Opportunity cost, MMT and public spending

Most MMT seems to assume that the economy is not at full employment, and rarely will be unless the MMT framework gets adopted.

Wouldn’t a debt cancellation worsen the financial position of at least some people (the debt holders), and so reduce their consumption to about the same degree, hence no increase in aggregate demand? If we want to think of a policy that improves the financial position of some people without worsening that of others, why not just a “helicopter drop” of newly printed money? But then of course we’d need to tax back the money to keep down inflation, and on net we’d be back where we started, no?

Oh – and about ”really” talking about (everyday) ”American opportunity costs” –
my Cousin thinks – it is/was ”the Crazy Rising of Healthcare Care – Education and Housing Costs – which (nearly) made the vacations in France impossible.

In other words:
Everybody seems to have her -(or his) unfavourable ”opportunity costs”?

>In the MMT framework, the role of taxes is precisely to reduce aggregate demand to a level consistent with the productive capacity of the economy.

“One man’s modus ponens is another man’s modus tollens”, but how is this not a refutation of MMT? This is obviously not what we observe, and monetary management of the business cycle works perfectly fine.

Many CT readers probably already know that, but a fairly complete MMT economical analysis of various implementations of student debt cancellation programs is available at the Levy Institute.

http://www.levyinstitute.org/pubs/rpr_2_6.pdf

The analysis and accompanying simulations argue for a positive effect on employment and a negligible increase of inflation, which in particular means that they (obviously) do not assume that the American economy is already at peak productive capability, as should be true in general for any sane MMT analysis, indeed any sane economic analysis.

“You are correct: at full employment (more precisely most productive employment) to increase the spending of some group of people we must either decrease the spending of some other group or face inflation.”

Don’t think so.

Our current full employment includes a huge proportion of people inadequately compensated in order to participate decently in our society. That kind of full employment cannot have the result you imply unless your economics requires and justifies misery.

@john #11

I’m not sure what you mean. I do not believe we are currently at full employment. If we were at full employment and some people were inadequately compensated, then to increase their compensation others would be required to decrease theirs, either directly by taking their money or indirectly by inflation. So what? I can definitely imagine* circumstances where I would endorse decreasing some people’s compensation to increase others’.

*I don’t really have to imagine; I can just look around.

I’m one of the signers-on to the Sanders et al. student debt relief proposal, although I don’t support it quite as written. Above all, I think only loans for public higher ed should be forgiven, consistent with making public institutions tuition-free but not private.

Now on to financing. First, I’m not an MMTer, although I’m sympathetic to paleo-Keynesianism, so I’m not far removed.

To estimate the consumption impact, let’s first assume that private lenders would be made whole by the government. Thus there is an aggregate increase in private wealth and corresponding decrease in public net wealth. To follow on with JQ, let’s also make the counterfactual assumption that the US is at full employment, since other measures could be taken to get there.

The immediate effect on consumption would be something like current debt service. There may be a secondary effect, a sort of rebound, due to some ex-debtors downshifting their employment. (The claim that young people carrying student debt are beholden to jobs that pay more but satisfy less is one of the arguments for debt relief in the first place.) And there may also be a pure wealth effect if you believe in intertemporal consumption optimization or something close to it.

I view this windfall as falling under the same heading as the income effect of cancelling tuition: discretionary income of students and their families rise at the expense of government net wealth. It is a one-time, transitional increase. And I would finance it, to the extent required, by increased taxes on upper-income households justified by the fact that they receive some of this windfall themselves. Even upper income households that pay for private colleges and universities would benefit somewhat, since private tuition would have to fall if public higher ed tuition were zero. I consider this a necessary part of the package, in fact, in order to avoid the regressive aspect of the policy that some centrists claim to worry about.

To sum up: yes, some increase in upper bracket taxes is needed. Yes, it is justified to offset what would otherwise be a windfall for these households. Therefore it does not compete dollar-for-dollar with other such tax-financed programs.

@1o+11
”full employment”

One day economists will learn – that ”full employment” – which doesn’t pay living wages and where you need – one – two or even three ”gigs” to pay your rent – really can’t be called ”employment” – as in such a ”A Fake Employment Economy” – you always need some boy – or girlfriend -(or a husband or wife?) – to come up with the money to cover the rest of those ”exploding living costs” -(economists might not call ”inflation”) – as they are not part of some ”basket” nobody uses anymore.

And that’s the ”opportunity cost” of turning a ”Predominant Producer Economy” into a ”Predominant Consumer and Service Economy”.

But no worry – America is about the only country who always might be able to MMT itself out of that… ”pickle”?
-(as there is sooo much money out there – that just one Bugatti pays for a lot of tips)

@
”This reflects long hours for many jobs (especially professional), limited or no vacations and multiple jobholding because of low wages”.

And that’s the worst – as all of our friends who stayed (back) in the homeland can’t even take the six to seven weeks of summer vacations with us -(anymore) – which makes the definition of ”opportunity cost” -(the loss of other alternatives when one alternative is chosen) so… depressing?

@Peter Dorman #15

If we were at full employment, then Harry’s original objection in the other post would have more force. If we must give something up, even if we just have to give up some billionaires’ wealth, then it becomes salient to ask if forgiving student loan debt forgiveness is the most benefit we can obtain. I find Sanders’ proposal attractive because it increases aggregate demand at less than full employment with negligible opportunity cost.

@nastywoman #17

One day economists will learn – that ”full employment” – which doesn’t pay living wages and where you need – one – two or even three ”gigs” to pay your rent – really can’t be called ”employment”

Some of us do know this! Still, fixing distribution problems is different when everyone is working than when we have a lot of people out of work. The distinction between full and not-full employment is still important eve if it isn’t the only or even the most important distinction.

@18

I know you’re not all that keen on these time studies etc. But:

“Worth observing that despite significant unemployment and underemployment among some groups in the potential labor force, the US is generally overemployed – annual hours per worker (~1800) are around 20 per higher than most comparable countries.”

It’s still true that “work” is the sum of unpaid household labour and paid market labour. Page 26 here to stick with OECD numbers:

https://www.oecd.org/berlin/42675407.pdf

Breaking it out into paid, unpaid labour, then personal time, leisure, the average American has more leisure time than the average French. Which we’d expect, the USA is a richer place, people do take part of greater income or wealth as more leisure.

