My proposals remain:

1. A full FICA suspension:

The suspension of FICA paid by employees restores spending which supports output and employment.
The suspension of FICA paid by business helps keep costs down which in a competitive environment lowers prices for consumers.

2. $150 billion one time distribution by the federal govt to the states on a per capita basis to get them over the hump.

3. An $8/hr federally funded transition job for anyone willing and able to work to assist in the transition from unemployment to private sector employment.

Call me an inflation hawk if you want. But when the fiscal drag is removed with the FICA suspension and funds for the states I see risk of what will be seen as ‘unwelcome inflation’ causing Congress to put on the brakes long before unemployment gets below 5% without the $8/hr transition job in place, even with the help of the FICA suspension in lowering costs for business.

It’s my take that in an expansion the ’employed labor buffer stock’ created by the $8/hr job offer will prove a superior price anchor to the current practice of using the current unemployment based buffer stock as our price anchor.

The federal government caused this mess for allowing changing credit conditions to cause its resulting over taxation to unemploy a lot more people than the government wanted to employ. So now the corrective policy is to suspend the FICA taxes, give the states the one time assistance they need to get over the hump the federal government policy created, and provide the transition job to help get those people that federal policy is causing to be unemployed back into private sector employment in a more orderly, more ‘non inflationary’ manner.

I’ve noticed the criticism the $8/hr proposal- aka the ‘Job Guarantee’- has been getting in the blogosphere, and it continues to be the case that none of it seems logically consistent to me, as seen from an MMT perspective. It seems the critics haven’t fully grasped the ramifications of the recognition of the currency as a (simple) public monopoly as outlined in Full Employment AND Price Stability and the other mandatory readings.

So yes, we can simply restore aggregate demand with the FICA suspension and funds for the states, but if I were running things I’d include the $8 transition job to improve the odds of both higher levels of real output and lower ‘inflation pressures’.

Also, this is not to say that I don’t support the funding of public infrastructure (broadly defined) for public purpose. In fact, I see that as THE reason for government in the first place, and it should be determined and fully funded as needed. I call that the ‘right size’ government, and, in general, it’s not the place for cyclical adjustments.

4. An energy policy to help keep energy consumption down as we expand GDP, particularly with regard to crude oil products.

Here my presumption is there’s more to life than burning our way to prosperity, with ‘whoever burns the most fuel wins.’

Perhaps more important than what happens if these proposals are followed is what happens if they are not, which is more likely going to be the case.

First, given current credit conditions, world demand, and the 0 rate policy and QE, it looks to me like the current federal deficit isn’t going to be large enough to allow anything better than muddling through we’ve seen over the last few years.

Second, potential volatility is as high as it’s ever been. Europe could muddle through with the ECB doing what it takes at the last minute to prevent a collapse, or doing what it takes proactively, or it could miss a beat and let it all unravel. Oil prices could double near term if Iran cuts production faster than the Saudis can replace it, or prices could collapse in time as production comes online from Iraq, the US, and other places forcing the Saudis to cut to levels where they can’t cut any more, and lose control of prices on the downside.

In other words, the risk of disruption and the range of outcomes remains elevated.

58 Responses

  1. Why the reduction from $300B to $150B? I’m interested in the math behind that. Is it just a gut feel for the proper deficit size, or is there something more … scientific?

      1. @WARREN MOSLER,
        That’s the shortfall in the 2012 budgets, which already include tons of cuts the states desperately did not want to make. The spending level that the state politicians would naturally settle on as the “right size of government” is not the 2012 levels but the significantly higher 2008 levels (plus the currently above-normal demands on Medicaid and welfare). If the federal government wants to fully repair the state budgets, the distribution needs to cover the full shortfall between expected 2012 state revenue and 2008-style state spending levels (again, plus the temporarily higher welfare costs). I don’t have a figure for that but your old $300b sounds about right.

        Also we should keep in mind that states will have, and already have had, shortfalls in more than just one year. I would propose the transfers continue in diminishing amounts until state revenue has returned to trend.

      2. makes sense. more can be done if the 150 isn’t deemed enough. but remember state tax revenue will be way up as the output gap narrows with the FICA suspension, etc.

  2. “An $8/hr federally funded transition job for anyone willing and able to work to assist in the transition from unemployment to private sector employment.”

