The Job Guarantee and the MMT Core: Part Eleven, Price Anchor or Price Buoy?
Is the JG a Price Anchor?
More on Cullen Roche's claims about the JG, this time a discussion of his price anchor vs. price buoy post.
Let's begin with:
”. . . This is right in theory and entirely unproven in reality. . . . with regards to the price stability issue, the term “price anchor” is misleading as it gives the impression that the JG can serve as a highly effective way to contain inflation over the course of the business cycle . . . More likely, the JG would serve as a good deflation fighter and only a “soft ceiling” (per Warren) or marginally better inflation fighter than what we have today . . . .”
Cullen also thinks the deflation fighting properties of the JG are not so important because modern governments have become adept at fighting inflation, as illustrated by the fact that the US just had only its first deflation episode in 50 years in 2009. So, he doesn't think it's the downside we're worried about so much as the upside.
He's right that deflation hasn't been a concern for a long time now. But, as I recall, Ben Bernanke and Timothy Geithner were pretty concerned about that in the early part of 2009, and they'd certainly become gravely concerned once again, if the banks in Europe would suddenly collapse, or if any “black swan” bringing the banking system to the brink of solvency suddenly hit the economic system.
With respect to the JG and inflation, Cullen says further:
”. . . its effectiveness in stopping high inflation will still rely on the boys switching the policy levers at Fed, Treasury and Congress….In this regard, I think the JG is severely lacking and requires something greater involving counter-cyclical policy (not men with perfectly trimmed beards making predictions!).”
Cullen then digresses and restates his view, expressed in previous posts, that full employment with price stability are the wrong goals for modern macroeconomics. He thinks the goal should be: “. . . full productivity (leading to full employment) focused on maximizing living standards over a multi-generational period. He thinks “we should use our proven MMT understanding to implement policy approaches that get the economy operating at full productivity . . . “ And he claims that:
The counter-argument in MMT is that you need the JG because it will help contain inflation over the cycle by serving as a “price anchor.” Of course, I am divorcing price stability as a secondary goal (it’s not “central” to my thinking though that doesn’t mean it’s unimportant) so I don’t know if that makes me non-MMT or not (perhaps it does)….Nevertheless, I think the inflation fighting argument is vastly overstated because the JG doesn’t serve as a price anchor at all. It serves as a price buoy.”
I think Cullen is distorting the MMT reply here. The first reply of the MMT founders and their students would be that you need the JG to create full employment and maintain it and to fulfill this component of public purpose. Then they'd say that the JG also helps to achieve price stability because it does serve as a stabilizing influence on prices throughout the business cycle. It is in this sense, that it is “a price anchor.” Here's Bill Mitchell's basic formulation:
”The fixed JG wage provides an in-built inflation control mechanism. In an earlier published paper I called the ratio of JG employment to total employment the Buffer Employment Ratio (BER).
“The BER conditions the overall rate of wage demands. When the BER is high, real wage demands will be correspondingly lower. If inflation exceeds the government’s announced target, tighter fiscal and monetary policy would be triggered to increase the BER, which entails workers transferring from the inflating sector to the fixed price JG sector.
“Ultimately this attenuates the inflation spiral. So instead of a buffer stock of unemployed being used to discipline the distributional struggle, the JG policy achieves this via compositional shifts in employment. That is it can also deal with a supply-shock that generates distributional demands that ultimately cause inflation.
“The BER that results in stable inflation is called the Non-Accelerating-Inflation-Buffer Employment Ratio (NAIBER). It is a full employment steady state JG level, which is dependent on a range of factors including the path of the economy.” (emphasis mine)
Let's see what Cullen says to deny this claim.
”Robert LaJeunesse wrote an interesting book titled “Work time regulation as a sustainable full employment strategy” in which he explained the misguided thinking of the JG as a price anchoring buffer stock:
“During robust economic times, buffer stocks offer little prospect of abating wage pressures in the primary sector. Since buffer stocks target a minimum price of labor, an earnings floor if you will, and do not create a wage ceiling they will have little impact on the primary sector wage demands. Capitalists will be able to maintain a significant degree of labor market segmentation, allowing them to avoid hiring from outside the primary sector. As such they will avoid payroll expansion and attempt to squeeze more from existing workers in the form of longer hours and greater work intensification. One only has to look at the history of commodity prices (such as oil) to realize that buffer stocks do not place a ceiling on prices. Buffer stocks may mitigate price swings, but they tend to prop prices up rather than restrain them, particularly when the commodity is in short supply. Buffer stocks, therefore, do not serve as a price anchor but rather as a price buoy. That is, they represent an earnings floor rather than an earnings ceiling. Public and private sector employees alike will still face pressure to work long hours under a job guarantee – either to maintain insatiable consumption desires or to retain jobs that offer long hours on a take-it-or-leave-it basis. Such behavior would most certainly become inflationary as Mitchell and Wray (2005) concede when they write, ‘if the government decides not to deflate demand, the ELR pool still allows the economy to operate with higher aggregate demand and lower inflation pressures, although inflation can still result.’”
