The Best Part of New Capitalism Is That You’ll Never Have to Search for a Job
Today’s post is all about the Job Guarantee (JG). The JG is, of course, the flagship policy policy proposal of Modern Monetary Theory. For a concise, complete overview of the concept I recommend the Wikipedia article.
Recently it has been brought to my attention that the JG is either unknown or badly misunderstood within the business community. This is in spite of the fact that there exists, at this time, an unprecedented opportunity for sharing new policy ideas. There are simply not enough of us who understand why they should be in favor of a JG. In this post I will discuss the various ways in which a JG policy is desirable from an explicitly capitalistic point of view. Some of my framings, steeped in my capitalistic worldview as they are, are slightly incompatible with MMT itself. I will call out those passages with asterisks (**) not because I am looking to pick arguments with the MMT developers but because they have asked me to take care not to misrepresent their ideas as I make my case.
The basic concept of a JG is for a government to make a standing offer to employ anyone who is willing and able to work at a specified rate. In order for this policy to work as designed, the government must be the issuer of its own currency and it must not be subject to any fixed exchange-rate or convertibility provisions. The JG strategy only applies to what are known (incorrectly) as “fiat” currencies.
Because this offer is available to everyone, the JG wage would define an effective minimum wage. In this way, the JG could serve as a replacement for the traditional minimum wage policy in which government prohibits the sale of labor below a certain price.
From an explicitly capitalist perspective, there are numerous reasons to prefer a JG over a minimum wage.
Like the minimum wage, a JG is effective in preventing wage exploitation of those workers who do not enjoy multiple employment opportunities.
But unlike the minimum wage, it can never be claimed that a JG causes unemployment due to employers having insufficient funds or income from which to pay wages. Unlike a minimum wage, which shifts wealth and income from better-paid employees and shareholders to provide increased income at the floor, JG wages, and any increases in the JG wage, are paid for by the government.
You would think that getting government to pay for something would be easier than getting your fellow employees and shareholders to pay for it. Not so. The notion that government cannot pay for things without levying additional taxes is so deeply ingrained in the way we think about money that we will not even act to save our own balance sheets. It is truly remarkable.
Liberals waste so much ink when they try to argue that government-mandated wage increases do not hurt anyone or that anyone they do hurt must have been some kind of malevolent corporate fat cat. While it is true that a minimum wage increase may stimulate spending by putting more money into people’s pockets, there is no question that any benefits of a minimum wage increase are a side-effect of redistributing existing financial wealth from shareholders and better-paid employees towards low-wage workers.
These parties are perfectly rational in opposing an increase in the minimum wage. There are those business owners who are willing and able to take a hit for a minimum wage increase, and there are those who are not. It is not for us, in my opinion, to care about whether they are unwilling or unable. Nor whether they should be willing or able. I am interested in #fixingcapitalism using accounting logic, not in exhorting people to become more charitable than they want to be. And I do sympathize with the idea that business owners, whether they be large or small, have better ideas for their money than increasing pay at the lowest wage-tier.
I also feel that there are circumstances where the acceptance of employment below the minimum or JG wage might represent a fair trade between an employee and an employer. As much as possible, we should respect and value the freedom of individuals, and especially entrepreneurs, to negotiate the transactions that make the most sense to them.
Entrepreneurship is the fuel that makes capitalism go.
Unlike a minimum wage, which does nothing to solve unemployment and may possibly cause it, under a JG system, no one will be unable to find paid work. As we speak, 5-percent of the workers in the world’s wealthiest economy are doing nothing but searching for jobs. Like everyone else, these people require resources including food, housing and medicine while they seek the next opportunity to improve their balance sheets. Imagine how much wealthier we could be if all of those people were suddenly contributing their labor to our languishing public service sector in all kinds of ways.
In New Capitalism, you will never have to search for a job.
Unlike a minimum wage, a JG increases the quantity of labor available for capital improvement projects and free public services.
And unlike a minimum wage, the JG wage can be increased without subtracting anything from the income of shareholders or better paid employees. In fact, the JG creates more savings on customer balance sheets which leads to increased sales and profits for business.
Unlike a minimum wage which must be met at all times, good and bad, a JG system could afford employers the ability to offer wages below the JG rate in order to weather a difficult period for the business. Far from hurting the employee, this allows them to make their own decision about whether to join the JG pool or to wait out the storm in the private sector, albeit with reduced pay. This is the difference between having zero options for paid work and having two options. Another possibility in circumstances like these is for an employer to offer equity in lieu of cash wages. If the business recovers, this could create substantial upside for the employee who takes some risk on their employer.
