High levels of unemployment triggering a recession. Employment levels are the best measure of economic strength
Barone, 10-18, 20, Robert Barone, Ph.D. is a Georgetown educated economist. He is a financial advisor at Four Star Wealth Advisors. www.fourstarwealth.com, Forbes, The Real Recession Is Just Starting
The best gauge of economic health is employment, and, on that front, the news is not good. New unemployment claims continue at well over +1.2 million/week; the pre-virus norm is +200K. When all claims are considered, the total is more than 25 million, a real unemployment rate in excess of 15%. On Friday (10/16), the news that retail sales rose 1.9% in September buoyed the equity markets early on after several losing sessions during the week as hopes for an immediate additional fiscal stimulus package faded. In a recent blog I explained how consumption rose in August, even as incomes fell, due to the large pool of savings resulting from the CARES Act. There was still a small amount of savings left in that pool over and above what was the pre-virus norm as measured by the St. Louis Fed. I suspect that last of those “excess” savings were spent in September, causing that unexpected rise in retail spending. But, even with the unexpectedly good retail sales news (up 1.5% even ex-autos – used car sales are on fire as the public eschews public transit), the markets finished flattish on the day and down for the week. Despite all of the hoopla around the data releases, without the stimulus, the economy would have contracted (by at least -10% according to economist David Rosenberg). Even with the headline retail sales, the underlying economy is truly in Recession and will be there for a significant period of time. An economy not in Recession doesn’t need a Fed pumping up its balance sheet and the money supply. (The Fed added $75 billion to its balance sheet the week ended Wednesday, October 14th; no wonder rates retreated across the yield curve!) An economy not in Recession also doesn’t need another fiscal stimulus package that the Fed (Powell in particular) is begging for. While that appears to be stalled for political reasons, it likely will proceed after November 3rd. The Interest Rate Scene Interest rates rose over the past month triggered in part, by the Fed’s policy shift in the way inflation will impact monetary policy going forward, in part, by the FOMC minutes (Federal Open Market Committee, the rate making Fed committee), which openly worried that more fiscal stimulus was needed but would not be forthcoming in a timely manner (and subsequently Chairman Powell’s promise to Congress that the Fed would monetize any fiscal deficits (his “hand in hand” comment)), and, in part, due to the expectation that any new stimulus would arrive post-election no matter who won (but a larger stimulus if the Democrats win). Because a new stimulus would dramatically increase supply, rates began to drift up in late September/early October. True to its word, the Fed provided the loot to push rates back down over the last several market sessions. And Inflation There has also been some concern about the re-emergence of inflation, another factor causing the recent mild spike in interest rates. That concern was initially stoked by the change in how the Fed will target future inflation. We have seen some spikes in the prices of commodities and food. Many of the commodity spikes were simply a bounce back from large downdrafts last spring. The price spikes in food, especially meat, is largely due to supply issues as processing plants dealt with virus prevention issues. The headline PPI (Producer Price Index) for September was +0.4%. Ex-food and energy, however, it was a very meek +0.1%. So, no inflation to worry about at the manufacturing level. September’s CPI (Consumer Price Index) rose +0.2% versus August and +0.2% ex-food and energy. Year over year, CPI is up 1.37%; again not displaying any worrisome tendencies. Rent and rent equivalent calculations (related to mortgage costs) comprise more than a third of the CPI Index. Rents are now deflating, especially in densely packed urban centers, and falling mortgage rates have an impact on the mortgage calculations in the index. So, it appears that measured CPI inflation isn’t going to be a problem for quite some time, at least until after we get through the coming wave of evictions. Unemployment, the Real Economic Indicator To gauge the health of the economy, one needs to look no further than the state of the labor market. And, on that front, the news is not good. At the state level, Initial Claims (ICs) jumped more than +76K in the first full measurement week of October and this is without any reporting from California. (The California IC data for the week of September 26th has been used in the October 8th and October 15th data releases covering the weeks ending October 3rd and October 10th. California is due back on-line for the data release on October 22nd, covering the week ending October 17th. Likely there will be significant upward revisions. Unless California found and fettered out a significant number of fraudulent claims, the Disney and airline layoffs probably swelled their IC numbers – we will know soon! The accompanying table and chart of state ICs shows the flat to slightly rising right-hand tail. “Normal,” i.e., pre-virus, is shown in the left-hand tail. Let’s also remember that +885K ICs are new layoffs, most of which occurred in the prior week. Yikes! In addition, ICs under the CARES Act PUA program (Pandemic Unemployment Assistance – for self-employed, independent contractors, and gig workers) added another +373K. While the PUA ICs fell -91K from the prior week’s +464K level, when the state ICs and PUA ICs are added together, the result is a mind-blowing +1.26 million ICs for the week of October 10th. That’s 6.5 months after the initial shock. When state ICs and PUA ICs are added, the result is +1.26M ICs for the week of Oct 10 Initial Claims- State (NSA) UNIVERSAL VALUE ADVISOR When the Continuing Claims (CCs) are added to the ICs as shown in the chart and table at the top of this blog, there remain more than 25 million unemployed. While the “official” U3 number is 7.9% for September, the “real” unemployment rate is in the 15%-20% range. The right-hand side of the chart shows that, while total unemployment is down from its 32 million peak in June, the improvement halted in September. The left-hand tail of the chart shows the much, much lower pre-virus norm. Finally, much of the fall in CCs in the state programs appear to be an exhaustion of eligibility, not re-employment. The monthly BLS JOLTS (Job Openings and Labor Turnover Survey) report shows declining hiring and the various surveys from employment consultants show continuing significant levels of new layoffs. Conclusions Don’t be fooled by the retail sales data or the talk of the return of inflation Don’t hold your breath for or hold out cash in anticipation of rising interest rates The economy is in Recession; we just haven’t felt it because of the CARES Act stimulus, but, eventually we will because we have a huge, huge unemployment problem;And then there is the oncoming eviction crisis (on hold until year’s end); there hasn’t been much discussion about this, and I wonder if it is priced into financial markets;
