.  In that context, I'm not really sure if adopting the very concepts and frames I'd like to demolish is the most productive use of time.
by Zwackus on Mon Nov 26th, 2012 at 01:51:32 AM EST
[ Parent ]
And, more than that, I don't think negotiating with the austerity-fixated policy establishment is really something to pursue in any case.  They already believe what they want to believe, facts be damned, and one cannot expect rational argument to matter to them.

My ultimate goal would be to build an alternative narrative and rhetorical strategy that is coherent and persuasive without any acknowledgement of the enemy's frames and ideas.  Victory would be achieved not through any sort of rational exchange of ideas, but by building mass support for the alternative narrative, seizing power, and using that power to destroy the employment and funding opportunities of the enemy.  

by Zwackus on Mon Nov 26th, 2012 at 03:44:52 AM EST
[ Parent ]
As with scholasticism the universities are likely to be the last bastion of the old modes of thinking as they are the abodes of those most deeply steeped in that mode of thought and where the conflict most strongly resembles theological disputes with orthodoxy and heresy.

As the Dutch said while fighting the Spanish: "It is not necessary to have hope in order to persevere."
by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Mon Nov 26th, 2012 at 11:39:53 AM EST
[ Parent ]
Very much enjoyed the document mentioned in last week's Salon

We'd need a few think tanks and a couple of journalists. Maybe summer camps for the next generation of politicians?

sapere aude

by Number 6 on Mon Nov 26th, 2012 at 08:15:03 AM EST
[ Parent ]
Randall Wray is very good at clearly expressing complex ideas and Hyman Minsky was his PhD adviser. Also Wynn Godley, the godfather of stock and flow analysis, was his office mate for years.

Following on Wray's line of argumentation about framing I think a productive meme and line of supporting argumentation is that the goals of wealthy US conservative libertarians to reduce to a minimum their taxes and the power of the federal government and to increase to a maximum their own personal wealth and power are inherently self defeating. In the USA their wealth is tallied in dollars and the need for US dollars to pay taxes is largely what maintains the value of that dollar. Therefore largely exempting themselves from taxation undercuts the value of their wealth.

The wealthy refusing to allow themselves to be taxed is like the Lannisters refusing to pay their debts in Game of Thrones. Lannisters are the ones with the gold mines and that they always pay their debts is the source of their credibility. The further the distribution of wealth in the US proceeds towards the direction of the concentration of wealth in the hands of a few wealthy the weaker becomes the society that supports the government that issues that currency. The end point is monetary and societal collapse, and, while the very wealthy will be relatively much better off than the rest, in absolute terms they will be much worse off than they are now.

The irony of the rich wrecking the ship of state which they command would be much richer were it not that the rest of us are along in steerage and there are only enough life boats for some of the rich.

As the Dutch said while fighting the Spanish: "It is not necessary to have hope in order to persevere."

by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Mon Nov 26th, 2012 at 01:53:45 PM EST
[ Parent ]
My question would be whether it is better to prescribe the solution for the electricity system, or is it better to set the economic and social parameters and then let the technical people figure out the best engineering solution.

Is the argument against coal a philosophical thing? Or is it a practical thing about externalities and social impact of burning coal? I think it's the latter, but it would be better to tell the technologists what it is that you want to accomplish overall rather then tell them "I want wind power."

For example, there is a lot of hand-wringing about the power system problems in NYC after the hurricane. "The wires should have been buried so they wouldn't blow down." "The transformers should have been up in the air so they wouldn't get flooded." "We should have had more local generation systems so the failure radius would be smaller." "We should have had more externally available power to provide geographical redundancy." It is Really Complicated.

So the politicians and amateur engineers should say what they want to achieve overall, and then set up a funding system that allows the utility companies to spend some money on R&D and engineering and capital investment and let them figure out the tradeoffs.

Maybe the answer is wind, maybe the answer is PV, maybe the answer is thermal solar. (Also coal, nukes, hydro, tidal, you-name-it.) Depending on how you twiddle the requirements, it can be any combination.

by asdf on Wed Nov 28th, 2012 at 11:01:29 AM EST
[ Parent ]
(I)s it better to set the economic and social parameters and then let the technical people figure out the best engineering solution.