This argument is very unconvincing to me, because it seems to assume that the JG would operate in isolation. But that's not what the MMT advocates, including Bill Mitchell just above, assume. They assume instead that if demand-pull inflation threatens, then the Government will respond by raising interest rates, raising taxes, or both.
At that point, Aggregate Demand (AD) will be reduced in the private sector, sales will decline, and the private sector will cut back on employees. When that happens, the JG will expand, preventing people from becoming unemployed, but also paying them at less than the private sector prevailing wage they received before. This will cool demand further, but much less than would be the case if people were plunged into unemployment. Nevertheless, the JG program will certainly provide a price anchor, since as more and more people join the ranks of the JG employed, both AD and upward pressure on private sector wages would surely be reduced, but not by so much that there is likely to be price deflation as there was recently. I do not see how this conclusion can be avoided. Nor do I see that LaJeunesse's argument, quoted by Cullen, even touches it.
The last part of the LaJeunesse quote is hand-waving. If the JG is paying a living wage then why should workers want to work long hours to fulfill “insatiable desires.” And why should JG public sectors have such desires, or the JG program accommodate them? Finally, even if this dynamic obtains to some extent, then why should it be strong enough to overcome the tendencies toward weaker demand being created by private sector lay-offs? That is, what percent of the labor force would be involved in this dynamics? Not much of it, I think.
Finally, even though Mitchell and Wray “concede” that inflation can still result if the government doesn't do anything to deflate demand, clearly this isn't anything to worry about if the economy becomes over-heated. At a minimum, the central bank will raise interest rates, reducing the level of business activity and private sector employment, and at that point the JG program will work according to the dynamic outlined above. So, Mitchell and Wray may be conceding a theoretical possibility, but that possibility goes against both what they recommend, and also what is likely to be done.
Some Distractions and Irrelevancies
Next, this piece from Cullen seems entirely irrelevant to the argument:
The commodity buffer stock comparison has weak points, but one recent example of this sort of buffer stock idea surrounded the release of reserves from the Strategic Petroleum Reserve in the middle of last year. I spoke to several analysts and traders who, at the time, said the move was a desperate attempt to pull prices down and stimulate the economy. President Obama pulled hard on that buoy and released a small amount of this buffer stock into the market, but he couldn’t pull the prices down for long. Capitalists got back to being capitalists and market dynamics took control once again as prices floated higher. The labor market works a bit differently, but contains some of the same problems that specific commodity price targeting would.
This is more hand-waving. What does it have to with the Government expanding the buffer stock when private sector employment contracts, or with the private sector expanding its employment and shrinking the public buffer stock when it decides to do so? Nothing, as far as I can tell. Would Cullen care to explain the connection to slow folks like me?
The problem in the labor market is one of money neutrality (a concept that MMTers very publicly reject). In order for the buffer stock to control the market it essentially has to be THE market. But labor is not like any simple commodity. It is a highly specific and specialized commodity. We know this from the remarkable wage discrepancies that exist in the world today. A job at Goldman Sachs is a commodity unlike anything seen in the rest of the labor market. So setting the price of low price unskilled labor doesn’t have a sufficiently uniform effect across the entire labor market to keep wages low when the economy is booming and Goldman Sachs is poaching from Bank of America, Boeing is poaching from Caterpillar, and Microsoft is poaching from Cisco.
Forgive me, Cullen, but this comment is ridiculous! Obviously the Executive level employees of GS, BOA, and Boeing, and other large organizations aren't numerous enough that competition for them can cause wage inflation, when private sector demand for all other workers is rapidly declining. Sure, the price of certain kinds of labor will be sticky in the face of a serious recession. But the pay of 150 million workers across the economy will have a tendency to decline as more and more people leave the private sector and join the JG. The JG doesn't have to be "THE market" to cause that to happen.
