Obstacles to full employment

Is full employment sustainable? For me, this is one question posed by the row between Richard Murphy and Jonathan Portes and Simon Wren-Lewis over Labour’s proposed fiscal rule.

Richard describes the difference between them thus:

I am seeking a stable, sustainable economy with full employment. They are seeking the restoration of the model of central bank monetarism that existed from 1999 to 2008 in the UK, with well-known consequences.

This is because Portes and Wren-Lewis want to use fiscal policy to inflate the economy away from the zero lower bound, so that interest rates can again be used for macroeconomic stabilization.

Richard’s desire, however, runs into a problem. Economists generally agree that at some point high employment will trigger rising inflation. What this point is is an empirical question. The fact that inflation has been quite stable since the early 90s whilst unemployment has not been makes me suspect it might be further off than the Bank of England thinks, but that’s by-the-by. Which poses the question: what should we do to curb this inflation?

The conventional view, which Simon and Jonathan take, is to raise interest rates. But Richard and MMTers are right to say this isn’t the only possibility; in theory tax rises are also an option, as could be public spending cuts or reverse QE. For me, this too is an empirical matter: my weak prior is to favour interest rates to some extent.

All of these policies, however, control inflation by depressing aggregate demand thereby tending to raise unemployment.   

MMTers rightly say inflation is a constraint upon government borrowing. But it is also a constraint upon full employment.  

Now, you could reject this by appealing to the idea of wage-led (pdf) growth (pdf). The prospect of continued full employment - and the wage rises and high demand it would bring with it  - might encourage firms to expand capacity and invest in raising productivity. That would help hold down inflation.

We know that this has worked in the past: it did so in the 50s and 60s.

I fear, though, that it might not be so successful this time. In the 50s there was a backlog of potential investments and innovations for firms to exploit. That facilitated high capital spending and rapid productivity gains. It’s not clear we have such a backlog today.

We also know that wage-led growth ultimately failed in the 70s. There are two particular dangers here. We can call them the Minskyan and the Kaleckian.

The Minskyan one is that stability eventually begets instability. Confidence that demand will stay high could incentivize companies to over-invest thus reducing profits; or encourage banks to make ever-riskier loans; or cause share prices to rise too high. We saw all of these in the early 70s. I don’t know if Richard is right to say that higher interest rates will trigger another credit crisis. But I do suspect that he underplays the extent to which capitalism can generate crises even without significantly higher interest rates.

The Kaleckian danger is that:

Under a regime of permanent full employment, the ‘sack’ would cease to play its role as a ‘disciplinary measure. The social position of the boss would be undermined, and the self-assurance and class-consciousness of the working class would grow. Strikes for wage increases and improvements in conditions of work would create political tension.

As we saw in the 70s, this can lead to lower investment and hence weaker aggregate demand and rising unemployment. I suspect this will be a problem for any government seeking full employment: capitalists have got used to decades of unemployment and so would regard its absence as weird, and this alone could depress animal spirits.

There are, therefore, big obstacles to lasting full employment within a capitalist economy: a job guarantee, as I understand it, highlights these obstacles more than it overcomes them.

For me, this is why many debates about macroeconomics leave me a little cold. They miss the point that there might be severe limits, within a capitalist economy, to how much even the best policies can achieve.

Comments

[Luis Enrique]

I once read an MMTer describe their view as "if it's technically possible, finance is not a constraint."

I like that way of looking at things, but it raises question, how close can we get to the technological frontier? I might be unfair, but some MMTers seem to take view that so long as there is unemployment, we can raise AD without inflation. Why isn't the experience of developing countries relevant here? When an African government turns to the printing press because it can't pay the army's wages, it will do so in face of mass underemployment, and that doesn't stop inflation occurring. Which is another way of asking what "full employment" means - I'm sure SWL and Portes will say they want that too.

Behind all these disagreement is simply, I think, different views on how far we are away from potential output (which is what your post is about)

[Peter K.]

