Employment for All: A Response

Last week, Alex of Christian Economics wrote a piece arguing, on the basis of both catholic social teaching and modern monetary theory, for the government to act as an employer of last resort. In this post, I'd like to respond to several aspects of his argument. This kind of exchange is always challenging as on the one hand I want to give the fullest possible justice to Alex's argument, but on the other in an internet debate it seems impossible to respond to every point without both sides getting totally bogged down in novel-length posts. As such, this post will be comprised of several titled sections dealing with different aspects of Alex's post which I thought most interesting to present counter-arguments to.

The Purpose of Unemployment: Why Looking For Work Is Work
Just a couple months into my first full time job, I was laid off. It was 2000 and the tech bubble was in the middle of bursting, and I was a college senior trying to work full time while finishing off my last few classes. The web hosting company that I was working for had built itself on an unsustainable business model so one day my whole office showed up to work and found out that every single one of us was laid off. Even though I was young enough and my expenses were low enough that I could weather joblessness fairly easily (despite not qualifying for unemployment since I hadn't been working the job long enough) if was definitely one of the uncomfortable experiences of my working life. Looking at the job listings was infuriating -- it seemed like there were dozens of jobs that I could do (and, of course many, many more which required experience or qualifications I didn't have) but they remained steadfastly silent as I sent out applications and resumes. It only took me a few weeks to find a part-time job at similar wages, and only a month longer to find a full time job that actually paid slightly more than the job I'd been laid off from, but it seemed like a very long time.

I bring up the personal angle because it seems to me that job searching serves very different purposes for the individual job hunter and for society as a whole.

For the job hunter, the goal is simple: Find a job that he or she is able (hopefully even happy) to do which will pay enough to meet his financial responsibilities.

However, the interaction between that job seeker and potential employers actually provides society with a very, very useful function. The process of workers (whether unemployed or not happy with their employment) searching for jobs, and hiring managers searching for the right candidates, powers an allocation mechanism far more complex than any job allocation authority (at however local a level) could manage. It serves to signal workers what kind of work is needed -- drawing more people into some fields where more workers are needed, and signaling to others that their field is drying up and it's time to look in another industry, retrain, etc.

In this sense, short term unemployment (in which a worker takes anywhere from a few weeks to a few months to find a new job after being laid off or quitting) is not necessarily a loss for the economy. Job seekers are doing valuable work by looking for the industries and companies where their skills and experienced will be valued the most.

This runs against the way job seekers normally feel at the time -- at the moment the feeling is simply: "I'm willing to work! Why is no one hiring me?" It also runs against the armchair economist wisdom, which would suggest that anyone not working isn't being productive. But given the importance of organizational capital in a complex modern economy such as ours, where specialization plays such an important role, the job searching process actually produces economic value in the long run by getting people to the right place.

In this sense, a low unemployment rate made up of people who are short-term unemployed is not necessarily a bad thing. (This is, I would argue, one of the reasons why a certain amount of public unemployment insurance is a benefit for a free market economy.)

Obviously, the level of unemployment we have now is far, far above that "healthy" level (which would represent only people who are "between jobs") in that we not only have lots of people out of work right now who want to work, but many of them have been out of work for a long time. That is, however, a separate issue. Sectors of the economy which had massively overgrown during the last ten years have now bottomed out, leaving some workers struggling to find jobs in new industries, and others trapped in long term unemployment. Meanwhile, many companies that are hiring report that they are having difficulty finding qualified applicants for the jobs they do have open. (In my own field -- admittedly a small and somewhat specialized one -- I can confirm that recruiters have started calling people up out of the blue to ask if they'd be willing to apply for jobs.)

Make Work and Sticky Jobs: How a Job Guarantee Would Keep People Doing The Wrong Things
So let's grant that searching for who is willing to hire someone with your skills and experience actually provides economic value. Wouldn't it still be more productive to have people do some kind of assigned work in their local county via a job guarantee problem than it would to have them simply collect unemployment benefits?

At a strictly economic level, this seems like a no-brainer. The problem, I think, is one of human behavior. When you have a job, your tendency is to mainly focus on keeping it -- unless the job itself becomes unbearable (or insecure) or you have the strong sense that you could do better. Not just that, but your current job tends to drain enough energy that it's hard to maintain a protracted job search while holding down your current job.

My concern is that a job guarantee program would create a set of perverse incentives. Clearly, if you're holding a job guarantee job, the job security is complete -- you won't be laid off. However, if its essentially a flat organization in which everyone is paid the same "living wage" to do assigned public service work -- there's absolutely no future in it. So by offering people that salary and that security, you implicitly tell them "stay in this job", but you give them no future.