Have you been reading too many century old H.G. Wells novels, the ones where various kinds of technologists band together to save the world? I agree it would be better to let these decisions be made, to a large degree, on the technical merits, but in what alternate universe has that been happening? In this universe, in the USA, we have had, until recently, the spectacle of EXXON funding 'research' and publications denying global warming. The current CEO, considering the impact on the bottom line of American Tobacco of the court decisions showing that they had deliberately misled regulators and the public on the dangers of tobacco, decided to quietly stop funding such research - without ever admitting that they had been funding it - and quietly acknowledging some of the effects of greenhouse gas emissions. (There is a recently published book on that subject, but memory fails.)

In the USA, especially with the decline of state support for universities, technologists are typically either employed by corporations or have their research funded by corporate donors. Few manage to complete their PhDs while flouting the tacitly expressed interests of these representatives and agents of wealth. I could cite examples of similar influence on reporters and presenters in the media. This is 'capital' exercising 'market discipline'.

Too often, I fear, received technical opinion is pretty much what TPTB want it to be.

As the Dutch said while fighting the Spanish: "It is not necessary to have hope in order to persevere."

by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Wed Nov 28th, 2012 at 03:14:52 PM EST
[ Parent ]
ExxonMobil: A 'Private Empire' On The World Stage by Steve Coll. Google-fu to the rescue of failing memory!

As the Dutch said while fighting the Spanish: "It is not necessary to have hope in order to persevere."
by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Wed Nov 28th, 2012 at 03:28:05 PM EST
[ Parent ]
Right, but that is an artifact of a conscious political decision to move away from--in this case--the regulated public utility model. There is a LOT of discussion about this in EE circles, because the old model where the power companies were guaranteed a certain amount of profit and a certain amount of money for R&D is really what built most of the current infrastructure over the past century. Thing started going downhill when deregulation (partial deregulation) of the industry discouraged investment.

So not only do we have now an unreliable electricity system, we also have the situation where the 1% (or the 10% in places like New England, where every winter blizzard takes out your power for a couple of days) has a private generator. It's like living in frigging India, for crying out loud.


by asdf on Wed Nov 28th, 2012 at 04:09:56 PM EST
[ Parent ]
Ahh, I see where you are coming from. That was a good model. Do you think Humpty can be put back together again? My guess is that all the bank's horses and all the bank's men would be busy stomping the pieces into dust. The key here is to reunite the responsibility for the entire system with those who both can design and build it and who have institutional interests in doing so well. But now it needs to be done, at a minimum, on an integrated, regional level: the Eastern US grid, the Western US grid and the Texas grid. But any worthwhile plan going forward should integrate these grids, which is where federal funding could help.

It seems to me the primary problems are political. Finance has too large an influence and cares only about next quarter's returns, and, possibly, the year's returns. Do you have a plan for getting beyond that obstacle? It would be hard to come up with a worse system nationally than what we now have, thanks in no small part to the efforts towards deregulation. But if we stay on that path I am confident that our financial geniuses can and still will make the system less reliable and more expensive. Meanwhile the politicians care far more about campaign contributions than about anything that will not immediately end their careers.

As the Dutch said while fighting the Spanish: "It is not necessary to have hope in order to persevere."

by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Thu Nov 29th, 2012 at 12:13:55 AM EST
[ Parent ]
"Do you have a plan for getting beyond that obstacle?"

Yep. Global warming causes social dislocation on a scale comparable to the Black Death, triggering an upheaval of the entire economic system. The only question is about the schedule.

by asdf on Thu Nov 29th, 2012 at 10:23:43 AM EST
[ Parent ]
That seems to be the default assumption. I know we can do better but can only hope we will. I find it highly ironic that we are classified as a social species, given our social competence as a species. That is likely to be a self correcting problem.

