MMT with FJG fails—system cannot cope in times of recession

The MMT crowd is right that the government has far more headroom to spend, and better macro-economic (as opposed to nice-but-silly humanitarian) reasons to do so than their mainstream opponents think. But they are wrong about what to do with that spending power. They correctly understand that government spending is constrained by the economy’s available resources rather than by tax revenue. But their central policy proposal, a “Federal Jobs Guarantee,’’ is a terrible stinky heap of burning radioactive garbage drenched in awful sauce, sprinkled with bad. It’s unfit for purpose, now and later, on its own terms and on any reasonable person’s.

I don’t make these criticisms gleefully, as in general, I am sympathetic to the general thrust of their thinking. But a real friend tells you when you’re wrong, for your own good (and everyone else’s). This basket case of a policy would be a disaster if tried and could discredit the entire school which proposed it, leading to the macroeconomic baby being thrown out with the policy bathwater. MMT needs to be forcefully critiqued, and saved from this glaring flaw. Unfortunately, this flaw is one that most MMT advocates refuse to acknowledge, and will passionately defend. So it must be attacked with equal passion. It’s like the 6 minute back alley fight scene in They Live — they must, despite their protestations, be made to see.

Unfortunately, that won’t be easy. This policy proposal isn’t some early stage-skin cancer that can be easily cut off. It’s tied to macroeconomics deep in the guts of their thinking.

The FJG arises from MMT’s understanding of money. In MMT, money is simply a token used for paying taxes. Governments impose taxes to force people to earn money. As a result, everyone ends up needing a job. To put it another way, the government introduces money and taxes for the purpose of creating unemployment. They create this unemployment in order to get people to work for the government.

The monetary system’s original sin is that it creates unemployment. . . . Money is a public institution that is launched into existence by creating unemployment

The MMT perspective is that the government has made a mistake by taxing people into needing jobs without also providing jobs for everyone. The Federal Jobs Guarantee is the obvious solution. The government simply creates a job for anyone who wants one.

On the face of it, this story checks out. If the government imposes a universal tax payable only in government-issued money, then it forces everyone to go earn that money from the government, either directly (by fighting in the army, for example) or indirectly (selling food and ale to the soldiers on leave). The government, in this account, sets the value of the currency by setting the wages it pays for the labour it hires. The purchasing power of currency is thereby anchored to labour.

An adjacent school of thinking now emerging, Consumer Monetary Theory (CMT) on the other hand, remains agnostic about particular origin stories, which have partial and overlapping elements of truth, and focuses on the contemporary reality that the economy requires a standard unit of account in which to set prices.

Our dollars represent claim tickets against the economy’s production. Whenever we spend a dollar, we claim for ourselves one dollar’s worth of the economy’s productive output. Consumers are continually buying and using the goods and services that support their livelihoods. They’re redeeming their money tokens in exchange for the economy’s products

Money is what you buy stuff with, so it must be anchored to consumer goods and services. For a currency to be useful, its purchasing power has to remain reliably stable with respect to the kinds of things that people ordinarily buy.

It is, of course, true that the imposition of taxes is one important way that governments can validate the money they issue, and thereby mobilise a workforce paid in that money. But the mere imposition of taxes denominated in an arbitrary unit won’t transform that unit into the economy’s currency. If the government demands you pay your taxes in sandbags, you’ll start buying sandbags for tax payment purposes, but nothing much else will change beyond that.

Robbed of its theoretical grounding, the FJG can sometimes seem like a solution looking for a problem, or problems, to solve. Worried about food deserts? The FJG can fund and staff local community organic gardens! Worried about climate change? FJG can also be the green new deal. Child care affordability? FJG! Aged care? Let’s get those unemployed people wiping grandma’s butt!

FJG skeptics might respond that we can solve these problems using this crazy new idea called the “public sector” doing this crazy new thing called “hiring people” using these crazy new doodads called “employment contracts”.

“Sure fine yeah”, say the FJG advocates, “this is like that, but better!” they insist.

The regular old public sector, which hires only those needed to perform specific tasks and provide specific services, would leave out some workers. The job guarantee would hire anyone who needed a job, eliminating “involuntary unemployment” by acting as an “employer of last resort”.

The goal is to keep these people employed during rough times, with the explicit goal of releasing them again when the private sector is labour hungry enough to lure them back with better wages. Built into this policy is an admission that these are non-essential “nice-to-have” jobs since we can forgo them during boom times when the private sector is employing more people. Even in these boom times, though, the FJG would still play an important role, keeping employers honest and fair, by giving workers a permanent alternative.

By scooping up workers as they are discarded by the private sector the FJG could provide macroeconomic benefit, acting as an “automatic stabiliser”, preventing downturns, or at least preventing them from becoming self-propelling juggernauts, by giving jobs to those who get fired, sustaining their spending power when it would otherwise disappear. The idea is that this prevents a cascade of collapsing demand from ripping through the economy.

So how would that work in our present predicament?

Firstly, right now we want people to stay home as much as possible, which makes it more challenging to think up jobs for people to do. That might not be the case during the next big crisis, of course, unless it is. The next economic contraction might well be related to, or at least concurrent with, a climate change disaster, and having people stay home, off the roads and out of factories might be the grim necessity then, as well. But let’s leave that to the side

Instead, let us simply consider the sheer volume of new applicants would completely overwhelm the system. The existing welfare bureaucracy, which simply has to assess claims and authorise payments, not create jobs and place people in them, cannot keep up with the flood of new applicants for unemployment benefits. I personally signed up over a month ago, and am yet to hear back about my application, except a text message to the effect that I was in the system and would be called with more information, eventually. Similar stories abound worldwide, as a simple google search reveals.

The system cannot cope. And how could it?

Let’s imagine that administration systems weren’t, in normal times, labyrinth and opaque bureaucracies designed to moralistically separate the deserving from the undeserving poor, but efficient and streamlined systems that quickly and cleanly came to the aid of those in need. If they are set up to manage a monthly flow of claims in the tens or hundreds of thousands, how can they possibly deal with the sudden influx of millions, or tens of millions? They can’t, unless they are in normal times running at only 10% of capacity or less?