This will spread globally
AP, 10-19, 20, https://apnews.com/article/virus-outbreak-pandemics-dubai-united-arab-emirates-lebanon-14975eeacebafffd5bf15adf677bad02 IMF: Nearly all Mideast economies hit by pandemic recession
DUBAI, United Arab Emirates (AP) — The coronavirus pandemic has pushed nearly all Mideast nations into the throes of an economic recession this year, yet some rebound is expected as all but two — Lebanon and Oman — are anticipated to see some level of economic growth next year, according to a report published Monday by the International Monetary Fund. This comes as the IMF estimates that the global economy will shrink 4.4% this year, marking the worst annual plunge since the Great Depression of the 1930s. Well before the coronavirus swept across the globe, several Mideast countries had been struggling with issues ranging from lower oil prices and sluggish economic growth to corruption and high unemployment.
Recession puts 2 million kids in poverty
Dr. Stephanie Kelton, 2020, Stephanie Kelton is an American economist and academic. She is currently a professor at Stony Brook University and a Senior Fellow at the Schwartz Center for Economic Policy Analysis at the New School for Social Research. She was formerly a professor at the University of Missouri–Kansas City. She also served as an advisor to Bernie Sanders’ 2016 presidential campaign, . The Deficit Myth Kindle Edition.
The Great Recession, which lasted from December 2007 to June 2009, left permanent scars on communities and families across the United States and beyond. It took more than six years for the US labor market to recover all 8.7 million jobs that were lost between December 2007 and early 2010.6 Millions struggled for a year or longer before finding employment. Many never did. And some who were fortunate enough to find work often had to settle for part-time employment or take jobs that paid substantially less than they had been earning. Meanwhile, the foreclosure crisis swallowed $8 trillion in housing wealth, and an estimated 6.3 million people—including 2.1 million children—were pushed into poverty between 2007 and 2009.7 Kelton, Stephanie. The Deficit Myth (pp. 6-7). Public Affairs. Kindle Edition.
A global economic collapse is imminent
Desmond Lacham, October 15, 2020, The IMF Can’t Be Any Clearer: The Global Economy Is on the Brink of a Crisis | The National Interest, https://nationalinterest.org/feature/imf-can%E2%80%99t-be-any-clearer-global-economy-brink-crisis-170723, October 16, 2020, Desmond Lachman is a resident fellow at the American Enterprise Institute.
The IMF is now warning in the clearest of terms that any slowing in the world economic recovery could cause serious problems to the global financial system. As a second wave in the coronavirus pandemic now appears to be threatening the United States and global economic recoveries, the world’s economic policymakers would do well to pay attention to the International Monetary Fund’s latest warnings about the vulnerability of the global financial system. Maybe then they will become more focused on the urgent need to keep providing strong fiscal and monetary policy support to the global economic recovery. The IMF is now emphasizing that the very scale of the pandemic has caused financial market vulnerabilities to increase across multiple sectors of the world economy. This has occurred as an extraordinary amount of monetary policy easing has helped support the world economy but at the cost of exacerbating pre-existing financial market vulnerabilities. The vulnerabilities highlighted by the IMF include the sharp rise in the corporate sector’s debt burden as it has been forced to meet pandemic-related cash shortages by increased borrowing. They also include a marked deterioration in the emerging market economies’ outlook with a large number of low-income countries so heavily indebted that they now face imminent debt distress, while others have been hit by a perfect economic storm.Compounding these vulnerabilities has been the growing disconnect between buoyant global equity markets and the state of the world economy. This has occurred as investors have taken on more risk and stretched for yield in an environment of ample global liquidity. The IMF is now warning in the clearest of terms that any slowing in the world economic recovery could cause serious problems to the global financial system. Any such slowing could cause the corporate sector and the emerging market’s liquidity problems to morph into solvency problems. At the same time, it could also lead to a sharp fall in global equity prices by narrowing the currently large gap between equity prices and the state of the global economy. The IMF is also warning global policymakers not to be overly complacent about the world financial system’s ability to withstand a renewed economic downturn. In particular, it is cautioning that in an adverse macroeconomic scenario, some banking systems might suffer significant capital shortfalls. They might do so because a large number of firms and households will not be able to repay their loans. The IMF’s warnings would seem to be all the more timely given that there are growing signs that the global economic recovery is stuttering and troubling signs are emerging of a second wave in the pandemic. Major European countries like France, Spain, and the United Kingdom are all being forced to reimpose restrictions as infection levels now exceed those in the spring. Meanwhile, major countries like the United States, Brazil, and Mexico, which have had among the world’s worst pandemic performance records, are yet to have in place a coherent program to deal with the pandemic.