At the very least it’s not so clear cut that Americans “work more”.

@Larry # 14

Yes, I see that you’re looking at student debt write-off in the current economic climate. I’m just trying to focus directly with the analysis in John’s post.

We seem to agree at least that a policy having the effect of increasing consumption increases aggregate demand, which is almost tautological. And if we’re at or near “full employment”, then that increase in demand simply increases inflation, which in turn reduces real consumption. So then, as John indicates, in order to prevent that generally, we need to reduce aggregate demand in some more specific way — but we’ve already done that if we simply wipe out assets, as we do if we “forgive” certain kinds of debt. So the simple old “take from the rich and give to the poor”, for example, whether it involves student loan write-offs or bank robberies, just leaves the aggregate economy in place. Doesn’t it?

The only question then seems to be what constitutes being at or near “full employment”, which has assumed a kind of mythical status. It can always be argued that as long as there’s something a bit more “productive” (which can be defined in different ways) that any of us could possibly be doing then we’re always going to be short of that ideal, and no sort of “Job Guarantee” (the caps aren’t mine) would be able to bridge the gap. But in the world as we have it, there are real economic conditions in which an increase in aggregate demand really does increase inflation mostly, and only slightly at best increases aggregate production. So in this world, it seems like we should really contrast a policy like writing off student debt with a much simpler one of just giving the Poor direct access to bank vaults. In terms of opportunity cost.

1) Millenials and the older Gen Y cohort are now the largest voting bloc in the country. Notwithstanding anti-democratic instutional arrangements in the united states, they SHOULD be voting themselves generous benefits. A straightforward debt holiday would be an effective step in that direction, esp since
2) This generation has been victimized by an older political class that viewed them as a resource to exploit, like natural gas or timber, and not as future citizens with aspirations and hopes of their own.
3) There is so much “let’s make the perfect the enemy of the good” reasoning on this blog whenever Sander’s name comes up. This usually takes the form of “couldn’t we use the money Sander’s wants to use for (politically popular, simple idea) to do (complicated, hard to sell, maybe–according to an econ 101 text book more ‘efficient’ idea). Maybe this is come residual animus from the 2016 campaign, but really, people, get over it.

1) But doesn’t the premise of MMT (that government spending being inflation constrained not budget constrained) make the whole question of “best use” into something much more complex? Most government spending has to be compared to other alternatives with comparable inflation impact. Some spending can have negligible or positive inflation impact (spending that increases growth, productivity or that removes mitigates negative externalities could fall into this category). I.e., you can’t compare spending that has negligible or a salutary inflation affect to other uses of higher impact. When you are comparing two alternatives where one reduces inflationary potential, you should do both.
2) And as a practical matter, all policy formulation in the US Congress radically are constrained by bandwidth overload. so that the perfect is almost always the enemy of the good which is comes to passing legislation. (I.e., my heuristic response is that if a policy is popular enough to be enacted into legislation, you should run with it).
3) The other objection to MMT (e.g. a la Krugman) which probably requires specific addressing is “crowding out”. Iiuc, Krugman and other neo-Keynesians would say government spending reduces private investment (except maybe near the ZLB), a view which derives from the neo-classical notion of loanable funds. MMT (and indeed all post-Keynesians school of thought as they embrace endogenous money) then implies that crowding out doesn’t happen.

@Metamorf #25

I’m just trying to focus directly with the analysis in John’s post.

All right.

So the simple old “take from the rich and give to the poor”, for example, whether it involves student loan write-offs or bank robberies, just leaves the aggregate economy in place. Doesn’t it?

Not really. We have to distinguish between stocks and flows. If I have $1000 in my desk drawer that I have no intention of spending, and you steal it from me and spend it, aggregate demand has increased: my stock of money has decreased, but my flow is the same; your stock has not increased, but your flow has. I might decide to spend less to replenish my stock of cash in the drawer, but there is no way to tell if my reduced spending will be more or less than your increased spending.

But in the world as we have it, there are real economic conditions in which an increase in aggregate demand really does increase inflation mostly, and only slightly at best increases aggregate production.

True. An important topic in MMT is that different specific compositions of aggregate demand have different effects on aggregate supply. As I mentioned in the other thread, if we try to spend money on products with inelastic supply, we will increase inflation, even if we are not at full employment. I think Wray’s line is, “We have to buy a lot of bombs to employ one guy in Harlem.”

So in this world, it seems like we should really contrast a policy like writing off student debt with a much simpler one of just giving the Poor direct access to bank vaults. In terms of opportunity cost.

By day, I’m a third-rate economics instructor, by night, a revolutionary communist. So sure, I agree completely. Compared to the Glorious People’s Revolution, forgiving student loan debt is at best small potatoes. I don’t think Bernie is a revolutionary communist, though.

@metamorf Only 7.63% of student debt is private ($119 billion), a rounding error in the US economy.

https://www.nerdwallet.com/blog/loans/student-loans/student-loan-debt/

– and as ”Schäuble” and thusly ”the Germans” were mentioned – how about the following opportunity costs?

The German government is currently considering a ban on work-related emails after 6pm, to counter the accessibility that smartphones and constant connectivity give employers to their employees.

And Germany’s system of Elternzeit (“parent time” or parental leave) is the stuff of fantasy for most working Americans. The United States does not currently have laws requiring maternity leave, while Germany has some of the most extensive parental protection policies in the developed world.

Since “at will” employment does not exist in Germany, all employees have contracts with their employer. Parents who have been gainfully employed for the previous 12 months are eligible for Elternzeit benefits, which include up to three years of unpaid leave with a “sleeping” contract. The employee is eligible to work part-time up to 30 hours while on leave, and must be offered full-time employment at the conclusion of the parental leave. Parents may also choose to postpone up to one year of their leave until the child’s 8th birthday. Either parent is eligible for parental leave, and many couples make the choice based on financial considerations.

In addition to the preservation of the employee’s contract, the state will pay up 67% of the employee’s salary (with a cap of 1800 Euros per month) for 14 months. Parents may split the 14 months however they choose. These benefits apply equally to same-sex couples.

Have you picked your jaw up off the floor yet?”

