/Flattening the curve – the Phillips curve that is

Flattening the curve – the Phillips curve that is

I did an extended interview over the weekend and during that interchange it became obvious that when a newcomer encounters the concept of the – Job Guarantee – for the first time, they may only see it in a narrow way, as a job creation program and fail to see it the way that the concept was developed as an integral part of Modern Monetary Theory (MMT). When I started talking about the era in which I had first started thinking about using buffer stocks to maintain full employment, it became obvious that the sort of considerations that went into the concept of the buffer stock employment model (the Job Guarantee) had not been fully appreciated by the interviewer. That is no criticism. It is just an observation and a reflection of how long we have been pushing this MMT barrow. At the moment, all the talk is of ‘flattening the curve’ and that is exactly the function that I saw for the Job Guarantee as I toyed as a young postgraduate student and nascent academic with new ways of thinking about macroeconomics that would fight the Monetarist scourge that was dominating in the late 1970s. It was a different era and the challenges from a economic theory perspective were different. I think it is important to understand this context because, as the interview demonstrated, new ‘light bulbs’ go off when the concept of a Job Guarantee is put within the historical exigencies that were dominating when I came up with the idea. So the Job Guarantee flattened the curve long ago – the Phillips curve and that was, in my view, a highly significant development in the context of macroeconomics and makes MMT very different (in addition to a lot of other aspects). Unfortunately, while we knew how to flatten the curve back then, the Monetarist viral infestation continued and we have suffered the shocking consequences ever since.

As I have explained in the past, when I met Warren Mosler in 1995, he was talking about an Employer of Last Resort policy approach to deliver full employment and price stability and I was talking about a buffer stock employment (BSE) approach to the deliver the same.

That coincidence, which in science is referred to as – multiple discovery – laid the foundation for our life long relationship and the beginnings of the project, which we now call Modern Monetary Theory (MMT).

I have also explained in the past what I was up to in 1978, sitting in a cold lecture theatre at the University of Melbourne doing my fourth-year studies (honours) and taking Agricultural Economics as one of my elective units,

We were studying the Wool Floor Price Scheme introduced by the Australian Government in 1970 to stabilise farm incomes by maintaining an agreed price for wool irrespective of the quantity of wool delivered by the farmers to the market each clip.

Buffer stocks have long been used in agriculture and commodity production.

In November 1970, the Australian Government introduced the Wool Floor Price Scheme. The scheme was relatively simple and worked by the Government establishing a floor price for wool after hearing submissions from the Wool Council of Australia and the Australian Wool Corporation (AWC).

The aim of the system was to stabilise farm incomes and led to an agreed price for wool being paid to the farmers. The Government then stabilised the private at this guaranteed level by using the AWC to purchase stocks of wool in the auction markets if demand was low and selling it if demand was high.

By being prepared to hold “buffer wool stocks” in times of low demand and release them again in times of high demand the government was able to guarantee incomes for the farmers around the stable price.

The contention that ultimately led to the demise of the system was whether the guarantee constituted a reasonable level of output in a time of declining demand. Farmers clearly had an incentive to over-produce wool knowing that the government would buy any excess not demanded by the auction markets.

While I wasn’t all that interested in wool, this was a time when inflation had risen sharply after the OPEC oil crisis and governments were pushing up unemployment via fiscal austerity policies in order to curb it.

It was the time that the Monetarists emerged and started to take over the academy and infiltrate policy circles, first, into central banks and then beyond.

The big question of the day was inflation, or more accurately stagflation – the coincidence of high inflation and high unemployment.

This coincidence had not been thought of in the full employment, Keynesian era, where inflation was largely thought of as a demand-side phenomenon – excessive spending relative to the productive capacity of the economy.

The problem was that the inflation was derived from an ‘imported raw material shock’ (the rapid and sharp rise in the price of oil) and this created a distributional struggle between labour and capital over how the real income loss to the nation would be shared.

Workers resisted real wage cuts and firms resisted margin cuts – they both had ‘price setting’ power to more or less extent – and they used that power to try to force the opposing party to take the real income hit.

So it was a supply-side event (the oil price rise) that had triggered a wage-price spiral that resulted in the inflation.