    Two big problems here. First, the reason the majority (not all) of the unemployed are without work is because the private economy does not have a productive (profit maximizing) use for them. What will we have them do that doesn’t waste resources? Separate green, red and yellow M&M’s? Second, “to assist in the transition” implies that A) millions of Americans counting M&M’s (or something equally as unproductive) makes them somehow more attractive to the private sector or B) their spending will increase demand and thus spur hiring. If A, that is absurd, if B, why can’t this simply be accomplished through the tax code?

    1. @Rob,

      private economy functions for profit, which then gets appropriated disproportionally by minority of population mostly.
      Private economy provides services and productively employs people only if there is profit to be made.
      The fact that business is private says nothing about the benefit that the business brings to society, or whether its employees are employed productively. In fact – if it is average business – most likely it has some employees that do most of the work, and a few that take most of the pay. Also private business will waste resources if that is profitable (for example if it gets its hands on some free resources that are not protected by any regulation, and it can increase profitability by not worrying about pollution or waste)

      1. @WARREN MOSLER,

        yes, the government regulations. I agree, that they are essential. In fact – I think – it is the regulations and rules that make or brake private economy. That is – they make the difference between wasteful unregulated economy that benefits the few – and the efficient regulated economy that benefits the most.

      2. @Gary, No one said anything about private business wasting or not wasting so I don’t get your point. Is your point JG waste is okay since the private sector “wastes” things too? It’s irrelevant to the discussion anyhow and as nothing to do with the waste I’m talking about that would definitely come from a JG (think of all the raw materials that would go into needlessly painting government buildings, wasting water to wash windows, etc).

        Furthermore, if there is profit to be made, there are sales, which means demand is being met, ipso facto, some segment of society is benefiting. Maybe there are ancillary costs but at least a demand exists to be filled. The same cannot be said for the services like pulling weeds on I-95, washing windows on gov’t buildings or splitting up M&Ms by color. Those people proving things society doesn’t need or want can now go bidding up prices and using up resources society does need. How are those spent resources not a cost to the rest of society that is actually working to fill a real demand?

      3. @Rob,

        yes, my point about waste was that private businesses wastes on a scale that is destroying the planet – so it is rather hypocritical to be concerned about waste first when employing people that private business discarded.

        Anyway – how about employing unemployed to cleanup (or maybe even employ them to help prevent) the waste that private business created?

        People use the resources while they live and survive. When people work – they can help create or preserve some resources.
        Or is your point that dead people are better than alive because they use less resources that way?

    2. @Rob,

      Yes, unemployment is high because aggregate demand is too low. To reduce either the unemployed rolls or the JG rolls aggregate demand must be raised. JG would help, I think, as compared to unemployment, because the payments are higher, but it would not be enough, and stimulus is not the purpose.

      Stimulating alone, whether through the tax code or through spending, runs the risk of over-stimulating, and inflation. JG creates a price anchor that prevents inflation.

      “What would they do” is a topic of discussion on other blogs.

      I think the main activities should be

      1. Working on resumes and other job-hunting training and activities (1-2 days a week)
      2. Working a subsidized intern/trainee position in the private sector, as a prelude to an ubsubsidized skilled hire.
      3. Volunteer work in charitable organizations, like food banks or Habitat for Humanity

      I think big WPA-style projects (building the Hoover Dam, etc.) are ill-suited for JG. The JG workforce will have VERY high turnover. The turnover in unemployment insurance recipients is about 10% a WEEK. And such projects need a relatively constant, if not stable, workforce, usually with specific skills. The next Hoover Dam will not be built with picks and shovels and wheelbarrows, but with high-tech equipment requiring specialized training to operate. The JG workforce will expand and contract with the economy, so projects in progress could be left in the lurch with no workers.

  3. I’ve shaved my jobs plan down to one simple step: abolish the federal income tax. This could pass Congress before 2013 because it would definitely have right-wing support. All we would have to do is convince some Dems that leaving about one trillion dollars per year in the economy instead of confiscating and destroying it would be solid and consistent annual stimulus. Also, Dems might find it attractive that abolishing the federal income tax would demolish once and for all the Right’s nonsensical “income redistribution” talking point. Of course, this would first require teaching Dems that income redistribution does not happen at the federal level.

      1. @Tyler,

        Sorry, I should have explained my proposal better. I’m not proposing to give every American one trillion dollars. I’m proposing to abolish the federal income tax – a tax that takes about one trillion dollars out of the economy annually.

