Monday, January 9, 2012

Hugo Heden and John Lounsbury — The Job Guarantee Brouhaha


Read it at Global Economic Intersection
The Job Guarantee Brouhaha
by Hugo Heden and John Lounsbury
(h/t Hugo Heden)

John Carney replies below in the comments here.

11 comments:

John Carney said...

I'll leave a reply here.

Heden and Lounsbury conclude that I'm a captive of my assumptions while not really doing anything to challenge my arguments.

They largely concede my point about bureaucracy. They partially concede my point about inflation, and don't really understand the part to which they object. One remaining point about the relative merits of JG work is just wishful thinking.

1. Heden and Lounsbury agree with me that any increase in aggregate demand created by the JG could be inflationary. They say that we could balance this out with higher taxes.

I agree. But "we'll guarantee jobs and raise everyone else's taxes" is not how the JG is usually presented.

2. H&L write: "We will note that the JG output should be useful, and absolutely not “largely waste”. Examples would be environmental restoration, urban development, social work or infrastructure repair, maintenance, development."

First, this is irrelevant to the discussion of inflation because none of these things soaks up increased aggregate demand. In fact, they may in fact soak up aggregate supply, making the inflation worse.

Second, how on earth can they be sure that the JG will be directed at all these wonderful things instead of stuff politicians like?

Third, these projects--environmental restoration, urban development, social work or infrastructure repair, maintenance, development--are not as easy to get started and put people into as J&L think. Social work is a profession that usually requires years of study. Infrastructure work is dangerous, tough and again, is conducted by professionals. Urban development is also not something you just start doing the day after you lose your job as an marketing assistant.

3. The argument against stagnation is just more magical thinking.

"A JG program, on the other hand, would offer skill maintenance or retraining, considerably increasing likelihood of re-employment, and of finding skilled job-ready workers as needed for business," H&L write.

Oh yeah? How are you going to make sure you are retraining for what the economy will demand when the retraining is done?

What's more, they completely ignore my argument that many people will find the JG so comfortable they won't ever seek private sector jobs. The seamless movement between JG and private sector jobs may be just a fantasy.

They conclude: "Our conclusion is that Carney appears to be a captive of his assumptions rather than a critical analyst when it comes to the JG (Jobs Guarantee) concept."

Do you think that they approached my arguments with open minds? Or minds full of assumptions--such as, JG will be wonderful, meaningful jobs?

Hugo Heden said...

Thanks for your thoughtful response, John! Good to hear from you.

I will split my response to you into a few comments here.

> "They largely concede my point about bureaucracy."

Well, I would rather say "to a miniscule degree" than "largely".

You wrote in your original article: It's a bureaucratic nightmare. There are currently over 13.5 million people unemployed in the United States. Creating worthwhile jobs for every single one of them is impossible.

* We wrote:

Yes, there will be bureaucracy. The current system has its flaws too though. Mass unemployment results in huge permanent losses every day in foregone output and income. Add to that the depreciation of human capital, increasing family breakdowns, child abuse, crime, medical costs, skill loss, psychological harm, ill health, reduced life expectancy, loss of motivation, racial and gender inequality and loss of social values and responsibility. The personal, family and community losses are enormous and persist across generations. See MMT Wiki.

In the light of this, a bureaucratic burden seems a reasonable price to pay. And the bureaucratic structure is already in place – unemployment insurance benefits administration which would largely be replaced by JG administration.


* We also noted that

- the bureaucratic burden should not be much worse than today's UE-compensation systems

- the idea is not to "central plan" the jobs needed

- the number of those should eventually amount to a few million, not 13,5.

Hugo Heden said...

> Heden and Lounsbury agree with me that any increase in aggregate demand created by the JG could be inflationary.

No, we most definitely do not agree with that. Let me attempt to clarify, because this is important.

* We wrote:

"If there is considerable slack in the economy (businesses have problems with low sales and operate below full capacity etc.) an increase in aggregate demand should in fact not be inflationary according to MMT proponents and other economists."

