Re: Full Employment is what?

[Paul Davidson <pdavidson@xxxxxxx>]

At 06:09 PM 5/29/01 -0400, Warren wrote:


> paul davidson wrote:
>
> > At 12:40 PM 5/29/01 , Warren wrote:
> > >Right.
> > >
> > >I like to point out that the logic is that the private sector
> wage will always
> > >be
> > >slightly ahead of the JG wage in order to attract needed
> workers
> > >from the JG pool.
> >
> > How much slightly head to select workers from the ELR pool? 
> After all
> > unless effective demand exogenously increases employers will never
> want to
> > "need" ADDITIONAL workers from the ELR pool.
>
> Right.  There could be an equilibrium level of elr workers, with
> millions going
> back
> and forth from elr to private sector on a continuous basis.  But
> that 'stability'
> assumes
> quite a bit of unlikely happenings, including a stable net disire to
> save, constant
> animal
> spirits, etc. 


Yes and if with more income people the population has a net positive
desire to save n more, while nobody in the private sector has a net
private desire to spend more,  then the ELR ranks will swell.

> That's where the next part of
> Full Employment and Price Stability
> comes
> in.  The politicians 'count bodies' in the elr pool and determine
> whether it is too
> big or
> too small, then conduct discretionary fiscal policy accordingly. 
> And yes, as you
> stated,
> this looks much like current policy where we count unemployed and
> presumably do the
>
> same.  So the actual operational process will be very familiar with
> policy makers
> and the public debate will be on much the same lines.  However,
> underneath, as
> FEAPS points out, there are substantive dynamic economic differences
> between
> managing a pool
> of unemployed and a pool of elr national service workers.
>
>
> > (After all that was the
> > raison d'etre for WPA and PWA -- government employer of last
> resort
> > --policies under the Roosevelt Administration during the great
> > depression.  The only problem was there was so my
> unemployed  and not
> > enough government funding of these WPA and PWA agencies to employ
> all who
> > were willing to work.
>
> Yes, govt continued to act as if it were revenue constrained throughout
> the 30's.
> Elr works when govt realizes it is not revenue constrained per se.
>
>
> And when War broke out, the government placing
>
> > contractual orders for war material increased effective demand so
> much that
> > the WPA and PWa workforce was completely depleted [ also
> military
> > conscription] and the private sector induced housewives and others
> who were
> > not in the labor force to take a job -even doing what in those days
> was
> > considered "man's work", e.g.,Rosie the Riveter.)
> >
>
> Yes!
>
> >
> > In the bsence of an exogenouys increase in effective demand,
> with
> > productivity increasing employers require fewer "needed"
> workers. thereby
> > swelling the ELR pool no matter what the wage differential.
> >
>
> Yes, which would trigger debate for tax cuts/spending increases to shrink
> the
> pool.  That way most people 'pull' for the 'good stuff' like labor
> saving devices,
> more imports, etc. as opposed to today where they often take the 'wrong'
> side
> of the economic argument out of self interest.
>
> >
> > >  This is qualitatively different that saying the JG wage
> must
> > >be set
> > >below the private sector wage.  The JG wage could be set at
> any level, and
> > >market forces will effectively make the JG wage the 'minimum
> wage.'
> >
> > Yes, the ELR wage is the minimum wage  and it could be
> significantly
> > arithmetically and statistically lower than the the market
> wage.
>
> Yes, particularly if it is a high prestige, productive type of
> employment, so that
> private sector employers have to offer a much higher wage to attract elr
> workers.
> And vice versa.  (either you 'believe' in markets or you
> don't!!!)

Not quite Warren, I believe that once the constraint of a lack of
effective demand is removed by government policy to stimulate additional
private sector spending then markets are effective in meeting that
demand.

But as the dotcom bubble indicated, and the movement of many high
prestige CEO and mangers FROM OLD STANDARDIZED AND ESTABLISHED
ENTERPRISES to dot com  enterprises  shows, the  MARKET
DIDN'T WORK TO WELL! Many of those expensive homes in Silicon Valley are
now up for sale and, I am told, residential property prices are going
down as these prestigious managers (and some go-go fund managers and even
some venture capitalists)are joining the unemployed !

The solution to the so called dotcom boom (bubble) was not a
higher rate of interest as Greenspan  enforced -- but a LOWER rate
of interest (see page 322 of the GT).