In my opinion there are two different problems in the OP argument, that reflect two different problems with the MMT:

[Disclaimer: not an economist here, just your average internet crank]

1) Exactly what is “full employment”? My understanding is that in orthodox, neoclassical economics full employment is when the supposed marginal productivity of labour matches the wages, so that additional workers would be paid more than their additional output (under the assumption of falling productivity of labor).
If this is what “full employment” means, then it is perfectly possible to be at “full employment” with a lot of people unemployed and a lot of people underemployed with sucky wages – depending on the marginal productivity of labor function.

I think that the idea of the falling productivity of labor is wrong or irrelevant, and that productivity of labor should be assumed to be constant, that leads to what is now fashonable to call “classic” economics. In this case, though, it is difficult to define clearly “full employment”, because if labor productivity is not falling there is no point when wages reach labor productivity, unless wages rise so much that they reach 100% of the output – but obviously a capitalist economy cannot reach 0% profits, so we have to hypotise that there is a “peak employment”, that is different from the “full employment” of neoclassical theories.

In operational terms “full employment” is defined as “the point after which stimulus produces a lot of inflation”, but then the whole premise of the MMT becomes circular.

The problem for the MMT is that they should make clear what they mean with “full employment”: either the neoclassical concept (in which case it is possible to be at full employment with low wages and a lot of unemployed people) or something different, that they should define anyway.

2) The second problem is the confusion (IMHO) in the OP between the stock of savings and aggregate nominal demand. Basically in case that the government assumes someone’s else debt, and pays for it by printing money, it is increasing the quantity of money, that is the stock of savings.
When we speak of stimulus, instead, we are speaking of aggregate demand, that is a flow (nominal aggregate demand = nominal GDP).
There is no direct relationship between the “quanity of money” (that is the stock of savings) and nominal GDP, otherwise the debt/GDP ratio would be constant.

For the MMT, this is also a big confusion as the seem to assume that by printing issuing money they are increasing aggregate demand, whereas they are increasing the saving stock.
In fact it seems to me that the MMT implies a very dubious quantity theory of money where the price level is equal to (quantity of money)/ (stuff produced), so that it is ok to increase the quantity of money but only as long as the quantity of stuff also increases.
But this is IMHO a wrong model of inflation, as there is no particular reason an increase in the quantity of money (stock of savings) should cause inflation.
Apparently inflation (at least demand-pull inflation) depends on wage-price spirals, and the increase in wages is likely caused by low unemployment, not by the quantity of stimulus.

@MisterMr #39

(Sorry to qualify everything with “I think” or “scholars say”; I’m not an MMT scholar, just a third-rate economics instructor who reads a few MMT blogs.)

My understanding is that in orthodox, neoclassical economics full employment is when the supposed marginal productivity of labour matches the wages, so that additional workers would be paid more than their additional output . . . then it is perfectly possible to be at “full employment” with a lot of people unemployed

I don’t think that’s correct. As I understand it, the marginal productivity of labor is always equal to the wage, regardless of the macro situation. Full employment is when society’s resources, especially labor, are fully employed: everyone is working as much as they want, and all other natural resources are being most efficiently employed. MMT scholars usually use this definition.

Of course, according to “orthodox, neoclassical” economics, we are always at full employment. If unemployed people really wanted a job, they would take one at a lower wage; if they do not have a job, classical economists conclude they do not want one at the lower wage.

I think that the idea of the falling productivity of labor is wrong or irrelevant, and that productivity of labor should be assumed to be constant.

Well, we can always set one thing constant and adjust everything around that, but I don’t know why you would want to to hold labor productivity constant. People can make more stuff per hour of labor today than 100 years ago, so why not take a straightforward view and say that productivity has increased?

There is no direct relationship between the “quanity of money” (that is the stock of savings) and nominal GDP, otherwise the debt/GDP ratio would be constant.

Yes, this is a core MMT concept. There are indirect relationships, though.

In fact it seems to me that the MMT implies a very dubious quantity theory of money where the price level is equal to (quantity of money)/ (stuff produced), so that it is ok to increase the quantity of money but only as long as the quantity of stuff also increases.

AFAIK, MMT scholars say the price level is roughly (flow of money) / (stuff produced), and no MMT scholar holds to the quantity theory of money.

Apparently inflation (at least demand-pull inflation) depends on wage-price spirals, and the increase in wages is likely caused by low unemployment, not by the quantity of stimulus.

And a lot of other things, notably whose wages are increasing, and whether the increase in those people’s wages is associated with increased supply.

Reading comments I see a common
Point

Assuming full employment is jumping ahead of achieved policy

Since the second world war
Not even during the early Korean war mobilization or peak Nan did the us production system go into sector max mode

Read late William Vickrey

On maximum
Market mediated employment
Thru fiscal thrust macro
Ie thru some mix of
tax cuts transfer payment and public spending

Get this onto max drive
Ie continued stimulus till corporate sector
Price increases accelerate continuously
for a year or 6 quarters
Or some such feed back warning
Recall America at the republic level
Faces no dire policies from trade imbalance
And imperial dollar forex slides
Are job class beneficial despite import
Price inflation aka the 70″s ……

IOW

We need a blast in full measure of output max macro

Preparing responses to outcome are secondary

.
.

As much as I admire John Quiggin (Zombie Economics is a great book and a potent weapon against conservatives who vomit out long-debunked Econ 101 or Laffer-curve junkthink), switching Bernie Sanders’ proposal to a discussion of opportunity cost proves pointless and counterproductive and altogether meaningless.

The plain fact of the matter is that opportunity cost can’t be calculated. It’s an ignis fatuus. To figure out what opportunity cost really is, we’d have to be able to see into the future and figure out with perfect clairvoyance all the effects of our actions. No one can do. No economist can do this. No policymaker can do this. And no one should even try because we’d contort ourselves into pretzel knots and wind up in a dead-end of infinitely branching possibilities.

Campbell’s Law and the Cobra effect assure us that whatever ingenious calculations we try to make to predict people’s future actions and “nudge” society into a better world will usually backfire. The Lucas critique not only applies to inflation, but probably also to unemployment and deficits and most of the rest of the things we can measure about the economy. Simply put, when you put a policy in place and spend money on it to change society, people game the system and you typically get results that turn out to be the opposite of what you expected. So targeting full unemployment (1945-1975) creates runaway inflation and a resurgence of neoliberal oligarchy, whereas people who argued in favor of targeting full employment in the 1940s-1970s claimed that the opportunity cost of failing to do so would be a return to the Great Depression and huge economic inequality of the 1920s.