COVID causing a global economic downturn now, pushing 60 million people into poverty and risking a world war due to rising nationalism
Reinhart, September/October 2020, CARMEN REINHART is Minos A. Zombanakis Professor of the International Financial System at the Harvard Kennedy School. Subsequent to the completion of this article, she was named Chief Economist at the World Bank.VINCENT REINHART is Chief Economist and Macro Strategist at Mellon, The Pandemic Depression, Foreign Affairs, https://www.foreignaffairs.com/articles/united-states/2020-08-06/coronavirus-depression-global-economy
The COVID-19 pandemic poses a once-in-a-generation threat to the world’s population. Although this is not the first disease outbreak to spread around the globe, it is the first one that governments have so fiercely combated. Mitigation efforts—including lockdowns and travel bans—have attempted to slow the rate of infections to conserve available medical resources. To fund these and other public health measures, governments around the world have deployed economic firepower on a scale rarely seen before. Although dubbed a “global financial crisis,” the downturn that began in 2008 was largely a banking crisis in 11 advanced economies. Supported by double-digit growth in China, high commodity prices, and lean balance sheets, emerging markets proved quite resilient to the turmoil of the last global crisis. The current economic slowdown is different. The shared nature of this shock—the novel coronavirus does not respect national borders—has put a larger proportion of the global community in recession than at any other time since the Great Depression. As a result, the recovery will not be as robust or rapid as the downturn. And ultimately, the fiscal and monetary policies used to combat the contraction will mitigate, rather than eliminate, the economic losses, leaving an extended stretch of time before the global economy claws back to where it was at the start of 2020. The pandemic has created a massive economic contraction that will be followed by a financial crisis in many parts of the globe, as nonperforming corporate loans accumulate alongside bankruptcies. Sovereign defaults in the developing world are also poised to spike. This crisis will follow a path similar to the one the last crisis took, except worse, commensurate with the scale and scope of the collapse in global economic activity. And the crisis will hit lower-income households and countries harder than their wealthier counterparts. Indeed, the World Bank estimates that as many as 60 million people globally will be pushed into extreme poverty as a result of the pandemic. The global economy can be expected to run differently as a result, as balance sheets in many countries slip deeper into the red and the once inexorable march of globalization grinds to a halt. ALL ENGINES DOW In its most recent analysis, the World Bank predicted that the global economy will shrink by 5.2 percent in 2020. The U.S. Bureau of Labor Statistics recently posted the worst monthly unemployment figures in the 72 years for which the agency has data on record. Most analyses project that the U.S. unemployment rate will remain near the double-digit mark through the middle of next year. And the Bank of England has warned that this year the United Kingdom will face its steepest decline in output since 1706. This situation is so dire that it deserves to be called a “depression”—a pandemic depression. Epidemiologists consider the coronavirus that causes COVID-19 to be novel; it follows, then, that its spread has elicited new reactions from public and private actors alike. The consensus approach to slowing its spread involves keeping workers away from their livelihoods and shoppers away from marketplaces. Assuming that there are no second or third waves of the kind that characterized the Spanish influenza pandemic of 1918–19, this pandemic will follow an inverted V-shaped curve of rising and then falling infections and deaths. But even if this scenario comes to pass, COVID-19 will likely linger in some places around the world. So far, the incidence of the disease has not been synchronous. The number of new cases decreased first in China and other parts of Asia, then in Europe, and then much more gradually in parts of the United States (before beginning to rise again in others). At the same time, COVID-19 hot spots have cropped up in places as distinct as Brazil, India, and Russia. In this crisis, economic turmoil follows closely on the disease. This two-pronged assault has left a deep scar on global economic activity. Some important economies are now reopening, a fact reflected in the improving business conditions across Asia and Europe and in a turnaround in the U.S. labor market. That said, this rebound should not be confused with a recovery. In all of the worst financial crises since the mid-nineteenth century, it took an average of eight years for per capita GDP to return to the pre-crisis level. (The median was seven years.) With historic levels of fiscal and monetary stimulus, one might expect that the United States will fare better. But most countries do not have the capacity to offset the economic damage of COVID-19. The ongoing rebound is the beginning of a long journey out of a deep hole. Although any kind of prediction in this environment will be shot through with uncertainty, there are three indicators that together suggest that the road to recovery will be a long one. The first is exports. Because of border closures and lockdowns, global demand for goods has contracted, hitting export-dependent economies hard. Even before the pandemic, many exporters were facing pressures. Between 2008 and 2018, global trade growth had decreased by half, compared with the previous decade. More recently, exports were harmed by the U.S.