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"Baked in the institutions" is right
In the UK for example - Mark Carney (ex-Canadian antidemocratic rat):
"The issue would be imperilling potentially the achievement of price stability. The consequence of that of course would be inflationary
Which I think crossed a line he shouldn't have - since that is a deliberate political statement."
Corbynomics is about creating more investment in the economy by simply spending the money on infrastructure and refusing to pay out corporate welfare in the form of interest to those who choose to save in the private sector. That has been signposted five years in advance of any potential start, would be subject to parliamentary debate and approval anyway, and would take a little while to get going. If that isn't 'signalling' and 'setting expectations' then nothing is.

If a Corbyn government is elected it would be the Bank of England's job, under the current arrangements, to ensure there was space in the economy to handle whatever spending the government decided to undertake. It can do that, theoretically, by assessing the output gap and adjusting interest rates accordingly.

So if there is any inflation from the government spending it would be entirely down to Carney & Co. failing to do their job properly.

That means the quote above is either a statement of incompetence, in which case the Governor should be sacked right now, or it is, in reality, a statement in support of the political philosophy of the current government and the set of people the Governor belongs to and represents - the bankers.

That single political philosophy has, with the election of Corbyn, finally given way to a real alternative. Comparing the two is instructive.

The incumbent philosophy should be familiar to everybody.

A central bank ensures there is sufficient borrowing in the economy to maintain 'aggregate demand' at 'full employment' where 'full employment' is defined as a few million people out of work give or take a few million more.
The central bank is supposedly independent, but is really politically homogenous.
Activity is based entirely upon the private sector, under roughly free market rules, operating exclusively and having access to all the resources of society.
In this model the government is just another actor in proceedings that has to carve out its space 'competitively' with everybody else by taxing, spending and borrowing.
The push is for ever smaller government with the state constantly deferring to private interests and binding its own hands ever tighter.
If anybody is left behind it is their fault, not the fault of a system incapable of maintaining real full employment - where everybody has a job and an income.

The result of this philosophy is all around us - vast inequality, massive private debt burdens, wage shares on the floor, insufficient investment, productivity trashed, and millions of people without a living income to sustain them. And of course eight years after a collapse we're still not back on our feet. It simply doesn't work for the majority.

The new philosophy is very different.

1.the state, as representative of us all, takes the resources necessary to create the critical public infrastructure and basic functions - all those that are a natural monopoly or are best treated as a natural monopoly, plus whatever is required to fulfil the critical public purpose of the people who elect them (a health service, education, etc).
2.the private sector is then allowed to play with the rest of the resources as it sees fit.
3.the state then takes what the private sector decides it doesn't want to use and deploys them sensibly for the 'nice to have' public purpose.
Within this philosophy the free market private sector is bookended by the public sector and sensibly contained - like any good nuclear reactor should be. Here the public sector gets first dibs at the resources of society and maintains the structures necessary for the private sector to operate at optimal efficiency and maximum output (for example, removing the need for 'jobs' in the private sector allows it to press on with automation).

Brian has done work on the forex issues:
http://www.bondeconomics.com/2014/02/why-rich-countries-should-float-their.html

"We saw a clear example of monetary offset in the mid 1990's. Fiscal policy tightened a lot, the Bank of Canada loosened in response, and there was no recession and inflation stayed roughly on target."
Oh but it did. Loose credit and monetary policy lead to high house price inflation, while wage inflation is crushed.
They did it because "aspiration."
the "beauty" of "aspiration" is that it is purely redistributive and upwards redistributive too: all the gains to property owners from higher property prices necessarily are someone else's loss, someone who is poorer (at least in land).
At the same time as it rewards richer rentiers it punishes poorer workers (and businesses, but they are ambivalent about it).
As several policitians have let slip "aspiration" in the UK means "bigger better house prices for those who have bought properties in the South East in the 1980s to the 1990s", and lower wages and welfare, and higher rents and less security for everybody poorer than them.
This is "private Keynesianism" (as Colin Crouch has noted), which is just government-sponsored borrow-and-spend.
I expect it is the same story in Canada.

Canada's core and headline CPI have both been below target of 2% for the past 1, 3, 5, 10, and 20 years. What is the error bound? Even if there is a band, why are they generally below the mean? How exactly have they been held "accountable." Has the Bank of Canada's charter been revoked? Has any governor been fired? has there been any parliamentary inquiry?

Further questions, is there a one-to-one correspondence between a GDP growth rate and inflation? Over what time frame. If not, why would there be a monetary offset?

> Oh but it did. Loose credit and monetary policy lead to high house price inflation, while wage inflation is crushed.

You don't consume houses. House prices are not a meaningful way to measure inflation.

You do consume housing *services*. Rent, and imputed rent for owned homes, are relevant to and already included in inflation measures.

Regardless, my point still stands...
You consume land. My main point is wage inflation and asset inflation have diverged.

"You consume land."

Ok. Please explain.

Land is consumption without production. By excluding others from a location you consume land.

In the UK for instance many older people do not bother leaving London to more northern cities ("downsize") and live off rent so they can consume land.

srini: inflation targeting has a weird statistical property. Assume (for simplicity) the BoC's makes mean zero iid mistakes in hitting its 2% target. Then the price level P will be (sorta) a random walk (with 2% drift). And the weird thing about random walks is that their long run variance approaches infinity. So it is hard to test whether or not the drift is 2%.

The neat thing about a price level path target (or an NGDP level path target) is that it does not have that property. So it is much easier to test for drift =/= 2%, and therefore much easier to hold the Bank of Canada accountable.

(An econometrician/statistician could explain it much better than I can, but you should tell the econometrician that the BoC's errors won't be iid but should be IIRC MA(25) if it targets 24 month ahead inflation with a one month data lag and one month instrument lag.)

Last time I looked at the price *level* (2012) the headline CPI was much closer to the 2% trend line than a random walk would suggest!
See here

Sure, core was below the 2% trend line, but that is exactly what it is supposed to be, since core is only used as a short-term "operational guide". If core drifts below headline, on the longer term, the BoC is supposed to keep headline at 2% and let core drift below 2%.

To answer your questions: 1% error band, but aiming at the mean. Google "Coyne Affair", and John Crow's non-renewal. I don't understand your "further questions", and they suggest you don't understand me.

Bob: "If a Corbyn government is elected it would be the Bank of England's job, under the current arrangements, to ensure there was space in the economy to handle whatever spending the government decided to undertake. It can do that, theoretically, by assessing the output gap and adjusting interest rates accordingly."

Funny you say that. Because that is exactly how the Bank of Canada currently sees its job (though it would not use those words). You are simply repeating what I am saying above about monetary offset, using different language.

(It's sort of ironic, by the way, that just before he moved to the UK, Governor Carney was listening to overtures that he become the leader of the Liberal part of Canada. (You know, the ones who just got elected, and have gotten a lot of people excited about their "keynesian" policy.) Some of us thought that a bit "problematic", as they say nowadays.)

I thought of one of your posts for my title.
https://thefaintofheart.wordpress.com/2015/10/28/the-uk-ngdp-dog-is-barking/
If I am right, and we are in real time I wondered what you'd suggest should be done? Presumably not have a rate-rising bias like Mr Carney.

"According to (simple) New Keynesian models, a (perceived) permanent increase in government spending will not help the economy escape the Zero Lower Bound. The fiscal multiplier in that case is zero."

Where does this come from? Every model that I've seen that looks remotely NK (or even RBC, because nominal rigidity is unimportant for the result) suggests that a permanent increase in government spending will permanently raise output. That is, unless the household has log preferences (I think).

Nick,

http://qz.com/380388/the-absolutely-legitimate-incredibly-useful-indian-english-word-youre-not-using/

James: definitely not raise rates. Even a price level path target, with 2% drift, would be better than the 2% inflation target, because, as Scott says, it keeps the central bank honest. It's easier to test for bias.

John: " Every model that I've seen that looks remotely NK (or even RBC, because nominal rigidity is unimportant for the result) suggests that a permanent increase in government spending will permanently raise output."

I finally get where you are coming from. Yes, if you assume that government expenditure is digging totally useless holes in the ground, or stuff that the government buys then throws away, so it's like corvee labour, so people work harder to compensate. That's a supply-side effect, not a Keynesian demand-side effect. And it does nothing to raise the natural rate of interest (unless preferences are non-homothetic in just the right way), so it won't lift the economy off the ZLB.

Ramanan: lovely link! Normally I hate neologisms, but I love this one, because it is so useful and logical, and was so pleased to read it is not in fact a neologism, but has roots going back into latin!

I don't think this is a fair characterization.

First, what an economic "theory" recommends about government intervention is purely a function of which market failures the theory allows. That's a question of tradition and culture, which evolves. A more accurate description of modern theories is that they should be rooted in mathematical descriptions of optimizing behavior. That doesn't mean they can't have search costs, collateral requirements, market power, increasing returns, a financial sector, bounded rationality, special demand for safe assets, r < g, finitely lived agents, etc. All of which can recommend fiscal policy in situations in which the short rate > 0.

Therefore it's misleading to suggest that one theory recommends one policy whereas another theory recommends a different policy. They are different approaches, but differences in conclusions boils down more to the specifics of the model.

But we see that governments pretty much always run deficits regardless of the rate, and these deficits pretty much always increase as the economy shrinks, whether or not the zero bound is hit. Government deficit spending, not interest rate policy, was the key to avoiding a great depression the last time around.

Is this suboptimal behavior? It's hard to believe that if the interest rate is 0.0000000001%, then the model doesn't recommend deficit, but once it hits a magical zero, then suddenly running deficits is a good idea. Shouldn't the net benefit of running a deficit have at least *something* to do with the growth rate of the economy? Shouldn't there be a smooth transition rather than a knife edge result? If a New Keynesian model doesn't address that, then pick a different NK model to use to answer this question. There are many to pick from.

rsj: If (long run) NGDP growth is positive, then (measured) deficits would need also to be positive (on average), to keep debt/NGDP ratios stationary. It would be better if we measured NGDP-growth adjusted deficits.

But my post was about the cyclical aspects of fiscal policy, for AD stabilisation, not asking about optimal long run debt/GDP ratios.

" Government deficit spending, not interest rate policy, was the key to avoiding a great depression the last time around."

I'm crap at remember history, but I thought the economic historians had debunked that one? Christina Romer?? Also, I remember seeing some pretty convincing Scott Sumner graphs showing the US recovery coincided very closely with Roosevelt raising the price of gold, which is monetary policy.

On the knife edge thing: I guess it depends how knife-edgy you think the ZLB is. Taking my NK hat off, I don't see a knife edge. It's just how big you want the central bank's balance sheet to be. (And Milton Friedman was a crypto commie in his Optimal Quantity of Money article, wanting a super-large central bank owning damn near everything.)

Nick:

I think it depends on what the central bank is targeting. If the CB targets inflation the output gap and measures the output gap as a percentage deviation of output from its natural (flexible price) level, then stimulus will raise output, but it will not help the CB get off the ZLB. If the CB instead measures the output gap as a percentage deviation from a linear trend, for example, stimulus will help it get off the ZLB. Interestingly enough, if a CB has an NGDPLT and the ZLB is binding, stimulus will help than if the CB has an IT.

Of course I have never understood the Market Monetarist claim that an NGDPLT would "help keep us off the ZLB". I see that asserted in a lot of places, but I have never seen anyone attempt to substantiate or come up with a reason as to why it is the case. Is it that an NGDPLT is supposed to reduce the standard deviation of the nominal interest rate? Or are Market Monetarists just assuming that an NGDPLT would be better at stabilizing the economy and will therefore prevent the ZLB from binding?

John:

Second paragraph: here's the intuition: compare a (fixed) price level target to a (0%) inflation target. If the economy temporarily hits the ZLB for one period, and Y drops below potential, than the price level drops too. Under IT people expect 0% inflation from then on. Under PLT people expect positive inflation for one period (then 0% inflation thereafter). That positive expected inflation reduces the real interest rate below 0%, which helps prevent hitting the ZLB. It's like an automatic stabiliser.

Now compare a Price Level Path Target with a 2% trend, to 2% IT. Same automatic stabiliser property. Now compare a 5% NGDP Level Path target to a 2% IT, in an economy where potential output grows at 3%. Same automatic stabiliser property.

First paragraph: I'm not following you. "Interestingly enough, if a CB has an NGDPLT and the ZLB is binding, stimulus will help than if the CB has an IT." That seems to be the reverse of the truth. Because a permanent increase in useless G will raise future Y and therefore reduce future P which reduces expected inflation temporarily and makes the ZLB an even more binding constraint.

Before we abandon inflation targeting, we should actually try it. It seems to me that monetary authorities who are supposedly targeting inflation in practice have an inflation rate ceiling so that the trend to the price level can drift below the supposed trend level. I think that a price level and a "full employment" target could work. It's worth a try. But perhaps an NGDP target would work as well because it would be less subject to the inflation rate ceiling constraint.

I do not see why New Keynesians should necessarily equate monetary policy with changes in short term interest rates.

And there is still a role for "fiscal policy" in New Keynesian thinking. During recessions with low borrowing rates and marginal costs of project inputs below market prices, an income maximizing government will increase deficit finance investment.

One missing piece that at least is not often stated explicitly is the role of the money supply in inflation

I agree that fiscal....preferably on useful projects...Will help attain full employment and maybe...probably ..... depending on what happens to total production...lead to inflation

But if the fiscal remains the same in future periods....then we may hAve the employment benefits of fiscal

But shouldn't expect inflation

So inflation requires that one continue to increase the amount of fiscal

Which eventually would require an expansion of the money supply

"Funny you say that. Because that is exactly how the Bank of Canada currently sees its job (though it would not use those words). You are simply repeating what I am saying above about monetary offset, using different language."
That may well be Nick, but it is a deliberately political and provocative statement from the Governor of the Bank of England against regime change. Something that if said by any other Civil Servant would probably lead to them being fired.

"I think we hoped for what we would nowadays call "Divine Coincidence": that if we were successful at targeting "full employment" then inflation would take care of itself. And if it didn't, then maybe we needed some additional policy lever, like wage and price controls."
The government offers a job at the living wage for everyone. That then means bullshit jobs, unemployment and underemployment are eliminated. Firms then start to replace workers with machines. No wage and price controls. No hyperinflation.
Full employment is what it says on the tin.
But I guess you don't really care about that and want to keep deliberate unemployment to screw down wages and deny that there is an alternative. And then blame the unemployed worker for not getting jobs that don't exist. Disgusting.
If the thugs in the Central Bank Mafia get a hissy fit, we put them in their place.
Please give a reason for keeping unemployment high, given the enormous costs.

"And it does nothing to raise the natural rate of interest"
Anything with a "natural rate of interest" is going to wrong.
The “natural real rate of interest” is an unobservable entity—in that it’s not a rate you’ll find charged by any bank, but a rate that has to be statistically derived. But more importantly, it is a fantasy: there is no such thing. However it is required as part of a theory in which the economy returns to equilibrium after it is hit by an “exogenous shock.”
It's just made up.
The "natural" rate is zero because that is what it would be if there was no interest on reserves or government bonds issued.

If you can make theories with the "natural rate of interest" in can I make equally valid theories with the “Labor Theory of Value” in :o

Bob: "But I guess you don't really care about that and want to keep deliberate unemployment to screw down wages and deny that there is an alternative. And then blame the unemployed worker for not getting jobs that don't exist. Disgusting."

1. Mind your manners in comments on this blog. You are in my living room, and you don't insult the host.

2. Actually, I find the MMT Job guarantee plan theoretically fascinating. It would (probably) work very well if labour and jobs were homogenous. But they aren't.

3. Stop making assumptions about my motives. And stop being an asshole.

This is very nice. I may give it to my students.

My only quibble would be that the claimed fiscal multipliers of 1 and 2 seem less general than the rest of the post. Wouldn't the multipliers depend on the specific frictions you are postulating to make policy necessary in the first place? (Maybe I'm wrong about this.)

Nick, two things: 1) isn't the Divine Coincidence assumption doing all the work in your model? If NKs drop the assumption (that "if the central bank is successful at targeting inflation, then employment and output will take care of themselves") then the central bank could, in theory, successfully hit its 2% IT, and allow fiscal expansion without offsetting, with the expectation that employment and output will increase while inflation remains stable.

2) (The following may not apply to Canadian central bank operations, but I think it holds for the US). As I understand it, the reason the ZLB provides an exception to the general NK view has nothing to do with any mysterious properties of the number zero, but because at the ZLB the return on short term gov't debt equals the return on money. But since 2008, with the introduction of excess reserves and IOR, the ZLB is no longer unique. Given the presence of trillions of excess reserves, the only way the central bank can raise rates will be by raising IOR. Therefore, when the Fed raises rates above zero, the return on short term gov't bonds will still equal the return on money (most of which is now held as reserves), creating the liquidity trap condition at positive rates.

Thus, by dropping the Divine Coincidence assumption and updating our initial conditions to reflect the current operational realities, shouldn't the NKs return to Old Keynesianism?

JW: Thanks!

The multipliers of exactly 1 and 2 only work in a very simple model. More like an extreme limiting case. But I don't think there's anything necessarily inconsistent about them.

Thomas: you got stuck in spam again. Sorry.

"Before we abandon inflation targeting, we should actually try it. It seems to me that monetary authorities who are supposedly targeting inflation in practice have an inflation rate ceiling so that the trend to the price level can drift below the supposed trend level. I think that a price level and a "full employment" target could work. It's worth a try."

Well, the BoC has been doing something very close to hitting its 2% target, on average since it started.

The "full employment" target was tried. Didn't work. Inflation became unanchored. We don't know what "full employment" exactly is, and if the Phillips Curve is near vertical, it can't work.

Jared: "...then the central bank could, in theory, successfully hit its 2% IT, and allow fiscal expansion without offsetting, with the expectation that employment and output will increase while inflation remains stable."

No! I hear this view expressed a lot, but it doesn't make sense in any (vaguely plausible) model I can think of. It's the idea that monetary policy can control inflation, while fiscal policy controls real output. In standard macro models, both monetary and fiscal policy work through the same Aggregate Demand channel. They are both pulling on the same lever.

It's almost as if people think that Y is determined by Y=C+I+G, while P is determined by MV=PY. No.

2. It's the fact that currency pays 0% nominal interest that (maybe) prevents central banks cutting the interest on deposits below 0%. People would hold currency instead. But if currency has carrying costs (it does), and is awkward to use (it sometimes is), you can push interest on deposits below 0%, a bit.

The “natural real rate of interest” is an unobservable entity—in that it’s not a rate you’ll find charged by any bank, but a rate that has to be statistically derived.
Supply and demand curves are also unobservable, but can be statistically estimated around a local region. GDP is an unobservable entity with the official numbers containing all sorts of statistical fudges. Inflation is an unobservable entity, which can be statistically estimated but there's lots of different ways to do it. Don't even get me started on "happiness index" or other nutty concepts.
But more importantly, it is a fantasy: there is no such thing.

Yes, well that can be said about a lot of things. Global average temperature? How many people live in a global average climate?

Strangely enough there's a bunch of people ascribing importance to these statistical artefacts, how about that?

The government offers a job at the living wage for everyone. That then means bullshit jobs, unemployment and underemployment are eliminated. Firms then start to replace workers with machines. No wage and price controls. No hyperinflation. Full employment is what it says on the tin.

So your plan is to eliminate jobs and pay people to stay home, in order to achieve full employment.

I suggest that under your "full employment is what it says on the tin" scenario, there will be fewer people employed and fewer hours worked, although perhaps that was also written in small print on the same tin. There might be a handful of people out there who think you are holding the tin upside down, and that in order to get more employment it would be necessary to create jobs. I mean, just putting that out there.

Tel: "So your plan is to eliminate jobs and pay people to stay home, in order to achieve full employment."

The way it works (in theory) is like this:

Assume all workers and jobs identical (yes, I know). The government announces jobs for anyone at (say) $20 per hour. And it pays with newly printed money. So if there's a recession, and unemployment, the unemployed get government jobs and the money supply automatically expands and cures the recession. Until nobody wants a government job, and the money supply stops expanding.

It's like workfare, financed by the central bank.

It's like a gold standard, only labour replaces gold.

It's like the unemployed can pan for gold money, except it's paper gold.

OK, so they aren't paying people to stay home... sorry I shouldn't have said that.

At any rate, they would have to slot new people into some government task at short notice, then having them wander out again at random times. Sure, nominally these people have "jobs" but the utility of the outcome is highly questionable. They would end up doing even more mindless tasks than what Bob is complaining about with industry.

The only thing interesting about it, is that the Cantillon effect flows on a slightly different track. So effectively the new money flows in at the bottom instead of flowing in at the top... wealth transfer to a different group of people. I have no doubt that someone would find a way to get a share of that action though. You would need ohhh administrators and supervisors and a whole bunch of bean counters to manage the scheme... that's where the real benefits would end up going, and those would all be permanent jobs, just in case a recession ever hit.

Tel: But if all workers and jobs are identical...switching workers between jobs at short notice doesn't matter.

Now, as you are noticing, if we assume diminishing marginal benefits to private jobs, and to government jobs as well, so there's an optimal relative size of government, we would need some other policy lever to get the right mix of government vs private jobs.

I think the best way to do that would be to use taxes (or maybe bond sales) to reduce the money supply whenever there were too few government workers and too many private workers. Create just the right size of "recession", in other words, that exactly the right number of workers choose workfare.

It's neat thinking about alternative monetary arrangements. The one neat thing about this scheme is that it provides a nominal anchor. Setting a nominal wage at which the central bank will buy labour is like setting a price at which the central bank will buy gold.

(I could never really get off on Cantillon effects.)

Nick: (Quote for context and so I don't have to keep scrolling up when writing this) "Second paragraph: here's the intuition: compare a (fixed) price level target to a (0%) inflation target. If the economy temporarily hits the ZLB for one period, and Y drops below potential, than the price level drops too. Under IT people expect 0% inflation from then on. Under PLT people expect positive inflation for one period (then 0% inflation thereafter). That positive expected inflation reduces the real interest rate below 0%, which helps prevent hitting the ZLB. It's like an automatic stabiliser.

Now compare a Price Level Path Target with a 2% trend, to 2% IT. Same automatic stabiliser property. Now compare a 5% NGDP Level Path target to a 2% IT, in an economy where potential output grows at 3%. Same automatic stabiliser property.

First paragraph: I'm not following you. "Interestingly enough, if a CB has an NGDPLT and the ZLB is binding, stimulus will help than if the CB has an IT." That seems to be the reverse of the truth. Because a permanent increase in useless G will raise future Y and therefore reduce future P which reduces expected inflation temporarily and makes the ZLB an even more binding constraint."

Based on your argument, PLT and NGDPLT are the same. Why not just adopt a PLT?

Suppose a central bank follows a Taylor Rule that targets inflation and the output gap (once again defined as the percentage gap of output from it's potential level). Since fiscal stimulus does nothing to change the output gap, it will not induce the central bank to change the interest rate. Suppose that the central bank instead has a Taylor Rule that targets the gap of NGDP from a linear trend. Since fiscal stimulus does raise the level of output, it will induce the central bank to raise the interest rate.

John: "Based on your argument, PLT and NGDPLT are the same. Why not just adopt a PLT?"

1. NGDPLT works better than PLT if Divine Coincidence fails.

2. The automatic stabiliser properties of both are *qualitatively* the same (for an upward-sloping SRAS curve), but NGDPLT will be more reliable, because it works even if the SRAS curve is horizontal (so only Y falls but P does not fall at the ZLB).

Nick, I can sort of see that if all jobs are identical it would therefore be easy to slot people into work at short notice because the job they are doing is no different to what anyone else is doing.

In principle you are presuming a rapid convergence into some approximation of equilibrium, such that the only remaining degree of freedom is the split between private employment and public employment.

I argue that what actually happens is that any newcomer to a job takes time to learn the ropes, and if the job is badly suited they may never learn. What the employment guarantee does is drive the system far from equilibrium. What if I told you that next week three new people are turning up at your office and you must find jobs for all of them immediately? If any of them complain about the type of work you give them, then Bob gets to come around and kick your backside for insufficient commitment to the party cause. By the way, at some random time some or all of those people will be gone again, so you can't depend on them in any way.

Seriously, your a smart guy, what would you come up with given one week's notice?

The one neat thing about this scheme is that it provides a nominal anchor. Setting a nominal wage at which the central bank will buy labour is like setting a price at which the central bank will buy gold.

Hmmm, it's an anchor if and only if the guaranteed wage does not change... but we know how this game ends. Bernie Sanders stands in front of an angry mob shouting "Starvation Wages!" even though none of that mob look like they are starving (most of them are kind of chubby). Next thing that basic wage goes up, and the money adjustments happen automatically and Bernie gets back on the rampage again.

The inflation will be driven by those upping the ante squabbles, just like in the 80's when the unions were jumping up and down about how inflation was eating their wages (took them a while to realize the whole point of Keynesian stimulus is devaluation of real wages, but they sure figured it out).

"when the unions were jumping up and down about how inflation was eating their wages"
Specifically *after* the Job Guarantee is in place trade unions will be banned and labour regulations scrapped.
This ends rent seeking among employers and employees.

The majority of people on the JG will be unskilled and from the secondary job market. And anybody else, almost by definition, likely has an obsolete skill set.

What the evidence shows is paying *unskilled* workers more means they work harder. So why not collect that for the Public Good and force businesses to replace workers with machines, accelerating the capital development of the economy.

You get *higher* levels of private sector employment against inflation and we completely eliminate a current cost - the “long term unemployed” problem.

A derivative trader will not be trading derivatives on the Job Guarantee because those skills are obsolete and serve no public purpose. A lawyer that ends up on the Job Guarantee for whatever reason will find work using their legal skills at, say, the Citizen's advice bureau - because that has a public purpose.

The Job Guarantee will use people's *transferable* skill set and help them transition to a different role. That's one of the reasons Warren Mosler calls the Job Guarantee a 'transition job'.

The Job Guarantee wage is set as it is because that is what the people coming to it are worth. There is no better bid in the market, otherwise they would not be applying to the Job Guarantee.

There is no tariff sheet in society that says one skill is more valuable than another. What you consider valuable, somebody else may consider is a waste of time and space. Who decides? Who is Solomon?

JG is at the living wage avoids disrupting the market wage structure. That's why it is as it is. There is no other bid, and no other acceptable way of deciding relative value.

The JG is as voluntary as any other work in society. Lefties that believe that they have no obligation to work believe otherwise and start making ridiculous comparisons to slavery and other such unhelpful comments. Similar with right wingers who think the JG is just 'staying at home."

"What if I told you that next week three new people are turning up at your office and you must find jobs for all of them immediately?"
They receive unemployment benefits.
I don't think you fully understand the concept. We are *creating* a job to *fit* the person.
We already do JG. It's called offender rehabilitation - or Communty Payback. In other words we can find lots and lots of work for criminals to do for nothing. Think how much can be achieved by those who are merely down on their luck who are getting paid!

South Yorkshire delivered 221,225 hours worth £1.4 million pounds to the community for 1900 offenders.

From the report:
http://www.syprobation.gov.uk/media/22311/sypt%20community%20payback%20report%202012.pdf

"Darrel was at Barnsley Wood Recycling on an unpaid work order between 16 May
and 20 July this year.

Barnsley Wood Recycling was set up in 2011 to create employment and training
opportunities for people who struggle to find work. It is a social firm and part of the
Yes2ventures parent company.

This placement was ideal for Darrel and he embraced the work, following
instructions and working to the best standard he could achieve. The order sparked
an interest in the company and he got more involved with the business of Barnsley
Wood Recycling. As he was unemployed whilst carrying out his unpaid work order
he asked if he could work as a volunteer once he had completed his hours.

He has since been working there on a voluntary basis three days a week. He is
learning new skills in recycling and restoration of timber furniture, skills that he can
use throughout the rest of his life. Darrel has learned how to use a router to ‘sign
write’ carved wooden signs which the business has since sold to a local school.

If things continue as they are Yes2ventures, the parent company, would like to
employ him to work at Barnsley Wood Recycling."

Bob: "Specifically *after* the Job Guarantee is in place trade unions will be banned and labour regulations scrapped.
This ends rent seeking among employers and employees."

My opinion of you rises. You actually do care about the unemployed, and are not just a knee-jerk lefty.

Assume the JG is in place at $20 per hour. Hold it fixed at $20. Start in an equilibrium where many workers accept the workfare. Now assume that monetary and/or fiscal policy loosens, more and more. Prices and wages rise. Fewer and fewer workers accept the JG jobs, because the real value of that $20 wage falls and falls. Eventually, some workers choose to be unemployed rather than accept the crappy $20 per hour jobs. Eventually, no unemployed workers accept the really crappy $20 per hour jobs. Because it's like working for $1 per hour, in today's money.

JG is a really neat idea for theorists to think about. I like it that economists think of policies like that. But it falls apart once you recognise heterogeneity of jobs and workers.

Might it work a bit, on a small scale, as a partial replacement or supplement for UI and welfare? Maybe. But it's not the magic cure for unemployment and price level indeterminacy.

BTW, check out Morgan Warstler's variant of the JG.

Tel: are you the same Tel who comments on Bob Murphy's blog?

OK how to explain this?
I am aiming for a more equal society over time (I am left wing.) JG is the “mechanism” for this. (Yes, you will probably disagree with this but I am explaining my reasoning)
You will probably have basic income from nationalised land and energy (nuclear power IMV.)
Eventually VERY FAR in the future once everything is automated we all end up on a state funded job so we can have an income to buy the stuff the machines produce.
Because that comment really lacks real imagination.
Add up how much a home, power, food, etc costs and set the job guarantee at that would do nicely for most advanced nations. Where prices creep up you tax away the excess profit and redistribute downwards until it stops.
What wage the private sector has to bid to take people away from JG is market determined. If they don’t bid for certain functions that then more of the economy moves into the public sector until they do.
“Where prices creep up” is a conditional. Skipping that conditional is a key ‘Watchtower’ mistake in the logical reasoning of your point.
The alternative is that prices don’t creep up and capitalists ‘pay’ for the JG via quantity expansion in the economy – which is how everybody would prefer that it was paid for.
How much the JG costs is entirely in the hands of the capitalists. If they invest, quantity expand and hire then it is very likely that it will pay for itself easily and the capitalists will be much better off than before.
That’s what happens when you concentrate on making the pie as big as possible rather than concerning yourself solely with getting the biggest slice.

(cont)
This is "virtual machine capitalism" - socialism with capitalism run on top.
Capitalists must then compete for labour from the JG pool - investing and training to receive any profits. It's the latter that is the valuable process in capitalism - just as the heat out of a nuclear reactor is the valuable bit. To get that you simply have to contain the nasty stuff using effective engineering.

That is what MMT is all about - effective engineering to make the system work properly.

If the JG is £10 per hour then capitalists must compensate people properly for doing anything else that is less pleasant than the JG job. That may be money, or it may be promises - but compete they must. It's the lack of competition in the labour market that is causing the current malaise.

If capitalists can't make a profit out of a process, then the process either dies, or if it is considered to have public value it becomes part of the JG job list.

Overtime you get towards equality as you move the bottom to the top.

What many on the left struggle with is that things still need to be made - which capitalism is very good at - and you have no other rational mechanism by which relative value is ascertained even remotely accurately.

Once you strip rents and oligopoly out of the system competitive valuation is pretty effective - particularly when you no longer have to worry about whether a business lives or dies.

It's a bad idea to throw the baby out with the bathwater. We tried that with the Russian based systems, and they don't work. That's why China changed course.

The thing about the 'captains of industry' is that ultimately they only have one vote each.

You then limit *open* immigration to countries also with a Job Guarantee and similar proposals (e.g. Universal Healthcare.) This is the pragmatic way to open borders. This is a sanction that says "improve your social infrastructure and join us."

The JG can be the GPL of the people - guaranteeing you a job and an income wherever you go.

It really dosen't have to be like this Nick. Perhaps I am a starry eyed idealist but we can end poverty, unemployment, artificial borders that divide humans.

But not enough people know what is at stake and people are too greedy and stupid to let it happen.

"Now assume that monetary and/or fiscal policy loosens, more and more. Prices and wages rise."
You are stuck in equilibrium, Neo :)

The simple mistake in your thesis is to make monetary and fiscal policy too loose and make prices and wages rise. That violates the principle of functional finance and would never happen in an MMT situation. It doesn't happen in the current situation either.