* Arguably, most of the economies in the world are currently running far below the "inflation barrier" (corresponding to what mainstream calls "NAIRU").

* However, in the (currently unlikely) case that a JG is introduced when the economy operates at "full capacity" (on the inflation barrier, on "NAIRU" unemployment), then any increase in aggregate demand would be inflationary.

* So, if it turns out that aggregate demand does indeed increase (when JG spending replaces UE spending) -- and also that the economy is sufficiently close to the inflation barrier (NAIRU) – then yes. Then we have this unfortunate situation that you’ll either accept a tax-hike or a once-off inflationary episode.

* (Both amount to the same thing though – a “cost” is imposed on the economy – either as inflation or a tax hike.)

* And yes, a JG program is likely to consume somewhat more resources – in a direct sense, short term – than a UE system (at least in my personal view -- I'm sure the MMT pros should have better data on this). So I believe that replacing UE with JG should somewhat increase aggregate demand.

* Longer term however, these costs should be offset by the declining social costs in a JG system, otherwise present in a UE system, and from increased productivity that JG proponents argue should result.

* However -- again -- if the economy operates at a demand level considerably lower than the inflation barrier, introduction of the JG should not be inflationary whatsoever.

Hugo Heden said...

You wrote:

"2. H&L write: "We will note that the JG output should be useful, and absolutely not “largely waste”. Examples would be environmental restoration, urban development, social work or infrastructure repair, maintenance, development."

First, this is irrelevant to the discussion of inflation because none of these things soaks up increased aggregate demand. In fact, they may in fact soak up aggregate supply, making the inflation worse.
"

* Trying to take your point of view, I understand (I think) what you're saying here -- and if I had the same view/theory of inflation I would agree -- what we wrote is irrelevant to the discussion of inflation.

* Now, jumping back to our point of view, I still agree -- but for another reason. Our view of inflation is, I believe, fundamentally different from yours. See previous comment. As noted there, we believe that it is unlikely that the JG program would be inflationary whatsoever.

* So, if we thought the note you quote was irrelevant, why did we include it? Well, it was mostly to not let your statement of JG output being "largely waste" go unanswered.


You wrote:

"Second, how on earth can they be sure that the JG will be directed at all these wonderful things instead of stuff politicians like?"

* That we can't be sure of. If it goes the way you suggest, it would be a massive failure. Many nations have been able to run huge military, health care and educational systems (etc) with "acceptable"(?) levels of corruption, so maybe there would be a chance for JG too.

* Granted -- historically governments certainly also have failed their duties in this regard. Measures should be taken to prevent corruption and cronyism.

* Here we enter another level of the discussion -- how do we ensure that politicians behave as we expect when we elect them? That is highly relevant, but perhaps outside of the scope of this blog comment.


You wrote:

"Third, these projects--environmental restoration, urban development, social work or infrastructure repair, maintenance, development--are not as easy to get started and put people into as J&L think. Social work is a profession that usually requires years of study. Infrastructure work is dangerous, tough and again, is conducted by professionals. Urban development is also not something you just start doing the day after you lose your job as an marketing assistant."

* Right, many good points. What we envision is "unskilled" versions of work in these areas. For example, a social worker in a JG context could perhaps be a health care assistant, school assistant, library assistant, elderly home assistant etc.

* These are the difficult questions of

-- Can we come up with something useful that unskilled labor can perform?

-- What will the JG-workers do?

* I will leave that question unanswered as well, as I feel this is an area for academic debate rather than a blog-comment one. MMT academia seems to have plenty to say here.

* But in conclusion, one of the main points here would be to challenge your statement in the original article that:

"The people working in JG jobs are not producing goods that the market needs. Their work product is largely waste."

We believe that this is a statement that should be questioned.

Hugo Heden said...

Will try to be more compact.