  4. This maybe a dumb question (but I’ve asked far dumber ones): how do state and local taxes fit the MMT paradigm in terms of funding services most citizens (outside of anarchist and minarchist libertarians)think the local government should provide, like police, fire, K-12 education?

    If there is a broad agreement that these are appropriate government services, shouldn’t they be funded to a large degree by the currency issuer rather than regressive state and local taxes? Obviously this brings up many attendent issues, but removing funding problems should help improve services for people who don’t live in better off communities, right?

  5. great proposals.
    “Size of government” is very important as well in my view. Of course, that is a political question, but then again – most of the points here are also political.
    I understand the point, that if size of government (government functions) are defined – they should not be adjusted just because economy is in downturn – or upturn. The JG would do the adjusting.
    As well as tax changes.

    I wonder though – is it politically easier to change taxes – or the government spending (except JG)? Maybe taxes should stay the same, and in the downturns government would just do more public work (through JG and additional)?
    Although that would make government size and functions fluctuate based on economic conditions.

      1. @WARREN MOSLER,

        If they are neglected, yes, of course they would.

        Maintaining roads and bridges is a permanent function, not one that should be subject to economic conditions.

  6. I’ll buy it. I would like to see health care benefits added to the JG job, but that may be too much to ask.

    I have some hesitiation but not nearly enough to argue about,I suppose.

  7. Warren, where do you stand in above muddle through scenario on eur/usd at the moment?

    Last year we have seen the first phase of European austerity. Several months in which euro supply was squeezed that kept eur/usd relatively high. All kind of anti dollar trades from fear for US QE also played a role. By now we have entered phase 2 where more and more European deficits are rising via automatic stabilizers.
    It looks that Europe still will continue for some time with austerity. More and more ‘astute’ voices of doubt become louder though. At the same time it looks the US is not going to start QE again.
    And how do you see the impact of potential spike in oil $ prices on eur/usd?

    1. @Tom Hickey,

      Which reminds me, seeing as Congress (or at least half of it) is heckbent on repealing Dodd-Frank, Warren should package his banking/Fed proposals as the replacement for Dodd-Frank. :o)

  8. The left would turn the JG into something very different than your intended function. JG would be shunned by most employers because of the countless stories we would hear about lazy workers getting paid to do nothing. What we need is an Ameri-corp slightly modeled off our military, were a corr of committed professionals go to do great things because they believe in it, and they train and employee people to build and maintain sectors of the economy that get forgotten with free enterprise. I could see a subset of this organisation responsible for providing expanded employment opportunities during down times. …ya know what; a lot of the unemployed are unemployable; we just have to be honest about that and we can’t guarantee a job to everybody.

    It’s all so easy on paper….

    1. @Steve,

      JG is not guaranteed “to everybody”. It’s to those who are in the work force, willing and able to take a job, but can’t get one. Qualifications should be, I think, similar to those for unemployment insurance.

      Disability — inability to work — is a whole different thing. A social / medical problem, not an economic problem.

    2. I think I’d have the Fed run it, as it’s the price anchor. And the left just took 500 billion out of the medicare budget to give to the insurance companies when they passed their health care bill.
      Not the left I remember…

  9. Weaknesses in “Full Employment and Price Stability”.

    1. “The value of a currency is determined by the prices paid by that government.” Nope: given excess demand, the price of everything gets bid upwards – the relatively low wages being paid for JG just gets ignored.

    2. The public sector is not as good at employing the less skilled as compared to the private sector, plus the empirical evidence is that temporary subsidised jobs with the private sector maintains employability better than the public sector.

    3. Inflation takes off when employers cannot find the types of labour they want amongst the unemployed, and they resort instead to bidding up the price of already employed labour. If the price of relatively unsuitable labour (i.e. the unemployed / JG labour) is sufficiently low, employers will take on such labour instead of bidding up the price of labour generally. And that point applies to both public and private sectors.

    1. @Ralph Musgrave,

      1. “Given excess demand”, taxes should be raised.
      3. Shortages of specific skills and resultant bidding up of price for them is a change in relative values, not inflation.

      1. @John O’Connell,

        1. Yes, given excess demand taxes SHOULD be raised (or public spending cut). But governments are not 100% competent: sometimes demand DOES become excessive. And when that happens, the alleged unemployed / JG price anchor won’t restrain the inflation. Cullen Roche made the same point in the last 24 hours here:

        3. Even at high unemployment levels there will always be cases of SOME skills in specific locations being bid upwards. And that obviously does not equal inflation as long as the price of other skills in other locations drops to compensate. But the lower unemployment is the more the “bid upwards” phenomenon predominates. Then you have inflation.

