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An Alternative Policy: Sovereign Money Creation Monetary policy can be thought of as an attempt by the authorities to influence the amount of money creation and spending in the economy. By creating new money, bank lending enables spending in excess of what would otherwise be possible, which results in an increase in aggregate demand.27 Monetary policy was primarily unsuccessful at increasing GDP following the financial crisis because banks didn’t want to lend and individuals didn’t want to borrow. Rather, individuals wanted to save and repay debt, whilst banks wanted to reduce their leverage by lowering the rate at which they made new loans. Consequently, new money creation by banks, and with it spending, was lower than would have normally been expected (given the reduction in interest rates). Although QE did lead to a modest increase in spending, this occurred indirectly through QE’s affect on wealth.

In contrast, fiscal policy can be looked at as an attempt to change the level and composition of spending in an economy. Because the government is able to buy goods and services from the private sector, fiscal policy can be used to directly increase demand. However, since 2009 the government’s commitment to reducing the national debt has restricted the use of fiscal policy for this purpose. This has led to the policy dilemma outlined earlier: conventional monetary policy is ineffective and fiscal policy could be effective but is politically infeasible.

I will now discuss the forms that this type of QE for the People can take.

1. Helicopter drops

Since the global financial crisis, central bankers around the world have considered and sometimes used a number of unusual policy tools, including quantitative easing (QE) and negative interest rates, in an attempt to stimulate economies and fight deflationary pressures. Now some economists and policymakers are thinking about adding another item to this toolbox: helicopter money.

No, the use of helicopter money wouldn’t involve money actually falling from the sky. But it would involve a much more direct method of getting money into the hands of citizens than central banks have used before. Under traditional expansionary monetary policy, the Fed attempts to stimulate the economy indirectly by lowering the interest rates faced by banks, causing them to borrow and make more loans. In turn, the interest rates faced by businesses and consumers decrease, providing economic stimulus. In contrast, helicopter money would consist of the central bank creating money and then distributing it directly to the public through fiscal transfer payments — for instance, by financing a government spending increase or tax cut or, more drastically, by mailing a check directly to each household.

An ‘Either-Or’ approach to fiscal and monetary policy is mistaken

Larry Summers has delivered a pointed and sweeping critique of the prevailing consensus among central bankers. He rightly asserts that reliance on further interest rate cuts, asset purchases and forward guidance is likely futile and potentially counter-productive.

Focusing on this point, Lavoie (2013), a self-described “friendly” critic of MMT argues that while MMT theorists are correct about some aspects of their theory, many other claims are based on an assumed institutional structure that in fact does not exist in most countries: a consolidated functioning (balance sheet) between the central bank and the Treasury, a consolidation that does not exist in most countries. Here is an important institutional constraint, pointed out by Lavoie, that shows the importance of institutional specificity and possibly undermines some of the key MMT claims. In the US, specifically, monetary financing of deficits does not happen automatically. The Federal Reserve has to choose to monetize the debt by doing open market operations, and this choice is as much a political one as an economic one. In practice, the Fed has done this occasionally, but rather sparingly.

Wray and other MMT theorists suggest this distinction between the Federal Reserve and the Treasury is just a “veil.” They claim that various processes of treasury payment and funds clearing, essentially mean that the Federal Reserve accommodates (effectively monetizes) the Treasury payments. Indeed, this view of Federal Reserve accommodation is a tenet of much post-Keynesian writing on “endogenous money” (see Pollin 1991 for a discussion, critique, and empirical evidence). While it is true that the Treasury and Federal Reserve engage in short-term interactions that tend to engender “debt monetization” in the very short term, the issue here, is the connection in the medium and long term. The debate about the budget deficit and monetary policy is not about short-term monetary accommodation: it is about what the central bank chooses to do about medium-term accommodation versus leaning against the wind. Does it try to keep interest rates low in the medium to long term to facilitate the financing of budget deficits, or does it lean against the wind and raise interest rates. The recent fighting between Donald Trump and the Fed shows that this is a real political issue. It is not obvious, without further political economy analysis, whether Trump or the Fed will win, if they in fact disagree.

Of course, there might be less salutary effects as well, and the CAP proposal leaves a number of questions unanswered. For example, the report suggests turning the current pool of unemployed, displaced, and discouraged workers into teachers’ aides, EMTs, and elder-care assistants. But those are jobs that require a considerable amount of training and skill, and are generally long-term careers rather than temporary gigs. They might not be the right ones for a public-jobs program aimed at disaffected workers, in other words. Moreover, those would not be easy job categories to expand in the event of a recession. Demand for health-, elder-, and child-care workers is mostly based on the country’s demography, after all, and again, those jobs require training. Supplying streets with crossing guards, cleaning up highways and national parks: Those more menial tasks might be better suited for a public jobs program, but are not mentioned.