-Chinese trade war that U.S. President Donald Trump launched in the middle of 2018. For economies where tourism is an important source of growth, the collapse in international travel has been catastrophic. The International Monetary Fund has predicted that in the Caribbean, where tourism accounts for between 50 and 90 percent of income and employment in some countries, tourism revenues will “return to pre-crisis levels only gradually over the next three years.” Not only is the volume of trade down; the prices of many exports have also fallen. Nowhere has the drama of falling commodity prices been more visible than in the oil market. The slowdown has caused a huge drop in the demand for energy and splintered the fragile coalition known as OPEC+, made up of the members of OPEC, Russia, and other allied producers, which had been steering oil prices into the $45 to $70 per barrel range for much of the past three years. OPEC+ had been able to cooperate when demand was strong and only token supply cuts were necessary. But the sort of supply cuts that this pandemic required would have caused the cartel’s two major players, Russia and Saudi Arabia, to withstand real pain, which they were unwilling to bear. The resulting overproduction and free fall in oil prices is testing the business models of all producers, particularly those in emerging markets, including the one that exists in the United States—the shale oil and gas sector. The attendant financial strains have piled grief on already weak entities in the United States and elsewhere. Oil-dependent Ecuador, for example, went into default status in April 2020, and other developing oil producers are at high risk of following suit. In other prominent episodes of distress, the blows to the global economy were only partial. During the decadelong Latin American debt crisis of the early 1980s and the 1997 Asian financial crisis, most advanced economies continued to grow. Emerging markets, notably China, were a key source of growth during the 2008 global financial crisis. Not this time. The last time all engines failed was in the Great Depression; the collapse this time will be similarly abrupt and steep. The World Trade Organization estimates that global trade is poised to fall by between 13 and 32 percent in 2020. If the outcome is somewhere in the midpoint of that wide range, it will be the worst year for globalization since the early 1930s. This depression arrived at a time when the economic fundamentals in many countries were already weakening The second indicator pointing to a long and slow recovery is unemployment. Pandemic mitigation efforts are dismantling the most complicated piece of machinery in history, the modern market economy, and the parts will not be put back together either quickly or seamlessly. Some shuttered businesses will not reopen. Their owners will have depleted their savings and may opt for a more cautious stance regarding future business ventures. Winnowing the entrepreneurial class will not benefit innovation. What is more, some furloughed or fired workers will exit the labor force permanently. Others will lose skills and miss out on professional development opportunities during the long spell of unemployment, making them less attractive to potential employers. The most vulnerable are those who may never get a job in the first place—graduates entering an impaired economy. After all, the relative wage performance of those in their 40s and 50s can be explained by their job status during their teens and 20s. Those who stumble at the starting gate of the employment race trail permanently. Meanwhile, those still in school are receiving a substandard education in their socially distanced, online classrooms; in countries where Internet connectivity is lacking or slow, poorer students are leaving the educational system in droves. This will be another cohort left behind. National policies matter, of course. European economies by and large subsidize the salaries of employees who are unable to work or who are working reduced hours, thus preventing unemployment, whereas the United States does not. In emerging economies, people mostly operate without much of a safety net. But regardless of their relative wealth, governments are spending more and taking in less. Many local and provincial governments are obliged by law to keep a balanced budget, meaning that the debt they build up now will lead to austerity later. Meanwhile, central governments are incurring losses even as their tax bases shrink. Those countries that rely on commodity exports, tourism, and remittances from citizens working abroad face the strongest economic headwinds. What is perhaps more troubling, this depression arrived at a time when the economic fundamentals in many countries—including many of the world’s poorest—were already weakening. In part as a result of this prior instability, more sovereign borrowers have been downgraded by rating agencies this year than in any year since 1980. Corporate downgrades are on a similar trajectory, which bodes ill for governments, since private-sector mistakes often become public-sector obligations. As a result, even those states that prudently manage their resources might find themselves underwater. The third salient feature of this crisis is that it is highly regressive within countries and across countries. The ongoing economic dislocations are falling far more heavily on those with lower incomes. Such people generally do not have the ability to work remotely or the resources to tide themselves over when not working. In the United States, for instance, almost half of all workers are employed by small businesses, largely in the service industry, where wages are low. These small enterprises may be the most vulnerable to bankruptcy, especially as the pandemic’s effects on consumer behavior may last much longer than the mandatory lockdowns In developing countries, where safety nets are underdeveloped or nonexistent, the decline in living standards will take place mostly in the poorest segments of society. The regressive nature of the pandemic may also be amplified by a worldwide spike in the price of food, as disease and lockdowns disrupt supply chains and agricultural labor migration patterns. The United Nations has recently warned that the world is facing the worst food crisis in 50 years. In the poorest countries, food accounts for anywhere from 40 to 60 percent of consumption-related expenditures; as a share of their incomes, people in low-income countries spend five to six times as much on food as their counterparts in advanced economies do. THE ROAD TO RECOVER In the second half of 2020, as the public health crisis slowly comes under control, there will likely be impressive-looking gains in economic activity and employment, fueling