Modern Money Blog – Number Forty Two
Introduction to the Job Guarantee or Employer of Last Resort
by L Randall Wray
New Economic Perspectives (March 18 2012)
This week we begin our series on the Job Guarantee or employer of last resort. Both terms have been used to refer to the same proposal; indeed we have also experimented with other terms: Buffer Stock Employment and Public Service Employment. Each of these terms has its own advantages and disadvantages – as each draws attention to a different aspect of the program. Henceforth I will use Job Guarantee in this series.
I will proceed slowly. There is much confusion about what this proposal is and is not. We’ll begin with basics and proceed to develop the most general program. We’ll then look at variations on a general, universal approach to the proposal. The proposal can be, indeed must be, adapted to the institutional characteristics of the nation (or smaller component – city, county, state) that adopts it.
As you know, some have called it slavery; others accuse supporters of fascism or communism. Some claim we want to destroy the safety net. Others say we want to destroy capitalism.
These claims have always seemed to me to be completely over the top. What we are advocating is very simple and should not be threatening to anyone regardless of theoretical orientation.
I think that once the program is fully understood the only opponents will be those who enjoy seeing others unemployed. As I have argued, we cannot rule out cruelty. It is part of the human condition. So I do understand that some people like to witness the suffering of others – those they consider to be “undeserving”. Cruelty will always exist. But we should never let the cruelest people in our society dictate public policy.
As readers will recall, J M Keynes recommended directing cruelty toward management of balance sheets rather than toward tyrannizing fellow humans:
There are valuable human activities which require the motive of money-making and the environment of private wealth-ownership for their full fruition. Moreover, dangerous human proclivities can be canalised into comparatively harmless channels by the existence of opportunities for money-making and private wealth, which, if they cannot be satisfied in this way, may find their outlet in cruelty, the reckless pursuit of personal power and authority, and other forms of self-aggrandisement. It is better that a man should tyrannise over his bank balance than over his fellow-citizens; and whilst the former is sometimes denounced as being but a means to the latter, sometimes at least it is an alternative.
– The General Theory of Employment, Interest and Money (1936), Chapter 24
And as recent research demonstrates, we have created a sector of the economy that specializes in employing such people:
Studies conducted by Canadian forensic psychologist Robert Hare indicate that about one percent of the general population can be categorized as psychopathic, but the prevalence rate in the financial services industry is ten percent. And Christopher Bayer believes, based on his experience, that the rate is higher. Bayer is a well-known psychologist who provides therapy to Wall Street traders. The type of psychopath the author is writing about is characterized by compulsive gambling. And the Wall Street psychopath doesn’t necessarily show up to his or her first day of work in this condition. These “financial psychopaths” generally lack empathy and interest in what other people feel or think. At the same time, they display an abundance of charm, charisma, intelligence, credentials, an unparalleled capacity for lying, fabrication, and manipulation, and a drive for thrill seeking. A financial psychopath can present as a perfect well-rounded job candidate, CEO, manager, co-worker, and team member because their destructive characteristics are practically invisible. They flourish in fast-paced industries and are experts in taking advantage of company systems and processes as well as exploiting communication weaknesses and promoting interpersonal conflicts. Unfortunately – writes the author – the best candidates for many Wall Street jobs exhibit the traits of a financial psychopath.
I think Keynes might have under-appreciated the damage such psychopaths on Wall Street can do to our economy. In any case, we should not let the cruelty of these psychopaths prevent us from pursuing sensible programs, such as full employment for anyone who wants to work.
The Job Guarantee program can be added on to the existing set of social programs. We can retain unemployment insurance, welfare, social security, food stamps, job training programs, apprenticeships, and retraining programs for those such as downsized auto workers. There is no need to eliminate any of these programs. Later we can discuss the wisdom of reducing such benefits – but the Job Guarantee can be added with no cuts to such programs.
