Monday, May 21, 2018

Is the Job Guarantee a Ponzi Scheme?

“The basic idea is that the government can’t run out of money. It creates money just by spending.” -- Stephanie Kelton
This is true. Government cannot run out of its own money. But what is money? It is a token or pledge that can be redeemed for something of value. If government creates much more money than there are things of value to redeem it for the prices of those things go up. Not to worry, Zach Carter assures us:
But even inflation doesn’t impose a hard limit on policy options. The Federal Reserve can raise interest rates to deal with it, Congress can raise taxes to pull money out of circulation or even impose price controls.
Hyman Minsky expanded on this explanation in his financial instability hypothesis:
The first theorem of the financial instability hypothesis is that the economy has financing regimes under which it is stable, and financing regimes in which it is unstable. The second theorem of the financial instability hypothesis is that over periods of prolonged prosperity, the economy transits from financial relations that make for a stable system to financial relations that make for an unstable system.
In particular, over a protracted period of good times, capitalist economies tend to move from a financial structure dominated by hedge finance units to a structure in which there is large weight to units engaged in speculative and Ponzi finance. Furthermore, if an economy with a sizable body of speculative financial units is in an inflationary state, and the authorities attempt to exorcise inflation by monetary constraint, then speculative units will become Ponzi units and the net worth of previously Ponzi units will quickly evaporate. Consequently, units with cash flow shortfalls will be forced to try to make position by selling out position. This is likely to lead to a collapse of asset values. 
The financial instability hypothesis is a model of a capitalist economy which does not rely upon exogenous shocks to generate business cycles of varying severity. The hypothesis holds that business cycles of history are compounded out of (i) the internal dynamics of capitalist economies, and (ii) the system of interventions and regulations that are designed to keep the economy operating within reasonable bounds.
See? If "the authorities" decide to "exorcise [the demon of] inflation" through taxation or higher interest rates, it won't be the government that goes belly up. It can't run out of money. It will just be those speculative and Ponzi units whose net worth will evaporate. No problem!

It remains a mystery to me why job guarantee proponents point to Minsky as the patron saint of the job guarantee idea. It was, after all, Leon Keyserling who drafted the Full Employment Act of 1946, The Freedom Budget (1966) and job guarantee provisions of Humphrey-Hawkins (1976). Good old "siphoning off the increment to pay for the excrement" NSC-68 Leon. 

Mr. Keyserling was a big fan of spending that "paid for itself" by augmenting growth in the gross national product. His 1966 Freedom Budget was also touted as being financed through an "economic growth dividend." The idea was that economic growth of five percent over a ten year period would generate the revenue to pay for the program.

If it wasn't the government doing it, the method of financing that Keyserling advocated would be a Ponzi scheme because it relied on revenues that would presumably arise solely from disbursements and not from the sales of value-added goods or services. Fortunately, a government cannot operate a Ponzi scheme because "it creates money just by spending."

So, technically speaking, a job guarantee is not a Ponzi scheme. It's only a wee bit Ponzyish.


Jerry Brown said...

As a Job Guarantee proponent I would point to Bill Mitchell first. As far as I know, he is the main developer of the 'buffer stock of employed people' idea. As opposed to the current Fed policy that tries to maintain a pool of unemployed people to control inflation. This buffer stock is the real MMT economic argument (rather than ethical argument) for a Job Guarantee. And its a pretty good argument, especially when you consider the tremendous waste of resources that maintaining a pool of millions of idle people who would rather work amounts to.

Sandwichman said...

Well, you can play policy feature whack-a-mole with me but that's not the game you get to play with Congress. In some versions, the buffer stock acts as a brake against inflation. In other versions, the guarantee boosts the bargaining power of employees in private industry. Which is it? Brake or booster? And if you say one thing, how do you know Sandy or Pavlina or Stephanie or Randall aren't making exactly the opposite point across town?

I got called an obnoxious fool (the actually word was harsher) that could not have ever read anything about JG for talking about the reliance of JG proposals on growth assumptions. The Keyserling model was FULLY FUNDED by as so-called growth dividend.

And then there is this post over at Truthout "Three Ways to Design a Democratic Job Guarantee" that talks about "participatory budgeting," "sortition" and "co-operatives and worker self-management" as ways to administer a JG program. Woo-woo! Do Stephanie's Wall Street broker bros know about them apples?

I mean, c'mon?

Jerry Brown said...

Well, I certainly didn't call you obnoxious and would never call you a fool and if it was Egmont did it- you should be proud because he calls everyone from Keynes to Marx some variation of that.

As far as the other thing- Yes but on both depending on what the JG wage was decided to be. If it is close to or higher than current minimum wage it is going to increase low wage workers bargaining power. So a $15/hr JG is probably inflationary short term for the US. But the idea is that doesn't turn into a continuing spiral of increasing prices but more of a one off adjustment to prices. And then after that adjustment a JG is supposed to offer a better alternative for employers looking to hire than long term unemployed currently are- they will have a group of already employed individuals that are actually in the labor force to hire out of.

