Michael Roberts: Modern Monetary Theory Part 3 – a backstop to capitalism

It may seem a bit odd to only post the third part of a series. The first two parts were a bit long and complicated, so we linked to them. This one addresses one of the most interesting aspects of Modern Monetary Theory, the Job Guarantee. This is something completely different from Universal Basic Income. Roberts presents the MMT position concisely (even when somewhat oversimplifed) as well as his criticism.

You can read Part 1 here and Part 2 here

Michael Roberts – Economist in the City of London and prolific blogger

Cross-posted from Michael Roberts Blog

After two long and possibly turgid posts analysing Modern Monetary Theory, in this third post, I’m going to look at the practicalities – in other words, what are the policy proposals that MMTers put forward for the government to do in order to get more jobs at better wages and without provoking inflation?

Since the Great Recession, leftist economists have tried to refute the theories of neoliberal mainstream economics that call for balanced government budgets and a reduction in the high levels of public debt.  The policies of austerity that flow from the neoliberal view have meant the slashing of welfare benefits, reductions in public services, real wage stagnation and a rise in unemployment.  Naturally, the labour movement wants to reverse these policies that make working people pay for the failure of the banks and capitalism.

The usual alternative comes from traditional Keynesianism, namely that more government spending (by running deficits on annual budgets) can boost effective demand in the capitalist economy and create jobs and increase wages.  And here is where MMT comes in.  As leading MMTer Randall Wray puts it, what MMT adds to Keynesian fiscal stimulus policy is a theoretical argument that “a sovereign government cannot run out of its own currency.”  Because the state has a monopoly over fixing the unit of account (dollars or euros or pesos), it can create as much money as it needs, distribute that money to ‘non-state’ entities, and so boost demand and deliver jobs and incomes.  As Stephanie Kelton, a leading MMT exponent and adviser to Bernie Sanders, says “The issuer of currency can never run out of money because it can always print or mint more dollars, pesos, rubles, yen, etc.”

So running state budget deficits (and hiking up public sector debt) is not a problem.  And because there is nearly always ‘slack’ in capitalist economies, ie unemployment and underused resources, there is always room to boost demand, not just temporarily until the capitalist sector takes over again (as in Keynesian policies), but permanently. This sounds very attractive to the left in the labour movement.  Here is a theoretical justification for unlimited government spending and budget deficits to achieve full employment without touching the sticky sides of the capitalist sector of the economy.  All that is necessary is for politicians and governments to recognise the simple fact that the state cannot run out of money.

The key policy that MMTers put forward from that theoretical premise is what they call a government job guarantee.  Everybody will be guaranteed a job if they want or need it; the government will employ them on projects; or pay for them to get a job.  Most people work for capitalist companies or the government, but unemployment remains and can engulf a sizeable section of the workforce.  So the government should act as an “employer of last resort”.  It won’t replace capitalist companies, but instead sweep up those of working age that capital has failed to employ.  As Randall Wray puts it: “I’d just operate a bufferstock program for labor”.  You could call it a government backstop for capitalism (to use the current word dominating Brexit negotiations between the UK and the EU).

Bill Mitchell is a leading MMT economist from Australia and has campaigned tirelessly for the government job guarantee.  He describes it as an open-ended public employment program that offers a job at a living (minimum) wage to anyone who wants to work but cannot find employment”….  The Job Guarantee jobs would ‘hire off the bottom’, in the sense that minimum wages are not in competition with the market-sector wage structure.  By not competing with the private market, the Job Guarantee would avoid the inflationary tendencies of old-fashioned Keynesianism, which attempted to maintain full capacity utilisation by ‘hiring off the top’.”

Guaranteeing a job for all sounds great.  But apparently, it will not be a job paying a ‘living wage’ (a wage that people can live on).  No, it will only be a ‘minimum wage’ to make sure that it is not “in competition with the market-sector wage structure.”  In other words, the likes of Amazon or WalMart, or small retail and leisure businesses, will still be able to go paying their workers very low wages (at or near the minimum) without interference by any Job Guarantee, because such jobs will be paying less.

Thus the Job Guarantee acts a backstop for the private sector; it does not replace it.  Here is Bill Mitchell again: “The Government operates a buffer stock of jobs to absorb workers who are unable to find employment in the private sector. The pool expands (declines) when private sector activity declines (expands). The JG fulfils this absorption function to minimise the costs associated with the flux of the economy. So the government continuously absorbs into employment workers displaced from the private sector. The “buffer stock” employees would be paid the minimum wage, which defines a wage floor for the economy.”

In a way, this reminds me of the Universal Basic Income idea.  UBI is also like a backstop to capitalism, providing a basic income to people even if they don’t work.  The JG offers a minimum wage if you want to work.  But both do not threaten or replace capitalist sector wage structure or the decisions of capital over who to employ and under what conditions.  As Mitchell says: “To avoid disturbing the private sector wage structure and to ensure the JG is consistent with stable inflation, the JG wage rate is best set at the minimum wage level”.

