The Case for a Guaranteed By Robert Skidelsky August 16, 2019 – Project Syndicate

A government’s job is to protect its people from misfortune, in particular want of work, and one that abandons this duty of care to the market deserves to be cast out. This is the best argument for giving a government job-guarantee program a fair trial.

“Any government,” writes the economist and fully developed capitalist society? How is it to hedge fund manager , “can be paid for? Is there likely to be enough achieve full by offering a public political support for it? What are the main service job to anyone who wants one at a fixed objections? wage.” Versions of this idea have received Keynes with a Twist powerful endorsements from prominent Democratic politicians in the US, including Contemporary JGPs are inspired by the British presidential candidate and Rep. economist John Maynard Keynes, but differ Alexandria Ocasio-Cortez, who has linked a from classic Keynesianism in three important government job guarantee to a Green New ways. First, although JGP advocates accept Deal. Moreover, versions of a job-guarantee Keynes’s argument that the private sector may program (JGP), more or less connected to green not generate enough to maintain full economics, have been implemented in employment, they argue that the government , , , and – whisper should provide extra jobs directly instead of it quietly – Hungary under its illiberal populist trying to stimulate private spending to create leader, Viktor Orbán. them. In the in December 2017, 6.6 Second, a JGP is more radical than classical million people were deemed to be officially Keynesianism in its social objectives. For unemployed, 4.9 million were working part- Keynesians, was an end in time but wanted full-time work, and 5.9 million itself. But to today’s post-Keynesians, a JGP is wanted to work but were not counted in the a means to address a host of other socio- official statistics. In other words, at least 17.4 economic problems – notably , million Americans wanted but were unable to inequality, and climate change. find stable, well-paid work. Third, a JGP is supported by Modern Monetary Economists L. Randall Wray, Flavia Dantas, Theory, which brushes aside the problem of Scott Fullwiler, Pavlina R. Tcherneva, and “financing” full-employment programs. Stephanie A. Kelton have proposed that the US Government spending, MMT claims, creates its government guarantee all such jobseekers as own tax base. It is this monetary underpinning much work as they want – up to a weekly cap of JGPs, rather than the proposal itself, which of, say, 35 hours – at a fixed wage of $15 per has drawn most of the criticism. hour. Today, such a JGP might employ around Practice and Theory 16 million American workers and cost about 2% of US GDP. Unwanted , as Governments have always provided or we have known it since the Industrial subsidized “public works” during economic Revolution, would no longer exist. slumps, though never on a scale large enough to match the rise in unemployment. In the But, of course, JGP proposals raise many 1930s, US President Franklin D. Roosevelt’s questions: How feasible is such a program in a Public Works Administration paid private 2 construction firms $7 billion to build airports, generally reckoned to have been reached if the roads, dams, bridges, schools, and hospitals. In unemployment rate was 2% in the United addition, the Works Progress Administration Kingdom and 4% in the US. The level of (WPA) provided local jobs directly to the unemployment would be determined by unemployed. “macropolicy,” or the discretionary manipulation of interest rates, taxes, and public Advocates of the two approaches competed for expenditure to maintain a full-employment influence within the Roosevelt administration. level of total spending. The outcome – a victory for the WPA and direct job creation – opened the way for more This worked pretty well for 20 years or so, but substantial fiscal intervention and a more ran into two problems. First, governments profound connection between the New Deal lacked the forecasting power to undertake the and the “one-third of a nation” struggling with expertly timed monetary and fiscal economic deprivation. It was Keynes who interventions on which macropolicy depended. provided the theoretical rationale for a Governments would forecast the difference permanently larger public presence in the between actual and potential output (the output private economy. He argued that in an gap) or the excess of total spending at the full- economic slump, if the government were to set employment level of output (the gap), people to work rather than pay them and set their interest-rate, tax, and spending unemployment benefits, the multiplied effect of policies to close whichever gap threatened. But their earnings would restore the private sector how large were these gaps at any point in the to full employment. As a permanent policy, a business cycle? As Milton Friedman pointed public job guarantee would greatly dampen out, fiscal effects were subject to “lags,” during fluctuations in the business cycle. which any initial gap might have grown larger Moreover, Keynes insisted that providing or smaller. Policymakers were thus as likely to employment would have a multiplier effect destabilize the economy as steady it. regardless of whether the extra employees The second, more significant problem was one produced anything of economic value. In of political economy. Because Keynesian typical tongue-in-cheek