Modern Monetary Theory and The Job Guarantee

I recently wrote an oped piece for challenge magazine It is difficult to condense what I had hoped to say into 750 odd words, so here is the ‘extended’ edition.

Modern Monetary Theory (MMT) is an incredibly complex body of work that studies macroeconomics. At its most elemental level it says a currency is a social and legal construct. Currency issuers spend via an appropriation bill and are not financially constrained, though they are constrained by real resources. A monopolist of a currency can purchase whatever is for sale in the currency it issues, including idle labour. Thus unemployment is a political choice.

To understand that statement we need to make a distinction between monetary based and non-monetary based societies. The latter doesn’t have employment or unemployment. So what causes people to become unemployed?

It is the imposition of a tax liability that is the coercive mechanism that creates a desire to earn the governments unit of account. There is a paper Monopoly money: The State as a Price Setter that articulates a ‘tax-driven’ currency from when African nations were colonised. Prior to colonisation those communities consisted of subsistence production, internal trades and didn’t have a need to use a currency. Especially a European currency. It was the imposition of a hut tax in Malawi that forced communities to sell produce to the European colonisers or become labourers.

In the absence of having a good or service to sell that the currency issuer desires you need to sell your labour to earn the currency to pay the tax. So the imposition of the tax liability creates unemployment and spending (in the right area) creates employment.

Spending then gets more complicated and we make distinctions between different types of spending, however – the currency issuers spending is the currency users income. That is an accounting statement. If the government deficit over a given period is $X the non-government surplus has to equal $X. It is a question of whether the government has spent enough and directed the spending into the right areas as to whether we have full employment.

Within the body of work that is MMT it uses a Job Guarantee (JG) as a macroeconomic price anchor and stabiliser which I will explain below.

There have been claims that the Job Guarantee is workfare. It is not. It is a voluntary offer of a job to anyone, anywhere paid at a living wage with access to all the National Employment Standards just like every other worker.

The social policy setting of the JG is the policy manifestation of a technical concept to eliminate the tradeoff between unemployment and inflation. Current orthodox economists identify a link between rising employment and rising inflation and use unemployment to discipline the inflation rate.

That link is known as the Phillips Curve and rising employment is supposed to give rise to rising inflation. When the inflation rate rises above the central banks target range they raise the rate of monetary policy to slow aggregate demand (total spending in the economy) to ‘put the brakes’ on the rate of inflation (causing unemployment). There is a theoretical limit known as the natural accelerating inflation rate of unemployment (NAIRU) that theoretically if employment is to fall below inflation breaks out.

The trade-off clearly has not happened for quite some time. And it is questionable whether the NAIRU concept and natural rates of employment exist at all. We don’t very well go down to the river and stare at a school of fish and say ‘look at that pool of unemployed fish’ Employment is a social construct and it is hard to think we have run out of things for people to do.

Inflation is a continuous rise in the general price level. Which is different to a price rise. A price rise can lead to inflation if a conflict ensures and eventually you need a way to ameliorate the conflict.

Imagine all the workers on a small island. And they work producing widgets. At the end of the year you measure the widget output as X. The X is just the measure – whether it is one million or one billion doesn’t matter. The questions are; Is there enough widgets to satisfy everybody’s needs? Does everyone have access to all the widgets they need? How do we ensure equitable access to widgets?

The general price level itself is an abstract concept. There is a curiosity in saying that total output is X but the general price level compared to one year or ten years ago is higher or lower.

Imagine labour and capital fighting over those widgets. As one increases the price, the other seeks higher wages. Inflation gets more complex than that but the point is that labour or capital will end up with a higher share of GDP as a result of inflation.

It is a question as to whether total output is enough to satisfy our domestic needs, whether we are producing that output in an environmentally and socially sustainable way and whether we have equitable access to all the real resources we need. Are we as workers getting a fair share of our productive output?

I can appreciate there is a politically unacceptable level of inflation because people don’t like it. MMT economists say you can achieve a stable rate of inflation by using a ‘buffer stock of employed’ rather than a ‘buffer stock of unemployed’. This is what the Job Guarantee is.

The reason for the fixed wage in the JG is the anchor. It sets the general price level for an economy. We as a society set a floor for wages that says one hour of labour is equal to $X and guarantee it.

All prices within an economy are a function of government spending. The initial spend determines the price level.

The automatic spending triggered by those entering the JG mean the governments spending is directed when and where it is needed most – the unemployed. It allows for the governments fiscal position to float ensuring that we remain at the very least at ‘loose’ full employment and price stability.

The Government via its legislative powers has the ability to command real resources as well (such as what it did with private hospitals over the initial covid period and make childcare free) The latter took away a financial cost for households contributing to deflation.

The ABS writes;

The most significant price falls in the June quarter were child care (-95.0%), automotive fuel (-19.3%), preschool and primary education (-16.2%) and rents (-1.3%). 

https://www.abs.gov.au/AUSSTATS/abs@.nsf/mf/6401.0?opendocument&ref=HPKI

Free childcare, cheaper fuel, cheaper education, and falling rents are advantageous to the working class.

The JG chooses to use employment as the anchor for the general price level. If the rate of inflation is deemed politically unacceptable more workers would move into the JG pool. If the rate of inflation was lower than the politically acceptable rate of inflation there is scope to have the pool smaller.

In the event of accelerating inflation the cause of inflation can never be the wages of the JG workers because by definition they are purchased from the bottom and released from the pool when a better offer is made. It is only a small part of a broader full employment agenda.

Ideally you want the pool to be as small as possible. It is not there to replace existing skills based employment. It is there to sit alongside a national skills development framework to assist those that need it in finding future employment.

Similar to the wool price stabilisation scheme in Australia, The Australian Government guaranteed the purchase of excess wool and stored them in redbrick sheds to sell when the demand picked up again. The difference being is that people won’t work to produce excess labourers.

The JG ensures ’loose’ full employment as workers are drawn in and out of the JG pool rather than ending up unemployed. It can be thought of as a trasintionary arrangement for those that need it.

In a similar way to how the Commonwealth Employment Service worked, the unemployed person would have a case manager that held their CV and attempted to match that person to a job but rather than having that individual lay idle, they have the opportunity to maintain and enhance their skillset while seeking better employment working actively with their case manager to match them with an appropriate job.

A Job Guarantee is designed to create work to suit the individual. It is administered at the local level but funded by the federal government. The workers within this program are free to unionise and advocate whether something should be classed as a JG job. They are free to take part in determining what the living wage should be.

The work would be of public benefit and assist the JG worker in up skilling and finding work in the private or public sector. It is there to enhance the individual’s well-being and provide a public purpose. It is not used as a punitive system of punishment.

The types of work that can be done are limited only by our imaginations. We could pay musicians to give workshops on band dynamics, pay them to create and assist in the organisation of community festivals, we can have arts programs where artists can paint murals in public spaces and aid others in their own skill development. Surfers could be paid to pass on surf life safety skills and teach others how to identify and avoid rips. They could take part in sand dune rehabilitation. There is massive potential to enlist thousands of unemployed in ecological restoration and plant trees along with other flora to mitigate against climate change while they undergo study in a related area.

The advantage workers have, particularly those at the bottom who often hold little, if any bargaining power is that the JG sets the floor for wages. Private employers would be forced to compete with what we as a society determine to be the absolute minimum socially inclusive wage. It allows us to redefine our concepts of productive employment by including jobs that currently go unrecognised but provide value to our communities.

Most importantly the JG allows the most disadvantaged in our society an opportunity to engage in paid employment which would lead to recognition in the community, and vastly improved self perceptions and a more prosperous society.

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