It is, in effect, a straw man.

The JG is an auto-stabiliser - both on the spending side, and by solving the job match problem (individuals on the JG always match a job - since one is created if it doesn't previously exist).

What you are essentially saying is auto-stabilisers don't work. Yet the evidence on the ground is that they work very well indeed.

Tel: are you the same Tel who comments on Bob Murphy's blog?

Yes. Is that a good thing or a bad thing?

Banning trade unions is simply not going to happen in any democratic nation. Some of the exceptional union powers might be nibbled back, even perhaps a handful of corrupt union officials might be weeded out but you know even those steps are extraordinarily difficult. If you check the story of Craig Thomson, he used his union issued credit card to visit brothels, and the police had the receipts and they still couldn't successfully prosecute him for any serious wrongdoing (he originally faced a conviction with 3 months in prison, but managed to wriggle out of it on appeal because somehow the inept Victorian prosecutor had filled in the wrong charges on the paperwork). The same union that hired Craig Thomson to spend the members money on his own entertainment also "lost" the financial records:

http://www.smh.com.au/national/thomson-records-missing-20110826-1jem5.html


Well-placed health union sources told The Saturday Age yesterday that industrial umpire Fair Work Australia and an external auditor of the union in 2008 had found in separate investigations that records for the period 2002 to 2007 had ''disappeared''.

Fair Work has been probing the financial management of the national office of the union under Mr Thomson since April 2009 when a request was lodged with its predecessor, the Australian Industrial Registry.

No business would ever get away with that, but unions regularly do and the "Fair Work Australia" is notoriously lenient on unions and hard on employers. If they cannot even be made answerable on basic items, forget about ever taking major action.

Assume the JG is in place at $20 per hour. Hold it fixed at $20. Start in an equilibrium where many workers accept the workfare. Now assume that monetary and/or fiscal policy loosens, more and more. Prices and wages rise. Fewer and fewer workers accept the JG jobs, because the real value of that $20 wage falls and falls. Eventually, some workers choose to be unemployed rather than accept the crappy $20 per hour jobs. Eventually, no unemployed workers accept the really crappy $20 per hour jobs. Because it's like working for $1 per hour, in today's money.

That's not going to happen either, there's no way the activists will allow inflation to eat away their valuable income stream. Take a look at the example provided above: "Barnsley Wood Recycling" was created to accept funds on a government contract, it existed precisely as long as the government money kept coming, and now when I look it up, the business has been wound up. Essentially, what happens is that government pays some organizer to take unemployed people and give them something to occupy their hands for a while (that's what I mean by find jobs for them to do). The people may learn something in the process, even feel good about staying active, but the real benefit goes to the people who are paid to supervise. Now you have a political class with a vested interest in keeping that system in operation. Some of them may be very good people, and they feel they are doing very good work, so they will not allow it to fade away.

We have seen all this happen already in Australia. First we had the direct government approach with the Commonwealth Employment Service (CES) and from personal experience I've never seen such a dead end place in all of my life, everyone I knew at the time tried the CES at least a few times, everyone gave up. Finally the government also gave up on the CES because it was appallingly useless.

Then came the private agencies trying to find jobs for the unemployed, those were a little bit better, but still not much good. They soon figured out how to work the system for maximum reward, sending people off on training course after training course. Those training companies made huge money, and a handful of people found jobs. For the most part they found ways to shuffle the unemployed sideways onto disability pensions. Gradually the whole disability system became overburdened so now they are revamping that with the NDIS and that's going to be even more expensive. In Australia we have relatively healthy young people claiming their heroin addiction as a disability preventing them from working, government say OK, here's some extra money to cover your expenses, don't worry about looking for work.

Now we have "Work for the Dole" starting up (we tried it already back under John Howard, then got rid of it, now it's back again) and the jobs they find for these people are the really menial jobs like picking up trash, they don't teach skills. City councils are being handed a bunch of unemployed people and told to figure out what to do with them. The get them raking leaves, or cleaning the roadside, changing the paperclips on piles of useless council paperwork that never served a purpose in the first place.

There's also a fundamental problem with the concept of raising the price of labour by forcibly raising the supply of labour. This presumes some great mystical demand creation force, which I guess is supposed to be the money printing. Thing is money printing does not create demand, it creates a wealth transfer (via Cantillon effect) meaning that somewhere else in the economy the wealth that would have been spent now cannot be spent, because it has been transferred away. Governments do not create something out of nothing, no matter how you try switching the pieces around the physical world will insist these things balance out.

This is "virtual machine capitalism" - socialism with capitalism run on top. Capitalists must then compete for labour from the JG pool - investing and training to receive any profits. It's the latter that is the valuable process in capitalism - just as the heat out of a nuclear reactor is the valuable bit. To get that you simply have to contain the nasty stuff using effective engineering.

Because socialism has never done anything nasty... other than murder maybe 100 million people give or take a few train loads, let's just hit that mental reset button, then go back to plan A for the first time. The one great lesson of history is that no one learns from history.

The whole point about a virtual machine is that it is a self contained system, ideally it should be impossible to figure out from the inside of the virtual machine whether it is a real system or not. Your plan is to extract seemingly infinite supply of goods from some caged capitalists while simultaneously pretending that no wealth transfer is in effect here. Do you see a small problem?

It's an analogy.
"other than murder maybe 100 million people give or take a few train loads, let's just hit that mental reset button, then go back to plan A for the first time. The one great lesson of history is that no one learns from history."
Completely hysterical.
So, could you point out where in my policy proposals people will die?