But that’s socialism!
I know you think that anytime the government hires people that that means socialism. But it is not socialism.
In fact, a JG is essential to any well-functioning, sustainable private sector.
For decades, our markets have been dominated by an irregular boom-bust pattern which is entirely caused by our incompetent approach to fiscal policy. While markets are booming, we credit private initiatives for our all of the success and we hold hope that the need for fiscal policy has finally become a thing of the past. We cut spending and increase taxes in an effort to balance the budget, cutting financial wealth out of the private sector. Then, when those cuts begin to bleed, we wait, hoping that it will stop on it’s own. Then, when the bleeding shows no sign of stopping and instead intensifies, we panic and scream for government intervention. And it always comes (because we control the government) but not without causing more damage and additional compromises to market discipline, including bailouts. It is counter-cyclical, but it is constantly behind the curve of optimal policy.
I know it’s counter-intuitive and counter to what you learned in your MBA, but a JG system is the ideal tool with which to discipline both the private sector and the fiscal authority. The government is constrained in its public works projects by the size of the JG pool; the number of employees willing to work in exchange for its basic wage.
And when private businesses fail, their employees can immediately fall back on the JG. There is no need for bailouts, and the public sector should be happy to receive any workers who lose their jobs. There never would have been a mortgage crisis under a JG system, because long before all of those mortgages went bad, the JG pool would have expanded in order to create the additional money people would need in order to keep up with their newly increased obligations.
The precise causal channel goes like this:
As consumers take on additional mortgage-debt featuring increased payments, they reduce their spending in turn. This reduction translates into a reduction of sales to the businesses that they support. Those businesses slow their hiring or even reduce staff. Those who lose their jobs join the JG program and the money they earn is brought into existence from scratch. Those people are then able to increase their spending, which is income to their former employers. This income, which is newly created money to the private sector, enables the employers to once again increase hiring at wages sufficient to finally draw employees away from the JG pool.
Under this arrangement, a steadily growing economy will settle into an equilibrium with a JG pool that expands during times of rapid growth, and then shrinks as the entrepreneurs responsible for that growth earn the new money that is being created on the balance sheets of the JG employees. Nothing could be more democratic than this mechanism. The lowest paid employees in the economy are always holding the new money which is most likely to be spent, and this gives entrepreneurs the appropriate incentive to create products which directly improve the lives of the middle-class.
Yes. The lowest paid employees will be in the middle-class.
But how you gonna pay for it?
I just told you how we’re going to pay for it. The JG employees bring money into existence from scratch when they work for the government. The government creates the money to pay them and this translates into increased financial wealth in the private sector. First as spending money, then as savings.
You will never be able to appreciate the elegance of the JG until you change the way you think about money. As long as you think that money is something that people bring to government first so that government can then pay for the things which it requires from the private sector, you are doomed to interminable confusion.
Cash savings on individual balance sheets are created when government spends on things which add value to the government’s balance sheet.
** In MMT, assets added to the government’s balance sheet are not discussed as if they are a primary source of value for the currency. Instead, the value of the currency is believed to stem from demand for tax revenues. **
But… but… inflation!
You probably already know that government has the power to create money. And I know what you think. You think that the more money it creates, the less valuable it becomes. That is, you believe in some variation of the Quantity Theory of Money (QTM): “the hypothesis that changes in prices correspond to changes in the monetary supply.”
That is, when government creates or destroys money it causes either inflation or deflation. Pretty much all economists agree to the QTM to some extent. Generally speaking, their disagreements concern the time-horizon over which the QTM holds.
I am not an economist. And I do not believe in the Quantity Theory of Money.
** MMT is QTM-theoretic because it takes the view that money is created at any point where cash-balances are created. **
My theory is a capital theory. I call it the Equity Theory of Money on all of the marketing materials for obvious marketing reasons, but if you want to be technical, it’s really a capital theory because I believe that the value, and ultimately the price of a currency follows the quantity of public capital rather than the quantity of balance sheet cash, which is what economists are talking about whenever they use the word “money.”
In the Equity Theory, “Money” is the value stored within a capital asset, so by definition, money is created when people work in exchange for newly-issued equity assets. This is in contrast to the QTM where “money” is thought to be created via bank asset-purchases, as one example.
While you are working, you are constantly trying to increase the capital stock of your employer in some way, whether real or financial. If you are not doing that, you are not adding value, and by definition, you are not working. That does not mean that all of the value you create is for the benefit of the shareholders. Some is for the shareholders, some is for the customers, and some is for your fellow employees.
