MMTed - Home Page of Public Education in Modern Monetary Theory

Video Transcript: (use scroll bar as required)

Now in MMT, we deal with the inflation issue by contrasting two buffer stocks that are available to a currency-issuing government that wants to maintain price stability.

An unemployment buffer stock, which is the conventional way and the employment about the stock. Now, one of the problems of using the unemployment buffer stock mechanism, which is the way we deal with inflation pressures in the economy now, is that it's a very successful way to discipline price pressures in the market because it creates unemployment and makes workers reluctant to push for wage increases and it forces business firms to suppress their price decisions because sales are dropping off and they don't want to lose market share.

So it's an effective way of dealing with price rises. But the problem is it it's accompanied by massive losses. Just the massive GDP losses of the lost production arising from the unemployment are huge. But then there's a whole lot of other pathologies such as that that are impacted on the individuals who have to bear the unemployment life. They get rising sickness, substance abuse. They were subjected to rising incidence of mental illness. Some of those things then lead to family breakdown, rising crime rates, rising poverty rates, social instability, regions of the industrialised and the workers who endure a long term unemployment lose skills and make it harder for them to get back into the labour market if it grows again.

And then the overriding problem of using unemployment in this way is that what do you do for an encore because you're not addressing the underlying tensions that created the price pressures in the first place.

The benefits of full employment are quite clear - when you have a fully employed economy, there's income stability, workers can manage their own risk, they enjoy high degrees of self-esteem, they have training ladders available to them because firms are wanting to maintain their chasing around for workers to to employ in a growing economy. So they offer training and skill development programmes. Poverty rates for communities are lower.

And a really important one that's often overlooked is that you get high degrees of inter-generational stability because the children learn from observing their parents going to work that that's the path for them. And we know from research evidence that children grow up in jobless households, inherit the disadvantages of their parents. And as adults then start encountering job instability and movements in between unemployment and work and all the rest of the disadvantages.

So in MMT, we favour the use of a job guarantee as an employment buffer stock.

What is it? It's an unconditional job offer at a socially inclusive underline wage rate. Social inclusive means that the person it's not a poverty wage rate. The person can participate fully in society, go to the football, go to the opera, go out to dinner once a week or whatever it is is the norm. Now, why is this a way of of maintaining inflation control? Well, because you are offering a social inclusive minimum wage, the government is buying labour that's not wanted in in the non-government sector at a fixed price.

So imagine the economy's inflating. If the government comes in and imposes restrictive fiscal and monetary policy, it would normally create an employment. But in employment buffer stock economy, it's just redirecting employment from an inflating sector to a fixed price sector.

This has massive benefits relative to using unemployment. But I emphasise it's not a panacea. It's only better than using unemployment.

Now, a lot of people say, well, what would these workers do? And the critics always say they'd just be lying around doing nothing. Well, our research has shown that the type of jobs that could be productively deployed in the in the job guarantee sector are limited by your imagination. And they include personal care services, environmental care services, public infrastructure and if you want to push the limit, then we can evolve the concept of meaningful work and evolve the concept of what productivity means into a much broader concept of adding value to society rather than to just a narrow emphasis on adding to private profit. So think laterally for a moment.

We could offer jobs to surfers in a job guarantee world. What what would they do? Of course surfing and have fun. But what would they do to add productivity to society as a reciprocation for having a secure job? Well, I live very close to some of the best surf beaches in the world. And even this summer we've had a high incidence of drownings all along our beaches in Australia. Well, who knows the beaches and water safety the best? Surfers! So what would they do? They could take water safety classes for schoolchildren, highly productive outcome, reducing costs to society and giving those workers stable employment.

This is thinking laterally, pushing the envelope of what we mean by meaningful work. And the last thing I'd say is why we value full employment so much is because of our identity and our social position and our feeling of self-esteem is tied up in work.

And when a worker loses their job or doesn't have a job, merely sustaining them on unemployment benefits is not sufficient to meet those other elements of work that is so valuable to our psychology and our mental health and our sense of participation in society.

End of Transcript

Study Notes:

Let's take a look at the concept of a Job Guarantee as an employment buffer stock and an essential element for MMT's macroeconomic stability framework.

We now turn to policies that can be used to contain inflation. The MMT approach to inflation control compares two buffer stocks options available to government. In this context, a buffer stock is just a stock of people that goes up and down with the economic cycle.

