How The Job Guarantee Debunks Mainstream Economics

Mainstream Economists believe they can reach full employment with price stability simply by adjusting a single interest rate. Time to put that claim to the test.

Mainstream economists believe they can reach full employment and maintain price stability simply by adjusting a single interest rate. They prioritise monetary policy over fiscal policy because they believe that output is only ‘optimal’ when you mess around with interest rates.

However the Modern Money view doubts those claims. Once you fully understand the Modern Money position you inevitably end up at the Job Guarantee — automatic output and fiscal policy adjustment via a vastly enhanced spend-side auto-stabiliser. It is the logical conclusion of the Functional Finance approach: automatic, simple, rule based, no need for committees of Very Clever People reading the tea leaves, and is far faster at stabilising an economy than the mainstream approach, namely pushing ever greater increases in private debt via commercial banks.

Ever increasing private debt, personal and corporate, lunges the economy further and further towards instability. This culminates in a “Minsky Moment”, as we saw the 2007 banking collapse.

Deploying the Job Guarantee can test the mainstream claims. Let’s see how.

Let there be a Job Guarantee at the statutory minimum wage working for the public good. This is an alternative job offer open to all that want it. The wage is paid by the government fiscal authority directly from the central bank on an overdraft at whatever interest rate the central bank wants to determine for that overdraft. Since the central bank pays all its profits directly to the government, the level of interest paid and dividend received effectively cancel each other out. In this case what we will do is set the overdraft interest rate at the same rate available to a private sector entity wishing to employ more people. Specifically there is no issue of government bonds to offset the spend and inject interest payments into the economy.

Nothing the mainstream theorists can object to so far apparently. They allegedly know that we can do all this. So now let’s go through the consequences of implementing a Job Guarantee in these circumstances.

  • If anybody applies for the Job Guarantee job, then the economy is by definition not at full employment. So if there is any central bank tightening response to the extra government spending caused by the job guarantee hire, then the mainstream theorist is saying that their theories cannot maintain actual full employment.
  • If anybody applies for the Job Guarantee job then by definition they have no alternative bid in the private sector and therefore cannot be reducing private sector output. Yet they would increase public sector output, which means that the mainstream theory cannot be producing optimal output from the available resources.
  • If somebody on a Job Guarantee job spends and there is inflation, then any private sector hire of the same person would cause inflation since the necessary spending process is identical between the two (a bank somewhere would have to issue an overdraft at the same interest rate available to the government). That demonstrates that mainstream theory tries to maintain price stability by generating involuntary unemployment.
  • If somebody leaves a private sector job to join the Job Guarantee then that shows that the price of the job in the private sector isn’t the only determinant. There are qualitative matters in play and the mainstream competitive theories have failed to sort out those qualitative matters out at the price. (Job change is expensive. No rational entity in mainstream terms would change jobs to one at the same price).
  • If you create a Job Guarantee and nobody applies then there is no additional fiscal spend. That would mean there is nobody in the economy who is actually in need of a job and the mainstream theory is validated.

So it seems to me that the Job Guarantee is the perfect test of whether mainstream theories are as they say they are in practice. The government should get no bids for its job guarantee offer.

Here we have the Large Hadron Collider for the economy. The economy needs a Job Guarantee to show which theories actually hold up in reality and which should be consigned to the scrap heap.

If you liked this article, please click the ‘heart’ below to recommend it to others, and use the share buttons to spread the word. Remember Modern Money Matters.