And what sort of jobs will there be?  By definition they won’t be skilled jobs as the government will be “hiring off the bottom”.  But they will be in useful non-profit projects like building roads, bridges, etc: many socially useful activities including urban renewal projects and other environmental and construction schemes (reforestation, sand dune stabilisation, river valley erosion control, and the like), personal assistance to pensioners, and other community schemes. For example, creative artists could contribute to public education as peripatetic performers”.

When I read that list, I am reminded of the Roosevelt New Deal of the 1930s. Under Roosevelt’s Works Progress Administration (WPA) many unemployed were put to work on a wide range of government financed public works projects, building bridges, airports, dams, post offices, hospitals and hundreds of thousands of miles of road. This was all on very basic incomes.  Did it solve the problem of sky-high unemployment in the Great Depression?  Well, in 1933 the unemployment rate reached 25%; in 1938 it was 19%; so not a great success.  MMTers will say that this was because it was not done properly as Roosevelt kept trying to balance the government budget, not run deficits permanently.

The JG program is to provide jobs only at the minimum wage. That also reminds me of the notorious Hartz labour ‘reforms’ in Germany in the early 2000s that created programs for the unemployed at the barest minimum wage.  The unemployment rate fell but real wages stagnated.  While unemployment is at its lowest since German reunification in 1990, some 9.7% of Germans in work still live below the poverty line – defined as income of around €940 per month or less. Indeed, that working poor figure has grown from 7.5% in 2006 and even surpasses the EU average of 9.5%, according to Eurostat data.

German real wages and per capita GDP

If you want to know how minimum wage employment feels in the German context, read this.

The other issue with MMT-inspired non-stop government spending is inflation.  The state may control and issue the currency and governments may never run out of it, but the capitalist sector controls technology, labour conditions and the level of skills and intensity of the workforce.  In other words, the productivity of labour (real value) is not in the control of the state with all its dollar printing. So an economy is limited by productivity and the size of the labour force when fully employed.  If the government then goes on pumping money in when output cannot be raised  further, inflation of commodity prices will follow and/or inflation in speculative financial assets.

MMTers are aware of this problem.  Bill Mitchell says: “when the level of private sector activity is such that wage-price pressures form as the precursor to an inflationary episode, the government can manipulate fiscal and monetary policy settings (preferably fiscal policy) to reduce the level of private sector demand.”  In other words, the government will cut spending or raise taxes and/or interest rates in traditional mainstream style.  As Randall Wray puts it: The solution is to avoid spending more once full employment is reached; and to carefully target spending even before full employment to avoid bottlenecks.” 

So we are back with traditional Keynesian macro management, something that abysmally failed in the 1970s when capitalist economies experienced stagflation, ie rising inflation and unemployment at the same time.  The reason for that was that inflation and employment are not under the control of the state in a capitalist economy, but depend on the profitability of capital and the investment decisions of capitalists.  MMT only offers a backstop to capitalist investment and employment, not an alternative.

If there is inflation domestically that curbs exports for a country, the MMTers propose to float the currency.  So no capital controls and interference in currency markets. Randall Wray: I’d let the dollar float.”  That might be ok for the US, where the currency, the dollar, is the international reserve currency and has to be held by foreign states and companies to do business.  But that is not the situation for smaller capitalist economies, particularly so-called emerging economies.  If inflation takes hold because the government is printing pesos, lira or bolivaros without stopping to try and maintain full employment while capitalist production is collapsing, the result will be hyper-inflation.  And if those currencies are floating without any controls, then the value of the currencies will plummet – as in Turkey, Argentina, Venezuela etc.

What this shows is that MMT is very much an US/Australia-oriented theory and with policy prescriptions that have no viable application to most economies globally – just like Keynesian theory and policy.  The state may control the issuance of its currency but it cannot control its value relative to other currencies or to gold, the world money.  If trust in a currency’s value is lost by the holders or potential buyers of that currency, then its value will collapse, heightening inflation.

Labour leaders oppose austerity – the policy of the mainstream.  But they do not want a policy that means the overthrow of capitalist economic relations – that is too frightening, risky and not ‘realistic’, so they favour policies that they think can reverse austerity without threatening capitalism – like Keynesian deficit financing.  MMT offers a novel theoretical justification for permanent deficit financing – the state controls money as the unit of account and so there is no limit on government spending and rising public debt is nothing to worry about.  The only constraint is when resources run out and then inflation may ensue.  Then it’s time to tax.

In this way, MMT acts as a backstop to capitalism – the state is the employer of last resort but not the main employer.  It aims to compensate (patch up) the failures of capitalist production, not replace it.

Be the first to comment

Leave a Reply

Your email address will not be published.