Governments, wrongly, tightened fiscal and monetary policy, and the result was rising unemployment, which effectively marked the end of the full employment era.

The concept of the Non-Accelerating-Inflation-Rate-of-Unemployment (NAIRU) entered the lexicon as a central organising thought for the Monetarists who claimed there was only one unemployment rate consistent with stable inflation and that governments should just leave the ‘market’ to find that rate and stabilise prices.

Whereas during the full employment era, low unemployment was one of the key policy targets, in this NAIRU-Monetarist era, it became a policy tool.

If unemployment rose sufficiently it would discipline the wage demands of trade unions and create ‘soft’ conditions in the ‘product’ market (where goods and services are sold) such that firms would stop pushing up prices to protect margins.

As some high unemployment rate, the inflation would stop accelerating and stabilise.

That was what was going on in 1978 when I first conceived the idea of a Job Guarantee, although I called it the BSE. I was still calling it the BSE model when I first met Warren but soon after – Bovine spongiform encephalopathy – or mad cow disease became a huge problem in the UK (the EU banned British exports in March 1996), and so I thought I better change the name.

Eventually we (Warren, Randy, myself and others) agreed on the term Job Guarantee, given the term had a lineage in the progressive literature (although not one that was based on buffer stock mechanisms).

But for me, I was doing this thinking at a time that was very different to now or even the last 15 or so years.

So it is important when coming to the MMT literature that one has a historical appreciation of these things.

My thoughts were about finding a way to solve the dreadful unemployment problem of the late 1970s without exacerbating the inflation problem.

And, moreso, to actually come up with a plan that would solve the inflation problem and reduce unemployment back down to the low levels that prevailed before all the dislocation of the 1970s and before the neoliberals (Monetarists) had introduced all this chicanery about natural rates or NAIRUs, and convinced policy makers that they should not try to reduce unemployment using fiscal policy.

The neoliberals convinced governments that they had to use ‘microeconomic’ policies – curbing trade unions, reducing job protections, hacking into wages and other entitlements, and curbing income support schemes for the unemployed – if they wanted a more ‘efficient’ labour market.

The rot had firmly set in.

And as a young student and aspiring academic with a progressive bent, who also hated unemployment, I made it my mission to come up with work that would create a contest in the macroeconomic space in this historical context.

I was trying to think about how the government could use its capacity to maintain employment but stabilise inflation. I wanted to think of ways that governments could preserve employment should having to use its fiscal policy capacity to contract the economy

And at the time, I pursued several different novel paths – buffer stocks, hysteresis – as well as the traditions I had inherited in terms of incomes policies, wage guidelines etc, which had been used with various degrees of success.

But it is important to understand that this was the context in which my thinking on what we think of as the Job Guarantee began.

And that explains why I think of it as a price stability framework rather than a job creation program, an emphasis which many newcomers miss because they haven’t appreciated the context.

So in that vein, the Job Guarantee offered a dynamic adjustment path for governments to avoid the heavy costs of unemployment in the last resort case of having to impose fiscal contraction on an inflating economy.

And so this narrative becomes important and helps to explain why MMT economists consider policies such as Universal Basic Income to be undesirable.

Again this rationale for the critique of UBI is often lost in contemporary debates.

The fixed Jon Guarantee wage offer provides the in-built inflation control mechanism.

I introduced the term Buffer Employment Ratio (BER), which is the ratio of Job Guarantee employment to total employment to help us understand the dynamics of the framework.

The BER conditions the overall rate of wage demands. When the BER is high, real wage demands and margin push by firms will be correspondingly lower.

If inflation exceeds the government’s announced target, tighter fiscal and monetary policy would be triggered to increase the BER, which entails workers being shifted from the inflating sector to the fixed price Job Guarantee sector.

Please don’t misunderstand that point. The government might, in the extreme situation, impose austerity on the non-government sector and force firms to shed labour.

Under the NAIRU approach the jobs shed flow into unemployment. Under the Job Guarantee, they flow into the Job Guarantee pool of work.

Ultimately this attenuates the inflation spiral.

So instead of a buffer stock of unemployed being used to discipline the distributional struggle, the Job Guarantee policy achieves this via compositional shifts in employment.

That means it can also deal with a supply-shock that generates distributional demands that ultimately cause inflation.