But I'm just a very interested reader and not an MMT economist, so that's just my opinion.

Jerry Brown said...

Sandwichman, putting (most) economic considerations completely aside, I am very comfortable arguing just on ethical and political terms that the United States can afford and absolutely should have a policy that allows every resident who wants to work to be able to work, and at the same time be able to meet some basic standard of living, which standard can be argued about for sure. But it is basically a 'no-brainer' that most people think that someone who wants to work full time should be able to and not be impoverished at the same time.

The MMT Job Guarantee fits very well into that view, plus it has some good economic arguments to go along with it. In any event- that is the game you get to play with Congress, if you are lucky. You show them how it is the right thing to do, you show them how almost everyone else agrees with that, you show them how the country could (and always could) afford it, and you hope the ones being paid off by those who oppose are not that many. Lot of hoping at this point.

Sandwichman said...


The article I cited in the previous post made some good remarks about how politicians use economists. Not to tell them what is the right thing to do but to give them back up arguments for whatever they already want to do. I do have some reservations that job guarantee is one of those campaign slogans that either gets dropped or mangled into tokenism after the election is over. That is why I would rather do the hard criticism before it becomes a campaign issue and therefore "immune to criticism" except on partisan grounds.

Dave Schuler said...

Can anyone point to a government in which Chartalists enjoyed significant influence that did not end in a catastrophic loss of confidence in the government and the currency?

Calgacus said...

Sandwichman:But what is money? It is a token or pledge that can be redeemed for something of value. If government creates much more money than there are things of value to redeem it for the prices of those things go up.

No. This is wrong, or not precise enough. That's not really what money is, not how it acts in the real world. Subsequent sentences (& earlier posts) make this clearer as the above is a too terse to be called definitely wrong.

MMT is a theory of money. The most important and essential reading for MMT are the papers of Alfred Mitchell-Innes a century ago. If you understand money without reading these papers and the commentary on them - well, you are a genius like Abba Lerner (Keynes can't qualify, as he was the reviewer for those papers) Here they are L. Randall Wray, Credit & State Theories of Money: The Contributions of A. Mitchell Innes, Edward Elgar (2004).

Which is it? Brake or booster? And if you say one thing, how do you know Sandy or Pavlina or Stephanie or Randall aren't making exactly the opposite point across town?

As Jerry says, it is both, but mainly a brake once it is instituted.

We know that these people aren't saying the opposite across town because Jerry & I understand the theory that they have helped develop. To think they contradict themselves is to not understand the theory.

talking about the reliance of JG proposals on growth assumptions.
It doesn't. It simply doesn't, as Minsky in particular emphasizes. And there has been some work connecting the JG with degrowth and a-growth ideas.

Dave Schuler:Can anyone point to a government in which Chartalists enjoyed significant influence that did not end in a catastrophic loss of confidence in the government and the currency?
The New Deal in the USA. The whole world in the postwar Keynesian full employment era. The whole world now - which has abandoned in practice, but not in theory, the illusion of non-chartal money.

Sandwichman said...

"Sandwichman, no. you are [not even] wrong. Read this and that and the other."

Sorry, Calgacus, but have YOU read Andre Orlean's The Empire of Value? Or Joseph Vogl's The Ascendancy of Finance? Or The Specter of Capital Or Carl Wennerland's Casualties of Credit? Or de Roover's historical accounts of bills of exchange?

There is always one more thing one must read before knowing anything about anything. I will say I have read enough by Randall Wray to view him as a polemicist first and a scholar second. I don't mean that as an insult.

Sandwichman said...

O.K., Calgacus, I had a quick look at the Innes you cited and it seems to me he presents a credit theory of money similar to the authorities I cited -- Orlean, Vogl, Wennerland, de Roover.

Calgacus said...

I've glanced at at least one of those authors and I think more. But I am saying that Mitchell Innes is central. It is the #1 MMT reading. According to Wray, those are the two best papers on money ever. Those papers and the volume built around them are not just another thing to read; IMHO one does not understand money & MMT without them. There is nothing else as important to read for MMT. There are plenty of others who get credit & money almost right, but not as right, not as early, not as clearly as Mitchell-Innes. And others frequently throw in pointless garbage. Perhaps the most important thing in M-I is the qualifier "nothing but" - there isn't anything else to such and such concept but this. For instance, Schumpeter is far more famous, but his monetary theory is not as good, as some MMT authors have compared the two. FWIW, my personal next favorite reading is Lerner's Economics of Employment

I of course disagree about Wray. The MMTers can get a bit testy and polemic, so can we all, but what attracts me to MMT (& functional finance) is what I assert are the its scholarly standards and its rigor in argumentation, and above all, far above all, in definition. Imho such standards are simply appalling in most of economics, the lowest overall standards in any discipline I know of, and still lower than say in the 1970s, which was the first time I took some interest in economics. Generally, the more "math" (decoration) there is, the less mathematical it is & vice versa. (As a mathematician, "math" is a compliment from me.)