"As we saw in the 70s, this can lead to lower investment and hence weaker aggregate demand and rising unemployment."

It can but does it have to? Can we substitute massive government investment? Can we lower interest rates further?

Macroeconomics doesn't leave me cold. There's low hanging fruit economically-speaking and only (large) political obstacles to getting there.

I don't believe these limits have been properly tested.

[Ralph Musgrave]

“a job guarantee, as I understand it, highlights these obstacles more than it overcomes them.” Debatable. A JG scheme with a draconian workfare element could almost eliminate unemployment. To illustrate, it would be possible, at least in principle to just tell the unemployed their benefits are henceforth conditional on their walking up and down their street keeping it free of litter and call that a “job”. Anyone refusing the work would not be counted as unemployed since they’d have refused work. Hey presto: unemployment vanishes.

Obviously I don’t advocate that. In fact I’m skeptical about JG. But the above simple scenario illustrates that JG is a potentially powerful anti unemployment weapon.

[AllanJW]

All of the 'dangers' you repeatedly warn about here seem to me to miss an obvious benefit; many, many people will be better off than they are now if we stop worrying about possible future extreme outcomes and just bloody change what we're doing now.

I'm saddened that you along with most mainstream commentators on economic issues constantly seek to emphasise ('project fear') the eventual downsides which may exist in potentia but may never occur at the farther end of the distribution of possibilities.

In looking at a normal distribution of possible future events, 'Yes', there is a tail of possible poorer outcomes at the far end but for goodness' sake couldn't we agree that the big fat set of outcomes in the middle means that it's worth setting off from here, the really shit set of ACTUAL outcomes we're in at this extreme end of the distribution right now?

The millions of people who end up with better lives as a result will thank us.

[Clint Ballinger]

Where is the inflation in these: https://en.wikipedia.org/wiki/List_of_recessions_in_the_United_States

?
Deflation and/or debt deflation is generally much more of a problem for economic wellbeing (unless you lose a war or have a crazy dictator in charge, otherwise...)
So why the constant, endless obsession with inflation? It is not the problem nor the likely future problem we face.

[Jonathan Monroe]

We never had full employment in the 50's and 60's. We had full male employment.

The "problem that has no name" that second-wave feminism responded to was socially-enforced underemployment of married women.

Whether or not "1960's Keynesianism plus 21st-century feminism" could deliver full employment for both sexes is an open question.

What is not an open question is that some of the standard of living enjoyed by 1960's male-breadwinner single-income respectable working class families was the fruit of working women being paid less than they were worth.

[JWH]

@AllanJW,

Could you summarize what you think should be done please? Or point to where it is explained more fully? It isn't very clear to me what things you are criticizing.

[Regulate Florida]

@megafuego actually existing inflation is largely housing, medicine, education, elder care, child care. Medicine and housing seem to have some pretty compelling tools available, and care should really be addressed by immigration of the billions of people presently living on less than 10 bucks per day

[Andy]

@allanjw my thoughts exactly. All these models, debates and fears start to ring hollow in the face of 2 of the greatest risks facing mankind- climate change and automation. Time for something more 'radical'.

[Peach]

A combination of stimulus and rate increases could work - higher incomes can sustain higher levels of debt. I think Richard's view of debt sustainability is over-simplified given that the U.K debtors performance in paying down debt over the crisis was strong. There is slim evidence that we are approaching a level of household debt unsustainability. DSR is well below historical averages.

[mulp]

FDR in common man termms, and Keynes in his terms, laid out the path to full employment.

Only in an economy with too much transportation, too much clean air and water, 100% sustainable food production, too much housing, zero premature death and no disability, would government have no opportunity to employ everyone who can work but has no job with income high enough to pay to live and work.

The problem with monetary policy is the Fed does not pay money to teachers to teach the skills needed for an idle worker, whether reading and arithmetic, or how to weld, or machine, or lay brick, nor does it pay for housing in the city for unskilled labor living in the rural town with plenty of sound houses in need of only maintenance, not does the Fed buy cars for the unemployed wwho have no public transit options to move between abundant vacant houses and the housing short city.