financial-market optimism. However, this rebound effect is unlikely to deliver a full recovery. Even an enlightened and coordinated macroeconomic policy response cannot sell products that haven’t been made or services that were never offered. Thus far, the fiscal response around the world has been relatively narrowly targeted and planned as temporary. A normally sclerotic U.S. Congress passed four rounds of stimulus legislation in about as many weeks. But many of these measures either are one-offs or have predetermined expiration dates. The speed of the response no doubt was driven by the magnitude and suddenness of the problem, which also did not provide politicians with an opportunity to add pork to the legislation. The United States’ actions represent a relatively large share of the estimated $11 trillion in fiscal support that the countries of the G-20 have injected into their economies. Once again, greater size offers greater room to maneuver. Countries with larger economies have developed more ambitious stimulus plans. By contrast, the aggregate stimulus of the ten emerging markets in the G-20 is five percentage points below that of their advanced-economy counterparts. Unfortunately, this means that the countercyclical response is going to be smaller in those places hit harder by the shock. Even so, the fiscal stimulus in the advanced economies is less impressive than the large numbers seem to indicate. In the G-20, only Australia and the United States have spent more money than they have provided to companies and individuals in the form of loans, equity, and guarantees. The stimulus in the European economies, in particular, is more about the balance sheets of large businesses than about spending, raising questions about its efficacy in offsetting a demand shock. Central banks have also attempted to stimulate the failing global economy. Those banks that did not already have their hands tied by prior decisions to keep interest rates pinned at historic lows—as the Bank of Japan and the European Central Bank did—relaxed their grip on the flow of money. Among that group were central banks in emerging economies, including Brazil, Chile, Colombia, Egypt, India, Indonesia, Pakistan, South Africa, and Turkey. At prior times of stress, officials in such places often went in the other direction, raising policy rates to prevent exchange-rate depreciation and to contain inflation and, by extension, capital flight. Presumably, the shared shock leveled the playing field, lessening concerns about the capital flight that usually accompanies currency depreciation and falling interest rates Just as important, central banks have fought desperately to keep the financial plumbing flowing by pumping currency reserves into the banking system and lowering private banks’ reserve requirements so that debtors could make payments more easily. The U.S. Federal Reserve, for instance, did both, doubling the amount it injected into the economy in under two months and putting the required reserve ratio at zero. The United States’ status as the issuer of the global reserve currency gave the Federal Reserve a unique responsibility to provide dollar liquidity globally. It did so by arranging currency swap agreements with nine other central banks. Within a few weeks of this decision, those official institutions borrowed almost half a trillion dollars to lend to their domestic banks. The fiscal stimulus in the advanced economies is less impressive than the large numbers seem to indicate What is perhaps most consequential, central banks have been able to prevent temporarily illiquid firms from falling into insolvency. A central bank can look past market volatility and purchase assets that are currently illiquid but appear to be solvent. Central bankers have used virtually all the pages from this part of the playbook, taking on a broad range of collateral, including private and municipal debt. The long list of banks that have enacted such measures includes the usual suspects in the developed world—such as the Bank of Japan, the European Central Bank, and the Federal Reserve—as well as central banks in such emerging economies as Colombia, Chile, Hungary, India, Laos, Mexico, Poland, and Thailand. Essentially, these countries are attempting to build a bridge over the current illiquidity to the recovered economy of the future. Central banks acted forcefully and in a hurry. But why did they have to? Weren’t the legislative and regulatory efforts that followed the last financial crisis about tempering the crisis next time? Central banks’ foray into territory far outside the norm is a direct result of design flaws in earlier attempts at remediation. After the crisis in 2008, governments did nothing to change the risk and return preferences of investors. Instead, they made it more expensive for the regulated community—that is, commercial banks, especially big ones—to accommodate the demand for lower-quality loans by introducing leverage and quality-of-asset restrictions, stress tests, and so-called living wills. The result of this trend was the rise of shadow banks, a cohort of largely unregulated financial institutions. Central banks are now dealing with new assets and new counterparties because public policy intentionally pushed out the commercial banks that had previously supported illiquid firms and governments. To be sure, central bank action has apparently stopped a cumulating deterioration in market functioning with rate cuts, massive injections of liquidity, and asset purchases. Acting that way has been woven into central banks’ DNA since the Fed failed to do so in the 1930s, to tragic effect. However, the net result of these policies is probably far from sufficient to offset a shock as large as the one the world is living through right now. Long-term interest rates were already quite low before the pandemic took hold. And in spite of all the U.S. dollars that the Federal Reserve channeled abroad, the exchange value of the dollar rose rather than fell. By themselves, these monetary stimulus measures are not sufficient to lead households and firms to spend more, given the current economic distress and uncertainty. As a result, the world’s most important central bankers—Haruhiko Kuroda, governor of the Bank of Japan; Christine Lagarde, president