A Choice: Fed Interest Rate Hikes or a Job Guarantee

The JG is getting a lot of press. This is an attempt to call attention to it. I submitted it to the News & Observer but they didn't bite. Perhaps I pack to much information in it. An article could be written on almost any paragraph.

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Political discussions are sizzling as politicians listen to academics touting the advantages of a federal Job Guarantee to target full employment.

For decades the Fed has raised interest rates to fight inflation. After all, the Fed’s mandate is to maximize employment and achieve price stability. So, when the Fed thinks inflation is lurking, it raises interest rates to slow economic growth. Its rationale is based on the out-dated Phillips curve that indicates inflation increases as unemployment decreases. Accordingly, the obvious solution to rising inflation would be to increase unemployment. 

Conventional economists seek the elusive NAIRU (Non-Accelerating Interest Rate of Unemployment). It sounds spooky and is spooky. It posits that there must be some level of unemployment at which prices are stable. The Fed seeks that level through adjustment of interest rates.

That’s right! The goal of the Fed is to reduce job opportunities in order to control prices and maintain the value of the dollar. In doing so, it ignores the tremendous costs of unemployment. Not only does an idle worker contribute nothing to GDP, unemployment payments rise, and the sociological costs are huge. Adding to the misery, the victims of enforced unemployment are often looked upon with scorn.

In the end, the Fed’s action is counterproductive. Increased interest rates raise the price of everything, which is the very definition of inflation. And, through the resulting increased rents people pay, it provides more opportunities for the rich to disadvantage the less fortunate. It is a national policy that most conventional economists support. But it just doesn’t work.

Fortunately, there is an alternative. Marriner Eccles, FDR’s Chairman of the Fed understood it. We named the Fed building in Washington after him and forgot that he knew our great nation has the productive capacity and ingenuity to provide a decent living for everyone. 

During Eccles’ tenure the WPA (Work Progress Administration) thrived and offered jobs to the able and willing. In the 1990s, Warren Mosler, a hedge fund manager, reawakened economists to Eccles’ insights.

Academic authors see the JG as a federally funded, locally administrated program to hire any willing and able worker at a living wage with benefits. The range of possible jobs would have few limits and could include filling potholes to replacing water and sewage systems. And from directing traffic to providing health care. 

The JG would set the minimum wage and a standard for working conditions. Private firms would be free to offer higher wages or better working conditions to hire the workers.

The JG would be countercyclical to and dampen the business cycle by expanding in down times and contracting in good times always maintaining full employment.

Perhaps most important, the JG would counter the corrosive sociological consequences of unemployment and inequality. Critics citing the costs of the JG should first consider the costs of these consequences. The costs and benefits of a JG have been researched thoroughly in the academic community.

Fundamental to the thinking behind a JG is the realization that our economy is not driven by production as viewed by advocates of trickle-down economics. Instead, the economy is driven by sales, which in turn, stimulate production. So, by providing work and wages the federal government stimulates demand to which production responds. 

It is time to make a choice. We can keep the system of enforced unemployment, with all its sociological consequences, to provide a pool of unemployed workers looking for work at low wages. Alternatively, through the JG we can establish a pool of employed workers willing to accept work at wages above a livable minimum.

Academics pushing the JG idea are Professors Darity and Hamilton at Duke University, Tcherneva at Bard College, Kelton at Stony Brook, Fullwiler at University of Missouri, Wray at Levy Institute, and others all of whom are looking at our economy in a refreshing and enlightened way.

Dan Metzger is a retired physicist, living in Chapel Hill, with an interest in how the economy works.  

President Trump gets Foreign Trade Wrong!

I rewrote the last article published in the Albuquerque Journal and submitted it to the Durham News & Observer. It didn't fly.

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In fighting a war, generals on the battlefield know that a frontal attack is not always the best tactic. A flank attack is often a better move. And, so it is with foreign trade.

President Trump sees trade deficits, import expenses in excess of export income, as a bad deal and surpluses as a good one. Where we have trade deficits the frontal attack is the president’s tactic of choice. He plans to impose tariffs on some imports, which makes those goods more expensive. That’s not a win! Let’s take a closer look. There’s a better option.

When we import we increase our standard of living by purchasing something we want after considering price, quality, and availability. The president thinks we are not paying enough for some things. He wants us to pay more or do without those goods thus lowering our standard of living. 

This applies to the president’s most recent targets, lumber from Canada, cars from Germany, steel from Canada, Brazil, and North Korea; and aluminum from Canada and Russia. President Trump now invokes national security to rationalize tariffs to benefit workers in the metal industries. He could achieve his nominal objective by requiring the military to source its needs domestically while allowing the rest of us to buy at the lowest prices.

Other countries like to export to us so they can get US dollars, which are the widely favored foreign exchange currency. Exporters give us real goods in exchange for our depreciating dollars. Who is the winner in that exchange? In real economic terms of trade, the winner is the importer, who gets real stuff for mere paper or computer digits. The exporter bears the real cost as its productive labor is serving a foreign economy.

In real terms of real trade, our trade deficits make us winners not losers. So, what is the down side of being a winner? When we spend into a foreign economy rather than our own the result is higher unemployment. 

The dilemma is this. We must reduce our standard of living by limiting imports to maintain employment or suffer increased unemployment to enjoy a higher living standard. 

The frontal attack favored by President Trump is to impose tariffs to the consternation of trading partners, who may counter with reprisals. The flank attack is to learn how to deal with unemployment in general. We can do that, although we haven’t since the New Deal in the 1940s.

A federal Job Guarantee (JG) would provide work for anyone willing and able to work. It would be federally funded and locally administered to serve the public. This would provide a pool of employed workers that businesses could draw upon when they decide to hire. 

Workers would earn a minimum wage with benefits. The program would set a national minimum wage and maximize employment. Unlike the much ballyhooed Basic Income Guarantee (BIG), the JG would be countercyclical to inevitable business cycles. That is, it would increase when business hiring is weak and decrease when business hiring increases. 

The cost of the JG would be less than one might think, and it would be superior to the BIG. The work done would add to GDP, while an idle worker adds nothing. And, it would reduce the costs of unemployment benefits while increasing tax revenues. There is considerable literature on the subject generated by its proponents. The JG would help to maintain consumption demand and profits for business.

When we manage our unemployment by employing all able workers, including immigrants, we can enjoy the benefits of imports and increase our GDP. The end result is a better standard of living for all our inhabitants. That’s making America great!