As the Dutch said while fighting the Spanish: "It is not necessary to have hope in order to persevere."
by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Thu Nov 29th, 2012 at 11:55:44 AM EST
[ Parent ]
Arkansas can get much colder than most of India. During the ice storm of '09 the temps dropped into the teens at night and the house cooled down accordingly in three days. And, BTW, we now have a 6,500KW gasoline generator, the cost of which was applied towards the $1,000 deductible on my home owner's insurance for the loss claim from the ice storm, as it was considered mitigation of loss - we didn't lose food or have to move to a motel, which wouldn't have been available anyway. My deductable sits in my garage.

But I learned that it is awkward to impractical and also expensive to run such a generator full time, as I made at least one trip per day to the gas station to refill my three 5 gal. containers and was out every few hours to refill the tank. I probably should get a UPS with around 2KW peak capability and a half power run time of six to eight hours. I could charge it while the generator ran and then shut down most power draws for a few hours. What I really needed was the ability to power the fan in the gas furnace and to run the refrigerators and freezer periodically - along with better light than candles. I spent a few nights reading by the light of five to seven candles.

We were without power for five days and it took until day three to get the generator. Fortunately, we have a wood burning stove for heat in the living room and had the better part of a cord of seasoned oak available. We were able to do some cooking on the stove top, though it is not designed as a cook stove. I was able to make coffee by crushing the beans with the side of a chef's knife, heating the water on the wood stove and breaking out the French press coffee maker. The coffee tasted great. We could also heat up canned soup and chili, scramble eggs, etc.

As the Dutch said while fighting the Spanish: "It is not necessary to have hope in order to persevere."

by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Thu Nov 29th, 2012 at 01:03:05 AM EST
[ Parent ]
Right, so you burn oil in the generator to make electricity to run the fan in your gas furnace. Hmmm.

Of course the right thing to do is to live in a brand new off-grid, solar-powered house. Write that check today!

by asdf on Thu Nov 29th, 2012 at 10:26:56 AM EST
[ Parent ]
I know! But, properly done, I would need to install at least 3KW of panels and 10 to 15 KWH of inverter and backup batteries. That has a price tag of over $10,000 and the savings are dwindling fast as it is. My shop has a south facing roof, houses the pressure tank for the well, which is a back-up water supply and currently used to run one toilet and irrigation. I will need to further investigate its structural suitability for supporting the panels, but it would be perfect for the batteries and inverter - once I get it cleaned out. It is still filled with 'junk', including instruments and prototyping supplies for my electronics bench, from our move in 2006. :-)

As the Dutch said while fighting the Spanish: "It is not necessary to have hope in order to persevere."
by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Thu Nov 29th, 2012 at 11:50:56 AM EST
[ Parent ]
1,426,713 personnel are currently on active duty and a further 1,259,000 in the seven reserve components.

There are also 7.3 million in prison.

You can't be me, I'm taken

by Sven Triloqvist on Wed Nov 28th, 2012 at 06:34:16 AM EST
Not an economist, but my 50 cents:

  1. Higher wages do not create price inflation. Rent-seeking does. So, full employment is possible purely from economic point of vuew.

  2. Not likely. But we don't need "full emploment". We only need distribution of wealth.

  3. Yes. Real estate markets, natural monopolies, health care, rersource rents, banks = fire sector, more or less.

  4. If people don't have housing, do you give them housing or work at pharao's pyramids? (is a relevant question).

  5. Depends whether government programs create inflation or not.

  6. I am skeptical about that. Why would government money allocate itself in the end diffrently than private money? (We would get housing bubble, not full employment.)

  7. By public ownership.

  8. It's about wages. Rural sector does not pay enough compared to other business.
by kjr63 on Wed Nov 28th, 2012 at 11:58:10 AM EST
"If people don't have housing, do you give them housing or work at pharao's pyramids? (is a relevant question)."

I just add, that the question is about land. If government wants buildings, employing people building their own houses would be the most productive employment one can imagine.

by kjr63 on Wed Nov 28th, 2012 at 12:10:25 PM EST
[ Parent ]

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