of the European Central Bank; and Jerome Powell, chair of the Federal Reserve—have been urging governments to implement additional fiscal stimulus measures. Their pleas have been met, but incompletely, so there has been a massive decline in global economic activity. THE ECONOMY AND ITS DISCONTENTS The shadow of this crisis will be long and dark—more so than those of many of the prior ones. The International Monetary Fund predicts that the deficit-to-GDP ratio in advanced economies will swell from 3.3 percent in 2019 to 16.6 percent this year, and in emerging markets, it will go from 4.9 percent to 10.6 percent over the same period. Many developing countries are following the lead of their developed counterparts in opening up the fiscal tap. But among both advanced and developing economies, many governments lack the fiscal space to do so. The result is multiple overextended government balance sheets. Dealing with this debt will hinder rebuilding. The G-20 has already postponed debt-service payments for 76 of the poorest countries. Wealthier governments and lending institutions will have to do more in the coming months, incorporating other economies into their debt-relief schemes and involving the private sector. But the political will to undertake these measures may well be lacking if countries decide to turn inward rather than prop up the global economy. Globalization was first thrown into reverse with the arrival of the Trump administration in 2016. The speed of the unwinding will only pick up as blame is assigned for the current mess. Ope borders seem to facilitate the spread of infection. A reliance on export markets appears to drag a domestic economy down when the volume of global trade dwindles. Many emerging markets have seen the prices of their major commodities collapse and remittances from their citizens abroad plummet. Public sentiment matters to the economy, and it is hard to imagine that attitudes toward foreign travel or education abroad will rally quickly. More generally, trust—a key lubricant for market transactions—is in short supply internationally. Many borders will be difficult to cross, and doubts about the reliability of some foreign partners will fester. Yet another reason why global cooperation may falter is that policymakers may confuse the short-term rebound with a lasting recovery. Stopping the slide in incomes and output is a critical accomplishment, but so, too, will be hastening the recovery. The longer it takes to climb out of the hole this pandemic punched in the global economy, the longer some people will be unnecessarily out of work and the more likely medium- and longer-term growth prospects will be permanently impaired. The shadow of this crisis will be long and dark—more so than those of many of the prior ones The economic consequences are straightforward. As future income decreases, debt burdens become more onerous. The social consequences are harder to predict. A market economy involves a bargain among its citizens: resources will be put to their most efficient use to make the economic pie as large as possible and to increase the chance that it grows over time. When circumstances change as a result of technological advances or the opening of international trade routes, resources shift, creating winners and losers. As long as the pie is expanding rapidly, the losers can take comfort in the fact that the absolute size of their slice is still growing. For example, real GDP growth of four percent per year, the norm among advanced economies late last century, implies a doubling of output in 18 years. If growth is one percent, the level that prevailed in the shadow of the 2008–9 recession, the time it takes to double output stretches to 72 years. With the current costs evident and the benefits receding into a more distant horizon, people may begin to rethink the market bargain. The historian Henry Adams once noted that politics is about the systematic organization of hatreds. Voters who have lost their jobs, have seen their businesses close, and have depleted their savings are angry. There is no guarantee that this anger will be channeled in a productive direction by the current political class—or by the ones to follow if the politicians in power are voted out. A tide of populist nationalism often rises when the economy ebbs, so mistrust among the global community is almost sure to increase. This will speed the decline of multilateralism and may create a vicious cycle by further lowering future economic prospects. That is precisely what happened in between the two world wars, when nationalism and beggar-thy-neighbor policies flourished There is no one-size-fits-all solution to these political and social problems. But one prudent course of action is to prevent the economic conditions that produced these pressures from worsening. Officials need to press on with fiscal and monetary stimulus. And above all, they must refrain from confusing a rebound for
Economic decline causes nuclear war – loose nukes, counterbalancing, and regional instability
Mann 14 (Eric Mann is a special agent with a United States federal agency, with significant domestic and international counterintelligence and counter-terrorism experience. Worked as a special assistant for a U.S. Senator and served as a presidential appointee for the U.S. Congress. He is currently responsible for an internal security and vulnerability assessment program. Bachelors @ University of South Carolina, Graduate degree in Homeland Security @ Georgetown. “AUSTERITY, ECONOMIC DECLINE, AND FINANCIAL WEAPONS OF WAR: A NEW PARADIGM FOR GLOBAL SECURITY,” May 2014, https://jscholarship.library.jhu.edu/bitstream/handle/1774.2/37262/MANN-THESIS-2014.pdf)