You wrote:

3. The argument against stagnation is just more magical thinking.

"A JG program, on the other hand, would offer skill maintenance or retraining, considerably increasing likelihood of re-employment, and of finding skilled job-ready workers as needed for business," H&L write.

Oh yeah? How are you going to make sure you are retraining for what the economy will demand when the retraining is done?


* Difficult questions that many educational programs grapple with already?


You wrote:

What's more, they completely ignore my argument that many people will find the JG so comfortable they won't ever seek private sector jobs. The seamless movement between JG and private sector jobs may be just a fantasy.

* Agreed, we did not deal with that argument -- sorry about that. The article got way too long already, just like my comments here.

* You formulated it a bit differently in the article. Those who may be interested can take a look at

-- Section 3 -- It's economically stagnating

-- Our response 3. Economic Stagnation

-- but basically we argue that a full employment system with retraining programs could well be less stagnant than unemployment systems. (The problem is, according to MMT academia, that mass unemployment results in huge permanent losses every day in foregone output and income. Add to that the depreciation of human capital, increasing family breakdowns, child abuse, crime, medical costs, skill loss, psychological harm, ill health, reduced life expectancy, loss of motivation, racial and gender inequality and loss of social values and responsibility. The personal, family and community losses are enormous and persist across generations.)

Hugo Heden said...

And John -- thanks a lot for taking part in these debates in the outskirts of the economic universe! Much appreciated.

Tom Hickey said...

John Carney makes three points.

1. A JG is inflationary.

MMT says that the JG is not inflationary, if one understands inflation as MMT does, that is, in terms of the relation between effective demand and available real resources.

Milton Friedman proposed a flat tax with a negative income tax that is a transfer rather that pay for work. He did not see it as inflationary wrt to his monetary theory of inflation, but he was concerned about the potential for fraud, hence the need to control for it. This is no different from any other government program.

2. A JG is wasteful.

The JG could not possibly be more wasteful than idling resources which are available, since there is at least some output coming from their employment. MMT economists have made a case for a JG based on tthe cost of idle resources and the opportunity cost of not employing them when it is possible to do so.

3. A JG acts as a disincentive to private employment.

I don't see how pay for work is more of a disincentive than transfer payments to the involuntarily unemployed or through a basic income guarantee-negative incomes tax, and many prominent economists across the spectrum have recommend this.

What we are seeing now is people whose unemployment insurance has run out still unable to find work because the number looking for work exceeds the number of job offers available to them. Homelessness with no means of support is hardly an incentive to work that will produce results, since there are more people looking for work than there are jobs available or being created — by an estimated 4 to 1 ratio last time I heard. Rather it is a recipe for mental and physical illness, anti-social behavior or resort to crime.

Even if some people decided that they preferred basically a subsistence wage to a better offer, that's a market choice. Most economists would say, I believe, that rational people would take an opportunity that is more highly compensated even if one had to work harder.

While there is possible cohort of people that wouldn't mind remaining at the bottom when better opportunities develop, it is doubtful it would constitute more than a small residual. It is impossible to entirely eliminate inefficiency from a system of any complexity. The cost of this inefficiency would be far less that the waste, fraud and abuse in other programs where a lot more funds are involved but as the military.

Senexx said...

A quick note, given we're all getting into the mechanics and minutiae of a JG, when we say "inflation" - we should specify what type of inflation we mean.

Higher inflation is not inherently a bad thing. MMT/JG principles accept that.

My understanding of Austrian/Conservative variety is any inflation is a bad thing.

Hopefully when any of us talk about bad inflation, we're talking about accelerating inflation.

I fear on this discussion we may be heading back to school on "What is inflation?"

Hugo Heden said...

@ Senexx

Darn, you're so right.

Bill Mitchell is often very careful there - and we may have been a bit sloppy.

John Carney said...

I'll concede an important point here.

Most inflation from a JG would only be created by the aggregate demand created by wages in excess of Unemployment Benefits. Since the wages envisioned by Mosler are quite low, I don't think the inflationary effect would be all that much.

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