For your true go-getter, this won't be a problem. But for a lot of people, who really just want a job that pays the bills and provides some security, there will be a strong incentive to take one of these job guarantee jobs and just stay there. With no prospect for moving up and little incentive to look elsewhere, these people would be sucked into a job with no future, and would not necessarily even be gaining skills or contacts that would help them in finding a better job later. What seems like a help might actually decrease the lifetime earnings of many people by setting them up for the day they wake up and realize they've been doing pointless make-work for ten years, and have no skills or contacts that would allow them to get a better job. While it might initially seem like we're doing people a favor by giving them a job rather than making them search for one -- I think in the long run we would slow people down in finding "real" work, and we would cause them to make less and do less useful work as a result.

Value vs. Activity: How the Job Guarantee Would Create Inflation
[This section is going to get a bit tricky, as I think it's necessary to address the MMT understanding of money -- bear with me here.]

It seems to me that the MMT insight which kind of works is that to the extent that the government controls the printing of money, it can get away with "printing money" in order to pay for things in some situations with creating (much) inflation. However, it seems to me that this only works to the extent that the government does this at the rate of economic growth actually going on. Let me try an example here to get this across.

Imagine a closed economy in which there are only ten workers. There are 10,000 dollars in circulation. Three workers grow enough food for everyone, two make tools, two make carts and bicycles, one makes clothes, etc. One day, two new workers show up and start working. More work is getting done now -- there's more food, more clothes, more tools, more luxuries. These two new workers are smart guys and provide some new inventions, and as people specialize more they come up with better ways to do things themselves and things seem to get better and better. But a curious thing is also going on. Since there are only 10,000 dollars in circulation, everyone finds that they are making less money. Prices for all the goods being produced fall, but rather than seeming "cheaper" goods seem more expensive because everyone just has less money. This is particularly rough on a couple of workers who owe one of the others money. Now the amount that they owe is worth more, and it will take them longer to pay off. The problem is that there is more total value being created by all this work (with the two additional workers and the greater specialization of work) but the number of dollars in circulation is fixed.

Now, imagine that one of our 12 workers is not a very honest fellow. He sets up a printing press in his basement and starts printing dollars. He does it slowly, slipping a few extra dollars into circulation every so often. And somehow, this actually solves the problem. Prices are now stable, because our counterfeiter is creating money at the same rate that this little economy is growing. In the process, the counterfeiter becomes rich, because he's spending more money than me earns. But aside from the counterfeiter getting rich without deserving to, the slow inflation of the money supply is actually good for the economy.

However, eventually the word gets out. The twelve workers call a council and decide that this is actually a pretty good idea, they're going to make it work even better. They print an extra $2500 dollars in one big run, and they invite two more workers to come in and build a recreation hall for everyone to enjoy. Based on their past experience, they assume that they can have the rec hall built "for free" by printing new dollars to pay these two new workers.

Something is wrong, though. Prices seem to be going up, and there's not enough food and goods to go around. Inflation has set in.

Why didn't it work? Well, the 12 workers would like a rec hall, but they don't actually value it enough to save up their money and pay to have one built, or to take time out to build it themselves. When they print money to pay for building the hall, they've introduced more dollars faster than value is being created. The two additional workers are working as hard as the other workers, but they're not actually producing "value", as in: something that the other workers are willing to actually pay money for. If you print money in order to pay for something that doesn't have value (in other words, that you're not willing to pay for with your own money instead of "free" money) you're increasing the supply of money faster than you're increasing the supply of value. The result is that things that people do value will become more expensive. This is price inflation.

By circuitous route, this gets to what I see at the two big issues with the job guarantee idea:

1) The MMT idea that one can pay for this without inflation by simply creating money strikes me as false because the value created by the work being done will not equal the money created to pay for it. Why will the work done not be of value equal to the money paid for it? The short answer would be that if it was so valuable people would be paying for it. The problem, I think, is a variation of the Socialist Calculation Problem: planners, even at a fairly local level, are simply not going to be all that successful in knowing what is truly of value to people and making sure that this is the work accomplished via job guarantee work. This is in part because consumers themselves are often not all that clear what they value. What people tell you they would be willing to pay for is very often not the same as what they actually spend money on when they're actually managing their own money.

2) While I appreciate the argument regarding the dignity of work, it seems to me that the ELR idea is actually a false solution to the problem. The dignity of work, it seems to me, stems from doing work which actually provides value either to you or to others. I don't think that doing make-work in return for a guaranteed income will provide a sense of dignity to the worker -- and indeed, it may serve to destroy his sense that working has dignity in the longer term, leading to a "they pretend to pay us and we pretend to work" attitude that will be carried through into "real" jobs later on, making it harder for him to provide for himself and find satisfaction in his work.

Without attempting to put a Panglossian shine on things, I think that something much like our current system (in which unemployment benefits which are paid for through payroll taxes are used to support people while they look for new work) is not a bad way to do things. It is certainly being strained in times like this when long term unemployment suggests that we may be seeing shifts in the structure of the economy which businesses and workers have not yet adjusted to, but it does lessen the catastrophe of job loss while placing the emphasis on finding work that people are willing to pay for.

In Closing
I want to thank Alex again for taking on the daunting task of getting this debate off the ground. I've found the exchange intellectually stimulating and hope that readers have too. I look forward to the next round.