Cullen's next point is equally out there.
To make this point clearer, arguing that the JG is a strong upside inflation deterrent is a lot like setting the price for wool and then claiming that you’ve stopped commodities from rising above a certain point. Clearly, that’s not true. You’ve set the price of wool relative to other commodities, but for instance, you haven’t stopped oil market dynamics from sending oil prices through the roof. Now, if the government set all prices in the labor market then we’d be having a different conversation, but the JG would cover roughly 3-5% of the unskilled laborers at a point approaching full capacity. Because this buffer stock will have been dwindled down to largely low-skilled workers whose convertibility into private sector jobs is likely negligible, it will have an equally negligible impact on the broader wage scale.
I think an argument like this one, shows that Cullen is really “reaching”, and is ideologically biased against the JG. A fixed floor price of wool wouldn't affect very many other products in the economy. But a price floor for labor specified in a JG program will aways mean that the private sector must offer jobs at a higher price and with equal or better fringe benefits than the JG program offers. Otherwise, why would people work for the private sector? Who cares if the JG is only 3-5% of the unskilled or the total employed, when the economy is near full employment? It will still provide a floor that the private sector cannot breach without either losing workers or hiring undocumented laborers who can't take those JG jobs if they're unhappy with substandard pay.
”So the upside benefits will be relatively muted regarding price stability during an economic boom (when we’re nearing traditional “full employment”). Additionally, the job guarantee pool at 3-5% of all unemployed will be so small and non-convertible into widespread private sector jobs that it won’t come close to impacting prices and wages (when it’s most needed) to the extent that private sector jobs will (which will see substantial wage pressure during a boom period as skilled laborers compete for the other 95-97% of jobs). As Mitchell and Wray say, this would most certainly add to aggregate demand during the boom times which would lead to higher inflation. Ultimately, we will still rely on men with perfectly groomed beards pulling levers regardless of whether we have a buffer stock of unemployed or employed so the fact that the employed buffer stock acts as a price buoy and not a price anchor is quite substantial. Given the fact that modern governments have become particularly adept at fighting deflation, I think the price stability case for the JG is vastly overstated (not to mention that the policy, in my opinion, is off target).”
Bill Mitchell and Randy Wray make the point that the JG will only work to cool a boom, along with other Government deflation mechanisms. They've never said or implied that the JG will do it alone. Just look at the quote from Bill above. The question is why is Cullen distorting the MMT position here and in the other places we've indicated in this series. What axe is he grinding? What ideology is he defending?
Summing up the Anti-JG Indictment
"Importantly, none of this even touches on the various other risks involved in such a program. I have contended that there is potential for such a large government program to become overrun by other problems (corruption, praxeological issues, lobbyist/political controls, regulations, mismanagement, lack of productive work, various forms of moral hazard, etc) creating sizable risks. The fact that its impact as a superior price stabilizer is muted is further cause for concern. In addition, the goals of targeting price stability and full employment don’t necessarily maximize our true target – full productivity. And perhaps most importantly, the idea that the JG is embedded in MMT as a “central” piece of the theory distracts from the core proven concepts and gives the impression that you cannot understand modern money without understanding a massive government spending program that is unproven in the real-world (on any scale as would be introduced in the USA) and entirely theoretical."
This is just a repeat of earlier posts by Cullen and John Carney, which I've evaluated, and, I think, refuted in earlier parts of this series. The bottom line is that if you don't agree with the MMT normative structure centered on public purpose, then you won't accept the JG as core. So, what? All Cullen's saying is that he doesn't share the normative side of MMT. He just doesn't believe that economics ought to be practiced for the public purpose.
If he did, and he also believed in the importance of “full productivity”, then he'd be arguing that “full productivity” and “prosperity” were part of the public purpose of economics; but not that full employment and price stability are not, because according to all the survey data we have, people believe that economics should be about helping the economy get to full employment and price stability. Obviously, they want “prosperity” too, and one can make the case that increasing productivity, innovation, creativity, and technological advance are all very important for “prosperity.” But I really don't think that people will agree that full employment and price stability aren't also very important components of public purpose.
So, let me ask you Cullen, do you think macroeconomics should be practiced for the public purpose; or do you think it should be a tool for private gain alone? If you think it it's for public purpose then let's see your narrative relating “full productivity” to public purpose. And if you think it's for private gain, then let's see your narrative explaining why MMT ought to commit to that goal.