This may be an amusing anecdote: I stopped reading or taking or auditing course in the 80s, saying to myself, well about half of every economics book makes sense, and the other half is nonsense, but I guess the nonsense will work its way out eventually and I just don't have the time. I then started reading Bill Mitchell and others in 2010 and was a bit shocked at the severity of the criticism. Then I was at a Salvation Army thrift store with my wife, which had a great deal of textbooks, particularly economics ones. I'm a bibliophile, I don't mind moldy books, books crawling with bugs, or thumbing through Abdul Alhazred's Necronomicon etc. But I never got such a shock & horror looking at all those books; all the sensible stuff had been completely eliminated, it was all patent nonsense!

Finally I, and many others I am sure, am in awe of your scholarship and knowledge on most of economics and its history, which I have always felt essential to understanding anything, and are here to learn. But I guess that's all I'll say.

Sandwichman said...

I'll read Innes when I have time but it seems to me that I have absorbed his theory second- or third-hand, possibly via Geoffrey Ingham's work. Which brings me back to the original point of contention, which I would now like to reformulate as having to do with whether a "theory" -- no matter how apt -- can prevail over well-entrenched behaviors that do not accord with that theory. IOW, no matter WHAT money actually is, people and institutions behave AS IF it is something else.

To be perfectly frank, most people operate without any explicit theory of money whatsoever. Their expectations are, and will continue to be that "things are, have always and will always be the way they are." I don't really care to know whether a comprehensive MMT regime and the current crop of JG proposals could work in an economy where everyone was in sync with the program. That will never happen. So what we have to be very concerned about is IMPLEMENTATION of policy on the understanding that not everyone will be on board and that some powerful interests will be adamantly opposed.

Sandwichman said...

Geoffrey Ingham made pretty much the same point:

"Neo-chartalists correctly identify the state’s role in the social and economic structure of monetary creation. however, like most economists of any persuasion, they tend to overlook the fact that monetary policy is not simply a matter of functionality; it is also the result of social and political struggle in which economic theory informs, and gives meaning to, the conflicting interests. In contradiction of the positivist implications of mainstream economics’ naturalistic conception, theories of money are an essential part of the social process of producing money. They are 'performative.'"

Calgacus said...

Ingham is great, I was about to say him second, he is a great secondary source or substitute, he adds a lot of value, but not as much as Mitchell-Innes. He has a paper in that Mitchell-Innes commentary volume.

theories of money are an essential part of the social process of producing money.

OK, but not the "essential". "Money" has been the same in essence for say 40,000 years, if you want to go back to the oldest tallies, or older, as long as we can say there were humans. The JG operates at this very deep and universal level, which makes it extremely robust. A capitalist, monetary economy is really a credit economy, which is really a gift economy deep down.

So what we have to be very concerned about is IMPLEMENTATION of policy on the understanding that not everyone will be on board and that some powerful interests will be adamantly opposed.

This sentence contains a self-contradiction, from my way of thinking. For why are the powerful interests so adamantly opposed? I agree with the logic of these powerful interests, starting from their inhuman and ultimately inane point of view. They understand a great deal that so much of the left has forgotten. They are so adamantly opposed because they know the implementation doesn't really matter very much, any approximation say to the New Deal programs is far too close.

Any job guarantee that deserves the name "abolishes" (a horrible mistranslation, even though Marx used it at least once) capitalism. With it, the social and political struggle is won. It kills the true power of the powerful interests; it is socialism, it is communism, as the powerful interests have said for ever. And they are right.

Again, one cannot consistently say that "the devil is in the details", "the capitalists know what they are doing" and "capitalism is adamantly opposed to any JG". I believe that 2 & 3 are right. It looks to me like you are saying only 1 & 3 are.

Sandwichman said...

"Any job guarantee that deserves the name "abolishes"... capitalism."

Have you run that by Mosler's Wall Street buddies?

Calgacus said...

My point is that many of them know it already. Or knew it, to be sure. Statements to that effect appear when there is a popular push for full employment, or when they are trying to kill it. There hasn't been either for some time in the "developed" world. So one can judge better when there is more opposition to the JG out there, especially if we can find some minutes of the Big Boy Billionaires' Seekret Clubhouse. Maybe the world has changed, maybe people - the BBB's have grown up, or dream so much of transplanting their consciousnesses into immortal robot bodies that they have forgotten how to tie their shoelaces. That's a good thing. Does it matter for what other people should do and say?

Of course the original for "abolish" is "aufheben" & its forms, which is most commonly translated in Hegel(ian) scholarship as "sublate", a perfectly meaningless word, probably better to leave it in German. Imho by far the best translation is "resolves" (h/t to Michael Inwood's "kicks upstairs" though).

So a JG resolves capitalism. Or a JG kicks capitalism upstairs. :-)

Sandwichman said...

I'm good with "sublates."

AXEC / E.K-H said...


How MMT enlightens Washington

Egmont Kakarot-Handtke

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