fashion, he wrote: “If governments attached more importance to the Treasury were to fill old bottles with keeping unemployment low than to banknotes, bury them at suitable depths in suppressing inflation, budgets became disused coalmines which are then filled up to increasingly unbalanced amid growing political the surface with town rubbish, and leave it to pressure to prevent any rise in joblessness. private enterprise [...] to dig the notes up again This was the entry point for the monetarist [...] there need be no more unemployment and, counter-revolution. In 1968, Friedman claimed with the help of the repercussions, the real that excessive expansion of the money supply income of the community [...] would probably to hold down unemployment was the cause of become a good deal greater than it actually is.” rising inflation. The attack was lethal. The The Golden Age? demise of Keynesian “demand management” was signaled by Britain’s Labour Prime Persuaded by Keynes’s masterwork, The Minister James Callaghan in a speech in 1976. General Theory of Employment, Interest, and “We used to think that you could spend your Money, and the political circumstances of the way out of a recession and increase time, post-war governments committed employment by cutting taxes and boosting themselves to maintaining “full” or “high” government spending,” Callaghan said employment. Although there was no official . “I tell employment target, full employment was you in all candor that that option no longer 3 exists, and insofar as it ever did exist it only “golden age” average of 1.6% to 7.4% in the worked by [...] injecting a bigger dose of UK, from 3.1% to 7.5% in Germany, and from inflation into the economy.” 4.8% to 6.1% in the US. – people forced to work fewer hours than they Let the Market Decide wanted – was rising, poverty and inequality The new economic orthodoxy, endorsed by US increased, and economic growth slowed. The President Ronald Reagan and British Prime Great Recession that started in 2008 reinforced Minister Margaret Thatcher in the early 1980s, the Keynesian lesson that the private sector, held that the market, not government policy, beset by uncertainty, could not continuously should set the unemployment rate. The market deliver full employment. Moreover, the failure would guarantee that all genuine jobseekers of to prevent this economic would find jobs at “market-clearing wages,” collapse or bring about a durable recovery had and if people declined work at those wages, that discredited the monetarist approach to was their choice. If the resulting level of economic management. unemployment was deemed socially These neoliberal failures led to a revival of unacceptable, the answer was to improve interest in . An important early incentives to work by weakening labor unions initiative was the 1978 and reducing unemployment benefits. With Humphrey-Hawkins fully flexible labor markets, unemployment Act in the US, which “authorized” the federal would automatically be at its “natural” or government to create “reservoirs of public equilibrium rate – the rate at which inflation employment” to balance fluctuations in private had no tendency to rise or fall. In fact, the spending. The reservoirs would deplete or fill notion of up as the economy waxed or waned, creating an disappeared entirely. “automatic stabilizer” without any “management” of the business cycle. But the What survived from the wreckage of Keynesian Humphrey-Hawkins Act was never fiscal policy was the much weaker default implemented. It was the last gasp of New position that monetary policy (if managed by an Dealism. independent central bank) could do all the stabilizing that a market economy needed, but Following the 2008 recession, radical without the constant temptation to print money policymakers had to undergo what Pavlina R. for political purposes. To justify discretionary Tcherneva of Bard College called a monetary policy, the neoclassical (and anti- “fundamental reorientation” if they were to Keynesian) full-employment assumption was achieve “true full employment, long-term relaxed to allow for the effectiveness of a short- macroeconomic stabilization, better income term monetary stimulus. This so-called New distribution, and improved socioeconomic Keynesianism owed little to Keynes, but by outcomes.” The JGP is the attempt to do just allowing central banks to vary their official that. lending rates in pursuit of their inflation target, False Constraints it did at least keep a tiny space open for A JGP, the most radical of the post-Keynesian “monetary” policy to influence the real responses to the failure of neoliberal policies, economy. represents a fusion of two lines of thought. The Monetarists in Retreat first asserts government responsibility for full The new dispensation, however, ran into employment, but in the form of a direct job problems of its own. Between 1980 and 2008, guarantee rather than by managing aggregate average unemployment increased from its demand. The second, based on MMT, contends 4