I introduced another technical term (jargon).

The BER that results in stable inflation is called the Non-Accelerating-Inflation-Buffer Employment Ratio (NAIBER). It is a full employment steady state Job Guarantee level, which is dependent on a range of factors including the path of the economy.

I figured that it sounded friendlier than the NAIRU (-: Even in this era of social distancing we usually like our neighbours!

A plausible story to show the dynamics of a JG economy compared to a NAIRU economy would begin with an economy with two labour sub-markets: A (primary) and B (secondary) which broadly correspond to the dual labour market depictions. Prices are set according to mark-ups on unit costs in each sector.

Wage setting in A is contractual and responds in an inverse and lagged fashion to relative wage growth (A/B) and to the wait unemployment level (displaced Sector A workers who think they will be re-employed soon in Sector A).

A government stimulus to this economy increases output and employment in both sectors immediately. Wages are relatively flexible upwards in Sector B and respond immediately.

The compression of the A/B relativity stimulates wage growth in Sector A after a time. Wait unemployment falls due to the rising employment in A but also rises due to the increased probability of getting a job in A. The net effect is unclear.

The total unemployment rate falls after participation effects are absorbed. The wage growth in both sectors may force firms to increase prices, although this will be attenuated somewhat by rising productivity as utilisation increases. A combination of wage-wage and wage-price mechanisms in a soft product market can then drive inflation.

This is a Phillips curve world.

To stop inflation, the government may have to repress demand with tighter fiscal policy.

The higher unemployment brings the real income expectations of workers and firms into line with the available real income and the inflation stabilises – a typical NAIRU story.

Introducing the Job Guarantee policy into the depressed economy puts pressure on Sector B employers to restructure their jobs in order to maintain a workforce. For given productivity levels, the Job Guarantee wage constitutes a floor in the economy’s cost structure. The dynamics of this economy change significantly.

The elimination of all but wait unemployment in Sector A and frictional unemployment does not distort the relative wage structure so that the wage-wage pressures that were prominent previously are now reduced.

The wages of Job Guarantee workers (and hence their spending) represents a modest increment to nominal demand given that the state is typically supporting them on unemployment benefits. It is possible that the rising aggregate demand softens the product market, and demand for labour rises in Sector A.

But there are no new problems faced by employers who wish to hire labour to meet the higher sales levels in this environment. They must pay the going rate, which is still preferable, to appropriately skilled workers, than the JG wage level. The rising demand per se does not invoke inflationary pressures if firms increase capacity utilisation to meet the higher sales volumes.

With respect to the behaviour of workers in Sector A, one might think that the provision of the Job Guarantee will lead to workers quitting bad private employers. It is clear that with a Job Guarantee, wage bargaining is freed from the general threat of unemployment.

However, it is unclear whether this will lead to higher wage demands than otherwise. In professional occupational markets, some wait unemployment will remain. Skilled workers who are laid off are likely to receive payouts that forestall their need to get immediate work.

They have a disincentive to immediately take a Job Guarantee job, which is a low-wage and possibly stigmatised option. Wait unemployment disciplines wage demands in Sector A.

However, demand pressures may eventually exhaust this stock, and wage-price pressures may develop.

A crucial point is that the Job Guarantee does not rely on the government spending at market prices and then exploiting multipliers to achieve full employment which characterises traditional Keynesian pump-priming.

Traditional Keynesian remedies fail to provide an integrated full employment-price anchor policy framework.

In fact, a Keynesian policy agenda would impact more significantly on inflation if it was true that a JG was inflationary as a result of its impacts on demand in the product market.

In 2012, my MMT colleague and friend Randy Wray gave a – Keynote Conference Presentation – was reflecting on the beginnings of MMT and he said (among other things):

And then there was the job guarantee, which I immediately recognized as Minsky’s employer of last resort. I can’t remember what Warren called it but Bill called it BSE, buffer stock employment.

I had never thought of it that way, but Bill’s analogy to commodities price stabilization schemes added an important component that was missing from Minsky: use full employment to stabilize prices. With that we turned the Phillips Curve on its head: unemployment and inflation do not represent a trade-off, rather, full employment and price stability go hand in hand.