The JG employees, like all government employees, create and improve on public capital while they work. They create the assets which give value to the currency. It doesn’t come from taxes.
** MMT says it comes from taxes. **
It comes from the work performed by employees in the public service sector. They are the reason your money is valuable. You need them more than they need you. And they certainly don’t need you for your money.
Did you know that depending on how you count them, there are somewhere between $100 and $200 trillion in capital assets on the US government balance sheet? Do you know how they got there? US government employees created and/or acquired them while incurring net expenses (including wages) of only $19 trillion. That is why USD assets are so in demand around the globe. It is because they are claims of ownership over the >$100 Trillion capital stock known as the US government.
Let’s finally give those employees the credit that they deserve.
But what will the JG employees do?
Those who oppose the Job Guarantee cannot argue that it is socialism because the JG is an essential component of the process by which private capital is created. The only alternative to a JG is ad hoc deficit-spending at the behest of the legislature. This type of spending tends to come long after the optimal moment for government to increase its participation in the labor market.
It is not socialism, nor can the JG opponents argue that we are lacking the money to pay the wages of JG employees. Governments that spend in the currency that they issue never become insolvent. They can never run out of money.
The idea that money created via deficit-spending causes some degree of inflation is less wrong, but still far from the mark. These opponents simply fail to recognize the value within the government’s agreements with it’s employees and the assets that they create for the public.
** MMT proponents hold that deficit-spending, if excessive, can cause inflation. I believe that any monetary inflation results from transactions where cash-balances are created without increasing the capital stock of the government, and not from spending programs. This includes both interest payments and welfare payments as well as wars when they lead to capital losses. **
The opponents of the JG have only one attack that can possibly stick, and that is that we don’t really know how to run a JG properly. We haven’t really done it before, and when we tried we didn’t get it perfect right away. These opponents conjure the image of 19th-century workhouses for the poor in an effort to stigmatize the very concept of a JG.
And they have a point.
We don’t know how to run a 21st-century JG program because for the last several decades, professional policy-developers have been focused almost exclusively on managing the economy using monetary policy, while policy-makers have been mandated to work on deregulating and privatizing government services. And they have been sent clear mandates from the public to avoiding increasing spending and never to increase taxes.
In the field of Economics, monetary policy research has been funded by untold millions of dollars at elite institutions and think tanks, including the Fed. Monetary policy has been offered to the business world, exclusively and continuously, through the most powerful media outlets, which treat central bank deliberations over the risk-free rate (the rate at which the wealthy receive their handouts) like they are sporting events.
And in a very real way, they are sporting events.
Changing the interest-rate floor is disruptive to a broad subset of investors and corporations. As a result, there is an entire sub-sector within the financial system which specializes in helping the non-financial sector manage its exposure to the risk-free rate. In quant literature, it is known as Rho; the risk that the risk-free rate used in all of the other valuation procedures will change. This risk, and the industry which exists to contain and manage it, would no longer need to exist in a world of permanent Z.I.R.P.
Monetary policy enthusiasts have had the opportunity to pursue their research agenda and to sell it to the public and to see it work in real life. They have failed. It has been a disaster. And they were wrong about everything.
Is it time to fund a new agenda yet?
Researchers at U.M.K.C. and Levy Institute, among others, have already laid a very strong foundation of research into both the macroeconomic consequences and the operational demands of potential JG programs.
But it’s only a drop in the bucket when compared to the resources that have been allocated to monetary policy research. Soon, we are going to need a whole new way of initiating projects and a new way of budgeting for them which accounts for the unique trading-parameters of a JG system.
JG projects are constrained by the quantity of labor for sale, rather than funds from which to purchase that labor. However, unlike a traditional employer, the JG cannot increase its wage without altering the floor wage of the entire labor market. As stated, these are genuinely unusual constraints and we definitely have work to do before we will know how to operate semi-optimally under those constraints.
I don’t want to tell you exactly what the JG employees should do because this, of all places, is where we have the opportunity to put the democracy back into capitalism. This is where we need your help to figure out all of the work that the public sector ought to be doing in your community. There is no way this program can function optimally without public participation guiding it to ensure that resources are directed towards valuable public works. I happen to believe that the works will be most valuable if driven by actively-engaged communities on an ongoing basis.
What is most exciting about the JG, from an explicitly capitalist perspective, is that it may contain the key to balancing the demands of capitalism and democracy in a way that was previously assumed to be impossible.
While the elected legislature will always be required to authorize the spending, the JG itself can and should be an experiment in a new form of radical, participatory, yet well-funded democracy.