Ralph Musgrave - Ralphanomics

Muddled thinking on ELR.

The idea that government should act as employer of last resort (ELR) is as old as the stars. And one of the main groups pushing ELR is based at the University of Missouri-Kansas City (UMKC). Unfortunately there is a large amount of muddled thinking on this subject, for example in this paper by Pavlina Tcherneva of the above university.

I’m frustrated at this because the UMKC lot favour Modern Monetary Theory (as do I), plus they favour ELR, and I favour ELR – thought I don’t agree with them on exactly what form it should take.

The flawed arguments Pavlina puts for ELR are as follows.

1. Trickle up and down.

ELR is desirable in that it involves trickle up whereas, traditional demand management involves trickle down, (p. 2 & 3).

The flaw in that argument is that while traditional demand management often involves trickle down (which I deplore), it does not HAVE TO. For example, the VAT reduction earlier in the recession in Britain is an example of traditional demand management done in a trickle up manner.

Thus trickle down is not an INHERENT CHARACTERISTIC of traditional demand management. Ergo the trickle-up characteristics of ELR are not an argument for ELR.

2. Poverty.

Traditional demand management does not deal well with poverty (p.3). True. However – and this is a bit of a statement of the obvious – countries in the West typically spend about 10% of their entire GDP on anti-poverty measures even in the middle of economic booms. For example in Britain, about HALF THE WORKFORCE get some sort of in-work benefit regardless of whether the economy is at capacity or in a recession. Raising aggregate demand (AD) raises AD. That’s it. That solves some problems, not others.

Blaming AD increases for not dealing adequately with poverty is like blaming internal combustion engine carburettors for not cleaning your clothes. Carburettors perform a specific and very limited role. Same goes for adjusting AD. Neither AD increases nor carburettors solve every problem under the sun, nor do they even solve a particularly large range of problems.

Moreover, the relatively low wages normally paid on ELR type schemes mean that ELR does not deal too well with poverty either.

3. Raising AD can exacerbate inflation.

Pavlina claims that traditional methods of boosting AD tend to be inflationary. Well, sure. So what do we conclude? That all jobs dependent on demand should be destroyed and replaced with ELR jobs – jobs which by their very nature are never going to be fantastically productive?

A better and more precise statement of the above “inflation” point is that raising AD where the economy is nowhere near capacity will not exacerbate inflation too much, whereas once the economy reaches capacity (or NAURU to put it another way), the inflationary effects of any further rise in demand are serious.

Thus there is no harm at all in using a straight rise in AD to deal with unemployment given spare capacity. Indeed, this is a FAR BETTER way of reducing unemployment than ELR because regular jobs (public or private sector) are more efficient than ELR jobs.

Of course it is extremely difficult to know exactly when the economy is at capacity or what level of unemployment corresponds to NAIRU. Nevertheless, it is a good idea to get the theory behind ELR right, and in particular to understand the very different role that ELR plays as between where the economy is above and below capacity.

4. ELR as an automatic stabiliser.

Pavlina claims (p.5) that ELR is a good automatic stabiliser.

The answer to that is that in as far as the wage paid for ELR work is no different to unemployment benefit, and in that that is the ONLY cost of ELR schemes, ELR is no better as a stabiliser than unemployment benefit.
On the other hand if ELR pays a wage HIGHER than benefits, that reduces the incentive to seek regular work, which gives rise to problems dealt with below. Plus if ELR schemes involve costs other than the cost of ELR labour, that also gives rise to problems dealt with below.

5. ELR promotes growth?

Pavlina claims that ELR work promotes growth.

She says, “Growth, in other words, is a by-product of strong employment, not the other way round. How do we launch a virtuous cycle? One of the most effective ways is through direct job creation in the public sector…..One modern proposal inspired by Keynes and Minsky is the job guarantee (ELR), in which the public sector provides a voluntary job opportunity, in a community project that serves a public purpose, to anyone willing and able to work but unable to find private sector employment.”

So hundreds of thousands of people engaged in not desperately productive public sector type work will boost growth? I think not. Of course there will be a finite effect on growth, but it won’t be spectacular.

I use the phrase “not desperately productive” because that is often the REALITY of ELR type employment. In the 1930s, the WPA was commonly said to stand for “we piddle around”.

Alternatively, if ELR jobs REALLY ARE productive, why would the regular public sector not already be doing the work concerned? Put another way, if ELR jobs really are about as productive as regular jobs, why bother with ELR – why not just expand the regular public sector? Looks like ELR is in check mate there.

Anyway, let’s look at the ways in which ELR might promote growth a bit more closely.

Let’s concentrate first on the wage paid for ELR work, and let’s assume the wage is the same as benefits. In this case, no extra aggregate demand (AD) ensues. So to that extent, “strong employment” will do precisely nothing to bring an economy “out of recession”.

The only exception to the latter point would come where ELR jobs improved the EMPLOYABILITY of ELR people. Unfortunately the empirical evidence is that employability is not improved very much on these schemes which are concerned with public sector type work: PRIVATE SECTOR type subsidised employment is a different matter – employability does seem to improve. Which is one reason I favour extending ELR to the private sector.

ELR pays a regular wage.

In contrast to the above “wage equal to benefits” scenario, let’s consider the other extreme: where the wage paid is the same as in the regular economy for given skills and experience. In this case those doing ELR work have NO MOTIVE to find regular jobs. So ELR reduces aggregate labour supply, which means AD has to be reduced. In fact it will have to be reduced so much the ELR scheme is no longer a net creator of jobs.

And for evidence to back the latter point, consider the fact that we’ve had a VAST EXPANSION in public sector spending relative to GDP over the last century, plus these jobs pay the standard rate for given skills etc. The result has had no discernible overall effect on unemployment.

Pay on ELR schemes could of course be somewhere between the above two hopeless extremes. But any such compromise would probably just combine the hopelessness of both extremes, the net result being a hopeless compromise.

Other factors of production.

As distinct from pay, let’s now concentrate on the skilled permanent labour, capital equipment and materials required for ELR schemes (i.e. “other factors of production” (OFP)).

If ELR schemes employ no OFP at all, then no extra AD ensues. So there again, “strong employment” has no effect on AD: it won’t bring an economy “out of recession”.

On the other hand if such schemes DO EMPLOY significant amounts of OFP, there is a problem, as follows.

If the economy is working at below capacity, the best cure for unemployment is a straight rise in AD, not ELR. So let’s assume the economy is working at or near capacity.

In this scenario, ordering up extra OFP for use on ELR schemes cannot be done because the economy is at or near capacity: the result will be excess inflation. I.e. to make OFP available for ELR means reducing the OFP available for the regular economy, which destroys jobs in the regular economy. ELR is in check mate again.

Conclusion so far: the idea that extra AD can or should come via ELR schemes is badly flawed. And that is NOT TO SAY that ELR does not FACILITATE a rise in AD. Indeed, as I argue here, ELR in the form of subsidised temporary jobs with existing employers should improve the inflation / unemployment relationship, which in turn makes possible a rise in AD.

6. Can ELR jobs be made voluntary?

Pavlina claims that ELR jobs should be voluntary. Now there is a problem there, which is that anyone who voluntarily moves from unemployment to a ELR job ipso fact believes they have moved to a more attractive situation or scenario. That means that the RELATIVE ATTRACTIONS for them of regular employment must have declined. I.e. aggregate labour supply is reduced. And that in turn means that ELR jobs will at least to some extent be at the expense of regular jobs.

In other words Pavlina has not cottoned onto Calmfors Iron Law of Active Labour Market Policy which states that if ALMP type employment is not to be at least partially at the expense of regular employment, there has to be an element of compulsion. (Lars Calmfors is a Swedish economist.)

There is absolutely no question but that people who want ELR to be voluntary have their hearts in the right place. I’m sure they are all socially concerned, kindly people. Unfortunately to do good in this world, TWO CHARACTERISTICS are required. First, generosity, and second, having your head screwed on.

 

7. The purpose of economic activity.

Pavlina claims, “The difference between the non-profit JG model and conventional fiscal policies is that the former is a long-run program that has an explicit objective to deal with the problem of unemployment directly, rather than treating it as a by-product of growth.”

The problem with that statement is that employment creation is not the basic economic objective. The basic objective is to maximise wealth creation WHILE MINIMISING the amount of work or “employment” needed to create that wealth.

Indeed, economic nirvana would consist of robots doing all the work, while human beings did whatever they pleased all day long: socialising, reading books, playing or listening to music. I know several people who have spent decades living on social security benefit for fraudulent reasons. They lead a very pleasant, easy going life-style. They could doubtless give lessons on how to lead a life of leisure to the “everyone must work” brigade.

Conclusion.

There is not a cat in Hell’s chance of the human race ever understanding labour markets (to be cynical or realistic – take your pick).

 
Ralph Musgrave - Ralphanomics

Author: Ralph Musgrave - Ralphanomics

I wrote a book on unemployment recently with James Galbraith, and others. Galbraith is one of Obama's economic advisers. I love the different cultures that exist in this world. I took an interest in them long before the daft word 'multiculturalism' was widely used. I want to see these cultures preserved. I want to see Tibet staying Tibetan, and Britain staying British.

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