The switch to targeting inflation (1975-2019???) creates runaway college/personal debt and a gig economy that doesn’t pay people enough to live and a resurgence of full-on naziism.

Since we can’t meaningfully calculate the opportunity cost of alternatives to Sanders’ proposal to sink 1.6 trillion into canceling college debt, how about we take a more pragmatic approach? Do what common sense and the empirical signals tell us might help boost aggregate demand, and then change the policy (radically if necessary) as unforeseen and counterproductive knock-on effects from the policy start to pop up. Pretty much the same way FDR and his economists (most of ’em not academics) handled the New Deal.

In any case, if we want to take a stab at guessing about opportunity costs, forget college debt. That’s a one-shot deal. We can do a crude Fermi estimate about the opportunity of America’s insane military/security spending, which, broadly construed, runs about 53% of the current federal budget. That’s around 1.5 trillion dollars per year, year after year after year after year after year we’re throwing away, pissing that 1.5 trillion down a rathole and getting nothing for it other than corrupt Pentagon contractors like “Fat Leonard” and million-dollar luxury homes for CIA torturers and military contractors paid $400 a day to run sex trafficking operations and the misbegotten F-35, that can’t even fly.

Fat Leonard, the F-35, and so on:
https://harpers.org/archive/2019/06/the-pentagon-syndrome/

CIA torturer’s million-dollar home:
http://fortressamerica.gawker.com/this-cia-torturers-1-3-million-house-sure-looks-nice-1671406406

Sex trafficking by military contractors in Iraq:
https://apnews.com/ebe9f147ebcd44589749a6359dc2e462

A recent economic study suggests that military spending is the least effective way of creating U.S. jobs. The study found that spending that money on education would create twice as many jobs:
https://www.brown.edu/news/2017-05-25/jobscow

Do the math. If we slashed crazy U.S. military spending by, say, 90%, that would give us somewhere in the ballpark of 1.3 trillion extra dollars per year to play around with. That’s per year. So after 7 years, you’ve got 10 trillion extra dollars. After 14 years, you’ve got 20 trillion extra dollars. And so on.

Permit me to suggest that 20 trillion dollars is real money. The 1.6 trillion bucks Bernie is talking about looks like a rounding error when you’re talking about the kind of Himalayan mountains of cash America pisses down a rathole on its endless unwinnable foreign wars for weapons that don’t work and an American military that hasn’t won any wars since 1945.

Want to talk about opportunity cost? Let’s talk about slashing American military spending, not natter on about nitpicking Bernie Sanders’ proposal to cancel college debt.

P.S.: various ignorami will predictably claim that the U.S. spends only 760-something billion per year on its military. Utterly false. The Pentagon has perfected the art of disguising what it actually spends, hiding the actual costs of its programs, and misrepresenting its actual yearly budget — aided greatly by the fact that the Pentagon has never passed an audit, and thus cannot produce actual hard numbers for what it spends per year.

Examples: the 298 billion dollars in the U.S. annual budget for military pensions are magically not part of “military spending.” Classic creative accounting. The Department of Energy, which nowadays mostly spending its budget on exotic weapons for the DOD, also likewise magically gets its 20 billion dollar budget counted a non-military spending. The Department of Homeland Security’s 70 billion dollar annual budget likewise doesn’t count as military, even though it uses that money to put cities like Chicago into martial-law-style citywide lockdowns with tanks roaming the streets after a couple of kids blow up a black powder bomb. And so on. Examine the figures, and the best guess you come up with for a real U.S. military budget it north of 1.5 trillion per year.

For confirming guesstimates, see:
https://www.pogo.org/investigation/2018/02/americas-national-security-budget-nearing-12-trillion/

https://www.thenation.com/article/tom-dispatch-america-defense-budget-bigger-than-you-think/

– and as there seems to be this very unpleasantly growing dilemma for so many Americans about opportunity costs about what to pay first?

Should always the rent or mortgage payment be payed first and then risking that already at the 20th of the month there is no money for food anymore – or is the car payment the most important – as when th car get repossessed there is no way anymore to drive for uber or to get to the second or third job to pay for the car -(and especially the gas) –
and don’t laugh – as these are the real serious ”opportunity cost riddles” and not some ”financial mumbo jumbo”?

The inestimable Matt Bruenig points out that the statistics undercount the amount of student debt that low-income people have:
https://www.peoplespolicyproject.org/2019/06/27/low-income-people-have-more-student-debt-than-realized/

Now I’m really happy –
as this thread has come to a very ”constructive” solution from:
@45

”Want to talk about opportunity cost? Let’s talk about slashing American military spending, not natter on about nitpicking Bernie Sanders’ proposal to cancel college debt”.

– and as the major question for so many American families has become:

”Do you want to be bankrupted today – or rather be tomorrow?”
– or ”what are the (psychological – philosophical and financial) -opportunity costs of working for companies – which ultimately always bankrupt YOU?

As American employers have invented all these type of ”employments” –
(which are legally ”not employments” anymore) – BUT they give ever American ”the chance”
(haha!)
to be a ”free contractor”.

And then this nation of ”free contractors” –
(with – at the same time – some little – truly wonderful ”employment” – one only gets – by having invested in a real expensive Harvard education) –
becomes what @44 said:

A system were cost and value have become totally unmoored from one another.
”Never have so many (opportunity costs) so much more or so much less than what they are worth”.
and
”The latter somewhat desensitizes us to the former, at least as long as we don’t have to buy them”.
AND as long as the car – we need to drive for uber – which for sure will bankrupt US in the future – but haven’t bankrupted US yet – will NOT be repossessed – yet!

Z — yes, that’s what I read and I added up the spending commitments to which he gives figures (the stuff on teacher’s salaries, which I agree is crucial though I might have liked more subtlety, uses the phrasing “will work with States to” which I take to be a a way of saying “want to signal I support this but won’t fund it” — contrast with his willingness to say that he will fund cancellation of all medical school, veterinary school and law school debt: note, that by the time the debt forgiveness happens, teachers will be graduating from UW’s teacher ed program debt free because the Dean is securing funds to ensure that, so Bernie’s funds will flow to new doctors and new lawyers, but not new teachers, graduating at that time from our institution). Any of 100 people I know could have written his platform (including me), and yes, I think most of it is fine. I’m on holiday, so won’t say more for now, but will try to do a post in a few weeks looking at it piece by piece.

