The Job Guarantee and the MMT Core: Part Four, John Carney on the Mismatch

Parts One, [1] Two, [2] and Three. [3]

In the first three parts of this series, I analyzed views on the Job Guarantee (JG) idea offered by Cullen Roche [4] and Peter Cooper [5] in conjunction with a post by John Carney [6], which kicked off an explosion of blogosphere posts [7] and commentaries on the JG. In Part Three I began an analysis of John Carney's views by taking exception to his claims that the JG would be inflationary, a bureaucratic nightmare, and would cause economic stagnations

In this post, I'll begin analyzing John's further take on the JG in a second post of his [8]. His reasoning in this post, focuses on the problem of a mismatch between demand and the skills needed to fulfill it, the possible inflationary impact of this mismatch, and also amplifies his claims on the JG and stagnation. My interleaved replies from an MMT perspective to his assertions and arguments are provided in this and upcoming posts. All my replies assume that the JG would not be “paid for,” but would occur through deficit spending.

The Mismatch Problem

In commenting on the Government's efforts to fight unemployment since “The Great Depression” John Carney writes about the Government's efforts to achieve full employment through monetary policy. He starts his narrative with:

”. . . there was little reason to think that the additional demand created would be for the skills and services the unemployed possessed. If the cause of unemployment was not just a lack of demand but a lack of demand for what the unemployed could do, job growth would not result. What would happen instead was that there would be more money chasing the goods and services actually in demand. This created the potential for high unemployment and high inflation.

Comment: I don't think it's true to say that the US Government was trying to achieve full employment using monetary policy during the post-war 1945-1970 period. Instead, fiscal policy and monetary policy advocates contended with one another about whether monetary policy could possibly produce full employment. During the Kennedy/Johnson Administrations fiscal policy certainly held the upper hand, and even during the 1970s Nixon famously asserted that “we are all Keynesians now,” conceding that fiscal policy was the key to full employment.

During the 1970s, however, neoliberalism began to gain traction, as did Milton Friedman's monetarism. By the time of the Carter Administration, and in the face of cost-push inflation introduced by the Oil Cartel, monetary policy to reduce inflation was the order of the day, and the Government backed off using Keynesian fiscal policy to create full employment.

The closest thing we've had to aggressive Keynesian fiscal policy since that time was the present Administration's attempt to use deficit spending to recover from the crash of 2008. But most Keynesian and MMT- inspired stimulus advocates believed in early 2009 that a stimulus bill twice the size of the ARRA act, with far less emphasis on tax cuts, and far more emphasis on public sector spending was necessary to enable recovery. Experience since 2009 has refuted the view that the $800 billion ARRA fiscal initiative was large enough to enable full employment, or anything near it. The view among many macro-economists now is that the Administration, probably due to its unwillingness to be aggressive with the Democratic Senate, and partly due to its admitted underestimation of the severity of the balance sheet recession, injected far too little aggregate demand and/or direct job creation into the economy.

Experience has also once again refuted the view [9] that monetary policy can bring about full employment, or that aggressive monetary policy, designed to do that, would cause inflation or hyperinflation, since it is hard to imagine a more aggressive monetary policy than that practiced by the Fed since the crash, and we see that its policies have produced neither full employment nor any serious across-the-board inflation. This is consistent with MMT predictions, which viewed monetary policy as primarily impacting portfolio composition in the private sector [10], without however, adding any Net Financial Assets (NFA) to it. The Fed's expansion of the money supply, has added to reserves, but its hasn't added to the NFA stock and therefore to aggregate demand (AD).

In other words, MMT predicted that Fed policy would neither contribute to increased employment nor contribute to significant inflation, since trading bank reserves for assets of equal value held by the private sector increases the money supply in a very narrow sense, but doesn't increase AD in the private sector because it doesn't add to NFA. The question raised by this is whether Carney's view, quoted above, is even relevant to our present situation, since the real issue wasn't a mismatch between demand created by monetary policy and the skill composition of the labor force; but whether any significant demand at all was created by the Fed's monetary policy.

Mismatch and Hayek's Theory

John Carney goes on with his “mismatch” theory, quoting Hayek [11], he says:

"In other words, the core problem of most unemployment is a distribution problem. The distribution of labor did not match the distribution of demand. Increasing aggregate demand would not necessarily decrease unemployment. What is typically required to actually decrease unemployment is relocation and retraining of workers, something which many of the temporary measures intended to ameliorate the effects of unemployment actually interfere with.”

Comment: This is an assertion of theory, and one that is rather indirect in its construction of the problem. The creation of demand from a Job Guarantee program funded through deficit spending comes from paying JG workers, i.e. providing them with NFA in the form of high-velocity money, they did not have have prior to their participation in the JG program. At that point, those workers/consumers are the source of demand for further products/services in the private sector, not the Government directly.

These are likely to be products and services the JG workers could afford to buy before the crash resulted in their unemployment. So, if the capacity to supply those goods and services existed before the JG went into effect, there is no reason to believe that the same capacity would not be used to fulfill the new demand created by the JG provided that one is started before the recession causing unemployment has atrophied previously existing productive capacity. If the capacity is lacking because the recession caused lay-offs, then the workers necessary to satisfy the new demand can be re-hired as needed, as long as the private sector businesses are willing to exceed the JG floor on salaries and benefits.

The assertion that re-training and re-location are needed to lower unemployment assumes that some proportion of the people who want full-time private sector jobs can't get them because their skills don't fit businesses close to where the unemployed live, whose products and services would be demanded in the context of an operating JG program. This is probably true to some extent at a micro-level, but from a macro point of view, the actual size of that segment of the potential JG pool is what's important and that's an empirical question. John Carney doesn't even address that question. So, he doesn't even tell us what the size of his “problem” is.

And he also doesn't make explicit that he clearly has in mind local private sector for-profit businesses, that he thinks will not be able to employ that part of the JG pool whose skills don't fit the new demand these businesses will want to satisfy. Finally, he tacitly assumes, in the quoted passage, that Government-funded employment in the JG program isn't “actual employment”, when clearly the purpose of the JG is to create a buffer stock of fully employed people.

Next, there certainly will be some people whose skills don't fit the current labor market among those who want full-time employment, and there will be a consequent need to train these people. But, JG programs can make provision for re-training, and even for re-location within the US, if that's really what's needed. Many jobs these days, can be performed at a distance over the Internet. This will become increasingly the case over time, so that the relocation issue will become less and less important as the years go by as an important factor in employment decisions.

Hayek's argument about mismatch of demand and skills is now more than 60 years old, and re-location is far less important as a factor in structural unemployment than it once was. If it were still true to any significant degree, American businesses wouldn't be able to outsource consulting, marketing, advertising, software, accounting, and other private sector work to India and China, so clearly local businesses that can use these skills can certainly “outsource” them to other local areas within the United States, if that's what they want to do.

In fact, if John Carney is so keen about this problem of the JG program perhaps a partial solution is to pass laws requiring that businesses selling and operating in the US not to outsource services like the above to companies whose employees are resident in other nations. Some might think that such a proposal accompanying the JG is out of the MMT paradigm, since it's the MMT position that trade deficits add to the real wealth of nations [12], sovereign in their own fiat currencies. But if there's really a serious contention that the JG program might be less effective because of such a skills mismatch, then it seems to me that in a conflict between increased profits for US companies coming from that kind of outsourcing, which mostly serve to increase inequality in the United States, democracy in this country would be much better served by “outsourcing” to people in other local areas of the US, who are in the JG program, in order to minimize any possible “skills/demand mismatch” that may decrease the effectiveness of the JG, rather than by “outsourcing” to people of other nations.