The two buffer stocks we compare are:

Unemployment Buffer Stocks: Inflation is controlled using monetary policy to increase interest rates and/or fiscal policy to cut spending/hike taxes, which reduces spending in the economy and creates a buffer stock of unemployment. The unemployment disciplines workers' wage demands and stops firms from pushing up prices. It is a very costly and unreliable approach to achieving price stability.

Employment Buffer Stocks: The government makes an unconditional job offer to any person who desires to work at a socially-inclusive minimum wage and other benefits, which maintains full employment during periods of policy tightening. This approach, termed the Job Guarantee in MMT, controls inflation by reducing spending in the non-government sector and shifting displaced workers from the inflating sector to the fixed price Job Guarantee sector.

Both buffer stock approaches introduce so called inflation anchors - that is, the buffer stock provides the price control. The idea of using buffer stocks to stabilise prices has a long history in agricultural markets.

Unemployment buffer stocks

The video discussed the massive costs that mass unemployment inflicts on society. A policy strategy that uses unemployment to promote macro stability not only results in substantial, daily GDP (income) losses, but also forces those who are already disadvantaged to bear most of the personal costs, which include, physical and mental health issues, family breakdown, increased propensity for substance abuse, skill losses, social alienation, and intergenerational transmission of disadvantage.

Since the mid 1970s unemployment in many economies has remained at high levels. In addition, low quality, casualised work has emerged in the face of the persistently deficient demand for labour hours by employers. Underemployment acts in a similar way to unemployment by operating as a disciplining force on workers’ wage aspirations and demands. It weakens the capacity of workers to secure nominal wages growth. This labour wastage temporarily balances the conflicting demands of labour and capital by disciplining wage demands of labour. Similarly, the decline in spending (as unemployment rises) suppresses the ability of firms to increase prices to protect raise real margins.

Persistently high unemployment not only undermines the current welfare of those affected and slows down the growth rate in the economy below its potential, but also reduces the medium to longer term capacity of the economy. The erosion of skills and lack of investment in new capacity means that future productivity growth is likely to be lower than if the economy was maintained at higher rates of activity.

On any reasonable grounds, this approach is very costly and ultimately, unworkable in a modern economy. High and sustained levels of unemployment undermine the social and political stability of a nation.

Employment buffer stocks

Under a Job Guarantee (JG), the government provides an unconditional, open ended job offer at a socially-inclusive minimum wage to anyone who desires to work. Instead of a person becoming unemployed when aggregate demand falls below the level required to maintain full employment, the person is able to enter the JG workforce. Thus, the JG pool expands (declines) when private sector activity declines (expands). Hence the JG fulfils an absorption function, which minimises the costs associated with the flux of economic activity when aggregate spending fluctuates.

The JG would offer:

Socially-inclusive minimum wage, which would thus redefine the lowest wage paid in the economy. It would allow workers to fully engage with society according to usual norms.

Holiday and sickness pay.

Superannuation plans

Training opportunities

Other universal benefits - education, health care, legal aid, subsidised public transport, child-care, etc.

Choice of hours

The JG functions as an automatic stabiliser because it fluctuates up and down with the economic cycle. When the private spending is weak, the JG pool would rise and vice versa. The private sector can always recruit workers from the JG pool by offering higher pay and/or better conditions.

The JG is a superior price anchor. When inflationary pressures emerge, the government has to tighten policy settings. But, instead of creating unemployment, as they do now, they would see workers shifting from the inflating private sector to the fixed price JG, which ultimately curtails the inflationary pressure.

The JG is thus more than a public sector job creation strategy. It is actually intended to be a macroeconomic stability framework designed to deliver both full employment and price stability.

Why not just create well-paid jobs?

The JG does not replace the need for a strong commitment to well-paid public sector jobs. In the absence of inflationary pressures, the JG pool would be kept very small and it would always be preferable for the government to maintain high levels of economic activity and to create stable, well-paid jobs in the public sector.

But when inflationary pressures exist, the last thing the government should be doing is competing with the non-government sector for resources at market prices or creating unemployment.

If you want to read a very detailed report we produced in 2008 then download - Creating effective local labour markets: a new framework for regional employment policy

3.5 Buffer Stocks

Study Notes: