Monday, 2 January 2012

Why do ELR proponents always advocate public sector type work?

About fifty million people throughout history have tumbled the fact that there are an infinite number of public sector type jobs that the unemployed could to: sweeping the streets, maintaining public parks, etc.

These advocates of having government act as employer of last resort (ELR) nearly always advocate PUBLIC SECTOR type work, rather than PRIVATE SECTOR type work. And there is an appealing logic here, namely that the output of the public sector is GIVEN AWAY rather than SOLD. Thus demand does not need to be raised to create said public sector type jobs. (At least that is presumably the logic employed: the logic is rarely spelled out.)

That would seem to mean that there cannot be any inflationary effect from said public sector jobs. Unfortunately there is a flaw in that argument, as follows.

If unemployment is above NAIRU, or the “natural level” or the “inflation barrier” level, as Bill Mitchell calls it, a straight rise in demand is far preferable to any sort of ELR job. So let’s concentrate on the scenario where ELR really comes into its own, that is where unemployment is at or below NAIRU.

If an ELR scheme involves just the ex-unemployed and no other factors of production like permanent skilled labour, capital equipment or materials, it will be hopelessly inefficient. On the other hand, the scheme CANNOT order up the latter “other factors of production” (OFP) from the regular economy, because if the economy is at NAIRU, no extra demand is permissible.

So ELR is in a bind. At least it is certainly in a bind if it takes the form of schemes which consist of new or “specially set up” employers, as was the case with WPA – the main “make work” scheme in the U.S. in the 1930s.

Alternatively, an ELR scheme CAN consist of allocating the unemployed to jobs with EXISTING public sector employers (as was the case with the Comprehensive Employment and Training Act (CETA) system in the 1970s). But there is a problem here, which is that public sector employers are under similar cost cutting and output maximising incentives as the private sector. That is, if a public sector employer can cut costs by hiring subsidised ELR people and have them replace staff that the employer actually has to pay for, then the employer will be tempted to do so. Indeed, this abuse occurred to some extent under CETA.

Thus it is necessary to have rules in place governing the system (as indeed was the case with CETA). And those rules need to ensure as far as possible, that those taken on under ELR would not have been hired but for ELR. Of course the latter objective can never be attained with perfection, but as long as the objective is more or less hit, then the benefits of ELR will hopefully outweigh the costs.

Now if the above rules ensure that public sector employers are induced to expand output by taking on ELR people (rather than order up more of that inflationary OFP) then presumably the same rules applied to private sector employers will have the same result: that is private sector employers, if offered ELR employees on the same conditions as they are available to public sector employers, will expand output (given an increase in demand) by taking on ELR people rather than by ordering up more of that inflationary OFP.

Ergo there is no reason to confine ELR to the public sector.




  1. Ralph,

    I am about to put a huge smack down on the natural rate of interest over at my site, and I think it relates to one of the arguments you make in this piece.

    I fully agree - the ELR should not be left to Public sector choices alone.

    But I think any argument using NAIRU - and therefore idealizing the natural rate of interest - is using an indefensible assumption.

    In short,

    1. What's natural about it? I contend the natural rate of interest (thereby the NAIRU) is mis-specified. It's not natural at all. The true meaning of natural rate of interest should be "the interest rate that results in full employment". Here's why I think this should be (more accurately must be) the case.

    What do we know about our hypothetical barter economy? One thing we don't know is the price level for any numeraire. In short, we don't know the rate of inflation in any single good.

    Adding another good - even one as contentious and mysterious as money - doesn't matter.

    What we do know is "full employment in the barter economy".

    I know, barter economies don't exist and never existed. I am simply pointing out the natural rate of interest is trying to measure and control the wrong variable.

    The only way we can know supply and demand are equalized is by observing something that isn't in a feedback loop with supply and demand.

    I know this is outside of the argument you make here, and it also runs contrary to what Billy Mitchell says.

    But we shouldn't be using zero inflation as our guide or even some baseline ideal rate if we want to maximize economic growth. Because using zero inflation as a guide ignores the only thing we know with certainty about an economy without money.

    I think Saffra had a critique similar to this on the natural rate. But he did not make the observation or connection between what we know with certainty about the barter economy - the full employment criteria. It's a mandatory part of balancing supply and demand with no money involved.

    I do not think economists in general are "aware" enough of what we know with certainty about economies, much to the detriment of the profession and our loss of economic growth.

    Of course, this is why the Chicago School insists we're at full employment - otherwise they are left 200' off the ground with nothing but air beneath them.

    But over here in the real world, let's be clear - inflation is a horrible guide to thinking about economic performance.

    I think there are at least 3 other very strong reasons using the natural rate of interest at any point is a horrible guide to policy and even worse basis of theory, but I'll have to put those up at another time.

    I fully agree - the ELR should be extended to the Public Sector. But using inflation based arguments shouldn't be a factor in the slightest.