that “deficits don’t matter” in the pursuit of full A JGP, conjoined with MMT, is thus an attempt employment. to re-establish the case for fiscal policy, not as an emergency measure in a slump, but as a MMT attacks the orthodox view that permanent part of employment provision. Like governments, like households and firms, can Friedman, MMT envisages “ spend only as much money as bondholders or helicopter taxpayers allow them. Orthodox theory money,” scattered by the government over a identifies two types of “fiscal constraint.” The parched landscape. But it deviates from first is financial: the size of the government monetarism by insisting that extra money deficit is limited by the willingness of affects economic activity not by being printed, bondholders to lend the government money. but by being spent. As Kelton has said, “the This constraint bites hardest in a downturn, helicopter can drop money, gather bonds or just when the government deficit automatically fly away.” The only surefire way to guarantee grows. that new money is spent is for the government to spend it. That is why MMT supporters see The second constraint is said to arise from the the theory as part of fiscal rather than monetary limit of “real resources.” As stated by policy. It uses a version of the quantity theory University of Chicago economist John of money championed by Friedman to support Cochrane in 2009: “Every dollar of increased the case for the sort of fiscal intervention that government spending must correspond to one he abhorred. less dollar of private spending.” The clear implication, as I noted in my 2010 book, Some Keynesians who reject orthodox “crowding out” arguments also consider MMT Keynes: The Return of the Master, is that “jobs arguments too extreme. Specifically, they created by stimulus spending are offset by jobs would not dismiss questions of “confidence” as lost from the decline of private spending.” This cavalierly as do modern-monetary theorists. As constraint is portentously called Ricardian Keynes himself noted equivalence. , “Economic prosperity [in a capitalist society] is excessively The two constraints, taken together, mean that dependent on a political and social atmosphere governments have only a limited amount of which is congenial to the average “fiscal space” for employment policy. Either businessman.” Substitute “financial markets” the interest on public debt will go up, or the for “average businessman” and you have the private sector will increase its saving in world as it is, not as MMT theorists would like expectation of higher taxes. This was the it to be. intellectual foundation for austerity policy after 2008. It boiled down to the proposition that the The Six-Point Guarantee faster the government cut its spending, the For starters, MMT’s target is not aggregate quicker the economy would recover. demand but labor demand, because it is much easier to target employment than output. But such “crowding out” arguments are deeply Output and employment converge only in the flawed. It was nonsense to believe that in 2008- very short run: one can have jobless recoveries. 09, with the global economy in free fall, every And it is very difficult to calculate output gaps dollar of increased government spending on employment was a dollar subtracted from and multipliers. The direct job guarantee private spending. And it is odd to claim that a eliminates such problems. Further, by easing sovereign can run out of money that it produces workers’ transition to private-sector jobs as the itself. A government is not like a private firm economy recovers, a JGP helps to relieve the or household that has to go to the bank manager shortage of skilled labor that can produce for a loan. It has its own bank. 5

inflationary pressures when the economy is important contributor to economic recovery below full employment. and growth prospects generally. Second, JGP advocates attach great importance Fifth, JGP workers would be paid at a fixed to Keynes’s emphasis in 1937 on the “need rate, which the government can set at any level today of a rightly distributed demand [more] it chooses above that of unemployment than of a greater ” (my benefits. A fixed wage sets a floor for private emphasis). A satisfactory average level of firms’ wages, even without minimum-wage employment can be consistent with some parts legislation, since private employers would of the economy overheating and others having always have to pay at least the JGP wage to high unemployment. A JGP can thus be used to attract workers; and in periods of strong influence the distribution as well as the level of private-sector demand, they would have to bid employment – the aim of the , for scarce labor at above the JGP wage. The for example. availability of employable JGP workers at a Third, and consistent with this, JGP advocates lower wage would restrain inflationary wage say that their programs, while federally funded, demands. Finally, MMT provides monetary would be administered locally by various backing for the proposed fiscal policy. The entities, including municipal governments, basic idea is that because sovereign NGOs, and social enterprises, which would governments typically have a monopoly over seek to create employment opportunities where the issuance of their own currency, they can they are most needed, matching unfulfilled issue money whenever they want and thus never face the threat of bankruptcy. “In reality, local needs with unemployed or underemployed people. To ensure that projects then,” MMT advocates claim, “the size of the can be rolled out on demand, job banks and job deficit is irrelevant.” For monetary sovereigns, centers would maintain inventories of therefore, the composition of government communal needs under three main headings: liabilities is of no importance. It doesn’t matter care for the environment, care for the whether the central bank is “printing money” or community, and care for people. Addressing the Treasury is “printing bonds,” because the looming environmental threats, for example, central bank will always ensure the right could generate millions of public-service jobs amount of money to support its targeted interest for years to come. rate. Fourth, the public-sector job pool would be a When JGP Meets MMT buffer stock of labor that could expand and What has been most shocking to orthodox contract automatically with the business cycle, economists is MMT’s claim that a sovereign thus eliminating discretionary fiscal policy. government does not have to “finance” its Such a buffer – an idea introduced by the spending by issuing debt or raising taxes. This Australian economist Warren Mitchell – would claim has its proximate roots in Abba P. be a more powerful automatic stabilizer than Lerner’s theory of “functional finance,” which unemployment benefits, because it maintains rests on three key principles. demand more reliably. And although replacing First, governments should aim for the right unemployment benefits with wages would cost amount of total spending to prevent more money, it would deliver a more powerful unemployment and inflation, and not worry economic boost. A job pool would also better whether their policies conform to any maintain workers’ employability, and could longstanding economic doctrine about what is easily be coupled with on-the-job training – an sound or unsound. Second, policymakers should adjust the issuance of money to the 6 desired rate of interest – meaning the one Critics can be divided between those who consistent with the desired rate of investment. object to a JGP per se and those who object to Finally, the government should print, save, or MMT, the macro theory supporting it. destroy the money needed to implement the A familiar criticism of JGPs is that they first and second principles. generate quasi-employment – rather like On this view, governments should pay for their Keynes’s example of digging holes and filling spending by issuing their own money, and them in again. Local work programs, critics borrow from the public or raise taxes only in claim, offer “pretend” work that does not really order to “drain” the economy of excess money. need doing. In response, JGP advocates such as The only constraint governments face is Tcherneva have outlined the type of jobs that a inflation, and not the fiscal limitations JGP could provide. A JGP, she says, will emphasized by orthodox economists. address the urgent “environmental and care The inflation constraint is binding because it needs of communities” – for example through limits the amount of extra employment the a Green New Deal, initiatives in the arts, youth government can generate. If a government apprenticeship programs, child and elder care, spends too much money, it will no longer be and special-needs programs for veterans, at- able to buy real resources, because its extra risk youth, and former inmates. The essential spending will merely raise the prices of all the point is to identify “needs gaps” and devise resources (including labor) that it buys. Only national and local programs to fill them. when the economy can no longer deliver more Others have objected to the potentially punitive real goods and services to the state can the nature of a JGP. If a JGP job is alternative to government be said to have “run out of money.” unemployment benefits, it seems logical that a As Kelton, Andres Bernal, and Greg Carlock JGP entitlement should replace the put it, “inflation isn’t triggered by the amount unemployment benefit entitlement. In practice, of money the government creates but by the it is already widely accepted that availability of biophysical resources that unemployment benefits should be time-limited. money tries to go out and buy – like land, trees, The problem has been a lack of alternatives to water, minerals, and human labor.” unemployment. The JGP fills this gap. The only real issue is how much time on benefits JGPs and MMT, although logically should be allowed for job searching. independent, support each other. By linking them, advocates can make the politically A much stronger theoretical attack is directed appealing claim that the pursuit of full at MMT. Harvard luminaries Kenneth Rogoff employment is in no way constrained by the and Lawrence Summers have claimed that, by vested interests of bondholders or taxpayers. At denying the existence of a fiscal constraint, the same time, however, Keynes’s comment on MMT is inherently inflationary. They have a Lerner’s “functional finance” approach is point, of course: it seems naive to believe that worth quoting: “His argument is impeccable,” taxes can be increased whenever necessary to Keynes said. “But, heaven help anyone who stop inflation. But their argument would have tries to put it across the plain man at this stage been more interesting had they attacked MMT of the evolution of our ideas.” And the notion not for “voodoo economics” (Summers) but for that government “prints its own taxes” sounds “voodoo politics.” To say that there is no even more paradoxical to the average citizen theoretical reason why sovereigns need to after a half-century of neoliberal propaganda. “apply to the people” for money is correct, but it fails to consider why the rules of “sound What the Critics Say finance” were invented in the first place. The 7 rules were put in place precisely to prevent employment gap as it arises. The third is that governments from spending money at will. the best way for it to do so is to provide a direct That governments should apply to parliaments employment guarantee. The first is a matter of (ultimately, “the people”) for “supply” is part economic theory, which challenges the of the theory of the limited state. microfoundations of orthodox economics. The second is a matter of political economy. One For his part, economist Thomas I. Palley can argue that even if the first is true, some accuses MMT economists of lacking a class unemployment may be a price worth paying to perspective, and criticizes MMT’s attribution restrain inflation or prevent an undue expansion of economic crisis to financial instability. The of government intervention. The third is a root cause of financial instability, Palley matter of technique: which of the many argues, is the skewed distribution of wealth and possible policies for maximizing employment income, which generates under-consumption. is most effective? The main question Although money-financed deficits have helped concerning MMP is political: is this the best to reflate asset prices since 2008, they have not way to present the Keynesian argument that the addressed structural problems, and will thus aim of fiscal policy should be not to balance the lead to new crises. budget, but to balance the economy? In a reply to critics of MMT, economists Scott On these matters, my view is the following. Fullwiler, Rohan Grey, and Nathan Tankus make four points. First, excess demand should First, the contention that the market system be controlled by tightening credit conditions as cannot guarantee continuous work for all those well as by raising taxes. Second, speculative who want it seems to be indisputable. An (supply-side) sources of inflation should be met unmanaged market system has a built-in by regulation and price controls, which will tendency to underactivity; the growing shift some of the task of controlling inflation to financialization of economic life adds to the other government agencies. Third, assessing instability of employment, for reasons pointed the inflationary impact of new spending out by . proposals requires a disaggregated approach Second, I believe that maintaining full that considers variations in demand between employment (which includes preventing sectors and regions. Moreover, budgetary unwanted unemployment) is one of the chief policy should address not just the level but the responsibilities of modern government. I am distribution of output. Fossil-fuel industries, persuaded that a direct employment guarantee real estate, defense, and financial services are is better targeted to this purpose than either too large or too dirty, or eat up too many discretionary policy. natural resources, and should be curtailed. Fourth, governments should not slap on taxes Third, I am not persuaded that MMT is the best suddenly when inflation appears: they should way to challenge the orthodox theory of sound progressively raise taxes and tighten lending as finance. Though Michael Kalecki was no doubt needed. right to point out in 1943 that the social function of sound finance is “to make the level The Duty of Care of employment dependent on […] the The case for a JGP hinges on three interrelated confidence of those with money,” MMT is too propositions. The first is Keynes’s contention dismissive of the constitutional case for that the market for labor cannot be expected to limiting government spending. This does not clear continuously even if wages are perfectly mean these limits should be set by flawed flexible. The second is that, if that is the case, it theories of orthodox budgeting: the “bonds of is the state’s responsibility to fill the 8 revenue” are more elastic than either orthodox misfortune, and want of work is the greatest theory or MMT suppose. misfortune a population can suffer outside of war and natural catastrophe. An elite that Although the JGP debate involves questions of abandons this duty of care, on the spurious economic theory, the main issue is one of grounds that people “choose” their own level of politics – the size of the state, its proper employment, deserves to be cast out. FDR economic role, and the resources it needs. understood this, and so did Keynes. For the first Naturally enough, the wealthy and powerful time since the collapse of the Keynesian have generally preferred a limited state that revolution, it is being suggested by serious leaves them free to do what they want with the politicians that a government has the moral and money and power they control. The poor and financial responsibility to maintain full powerless, by contrast, have looked to the state employment. That is the best argument for to protect them against the insecurity of the giving a JGP a fair trial. market and the predations of the wealthy. Robert Skidelsky, a member of the British House of Keynes was on their side. He was right to say Lords, is Professor Emeritus of Political Economy at that unregulated capitalism guaranteed neither Warwick University. The author of a three-volume full employment nor an “equitable distribution biography of John Maynard Keynes, he began his of wealth and incomes.” political career in the Labour party, became the Conservative Party’s spokesman for Treasury affairs in There are undoubtedly problems with the the House of Lords, and was eventually forced out of the design and implementation of a JGP. But I Conservative Party for his opposition to NATO’s applaud its spirit and intentions. A intervention in Kosovo in 1999. government’s job is to protect citizens from