The Job Guarantee program can be added to an economy with a “big government” or to one with a “small government”. The Job Guarantee, alone, will not turn a “small government” economy into a “big government” economy. There is some latitude for choice over the size of the Job Guarantee program, itself. As we will see, it is in some sense a “residual” program (“last resort” draws attention to this aspect) that picks up workers as they “fall” out of the private sector. To keep the Job Guarantee program small we need more employment in the private sector.
All the traditional programs – whether supply side or demand side – are still available to try to pump up the private sector. For reasons I will discuss (and that were the topic of a recent excellent blog by Pavlina Tcherneva on the front page of NEP), I am quite skeptical of the ability of such policies to achieve anything close to full employment on a continuous basis.
But I could be wrong. Even with the Job Guarantee in place, we can give these supply side and demand side programs a try – if we really want to. If their supporters are right, the Job Guarantee will shrink to a “vanishingly small” (to borrow the words used by John Carney in a recent column) size. Fine. We’ll see. I do not think they will work, and I think that we would end up with unacceptably high inflation long before we approached anything close to full employment.
That is why I think we need a Job Guarantee no matter whether we pump our supply or demand sides, no matter how much we cater to the private sector, or increase the size of the public sector.
At the most basic level, what the Job Guarantee does is to increase the choices available to those who want to work.
Look at it this way. If you are involuntarily unemployed today (or are stuck with a part-time job when you really want to work full time) you only have three choices:
1. Employ yourself (create your own business – something that usually goes up in recessions although most of these businesses fail)
2. Convince an employer to hire you, adding to the firm’s workforce
3. Convince an employer to replace an existing worker, hiring you
The second option requires that the firm’s employment is below optimum – it must not currently have the number of workers desired to produce the amount of output the firm thinks it can sell. It is not in “equilibrium”.
If it is in equilibrium it will not hire you because the costs of your wage will exceed any induced sales from employing you. This is the well-known “Champaign” problem: unless you promise to spend your entire wages on the output of your employer, there is no reason to believe sales of your output (“Champaign”) will equal the cost of paying wages to you (to produce “Champaign”).
If the firm is in equilibrium, then, producing what it believes it can sell, it will hire you only on the conditions stated in the third case – to replace an existing worker. Perhaps you promise to work harder, or better, or at a lower wage. But, obviously, that just shifts the unemployment to someone else.
It is the “dogs and bones” problem: if you bury nine bones and send ten dogs out to go bone-hunting you know at least one dog will come back “empty mouthed”. You can take that dog and teach her lots of new tricks in bone-finding, but if you bury only nine bones, again, some unlucky dog comes back without a bone.
The only solution is to provide a tenth bone. That is what the Job Guarantee does: it ensures a bone for every dog that wants to hunt.
It expands the options to include:
* There is a “residual” employer who will always provide a job to anyone who shows up ready and willing to work.
* It expands choice. If you want to work and exhaust the first three alternatives listed above, there is a fourth: the Job Guarantee.
* It expands choice without reducing other choices. You can still try the first three alternatives. You can take advantage of all the safety net alternatives provided. Or you can choose to do nothing. It is up to you.
Let me close with a long quote from J M Keynes, among my favorite quotes from him:
The Conservative belief that there is some law of nature which prevents men from being employed, that it is ‘rash’ to employ men, and that it is financially ‘sound’ to maintain a tenth of the population in idleness for an indefinite period, is crazily improbable - the sort of thing which no man could believe who had not had his head fuddled with nonsense for years and years.
The objections which are raised are mostly not the objections of experience or of practical men. They are based on highly abstract theories - venerable, academic inventions, half misunderstood by those who are applying them today, and based on assumptions which are contrary to the facts …
Our main task, therefore, will be to confirm the reader’s instinct that what seems sensible is sensible, and what seems nonsense is nonsense. We shall try to show him that the conclusion, that if new forms of employment are offered more men will be employed, is as obvious as it sounds and contains no hidden snags; that to set unemployed men to work on useful tasks does what it appears to do, namely, increases the national wealth; and that the notion, that we shall, for intricate reasons, ruin ourselves financially if we use this means to increase our well-being, is what it looks like - a bogy.