@john #40

Whatever full employment is, I too do not think we are there, though there seems to be universal acclamation that we are, especially among the Fed.

I don’t think we’re there either, and most MMT scholars think so too; the acclamation is not universal.

In any event, if there is full employment and inadequate compensation, then the fear of inflation forces a system that includes misery, by the original macro style reasoning.

No, you just have to take spending away from people who are spending too much to increase the spending of people who have too little. The fear is the fear of redistribution, not really inflation.

@Larry #57

This “fear of inflation” thing seems odd to me.

Who, exactly, is supposed to be afraid of it? Near as I can tell, the only people it hurts are creditors, and since we are almost all debtors, shouldn’t we welcome rather MORE inflation than we’ve been “enjoying” the last 40 years or so?

What McLaren said

mclaren@45
“Hasn’t won any wars since 1945” … na they beat Granada.

Military Keynesianism is actually official U.S. policy. Paul Nitze’s NSC 68, presented as policy recommendation to Harry Truman on 7 April 1950, explicitly stated that America should pivot to an economic policy of growing its economy by producing weapons & military services:

https://en.wikipedia.org/wiki/NSC_68

As many have pointed out, that worked economically for a few decades, then began to break down as weapons contractors/congresscritters/Pentagon careerists began to game military procurement and military-industrial-complex system.

See “America’s Defense Death Spiral,” 2014:
https://nationalinterest.org/commentary/americas-defense-death-spiral-9980

And Chuck Spinney’s article “Why the Defense Budget is Always Underfunded,” replete with wonderful tricks like “front loading” and “bow waves”:
http://chuckspinney.blogspot.com/p/the-defense-death-spiral-why-defense.html

The opportunity cost of military spending is probably even bigger than I guesstimated, because we’re now stuck permanently near the zero lower bound in interest rates. And as Krugman et al. point out, near the ZLB, the multiplier effect of government spending skyrockets. In a normal economy with moderate growth and moderate interest rates (guesstimate a normal interest rate somewhere in the ballpark of GDP growth rate + 2 to 3%, no, this is not NAIRU, it’s just a Fermi estimate of what a non-pathological economy with real growth looks like when the financial sector hasn’t metastasized out of control and 94% of all new jobs since 2005 haven’t turned into $3/hr temp gigs courtesy of Silicon Valley and the NLRB isn’t ignoring gross violations of minimum wage law and the FTC doesn’t ignore gross violations of the Wright-Patman Act and the Sherman Act), in a more or less normal economy like that, the fiscal multiplier in recessions typically runs somewhere around (???) 2 to 3, if memory serves. But that’s in V-shaped recessions caused by the Federal Reserve slamming on the brakes.

Right now, we are not in a V-shaped recession. We’re in a balance sheet recession. Right now, the Fed has been pumping nitrous oxide into America’s economic engine courtesy of negative real rates on long-term inflation adjusted bonds (people are eagerly paying the U.S. government for the privilege of lending America their money), yet we’re barely getting a sputter. So the multiplier effect of fiscal spending right now is almost certainly much higher than normal. 4? 5? 8? Who knows? But that’s a huge opportunity cost.

The other issue is that the Lucas critique absolutely applies to today’s “employment” numbers, because so many of the new jobs created since 2005 are low-wage temp gig junk jobs that aren’t even really jobs. They’re creative-accounting magical fantasy “independent contractor” Potempkin-village work that boils down to companies lying in order to undercut the minimum wage. Look at Amazon’s mechanical turk and you’ll find independent contractor (so-called) gig “jobs” that pay around $1.35/hr. That bottom-feeding garbage gets counted in the federal employment statistics. Look at the Uber drivers sleeping in their cars. They’re technically independent contractors, but in reality they’re serfs making ~ $5/hr after expenses and fuel and repair costs etc. Look at the hordes of migrant retired elders living in their cars working at Amazon warehouses and barely scraping by:
https://www.thenation.com/article/qa-jessica-bruder/

Seems to me as though numbers like U6 and U2 have been as thoroughly gamed by employers as full employment was gamed by workers back in the 1960s and 1970s courtesy of out-of-control inflation. So talking about slack in the economy and the headroom for full employment involves a hall of mirrors today. Current definitions of a “job” have gotten so distorted by employers misclassifying their employees and outright lying and going on an orgy of wage theft, and the minimum wage has so thoroughly been destroyed as the bottom level of pay in the American economy, that there’s almost certainly a huge amount of employment left, if we define that as a real job, rather than some 70-year-old guy sleeping in his car and working seasonally in an Amazon warehouse as an “independent contractor.”

29 U.S.C. § 201 only requires employers to pay the minimum wage to employees. Employers do not have to pay the minimum wage to:

independent contractors
outside salespeople (a salesperson who works a route, for example)
workers on small farms
switchboard operators employed by phone companies with no more than 750 stations
employees of seasonal amusement or recreational businesses
employees of local newspapers having a circulation of less than 4,000
newspaper deliverers, and
apprentices, students, and learners

Well, you can see the net result. Uber and its wretched ilk are now the new American business model. There’s a new gold rush on to classify essentially every worker in America as one of the above categories, then piecework and nickel-and-dime ’em to death (in the same way the old coal mine operators did in the 1870s) where “independent contractors” must pay exorbitant fees to the company for services/equipment they need to do their job, while getting grossly underpaid for their piecework or independent contracting work.

Take the derivative of this trend and what do you get? Workers now routinely take home far less than minimum wage.