      2. @Ralph Musgrave,

        1. I think Cullen assumes his conclusion, wrt this point. We have many automatic stabilizers, and JG would be another one, more powerful than UI. Yes, it is theoretically possible to run deficits at too high a level even when the economy is approaching full employment, but when have we ever done that? Deficits always decline during boom times, and they will still do so, JG or not. It will still remain true that our taxes are too high for the size government we have.

        And he doesn’t understand how a buoy works. It’s attached by a line or chain to an anchor.

        3. Bidding upwards of some skills cannot cause inflation. If A offers a higher wage in order to “poach” an employee from B, then A and B’s combined profit is reduced by the amount of the employee’s wage increase, plus the increased employer taxes on it. The employee pays more tax as well. In the aggregate, incomes are reduced by the amount of the increase in taxes, and that can only cause downward pressure on prices, not upward.

      3. right, demand can be high enough to cause the jg pool to get too low to be an effective price anchor.

        what i’m saying is it’s a better price anchor then unemployment, a different point entirely.

        and you have to define ‘inflation’ of course to say you ‘have it’
        I’d describe what you are describing as a relative value shift, but it’s all semantics.

        And Cullen’s position on JG has been evolving and I’d guess at this point in time he’s pretty close to where I’m at functionally, while
        he thinks politically his approach has a higher chance of success than mine. And I can’t disagree with that, of course, as only time will tell.

      4. @Ralph Musgrave,

        If I can tear you all away from the inflation barrier for a moment I’d like to point out that there is a journey to get there.

        Firstly you don’t know where it is.
        Secondly you don’t know when it will strike.
        Thirdly jittery policy makers will likely move to kill demand when wage inflation starts to show through – rather than checking that all the unemployed that can be are engaged first.

        That’s where JG helps – on the run up to the inflation barrier. It keeps wage inflation stable for longer reducing the chance that the policy response to demand will happen too soon.

    2. 1. when govt spends on a price constrained basis there is no ‘excess demand’
      if prices go up and the govt decides to constrain the prices it pays, govt spending ceases should prices go up, etc.
      it’s the difference between having a bid and lifting offers.
      but yes, if the govt pays up for everything else the jg pool will get too small to be an effective price anchor. that’s all in the text. please re read, thanks.

      2. Point? the jg doesn’t take anyone away from the private sector. it’s an alternative to unemployment.

      3. True, but the fact remains that an employed buffer stock is a superior anchor to an unemployed buffer stock.
      It’s about ‘i don’t have to outrun the bear, I just have to outrun you’

  10. Warren – a point I think you may not address explicitly in your “Proposals”; as the interest rate tends towards zero, won’t retirees find their expected income shrinking significantly? Does this mean that in practice govts will probably need to ‘top up’ private pension arrangements, taxing workers additionally if required to keep a lid on inflation?


  11. John O’Connell,

    Your claim that the profits of employer A & B decline when they bid up the price of labour ignores the fact that when a large proportion of employers are doing this, those employers face excess demand, and are bumping up their prices, and doing very nicely profit-wise.

    The level of employment at which employers start bumping up their prices is the level at which a decent supply of quality labour is no longer available from the ranks of the unemployed: the level at which bidding up the price of labour kicks in in earnest.


    I’ve no objection to the idea that JG raises employment for a given level of inflation. It’s the “price anchor” idea as set out in “Full Employment and Price Stability” I’m objecting to. This includes claims like “The value of the currency is the ELR wage, since that is what the government, the monopoly supplier of its money, has decided it will pay.” And: “The proposed ELR program recognizes that the government is a monopoly supplier of its currency. Price is set through the ELR wage, which defines the purchasing power of the currency.”

    That’s attributing inflation control powers to JG / ELR which it just doesn’t posess.

    1. @Ralph Musgrave,

      What you wrote in the first paragraph is very relevant as you have essentially restated Michal Kalecki’s profit equation:


      (In a closed economy with zero consumer credit growth and zero government deficit profits of capitalists equal the sum of investment and consumption of capitalists)

      Increasing the profit rate will not increase the absolute profits of capitalists. Since workers consumption will eventually decrease, investment financed by credit will not be required to grow new productive capacities. So increasing the rate of profits may actually decrease these profits in absolute terms.