> > That is
> > why I called ELR the naturtal rate of unemployment with a humane
> face----
> >
>
> That and much more, as FEAPS begins to detail.
>
> >
> > But with compassionate conservatism in the White House, given the
> level of
> > effective demand, the White House could significantly increase
> the
> > differential between the market wage rate and the ELR rate in order
> to give
> > self-interested workers a "market incentive" to get off
> their duff and seek
> > out a productive job rather than a make waste on.
>
> ???  I don't understand that one.


Government projects can ,as the various East European experience with
communism has shown, can create jobs without producing things that
consumers want!  And  maximizing CONSUMPTION should be the end
goal of all economic activity --until, as Keynes noted in Economic
Prospects For our Grandchildren, the economic problem is banished. The
one thing about the entrepreneurial system is that if private sector
market demand increases entrepreneurs tend to increase production to
respond to that increase.  It is that what I mean when I say I
believe "markets work".

>   Remember, the 'source' of
> elr is 'monetary'
> in that the private sector needs the govt's spending/unit of 
> account
> only to pay taxes and net save, by definition and as a matter of
> accounting.

Yes and definition and accounting identities do not "prove"
anything--The latter just show the ex post result and the former are, as
the ECONOMIST magazine noted several years ago,  are introduced by
economists when they are tending to lose an argument.

The problem that your system has is  (1) how do you explain that
some economies use one type of money (often a foreign currency such as
the dollar) to settle contracts among private sector buyers and sellers ,
and another money to pay taxes; 
(2) why do people earn and get paid more chartalist money during an
accounting period then their tax liability? And if your response is for
net savings (as suggested above) the query is with flexible exchange
rates (which I believe you advocate as a necessary condition for a
successful ELR in an open economy), why can, and do people in country A
often try to net save via financial assets denominated in the money of
country B. (and if you argue via accounting that for every buyer there
must be a seller and therefore it does not matter-- I suggest that 
argument does not wash to explain  disruptive (to the real economy)
speculative movement in any financial markets. (For example when I went
to graduate school way back in the 1950s, one professor would ask in an
examination question, since in October 1929 there was the same volume of
buying as selling, how do you explain the Stock Market crash? [Relying on
accounting identities  wouldn't help and can actually be
misleading.]

> So even though in the case of the
> US elr would be enacted 'after the fact'
> as the country has run over 200 years without it (pretty much) elr is
> still
> the 'base case' from a monetary perspective.  That is, the govt
> imposes a
> tax and then lets the tax payers know what they need to do to earn
> what's
> needed to pay the tax.  In this case that's the elr program. 


Does this mean you would tax the ELR workers at close to 100% of their
wage? or  zero percent -- since they would barely earn a living wage
-- and even George W. suggests an income level well above the current
minimum wage before ant taxes are imposed.

> And, therefore,
> the private sector 'levers' off of all that.  For example, it must
> pay higher than
> the elr wage to compete, etc.  Once the elr is in place, think of it
> as
> if it came first for purposes of this analysis.

I am not worried about the chicken vs. egg problem.  Your think it
comes first is merely assuming that the ELR policy is exogenously
activated.

> In my Palestinian economic plan
> (also at mosler.org) or the UMKC public
> service program, this is all easier to visualize as there are no pre
> existing
> institutions to confuse the perception of cause and effect.

Just like it is dangerous to generalize from a Robinson Crusoe 
economy (which is a nnonmonetary economy -- even when Government Robinson
mandates the work for his man Friday. It is very dangerous to use an
analysis where there are "no preexisting institutions" to argue
that the entrepreneurial (non-neutral contractual money using) economy
would operate just as this "no preexisting instutuion"
economy.

In the UMKC buckaroo program you  are dealing with a model which is
more analogous to the Robinson Crusoe-Friday closed economy --
where  the buckaroo merely serves as a unit of account and does not
function as money does in an developed entrepreneurial economy (e.g., the
employer in the buckaroo system already "knows" with certainty
there will be a demand for the product of his outppers. And even if there
was no demand for their output, the Soviet factory could not go
bankrupt!
(Barkley help me -- what was the name of the East European
economist who I think called such a system -- a soft money (or was it
soft demand) constraint system?)

> > And the money we save by
> > paying ELR less could be used to further cut the income tax rate for
> "those
> > who are productive and pay taxes".
>
> OK.  Two things here.  First, govt isn't revenue constrained
> per se, so I'd change
> the above language.  But point well taken.  They could think
> that way.  But if we
> assume they understand the actual dynamics, they would cut taxes if they
> wanted
> to shrink the elr pool and increase private sector employment.  The
> risk is that
> if the elr pool is too small, it will no longer be a buffer stock that
> buffers the
> wage
> structure of the economy.  Like you, that risk doesn't concern me
> all that much,
> as it's hard to find evidence that inflation hurts growth, etc.  But
> others are
> concerned.