The conclusions reached in this thesis demonstrate how economic considerations within states can figure prominently into the calculus for future conflicts. The findings also suggest that security issues with economic or financial underpinnings will transcend classical determinants of war and conflict, and change the manner by which rival states engage in hostile acts toward one another. The research shows that security concerns emanating from economic uncertainty and the inherent vulnerabilities within global financial markets will present new challenges for national security, and provide developing states new asymmetric options for balancing against stronger states.¶ The security areas, identified in the proceeding chapters, are likely to mature into global security threats in the immediate future. As the case study on South Korea suggest, the overlapping security issues associated with economic decline and reduced military spending by the United States will affect allied confidence in America’s security guarantees. The study shows that this outcome could cause regional instability or realignments of strategic partnerships in the Asia-pacific region with ramifications for U.S. national security. Rival states and non-state groups may also become emboldened to challenge America’s status in the unipolar international system.¶ The potential risks associated with stolen or loose WMD, resulting from poor security, can also pose a threat to U.S. national security. The case study on Pakistan, Syria and North Korea show how financial constraints affect weapons security making weapons vulnerable to theft, and how financial factors can influence WMD proliferation by contributing to the motivating factors behind a trusted insider’s decision to sell weapons technology. The inherent vulnerabilities within the global financial markets will provide terrorists’ organizations and other non-state groups, who object to the current international system or distribution of power, with opportunities to disrupt global finance and perhaps weaken America’s status. A more ominous threat originates from states intent on increasing diversification of foreign currency holdings, establishing alternatives to the dollar for international trade, or engaging financial warfare against the United States.
(Plan): The Untied States should provide a federal job guarantee
Guaranteed employment stabilizes the economy
Dr. Stephanie Kelton, 2020, Stephanie Kelton is an American economist and academic. She is currently a professor at Stony Brook University and a Senior Fellow at the Schwartz Center for Economic Policy Analysis at the New School for Social Research. She was formerly a professor at the University of Missouri–Kansas City. She also served as an advisor to Bernie Sanders’ 2016 presidential campaign, . The Deficit Myth Kindle Edition.
Even if all 535 members of Congress woke up tomorrow and agreed to conduct fiscal policy the way Lerner recommended, involuntary unemployment would remain a permanent feature of our economy. There’s just no way for Congress to react to changing economic conditions by turning the steering wheel quickly enough to ensure that everyone who is looking for work can always find a job. At best, we might arrive at a closer approximation to full employment, but there would always be a significant cohort that remains locked out of employment. It’s also not enough to rely exclusively on Congress to adjust government spending and taxation to fight off inflation once it begins to accelerate. To supplement discretionary fiscal policy (the steering wheel), MMT recommends a federal job guarantee, which creates a nondiscretionary automatic stabilizer that promotes both full employment and price stability. Think of a poorly maintained roadway. You get a smooth ride until you encounter a pothole or a bump in the road. You can try to steer clear of hazards, but at some point, you’re destined to hit one. At that point, you could be in for a rough ride. If you’ve got a vehicle with good shock absorbers, they’ll buffer the impact, and you won’t get jostled around too much. But if the shock absorbers are weak, you’d better hang on! MMT enhances Lerner’s steering wheel with a powerful new shock absorber in the form of a federal job guarantee. Here’s how it would work. The federal government announces a wage (and benefit) package for anyone who is looking for work but unable to find suitable employment in the economy. Several MMT economists have recommended that the jobs be oriented around building a care economy.22 Very generally, that means the federal government would commit to funding jobs that are aimed at caring for our people, our communities, and our planet. This effectively establishes a public option in the labor market, with the government fixing an hourly wage and allowing the quantity of workers hired into the program to float.23 Since the market price of an unemployed worker is zero—that is, no one is currently bidding on them—the government can create a market for these workers by setting the price it is willing to pay to hire them. Once it does, involuntary unemployment disappears. Anyone seeking paid employment has guaranteed access to a job at a rate of remuneration established by the federal government. The job guarantee has its origins in the tradition of Franklin Delano Roosevelt, who wanted the government to guarantee employment as an economic right of all people. It was also an integral part of the civil rights movement led by Dr. Martin Luther King Jr., his wife, Coretta Scott King, and the reverend A. Philip Randolph. The influential economist Hyman Minsky advocated such a program as a key pillar in his antipoverty work. It’s important to note that the job guarantee doesn’t require policy makers to try to divine the amount of slack in the labor market using something like a NAIRU. Instead, the government simply announces a wage and then hires everyone who turns up looking for a job. If no one shows up, it means the economy is already operating at full employment. But if fifteen million people show up, it reveals substantial slack. In a real sense, it’s the only way to know for sure how substantially the economy is underutilizing available available resources. Why does the financing have to come from Uncle Sam? Simple. He can’t run out of money. It would be nearly impossible for a currency user, such as a state or local government, to commit to hiring anyone and everyone who showed up asking for a job. Imagine what would happen if the mayor of Detroit announced that the city was prepared to offer a job to anyone who wanted to work but couldn’t find employment anywhere in the region. It would be swamped with applicants. Even in a relatively good economy, tens or hundreds of thousands of people would show up, placing an enormous strain on the local government budget. Now think about what would happen