      In a feudal system where monetary rate of profits is theoretically infinite (serfs are not paid, they have to scavenge and are allocated time to look after themselves after working for the landlords) absolute profits may not be high after all. Feudal Poland in the 18th century was doing far worse than Prussia or Western European countries where modern capitalism was germinating.

      Obviously the conditions imposed by Kalecki may not be satisfied if either export surplus, customer credit growth (including loans taken by workers) or government deficit spending create external source of funding. However relying on customer credit growth is unsustainable.

      Regarding the second paragraph I think that JG may provide a kind of anchor for maintaining wage stability – as long as minimum wage is kept constant and individual firms can sack workers when their profits decrease as a result of increased pressure on the wage rate. JG workers can act as a buffer not much worse than unemployed ones. The key to achieve that is that there is no competition between ELR and the private businesses for labour, little substitution of goods/services produced by the private sector and that private sector jobs are more attractive than JG jobs.

      I agree that the argument that the value of the currency is determined by the ELR wage in general may be incorrect or imprecise because it relies on a kind-of general equilibrium. We can imagine the government still paying $8/h to unskilled workers while a wage/price spiral develops in the sectors running close to full capacity. Not all labour and not all the products are perfect substitutes.

    2. @Ralph Musgrave,

      But the employers as a group, no matter if there are two or a large proportion, are going to have the sales that the market will give them, at whatever price they end up charging. Or they’re going to sell as much as they can produce, if the demand is inelastic.

      This is true for the group WHETHER OR NOT they trade employees and raise wages. Since the skills are scarce, no new employees are brought into existence by this bidding war, so production is not increased. I agree that companies in this situation should do well because they have the ability to raise prices, but if they also raise wages they will not do as well as they would have done — AS A GROUP — if they had not bid up wages by “poaching” each others’ employees.

      Of course, if A can steal net employees from B, then A can increase production at B’s expense, and make more profits, even if they raise wages in the process. So, at a micro level it makes sense to try to steal a competitor’s employee. But A’s unit production gains are matched by B’s unit production losses, so at a macro level total production is unchanged. Total profits are lower, because wages (and taxes) are higher.

      1. @John O’Connell,

        Your analysis would be correct provided that full capacity utilisation and employment existed in the whole industry. When did it last happen? Probably in 1944 or 1945. After the war the economy was running close to the full capacity in the majority of Western countries but this was not exactly the same as full utilisation. Certainly this is not the case during a recession. The supply-side analysis is therefore not applicable to our current situation.

        Of course there have been cases of skill shortages limiting production in individual industries.


        If full capacity utilisation is not in place the sales of the industry are determined by the demand (“what the market will give them”) and increasing real wages of the workers will increase their purchasing power and should increase the sales. Squeezing workers more will not increase the absolute value of aggregate profits but may increase ROE for individual corporations. The trick currently employed in the West is to outsource the production overseas where the labour is cheap, shift productive capacities there but still extract some profits down the redistribution chain and obviously rely on the purchasing power of the Western customers.

        Good luck in the long run and let’s start learning these 5000 letters.

  12. I can see that a price anchor is a good thing and needs to be something that the government is a price setter for. I’m worried that the JG wouldn’t work because it wouldn’t be viewed as credible that the government would stick to the anchor. I think there is a potential “better than gold” price anchor a bit like the JG but credible. If the USD (or GBP our Yen or whatever) was redefined as 1/1400th of a starting low rank soldier’s pay then perhaps that could be such a credible price anchor. It could be extended such that there was a fixed ratio between that pay and the pay of a five star general (perhaps 5x as much?) and the president and any federal employee they decided to peg (perhaps all).

    As you say, the crucial difference between governmentl employees and say private sector car mechanics is that the government has total power over how much to pay their own employees and also it is the government that creates the USD (in “net financial assets sense”). If the peg were made to private sector car mechanics then disaster would ensue because the private sector car mechanics would constantly be changing their pay so as to keep ahead of the government in a cat and mouse spiral. The government its self pays the government employees so no such event can occur.

    The reason to choose military pay (rather than the president’s pay or JG pay or whatever). Is because military pay is such a large amount that it can not be messed around with and also the military are not going to be messed around with. Everyone relies on them being on our side. That would give international credibility to the idea that the government would not devalue the USD and just let the military suffer. That wouldn’t be the case with JG pay. That would make the currency a very trusted and sort after reserve currency even in a (near) zero interest rate environment as I guess we are heading towards.

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