If they are so concerned, then the ELR is not politically feasible-- as
long as the economy is not in a GREAT DEPRESSION.

> And they can exercise that
> concern without leaving people in the streets, etc.


But where else will the homeless stay -- Apparently even some workers who
earn minimum wage rates must live in "abandoned  cars, etc. ,
according to some labor economists.


> >  So in the hands of the
> wrong political
> > philosopky, ELR could be fare from a humane face.
> >
>
> True.  Just look at the Stalin era, etc.  You either believe
> in
> 'democracy' or you don't, as well.

Democracy has nothing to do with it as the democratic election of George
W. shows -- and as Sven clearly points out regarding the shrinking of the
welfare state in Scandinavia.

What we must appeal to is people's reasoning and that requires more than
accounting identies --for we all not that by accounting identities (and a
few foolishly absurd implicit assumptions), supply-siders demonstrated
that reducing government expenditures and increasing tax rate reductions
would wipe out the deficit in the Reagan years-- and bring us unbridled
prosperity forever.

> >
> > As my earlier quote from my 1972 EJ article suggested -- given
> societies
> > values , I prefer "cheap money" to encourage private
> sector increases in
> > effective demand --.
> >
>
> And that can be done with elr.  The pool will be smaller, that's
> all.  Maybe even
> 0, due to enough 'cheap money.'  Fine!  That's not at all an
> argument against elr.


It is if the alternative is to encourage (or induce) private sector
spending to assure full employment -- so that no ELR is necessary.


> >
> >   And if that fails to generate full employment (even with
> a close to zero
> > interest rate, e.g., Japan) for the government to more directly (via
> the
> > "socialization of investment as spelled out in the GT)
> stimulate more
> > contractual orders from enterprise and therefore increase the demand
> for
> > "needed" workers at the market money wage rate -- until
> full employment is
> > reached
> >
>
> Fine!  But meanwhile offer the 10 million+ unemployed Americans a
> national
> service job while you pursue the above policy.  These ideas are not
> mutually
> exclusive!!!

Offering jobs because the Clinton  and George W administration makes
a fetish regarding balancing the government (overall) cash budget
annually makes economic sense -- but not political wisdom.  As A
sage once said "It is not enough to be good (i.e., identify the
correct principles to solve the problem) you must also be clever (i.e.,
package the solution in a politically acceptable way).

> > I guess I am still a
> believer in the entrepreneurial system as the most
> > progressive system that mankind has devised -- provided that the
> problems
> > of an excess demand for liquidity and hence too small  point of
> effective
> > demand can be eliminated by policies spurring private
> enterprise
> >
>
> Then elr is for you.  It hires only 'off the bottom' when the
> private sector has
> not yet
> reached these people.  The private sector gets the pick of the
> litter all of the
> time.


The difference BETWEEN US is that I would try every possible means to
induce the private sector to hire the full emplloyment level  -- and
I believe, that proper policies could do this! (see my book POST
KEYNESIAN MACROECONOMIC  THEORY).

ELR is, in my view, a second best solution to the unemployment problem
because governments will not, and often cannot especially in some open
economy cases) encourage sufficient additional private sector
spending  despite high levels of unemloyment domestically.

But solving the unemployment problem via either ELR or via
Davidson private-sector demand increasing policies per se, does not solve
(1) the domestic inflation problem and the resulting arbitrary
distribution of income, (2) the Thirlwall's Law balance of payments
constraint problem for countries [other than the US], (3) and for making
speculation merely bubbles on the steady stream of enterprise rather than
having enterprise  as bubbles on a whirlpool of speculation.

In POST KEYNESIAN MACROECONOMIC THEORY, I suggest other policies to help
solve (1), (2) and (3)  above --while also instituting a
private  sector demand increasing policy. I think it is impossible
for ELR per se to solve all these problems except by an accident of
amazing coincidences  involving price and income elasticities --
even with a flexible exchange rate system as the only additional policy
-as some ELR proponents seem to suggest.

Paul

Paul Davidson

Editor, JOURNAL OF POST KEYNESIAN ECONOMICS

Holly Chair of Excellence in Political Economy

Economics Department - University of Tennessee

523 SMC

Knoxville, Tennessee 37996-0550

work phone: (865) 974-4221

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