    The idea about pulling productive resources away from the private sector is far more compelling to me, because it does shift productive resources from market forces.

    However, as far as I can tell, every civilization in human history has some amount of command economy based interventions. It's a matter of degree, not absolutes.

  2. TC, I didn’t say anything about a “natural rate of interest”. I referred to the “natural level” (of unemployment).

    The use of the word “natural” in the latter phrase has caused a bit of misunderstanding over the years in that many people assume the word is being used as per dictionary definition. Actually the phrase just means something similar to NAIRU, i.e. something like “the level of unemployment at which inflation becomes a problem”.

  3. Hi Ralph,

    I appreciate you giving me this space to outline this idea on the "natural rates". I've been thinking on this for a while and it's finally coming together - due to this post!

    I guess my point is both the "natural" rate of interest and the "natural" rate of unemployment both fail to capture the necessary condition of a barter economy with balanced supply and demand - full employment.

    Zero inflation is not a criteria of an evolving barter economy. We can easily introduce a new good to a barter economy - how about one that makes human labor less valuable, like oil? This causes the prices of commodities to fall, but the value of most human physical labor to be less valuable in real terms. In this barter economy - which I would argue looks like a developing economy btw - introduction of oil and machines cause "inflation" for the vast majority of people. If the numeraire is "one dude digging dirt for a day", then we've got inflation because the value of that dude digging just became massively less valuable.

    The zero inflation criteria for any numeraire isn't something we can know about a barter economy.

    But this economy still *must* have full employment. It's something we know has to be true.

    So anytime we fall away from the full employment ideal, we're in a problem area.

    Now, I take your observation that above the NAIRU we're stealing from the private sector with a grain of salt for this very reason - the zero inflation rate isn't anything like a decision point for an evolving economy for any other specific numeraire.

    For example, imagine we used arrows as money. Bullets come along and arrows become less valuable to end users, so the demand for arrows becomes lower.

    Is there inflation in this economy? My answer is "Who cares? We know we still have full employment."

    If we just think of money as a powerful technology that can reinvent or "uninvent" itself in extremely fine gradations, instead of money, I think you'll see what I am saying.

    The NAIRU basically takes the (value of labor)*(current economic output) and makes this product it into the numeraire of the economy. This isn't desirable at all.

    So, I don't think the NAIRU is the point at which we can say "the govt is using resources in a less efficient fashion than the private sector".

    Note that I very much agree with you the government reallocation of resources is a large potential problem. In fact, I created the TC rule at least in part due to my uncomfortable relationship with the ELR.

    I also agree your proposal to let the private sector absorb as much of this slack as possible - or even all of it - is a very, very good idea.

    My disagreement is with putting zero inflation within the logic as a way to tell when the government is mis-allocating resources. I think it's a non-starter.

  4. Great post Ralph (not least because you have lured TC out of his radio silence). :o)

    Tsy always holds the "commanding heights" of the economy because of its power to create money and to destroy it. That can be best accomplished by the tax code (e.g. giving wage tax credits to employers to induce hiring or taxing "excess profits" to inhibit cost-push inflation). Neither step would require any new govt programs since the IRS or in your country, Inland Revenue, are already on the job.

  5. The existence of an ELR is and also has been thought of as a matter of social/economic policy, with emphasis on the social. There is, in any economy, no more than one such employer. Other wise the last one of the several would, by itself, be the ELR. Assigning this position to a private entity would be a policy decision that makes no sense, IMHO. What incentive would be offered by the government to the putative ELR (pELR ? 'p' for private or putative or pwhatever ) to undertake this task? Would there be competitive bidding of private firms for this plum (?) contract? What would be the performance criteria on which the work of the pELR would be judged? Wouldn't it be better to hire the redundant workers into the government bureaucracy and have them issue these various RFPs? Or perhaps they could be trained as bank inspectors and placed (in duplicate or triplicate) in every systemically important financial institution in the country.

  6. Anon, You ask “What incentive would be offered…”. I set out my ideas on that a couple of days ago under the heading “Unproductive employees”. In short, in a free market, employers have a natural incentive to hire a variety of different types of labour to produce whatever they sell. So if we can set up an employment subsidy that prices relatively unproductive labour or “temporarily unproductive” correctly, then employers will hire such labour automatically.

    Beowulf, Thanks for your complimentary remarks. I’m a sucker for flattery :-) However I don’t think the income tax authorities are suited to this job. Organisations that collect income tax look at people’s total income for a given year, and collect tax accordingly. In contrast, what’s needed here (as I pointed out above in response to Anon) is a system that subsidises those who TEMPORARILY cannot find work to which they are well suited.

  7. " So if we can set up an employment subsidy that prices relatively unproductive labour or “temporarily unproductive” correctly, then employers will hire such labour automatically."

    But there you are offering profit to private operations for negligible investment on their part and no stake for the state's investment.

    If a private operation want to profit it should be required to invest.

    Outsourcing work to the profit making part of the economy is precisely the wrong approach - since it provides a disincentive to invest.

    What you need the Job Guarantee to do is weigh down heavily on the profit share of the economy. Ideally it should encourage loans to be repaid so the banks suffer and it should impact profits so that the private sector suffers but not labour.

    Then they might get their wallet out and spend rather than hoarding money as they are at present.

    The lack of jobs is a private sector failing. Rewarding them for failure is precisely why we currently have problems with the banks.

  8. I agree with Neil. The ELR (aka a government funded works effort) CANNOT go "private" b/c then we all know exactly what would happen:

    #1. Businesses would ONLY hire through the JG for all entry level positions (no wage expense!!!!). That's insane!!!! Now the government is subsidizing all companies and they only get more and more powerful, making the barriers to enter into any industry/sector that much higher.

    #2. Businesses would continually "add-in" more work to the ELR workers to pay even LESS to their employees. So if there were say tier #1 jobs (entry-level jobs) and there were tier #2 jobs (promotion #1 jobs)...companies would just hand over more and more work from tier #2 jobs to the ELR workers.

    This is just the absolute worst thing that can happen for people and the best thing in town for corporations. I think this idea of opening the ELR up to the private sector is an absolutely disastrous idea.

  9. Neil, Subsidies given to private firms (or taxes extracted from them) don’t in the long run have any effect on their profits: competitive pressures mean their profits sooner or later revert to what economists call “normal” profits. We place huge taxes on distilleries and give big subsidies to farmers. I can’t quote any evidence, but I’d guess that the average distillery and farmer makes a fairly standard or “normal” return on capital.

    Re investment, that’s exactly what is NOT needed. Investment goods are one of the “other factors of production” I referred to above – and more demand for those will be inflationary when unemployment is at the “natural” level or NAIRU or whatever you call it. Put another way, what IS NEEDED is extra demand for relatively unsuitable labour, with demand for everything else remaining constant.

    Re profits, I don’t think that’s anything much to with JG. I’m all in favour of clamping down on profits where there is evidence that excessive profits are being made e.g. because of anti-competitive practices. That’s a separate issue.

    Re “lack of jobs” being a “private sector failing”, I’d certainly blame banks (hence my rude remarks about Lloyd Bankfiend at the top of this blog). But I wouldn’t blame the average shopkeeper, plumber, engineering firm, etc etc.

  10. Mario, I fully accept that “private sector JG” could go badly wrong. But the world is full of disasters: e.g a banking system which causes economic catastrophy. So if I were economic dictator I’d at least give private sector JG a try.

    Re businesses only hiring via JG for entry level positions, I answered that point in the comments of my 31st Dec post, “Unproductive employees”. See my answer to Ben.

    Re your point #2, that is partially answered by my answer to Ben. But in addition, there is a limit to the number of relatively unskilled employees that employers can make use of. So that places an automatic limit on the number of JG people they’d hire. Also, skilled / well paid employees wouldn’t accept JG posts because the pay is limited to something similar to min wage or unemployment benefits. So that’s another automatic limit to the number of JG people that private employers would take on.

    In fact the big problem could be the opposite: refusal by most employers to have anything to do with JG. I can’t quote chapter and verse, but someone once did an experiment where employers were offered subsidised employees. A significant proportion refused the employees on the grounds that if the employees needed subsidising, there must be something wrong with them.

  11. MMT would be further ahead advocating public-private partnerships to hire and train the unemployed than adding another layer of bureaucracy .

    Or even advocating college for all with student loan forgiveness upon graduation.

    And we could dust off Richard.M Nixon's plan, the negative income tax...Offered to anyone making less than a "living wage" which I believe has ameliorated more poverty than we can see by government statistics.

    But for the JG proposal, those of us on the right see this as a left-wing fantasy somewhere beyond Ron Paul single handily legalizing drugs so I don't see what you think this advocacy of more government control will do to advance your economic theory in the non academic world.

    Or are you first interested in convincing the left?

    Then again, is the rest of the world simply unimportant as far as your viewpoint is concerned?

    I have no problem with MMT when we discuss how the economy, treasury, world trade, deficit hysteria etc works but bringing this degree of politics in relegates you to a small, unimportant, and not very interesting place.

    You can even get wonkish!

    I hope you understand that I am not an adversary but does anyone seriously believe any of us other than a handful of true believers would vote for this new government entitlement?

    If so, good luck talking to yourselves!

  12. Bosscauser, You could easily have a right wing version of JG by incorporating a harsh workfare element in it. I.e. you’d say to the unemployed within a week of their becoming unemployed, “Do this JG job on a wage which is no more than your unemployment benefit, else your benefit gets withdrawn”.


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