94% of all new jobs created since 2005 are low-wage temp gigs:
https://qz.com/851066/almost-all-the-10-million-jobs-created-since-2005-are-temporary/

“Facing poverty, academics turn to sex work and sleeping in cars”
https://www.theguardian.com/us-news/2017/sep/28/adjunct-professors-homeless-sex-work-academia-poverty

“Most jobs created since 2005 are non-traditional”:
https://www.nbcnews.com/business/consumer/most-jobs-created-2005-are-temporary-or-unsteady-n693631

“Are we living in a ghost job market?”
https://www.usnews.com/news/articles/2016-12-27/the-new-normal-alternative-jobs-drove-economic-recovery-report-suggests

“Five reasons why zero-hour contracts are the future of work”:
https://www.entrepreneur.com/article/235568

“Record number of UK workers are living on the edge with zero hours contracts”:
https://www.occupy.com/article/record-number-uk-workers-are-living-edge-with-zero-hours-contracts#sthash.HktfVayU.dpbs

Lots of economists currently that claims about robots wiping out middle class jobs are nonsense. Probably technically true. What those economists don’t seem to fully recognize is that while robots aren’t reducing the net number of total jobs, there’s strong evidence (recent paper by David Autor et al.) that robots are reducing the total number of high-wage jobs in the U.S. economy. In other words, while the lump of labor fallacy may be technically correct, robots clearly are transforming the nature of jobs so that an ever increasing number of new jobs are ever-lower paid.

“Polyani’s Pardox and the Shape of Employment Growth,” David Autor, 2006:
https://www.nber.org/papers/w20485.pdf

“The Polarization of the U.S. Labor Market,” Autor, Katz and Kearney, 2006:
https://www.nber.org/papers/w11986.pdf

“Recent Change in the European Employment Structure: the roles of Technology and Globalization,” Goos, Manning and Salomons, 2009:
https://core.ac.uk/download/pdf/34459389.pdf

And, in particular, “Robots and Jobs: Evidence from US Labor
Markets,” Acemoglu and Restrepo, 2017:
https://novafrica.org/wp-content/uploads/2017/06/Daron-Acemoglu.pdf
https://www.nytimes.com/2019/02/04/business/economy/productivity-inequality-wages.html

To put it another way, automation once upon a time got deployed to increase production efficiency and produce more widgets (or more services) per hour. But automation is now increasingly deployed by employers not to increase efficiency or to produce more widgets/hr or more services per unit time, but to destroy unions and pound down the wages of employees by fraudulently reclassifying ’em as “independent contractors” and gaming their actual pay down as close to zero as employers can get away with.

You can see the endgame here. Eventually all U.S. jobs, except for a tiny scrim of ultra-elite positions like Dean of Harvard or AI researcher or Nobel laureate materials scientist or governor of the Federal Reserve Board, will pay as near zero as makes no difference. These new sub-minimum-wage gigs will also be automated into and out of existence so quickly that employees will need special apps to tell them how many minutes they worked that day. Some finite difference app will shave gig workers’ hours down on an asymptote toward zero.

You can’t run a viable economy that way. Between the rich hiding their income in tax shelters overseas and the bottom 90% of the workforce on a glide path toward homelessness and starvation, the logical decision for ~90% of the electorate is to use the Samson in the temple strategy. Just smash it all. Bring it all down. Thus the recent votes for Trump, Brexit, Marine LePen, and who-knows-what in the future. When Lord Humungous, Ruler of the Wasteland, runs for high office, he’ll win in a landslide.

“Tax Evasion and Inequality,” Alstadsæter, Johanssen and Zucman, 2018:
https://gabriel-zucman.eu/files/AJZ2017.pdf

“For the biggest group of American workers, wages aren’t just flat. They’re falling,” The Washington Post,, 15 June 2018:

`The fall in those wages has alarmed some economists, who say paychecks should be getting fatter at a time when unemployment is low and businesses are hiring.

`“This is odd and remarkable,” said Steven Kyle, an economist at Cornell University. “You would not normally see this kind of thing unless there were some kind of external shock, like a bad hurricane season, but we haven’t had that.”’

Since the U.S. economy no longer offers anything but eventual immiseration and death sans healthcare for ~90% of the population when you project the status quo forward, it makes no sense for most voters to vote for folks who promises to grow the economy. “Growing the economy” is now just a code phrase now for “making the rich limitlessly wealthier while starving you.” In that kind of world, when the alternatives are [1] become eventually homeless & starve & die, or [2] crash the economy and pull it all down and blow up capitalism entirely, in which case you will still starve and die–but maybe the rich will too…

…Well, option 2 starts to look kind of appealing, doesn’t it?

If voters reach that kind of nihilistic and despairing ne minus infra, watch out. So it’s starting to look as though economists don’t have all that much time to suggest some viable alternatives to the status quo before the electorate starts to figure “If employment now means `It rubs the lotion on its skin or it gets the hose,’ maybe I’d just better grab that guy’s poodle, and maybe even eat it too…”

It is possible and desirable to have an unemployment rate that is never above 2 percent and underemployment and marginal attachment rates that hover around zero.

The way to do it is to set up a Job Guarantee whereby the federal government makes an unconditional offer of living wage employment to everyone who wants employment.

The employers in the program would be local governments, state governments, NGOs, not for profit social enterprises, cooperatives… anyone except for-profit firms (it is important that it doesn’t degenerate into a wage subsidy scheme).

It is a good idea to be very creative and imaginative when we think of what counts as a valid job.

Caring for children, elderly relatives, and relatives with disabilities could be a paid Job Guarantee job if a person wanted it to.

A Job Guarantee could validate and affirm caring work that is currently hidden and underappreciated.

Participating in education and training could be a paid Job Guarantee job if a person wanted.

Planning, launching and consolidating a small enterprise could be a paid Job Guarantee job if a person wanted.

There would be a panoply of Job Guarantee jobs related to social and community services, environmental services, artistic and cultural services, and small-scale public works.

The employer and the jobseeker would design a role around the jobseeker’s interests, preferences, and abilities.

For the vast majority of people, a Job Guarantee job would be a transition job – a stepping stone to a higher paid job in the private sector or in the regular public sector.

But there would be no obligation to move on. If a person wanted to do a Job Guarantee job on a long term basis there would be nothing stopping them.

A Job Guarantee would make it easy for people to create a role that is rich in meaning and purpose, that serves an obvious public good, that has positive social interactions, and that has relevant and rewarding opportunities for learning and development.

Macroeconomically the Job Guarantee would have one purpose: to be an automatic stabiliser that ensures that the federal government is automatically doing precisely the correct amount of spending to achieve full employment with stable prices.

When the private sector is recovering, federal government spending would automatically fall as people leave the Job Guarantee for higher paid jobs elsewhere.

According to economist Steven Hail of the University of Adelaide the Australian Government could increase its fiscal deficit to $50 billion or $60 billion per year without causing an inflation problem. The amount of unused real resource capacity is simply immense.

Enacting a Job Guarantee today would probably involve the expenditure of $30 billion per year.

That would leave another $20 billion or $30 billion of fiscal room for other expenditures (given that the fiscal position is presently balanced, more or less).

A macroeconomically literate Australian Government would be scrambling to find efficient and welfare-enhancing ways of filling that fiscal space. The Grattan Institute’s proposal for a universal dental care scheme would be an excellent choice.

If there were no fiscal space in the macroeconomy at present – if unemployment were 1 or 2 percent, with close to zero under-employment and close to zero people marginally attached to the labour force – then yes, it would be necessary to enact fiscal offsets (tax increases and / or spending cuts) to make a large new program non-inflationary.

But our fiscal context today is very different from that.

The Grattan Institute’s excellent proposal for a universal dental care scheme could be implemented over the next few years without the need for any tax increases or cuts to other spending items. In fact, the challenge would be to find other ways of expanding the Australian Government’s fiscal deficit.

@Nicholas, it is not easy though… I have seen well-intended and reasonably well-thought job programs that still end up as Kafkaesque hell.

The job has low priority (or they would have hired someone already). The workers are not a good fit (because the whole point of such a program is that it doesn’t easily reject people). Turnover is high, you never build up a smooth experienced workflow. Motivation is low (because people aren’t stupid and they notice those earlier problems). People are stressed out, because they still have to run a household on a small budget, and want to apply for regular jobs. Costs are disappointingly high – there’s always side costs like offices, tools, materials. And relatively high effort in administration, training, management, due to the turnover etc.

It doesn’t have to be like that, there are brilliant super-useful programs. But they don’t fall from the sky, and can’t just be whisked in and out of existence based on the whims of the macroeconomy. And if the program isnt brilliant, you are easily better off just to pay out unemployment benefits until they find a regular job.

and about this:

”*Actually in small doses, inflation is a good thing, as inflation is caused, in part, by capitalists raising prices because people have more money to spend and capitalists want to take more of this to get more profit for themselves”.

Is this why so many Americans can’t afford to live in America anymore?
And if it is – why NOT inflate about a 100 times more in order that not only ”the poor” but also the so called middle class and the rich can’t afford to live in the homeland anymore.
And then they ALL move to London – and in America there will be so many empty Villas and luxury apartments that the poor can occupy them?

How does that sound Hidary?

Hidari covers most of it

After some study of the history of colonialism and playing SimCity (kidding, study the inflation history in the US), I have become convinced that “boom and bust” is the way to go. This should be obvious, in that conservatives hate inflation more than recessions, and Greenspan’s “Great Moderation” was so beloved.

Booms leave infrastructure behind. Not just roads and schools and stuff labour likes, but also unions skills solidarity generous voters. China has a whole lot of empty buildings, and probably the best construction workforce in the history of the world, now working in Central Asia and Africa. Used to be Americans.

Love Mark Blyth a bunch, but “austerity” is not recessions, but the gov’t failure to adequate provide automatic stabilizers and ramp up social spending during recessions. MMT and JG would do much to fix that, but banks need to fail and be failed, and moderation won’t do.

So an inflation goal of 3-5% wth spikes to 10% would be my tolerance.

@72

No, the Federal Reserve has not made any net additions to the non-government sector’s financial assets. Only the Treasury Department can do that (after the spending has been authorized by Congress).

Quantitative Easing is not a fiscal stimulus. It is just an asset swap. The Federal Reserve buys government bonds, corporate bonds, and other odds and ends and it hands over reserve deposits in exchange.

Not surprisingly this hasn’t accomplished anything useful.

For ideological reasons and because of the appalling failures of New Keynesian and Neoclassical and New Monetary Consensus macroeconomists, too many politicians and bureaucrats are fearful of using fiscal policy.

There is this widespread and hugely counterproductive bias towards monetary policy.

Monetary policy is not very potent. Fiscal policy is incredibly potent.

Your job might be to interview older people in the community for an oral history project. Your job might be to teach people how to surf. Your job might be to care for your dependent child, or a relative with a disability, or an elderly relative. Your job might be to satisfactorily complete a program at university or TAFE. Your job might be to paint murals or perform concerts or organize theatrical productions.

I mean, this sounds great – but let’s be honest – some of things are not actually “jobs”. Some are jobs (I’ve paid people to try to teach me to surf!) but not ones that can, in fact, support many people. Why not just have a UBI, and then let people do these other things on their own, if they want to? Why pretend that these are “jobs” and put an extra layer of bureaucracy and make-believe in between? What’s the point of doing that?

I have a number of friends who would love to be rafting and kayaking guides and instructors. But – not enough people want to pay enough to make that viable. With a UBI, they could then do that. And, they wouldn’t need anyone else coming between them. Why wouldn’t that be better than a “jobs” guarantee? This is really unclear to me.

I think that Philippe Van Parijs, the Belgian economist who is the world’s leading theoretician for a UBI, regards a UBI as an indispensable precondition for genuine autonomy and freedom in a monetary production economy. I think he also sees a UBI as a good transition step towards post-capitalist possibilities.

The way that he justifies the UBI relies heavily on New Classical assumptions such as the claim that work is a form of disutility that people want to avoid. In my line of work (mental health, disability support, and research assistant work) I am highly sensitized to the psycho-social benefits of paid work and to the social and cultural exclusion that accompanies involuntary unemployment.

I reckon that designing a UBI and a tax policy so that the UBI is genuinely large enough to live on while participating fully in the life of the community (what Parijs would call a “highest feasible level” or “highest sustainable level” of UBI) and while encouraging enough production to meet everybody’s needs is a difficult needle to thread. I think that if a Job Guarantee and a highest sustainable level UBI were both offered, I would be ok with it, but if we could only have one I would much rather have a Job Guarantee combined with generous income support for retirees, the temporarily ill, and people with disabilities. I think it would be necessary to have a JG to provide a strong macroeconomic stabilizer and to mop up any residual unemployment.

Personally I consider a Job Guarantee to be a more helpful transition to non-capitalist, highly productive modes of economic and social organization because it appeals to people’s preference for mutuality and reciprocity, it is less vulnerable to losing political support because of perceived free-riding, and it can directly transform our cultural concept of what counts as efficient, productive, and worthwhile activity.