At the time, most of my academic attention as an honours student and then postgraduate student was focused on the Phillips curve and how it could deliver a mechanism to have full employment and price stability.

And, as Randy so acutely observed, the introduction of a Job Guarantee flattens the Phillips Curve.

In terms of the body of work we now refer to as MMT, this property is one of the distinguishing features of MMT relative to the mainstream New Keynesian and other heterodox approaches.

The Phillips curve has been a major theoretical and policy construct in macroeconomics – it is at the centre of macroeconomic thinking.

For MMT to come up with a means of flattening it so that the government can thus choose – of all the “steady state” unemployment-stable inflation equilibria available – the one that provides a job for all when the private market fails – was elemental.

That is also why when I read so-called MMT activists claiming the Job Guarantee is peripheral (an add on) to MMT, I just realise they don’t know what they are talking about.

I made a short video today (5 minutes or so) to help you visualise what I have been talking about here.

It is a new era now, folks!

Now, the era that all that was going on is very different to now.

The 1991 recession across the globe really purged all the OPEC inflationary forces from the system. Expectations realigned at low inflation and the problem since has been elevated levels of unemployment and underemployment.

So I can understand why people, who encounter the Job Guarantee idea for the first time, think of it as, exclusively, in terms of a job creation scheme to provide jobs when there are recessed times and deflationary forces, if anything, present.

It is natural to ignore the inflation stability mechanisms and to ignore the place in macroeconomic theory that the Job Guarantee concept occupies.

And this is probably why, activists pick and choose aspects of what they refer to as a ‘jobs guarantee’ and introduce all sorts of variations (like hierarchical wage structures, etc), thinking that variety is the spice of life.

And this is why I retort that there is just one Job Guarantee (the MMT version) and as many ‘jobs guarantees’ as you like to think up.

It is also worth thinking about how the change in circumstances influence the way we think about the Job Guarantee as an intervention.

I often read statements from progressive activists that invoke demands for a Job Guarantee when there is an unemployment crisis, as now.

First, the Job Guarantee should not be thought of as a ‘fiscal stimulus’ package in the way injecting funds into say public infrastructure might be.

When Warren and I converged and our two concepts became one, we considered that the Job Guarantee would be a minimum safety net architecture to provide places for the most disadvantaged when there was a need to deflate the economy.

We always thought that in normal times it would be a small, rather ephemeral pool of workers.

We had no problem with the idea that a Job Guarantee job might become a lifetime career for some workers.

It is ideally structured (being within the public sector and infinitely flexible) to cater for workers, for example, with extreme disabilities who may only be able to work spasmodically.

But, we didn’t think of it is as first-line stimulus approach in deflationary times, as we need now.

We also constructed is an an unconditional job offer – an infinite demand for labour at a socially inclusive wage. In other words, the pool was open-ended (not subject to ‘fiscal’ constraints) and could go up and down like a yo-yo.

That property introduces challenges in job design for sure but there was no thought of constraining the flows in and out of the Job Guarantee pool.

Second, in that regard, when faced with the sort of problems we are facing now – high unemployment and deflationary pressures – relying on a Job Guarantee may not be the best option.

Further, in dealing with the Green Transition challenges and the displacement that will occur as we reduce the carbon-intensive employment sectors, will require much greater job creation capacity within the public sector than that which the Job Guarantee might typically offer.

I am not saying that the Job Guarantee should not be part of our response at present. I have advocated that endlessly whenever I am interviewed etc.

But it is probably better to expand the public sector right now in terms of career-type positions at higher pay and higher skill designations.

One obvious way to achieve this is to redress some of the folly of the neoliberal years and nationalise various activities.

Transport

Water

Energy

Banking

Airports

Telecommunications

Superannuation

etc

And abandon the obsession with contracting out, outsourcing and the like.

This would provide a much more coherent response to the crisis than just being content to allow workers who are currently being made redundant by the millions around the world to have a socially-inclusive minimum wage in the Job Guarantee.

Conclusion

The Job Guarantee should be the last resort right now.

We do not need an inflation-fighting mechanism – instead – we need massive and well-paid job creation.

And to understand why I say that you have to go back to the roots of the idea, which emerged in very different times and challenges to now.

That is enough for today!

(c) Copyright 2020 William Mitchell. All Rights Reserved.