On top of that, the report seems to underestimate the cost of overhead and infrastructure—the program would need to be physically present in every zip code of this vast country, and the Washington has not run anything like this since the Great Depression. The fact that most government-sponsored worker-retraining programs perform abysmally goes unmentioned, too.

11. A Program Of This Magnitude Has Never Been Implemented And Can’t Be Modeled Accurately

There is a lack of modeling showing that a JG can be implemented in the first place. As [I] noted, it has never been done. However, an unemployment buffer has been proven to work to achieve prosperity over long time periods. The employment buffer has never been proven and will require a huge amount of factual data and proof to overcome the uncertainty. Some claim an unemployment buffer has failed us. But over 23% of all the goods and services made since 1AD were produced from 2001 to 2010. And despite claims of “American exceptionalism” it’s difficult to overlook the FACT that America, in just 235 years, has built the most dynamic, prosperous and wealthy nation that man kind has EVER seen. To claim that the world is not making enormous strides in terms of productivity and living standards is not grounded in reality. Yes, we are currently suffering mass hardship due to the balance sheet recession (which was caused in large part by money manager capitailsm – something I’d help resolve via the full productivity program), but let’s not take things out of context here by losing sight of the forest for the trees. There was no unemployment in our caveman days, but certainly you wouldn’t argue that living standards were higher then….If you’re going to build a model for the JG then you have to essentially prove that the current model (the greatest wealth and prosperity creating machine in human history) is broken and that your new model is better.

Because a federal job guarantee differs so radically from anything ever attempted in an otherwise predominantly market-oriented economy, making accurate projections is very difficult. The authors of the CBPP and Levy reports, however, agree that the program is likely to enroll over ten million people. In fact, there are several reasons why their estimates may be too low.

The CBPP report estimates a total of 10.7 million full- or part-time participants, with a “full time equivalent” of 9.7 million jobs. This is the number of workers required to reduce the nation’s U-6 (unemployment and underemployment rate including discouraged workers) from 8.2 percent (as of January 2018) to

But a job guarantee has bigger problems — macroeconomic, operational, political and the existence of a more effective alternative — that make it a poor choice.

The macroeconomic problem is that a job guarantee can’t guarantee a job for everyone. Unemployment has a “natural rate,” estimated at between 4 and 5 per cent in pre-Covid Australia. If unemployment falls below this rate, inflation increases and interest rates rise, hurting investment and consumption and bringing unemployment back up to this natural rate.

As I noted last week, the idea of a federal jobs guarantee is picking up steam among Democrats. Kevin Drum has written a couple of posts that present some interesting data that should be taken into consideration when evaluating the need for such a program.

Most importantly, he documents that among prime age workers (25-54), the percentage of women in the workforce rose rapidly from the 1960s to the 1990s and has since leveled off. But for men, the employment-population ratio has dropped by eight percentage points since the 60s.

Even in a world with perfect Fed policy, there’ll still be some unemployment. “Full employment” doesn’t mean literally mean “every single person is employed.” There will still be caregivers, retirees, and severely disabled people who aren’t in the workforce, and due to regular job churn and seasonal work, some working people will be unemployed in any given week. Ski instructors might not work in July, scuba instructors might not work in December, and so forth. When I left the Washington Post, I was “unemployed” for two weeks before I started at Vox because I wanted to visit friends and family for a bit. It was fine.

But there’s some structural unemployment that’s decidedly not fine because it’s not desired by the people who aren’t employed. Plenty of disabled people, for instance, would like to work but face structural barriers, like a lack of work accommodations or an inability to pay for health aides on the job, or a lack of work in a sector where they’re physically able to do the labor. (For instance, if you use a wheelchair and the only work available is as a server at a restaurant or a sales associate at a pharmacy, you might be out of luck.)

Simply finding work for tens of millions of job guarantee enrollees would be a formidable task; finding productive, impactful work catering to an individual's skills, in a given locality and in a timely manner, would be staggeringly difficult — if possible at all.

The costs, too, are daunting. Both the CBPP and LEI reports project costs ranging from $450 billion to more than $600 billion, which put the proposed programs in the same league with the Pentagon in terms of discretionary spending.