As long as there is any opportunity for capital investment, government can pay workers to build capital.

Sustainable farm production by planting trees, praire, contouring the land to retain and slow water runoff, etc, as done by FDR's favorite program, the CCC, which planted a hundred million trees per year that can often be found lining roads and stream in rural America, as well in national parks and forests. This was an investment in people in both work ethhic, networks of workers, and people who recreated in the parks much as they lived while in the CCC.

Today, forests and much land needs regeneration.

Lincoln and his party passed laws to build the transcontinental railroad to provide job opportunity after the Civil War by making it easy for the dispaced to move west by rail to the jobs made possible by railroads, like logging and farming and ranching and mining.

Today, railroads need regeneration to move workers regionally between housing and jobs, and railroads are lacking or decayed in many areas causing industry to leave. Any place cargo moved by rail takes more than two days longer than by truck the railroad needs regeneration. And for cargo trucked everyday halfway or more across the US, the railroads need serious upgrades. And any place long trains are restricted to prevent conflicts with cars and trucks, serious investment in both rail and highways are needed.

So far, I've touched on job creation everywhere, rural and urban. Just like done by government in the Civil War aftermath and in the aftermath of WWI.

The GI Bill invested in wworkers by giving them education, college yes, but probably more in the dirty collar jobs. And it invested in housing along with transportation built by government to support the need workers had to move between workk and jobs.

And in the Civil War era, telegraph to rural America was a government priority just as electricity was after WWI and WWII. Today, a huge need exists for fiber optics to every address to provide at least 50 years of future proof Internet capacity to every worker and family, just as the copper telephone wire installed everywhere by 1950 has served all the places wiithout fiber optic cable today, 70 years later. The fiber optic installed in the 90s has been upgraded in speed without touching the fiber installed decades earlier.

So, nothing has changed in the past half century, century, or ever 5000 years. In Egypt idle farmers during the flood season were employed building mouments that provide jobs today serving tourists, but more important made Egypt an economic powerhouse for millennia based on the development of project management and engineering skills.

[Avraam Jack Dectis]

.
I question the basic assumption that stable full employment is the holy grail.
.

[Nanikore]

The ZLB is a convenient excuse for macro-economists to say that really there does not need to be any serious rethinking of modern macro-economics and teaching, and once interest rates return to 'normal' behaviour we can go back to the way things were done before the crash with modellers calling the shots on macro policy and and reducing it to a largely technical operation that targets the interest rate.

But Low interest rates are a symptom of deep structural problems in capitalism. These problems were emerging over decades BEFORE the financial crash. NAIRU is also not a good way of thinking about the economy. It is purely coincidental RESULT. For example Inflation can rise because of specific CAPACITY CONSTRAINTS in an economy, even in the midst of high unemployment, a generally deflationary environment but with liquidity gluts. It's messy. But that's the real world.

[Calgacus]

"There are, therefore, big obstacles to lasting full employment within a capitalist economy: a job guarantee, as I understand it, highlights these obstacles more than it overcomes them."

Then you don't understand it. It overcomes the problem permanently. That's why Marx for one held that a capitalist economy with a JG - a droit au travail - is no longer a capitalist economy.

"Economists generally agree that at some point high employment will trigger rising inflation."

High employment does't trigger inflation. High employment fights inflation. What triggers inflation is that in a capitalist economy, high employment is achieved by the state giving more and more money to the rich, usually for some insane, destructive and inflationary purpose. The enormous amount of money and the malignant uses to which it is put are what inflates.

A job guarantee employs people by employing people. To do good stuff. Not bad stuff. Using far less money. Diabolically clever. Who'd of thought of that? - Somebody who goes to the corner grocery by walking, not by taking their private jet to go around the world in the other arc of the great circle geodesic, which is the usual way economists do and think about things.