A well-designed JG would be highly decentralized; the JG employers would be cooperatives, NGOs, not-for-profit social enterprises, local governments, state governments. The funding would be federal but the program would be administered at the grassroots community level.

A JG is an automatic stabilizer that ensures that the federal government is spending precisely the right amounts in precisely the right places to achieve full employment alongside stable prices. The size of the JG workforce changes automatically and quickly in response to the private sector’s demand for labour. A JG is a price anchor. It achieves inflation control.

A UBI, on the other hand, has no price anchor. It would be very difficult to contain the inflationary pressures of a UBI.

A UBI also provides none of the psycho-social benefits of participating in paid work.

A UBI that is set at a level that is sufficient to live on would cause workforce participation to fall, which would cause output to fall. UBI proponents have no plan to ensure that sufficient goods and services would be produced to meet everybody’s needs.

And a UBI is based on an impoverished understanding of what it means to be human (consumption entity) whereas a JG resonates with people’s yearning to contribute, belong, learn, and create.

UBI proponents do not grapple with the macroeconomic implications of their idea. They have no plan for price stability. They rarely show any interest in genuine full employment. They evince a vague hope that inflation won’t be a problem.

UBI has the dubious distinction of simultaneously being one of the most discussed and least developed ideas in public policy.

It is truly an awful idea in every respect.

“A JG provides an inflation anchor to stabilize prices. A UBI does not. A UBI with no JG would be highly inflationary because the federal government spending would be constant – it wouldn’t fluctuate in response to the private sector’s demand for labour.”

It is hard to prove speculation, but I see no reason for this to be true or likely.

Under a JG people are not employed producing goods for the free market to keep prices down (if they are then we are talking socialism and if we not talking socialism then those people would not be unemployed in the first place). Under a UBI, the incentive to work remains and the value of UBI is specifically determined by what is produced. That is UBI is significantly redistributive and so will increase the demand for basic goods increasing the money available to employ people to produce those goods. I am confident that people will in general choose productive employment for more pay rather than idle poverty. I’m also confident that involuntary unemployment will become less likely with more redistribution and that employers will make jobs more attractive in response to people not being forced to work. But the real issue is the bureaucratic cost of the JG – JG will certainly increase employment, but how much of it will be useful?

@Larry Hamelin 41

Sorry for the late answer, I wrote an overlong answer two days ago but got eaten by the intertubes, so short version:

In my understanding, in the neoclassical theory the wage rate is supposed to match the margianl productivity of the last worker, in a situation of “full employment”.
Capitalists are supposed to hire people as long as worker productivity is above wage, so the market is supposed to tend to “full employment”.
Keynesian interventions are supposed to bump the system up when something doesn’t work (“market failure”), so that the economy can happily gravitate towards “full employment” again.

In fact this is the definition of the concept of “full employment”, at best of my understanding.

This is most likely wrong IMHO, it is better to think in terms of waves of boom (euphory, investment) and bust (unsold stuff, disinvestment).

But, many economists, while they don’t give much credit to the concept of the neoclassical equilibrium, still speak of “full employment”, though this only makes sense in terms of the neoclassical equilibrium theory.

Keynesian stimulus works basically by bumping up profits and enticing capitalists to invest more, so it is not automatically a “lefty” policy, it can and in fact very often is used in order to create a more inequal society (see Trump’s tax cuts), so while I think most MMTers are lefties, they are openin the road for reaganomics/trumponomics.

Addendum to previous response to Nicholas Haines

There are two logical fallacy in your statement that federal government spending being constant regardless of private sector demand for labour.

Firstly, a transfer payment does not have the same demand effect as direct government purchases because it be saved.

Secondly, the transfer payment will be offset at high employment by higher tax revenue.

So this argument seems to me irrelevant -sorry I didn’t make that clear above.

Pretend work is an ugly business. We really need to get away with that obsession about working to contribute as only viable idenity between 25 and 65.

We`ve got somre really ugly stuff going on in Germany regarding the “second labour market” which are government subsidiced jobs for the disabled, physically as well as mentally. Quite often those jobs consitute of sth like: 900€ subsidy a month paid to the employer, 150€ a month paid to the employed. Usually the work is idiotic, sth. like folding cardbords. Now you might think they suggest that job just to people with a severe condition limiting the ability to think. Oh no, they got no inhibition to send someone with a social anxiety disorder there, because you know one less unemployed in the official numbers. Its supposed to great for “day structure”. Now imagine how much great and cheaper day structure you could create without the obsession that it has to consist of pretend work. Oh and those employed there quite often do it for the money, because they get it on top of welfare/or disability pension.
Usually there is also a pretense that working there would enable the future ability to work on the regular labour market, ofc in reality working at some make work project for the mentally disabled is pretty much makeing sure one will never get a regular job, at least if one mentions it at the applicatioin.

Some people argue that we should deliberately keep wages artificially low so that firms keep employing people instead of investing in automation.

That is a terrible thing to do.

It denies the workers the benefit of increased living standards.

It keeps productivity lower than it could otherwise be, which suppresses living standards.

If wage rises encourage firms to invest in technology and innovation, that is actually a good thing.

We can create new jobs for any workers who are displaced. Not just public sector jobs, but also new private sector jobs that are crowded in by the increased federal government spending.

Because total productivity has gone up we can give everybody a pay rise without it being inflationary. This includes people receiving income support payments.

Consequently, everybody’s real living standard improves.

We can also improve people’s quality of life by shortening the working day and gradually moving to a four-day working week without reducing anybody’s overall pay.

Productivity growth is great if the federal government uses fiscal policy and industrial relations and corporate law to ensure that the benefits are enjoyed by everybody.

Nicholas Haines, have you ever been on the dole or had to engage with the organs of the state who typically deal with poor people? Because if you had you would know that their agents are not typically the kinds of people who will help you fashion an artisanal job that you can enjoy doing for public money. They’ll send you to the other side of your state to dig potholes in the sun and yank your rent assistance if you even look sideways at the assignment.

I’m not arguing with the principle of the job guarantee, just saying it sounds like it would be horrible in practice. I think there are some chapters in the dispossessed that spring to mind …