Bob, I'm sure it was completely hysterical for those people who died in the various famines, political purges, forced labour, and quota killings. Must have been a laugh a minute.

If you want to study the history of socialism and what went wrong I can point the finger in a likely looking direction. You will need to put the time into it for yourself, there's some great material out there. Here's quick half hour summary, not the full answer, just a place to start:

http://tomwoods.com/399

This is a good one, but very brief, so come off sounding a bit glib. Obviously there's a limit to what you can do in a very small space. There's links provided though, for backing details.

https://youtu.be/Q_2HuEaCRnI

"FP037 Why Communism Failed in under 5 minutes"

"This is "virtual machine capitalism" - socialism with capitalism run on top. Capitalists must then compete for labour from the JG pool - investing and training to receive any profits. It's the latter that is the valuable process in capitalism - just as the heat out of a nuclear reactor is the valuable bit. To get that you simply have to contain the nasty stuff using effective engineering.
Because socialism has never done anything nasty... other than murder maybe 100 million people give or take a few train loads, let's just hit that mental reset button, then go back to plan A for the first time. The one great lesson of history is that no one learns from history."
OK. Can you specifically point out where millions of people will die when the Job Guarantee is introduced? I don't want links to videos. Because if you don't have a mechanism for the supposed disaster then what you are doing is spreading lies and deciet via McCarthy-style tactics accusing anyone to the left of you of being a Red.
Alternatively, you could get behind MMT's very reasonable proposals, that contribute to aggregate demand and profits and make the labour market an actual market. 'No deal' is on offer. Why is competition and increasing freedom a bad thing? Is there any good reason why employers should pay below the living wage?
It's amusing that you think if the employer fails to pay the rent, or the energy bill he must suffer consequences and possibly go out of business, but paying workers *below a living wage* is fine. Are you fine with in-work welfare benefits "topping up" wages?

Until then you are going to constantly get questioned, because what you have doesn't deal with the problem of 'effective demand' whereas MMT does.

Keynes demonstrated aggregate demand is not enough 80 years ago.

And that means your suggestions will, in the United States, leave up to eight MILLION people, and probably more, out in the cold. Literally unless they can find space alongside many others in the drain pipes under Vegas.

This is a really great 6 part series, I'm getting sucked into this and using all my network quota:

https://youtu.be/lGMJuhGWZSw

"Communism - The Promise and the Reality"

Bob, you are trying to say that every proposal should be presumed good unless the exact details of what's going to go wrong can be enumerated in advance. That sounds ridiculous to me.

Your background presumption is that capitalism is "nasty" and that socialism is somehow "nice" in comparison. I'm unwilling to allow the proponents of socialism to conveniently throw the murders of history down the forgettery. Socialism (in a whole range of forms) has been tried by various people at various times and it fails with great consistency. Where it does not collapse completely, it stagnates into grinding poverty like North Korea which must be one of the most high inequality nations on Earth. You have the Dear Leader so fat he can barely walk, while the people marching along behind you are like stick men. If there's anything that deserves the tag "nasty" then without a doubt socialism/communism/Marxism would deserve that.

In terms of the specifics of your proposal, I've already explained my best guess about what's going to happen. The rewards will end up going to a vested class of administrators who run those supposed "job creation" programs. They cannot logically create additional supply in the labour force while also creating higher wages because supply and demand don't work that way. As a consequence, they create keep-busy jobs that produce vastly less than they cost, in effect slurping people out of the real labour market and putting those people under the control of the (now very powerful) program administrators. Eventually those programs get bigger, not smaller, and you gradually eat away at productive capacity, then just keep printing that money in the belief of Keynesian demand creation. To some extent that's already happening in Australia, you can check the stats but something like half of all government spending goes into some type of welfare program and it keeps getting bigger. We have tried all sorts of schemes, including "Work for the Dole" which is not much different to your job guarantee, and none of them have produced great results.

Tel: I was just curious.

Tel and Bob: you two are wandering waaaay off-topic. Job Guarantee is just on-topic, since it's (a hybrid of) fiscal (and monetary) policy. And it's sorta Keynesian, if we stretch "keynesian" a bit.

Perhaps we should talk somewhere else ;)
http://pastebin.com/QMqhq3wa

"The rewards will end up going to a vested class of administrators who run those supposed "job creation" programs."

As opposed to the vested class of capitalists who run the current supposed "job creation" programs.

All of which currently oversupplies luxury fripperies to the wealthy while failing to supply sufficient needs to the less well off. Hence homelessness, poverty, unemployment, lack of business investment and poor productivity. All while constantly creating financial bubbles that blow up the world for decades, and generating pointless 'make-work' jobs in the pension, PR, advertising and marketing industries.

It's all the same really.

It's very simple. Creating jobs and matching people to them runs out of matching capacity very quickly - particularly as productivity improves with robotic technology. Increasingly the private sector needs brain surgeons and most people are simply not capable of being brain surgeons.

Eventually you have to take the people as they are and create jobs for them. Because they need something to do with their time.

You have to have a mixed system. The nuclear engine of capitalism has to be contained in an appropriate containment vessel to stop it creating damage to the environment.

Nowhere has tried the Job Guarantee, because no system has ever tried to create specific jobs for the people that need them. All other systems have been designed as punishments rather than social care to deal with the reality of capitalism that it is systematically incapable of employment everyone.

"I used to be a New Keynesian, until the recent recession"

What are you now?

sam: I'm a bit more monetarist.

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