Ensuring people have the opportunity to work and earn a good life is a shared value across the country. But, the federal jobs guarantee approach raises a number of concerns. And voters seem to be wary of it. In our polling, only 9% support a new program that guarantees a full-time government job—36 points less than those who support a new program where government works with business to create more good-paying jobs in the private sector. Among just Democrats, the divide was starker: 14% support a federal jobs guarantee while 59% want government to work with business to create private sector jobs.

Politics aside, the federal jobs guarantee raises five substantive concerns.

Simply finding work for tens of millions of job guarantee enrollees would be a formidable task; finding productive, impactful work catering to an individual's skills, in a given locality and in a timely manner, would be staggeringly difficult — if possible at all.

The costs, too, are daunting. Both the CBPP and LEI reports project costs ranging from $450 billion to more than $600 billion, which put the proposed programs in the same league with the Pentagon in terms of discretionary spending.

How much would a federal job guarantee cost taxpayers? The short answer, at the size the two reports project, is it would cost about the same as the Pentagon.

6 The Job Guarantee

In reality, the fiscal costs are likely to be much, much higher, and the economic welfare losses even more significant, because in the labor market and broader economy, a public jobs guarantee program would significantly crowd out productive private sector activity. This type of policy will radically alter behavior of both workers and businesses, and so the supply and demand for labor.

The Census shows that, among those who worked in 2016, 70+ million Americans earned under $32,500 (the full‐​time job guarantee salary would be $31,200). Yes, not all of these would seek out positions on the jobs guarantee program. But a large proportion would, especially those employed in uncertain roles with low levels of job security.

The Levy Economic Institute calculates up to 16 million could take part in such a program today (including the unemployed, those working part time seeking full time work and individuals currently inactive who might move into the labor market). Given the federal government would have to pay $15 an hour for full time jobs, plus benefits equal to 20 percent of wages, total labor costs per worker would be $37,440 per year. That’s before the cost of the materials for the programs and administration of the program itself. Even assuming some opt for part‐​time positions, and ignoring the non‐​labor program costs, we are talking about a gross cost of up to around 2.4 percent of GDP, significantly higher than the existing Medicaid program (2 percent of GDP).

The net cost on these assumptions will be lower, of course. People who take jobs will require less in welfare payments and pay some back in taxes. Some might wisely consider it a risk for their employment fortunes to be tied to the whims of politicians and their willingness to fund this program, and so remain in the private sector. But even taking this into account, and assuming the policy generates the macroeconomic bounty that the Levy researchers expect, they still think the annual net cost will be between 0.8 and 2 percent of GDP, with the program employing up to 10 percent of the workforce. That would in itself be a huge new commitment to finance at a time when the long‐​term fiscal outlook is already dire, and the short‐​term deficit already expected to balloon to over 5 percent of GDP in the coming years.

The U.S. government could commit to full employment by offering any willing and able person a job in public service. But should it? Known as a job guarantee, the once heterodox idea went mainstream last year with the endorsement of the Center for American Progress. While the specifics of any particular plan vary, CAP proposes “a large-scale, permanent program of public employment and infrastructure investment—similar to the Works Progress Administration during the Great Depression but modernized for the 21st century.”

Proponents argue that involuntary unemployment is a major source of social instability, and that public service employment, in particular, would help bring the country together. Nevertheless, here are three quick reasons why I don’t think a job guarantee is the way to go.

We must approach any discussion of the impact of a federal job guarantee on the wider economy with an abundance of caution. Our sample size for evaluating a program that the Levy report’s authors term a “radical transformation of the labor market” is zero. Even countries with much larger public sectors do not operate under the mandated system of a job guarantee.

However, economic theory and lessons from history can inform our understanding of the likely impacts of a federal job guarantee. Both reports’ authors are confident that in addition to benefiting program enrollees, a federal job guarantee would be an unequivocal positive for the larger economy, offering macroeconomic stabilizers and perhaps even paying for itself.

Indeed, job guarantee programs bear a certain resemblance to “workfare” programs in the 1990s, where cash welfare was replaced with subsidies given to poor households in exchange for the head of household actively seeking work. Leftists and liberals generally hated those proposals at the time, viewing them as a scheme to take benefits away from people who find it hard to work.

A job guarantee wouldn’t be taking existing benefits away from people; it would be conditioning new benefits on work. That’s a very significant difference, not least because the pay for job guarantee jobs would be much greater than welfare benefits used to be.