if the economy went into recession and the number of applicants doubled at the same time Detroit’s tax revenues were falling off a cliff. Remember, state and local governments really do depend on tax revenue to pay the bills. They can’t simply commit to spending more when their revenues dry up in a recession. But that’s precisely when the program is under the greatest strain (and when it’s most critical). Recall from the previous chapter that Mosler got his kids to do chores around the house by imposing a tax payable only in his business cards. In this sense, the tax (at least from inception) is the thing that causes people to seek employment. MMT reckons that since the government imposes the tax that causes people to look for ways to earn the currency, the government should make sure that there is always a way to earn the currency. With a job guarantee in place, the economy can pass through a rough patch without throwing millions of people into unemployment. The rough patches are inevitable. There isn’t a capitalist economy on earth that has found a way to eradicate the business cycle. Economies grow and create jobs and then, eventually, something happens to throw them into recession. We can and should use discretionary policy to try to tame the business cycle. Smoother rides are preferable to bumpy ones. But no country has figured out how to steer clear of every possible hazard. Over the past sixty years, the US has been hit with recessions in 1960–1961, 1969–1970, 1973–1975, 1980, 1981–1982, 1990–1991, 2001, and 2007–2009. Good times are followed by bad times, which eventually set the stage for the next round of good times. A major benefit of the job guarantee is that it helps to insulate the economy as it passes through the inevitable boom-bust cycle. Instead of throwing millions of people out of work when the economy softens, the job guarantee allows people to transition from one form of paid employment into another. You might lose a job sorting boxes for a private retailer, but you could immediately secure employment performing a useful job in public service. Because the job guarantee allows workers to transition into alternative employment rather than joining the ranks of the unemployed, the program helps to cushion the overall economy by supporting wages and preserving (or enhancing) skills until the economy recovers and workers begin to transition back into private sector jobs. And because spending to hire workers into the program becomes automatic once the job guarantee is in place, we don’t have to rely on discretionary spending to smooth the ride.24 The federal government guarantees the financing, establishes the broad parameters that define the types of jobs the program aims to support, and provides oversight to ensure compliance and accountability. Virtually everything else is handled in a decentralized way, bringing decision-making as close as possible to the people and communities who will benefit most directly from the tasks that will be performed. The key feature of the program is that it will act as a powerful new automatic stabilizer for the economy as a whole. MMT fights involuntary unemployment by eliminating it. In our view, the most effective full employment policy is one that targets the unemployed directly. Instead of aiming spending at infrastructure and hoping jobs will trickle down to the unemployed, MMT proposes what Bard College economist Pavlina Tcherneva describes as a bottom-up approach.25 It takes workers as they are, and where they are, and it fits the job to their individual capabilities and the needs of the community. We’re not talking about creating just any old job. This isn’t a make-work scheme, aimed simply at giving the unemployed a shovel in order to justify paying them a wage. It’s a way to enhance the public good while strengthening our communities through a system of shared governance. As Vickrey put it, these public service jobs would enable us to “convert unemployed labor into improved public amenities and facilities of various types.”26 The idea is to task people with useful work that is valued by the community and to provide compensation for that work in the form of a decent wage and benefit package. If the economy were to crash the way it did in 2008, the federal job guarantee would catch hundreds of thousands of people instead of allowing them to fall into unemployment.27 The private sector would shed jobs, but new jobs would immediately spring forth in public service. Since the federal government has committed to providing the funding for these new jobs, the downturn is cushioned by an expansion of the fiscal deficit. It happens automatically, without any need to wait for Congress to deliberate and haggle over whether to rescue the economy with fiscal stimulus. Because the program supports incomes, the economy stabilizes more quickly than it would in the absence of the job guarantee. The downturn is less severe, and the recovery arrives sooner. And because it’s a permanent program, it’s there to buttress the economy in good times and in bad. Since it’s always in effect, the job guarantee provides for a smoother overall economic ride, which helps to stabilize inflation. Without it, incomes would fall more sharply when businesses lay off workers as customers disappear, causing inventories to pile up and businesses to look for ways to quickly mark down prices to liquidate unsold items. When the recovery eventually arrives, companies can raise prices to reestablish customary profit margins. The more the economy swings around, the more prices may move in response. By stabilizing consumer income, the job guarantee helps to avoid wider adjustments in consumer spending that may result in more price variation. The job guarantee also helps to stabilize inflation by anchoring a key price in the economy—the price paid to workers in the job guarantee program. By establishing a wage floor, the government sets the minimum compensation, say $15 per hour. This becomes the rate of remuneration against which all other employment can be priced. Right now, the minimum wage is zero. Yes, the federal minimum wage is $7.25 per hour, but as the economist Hyman Minsky often observed, the minimum wage available to the unemployed is $0. You have to be employed to earn at least the federal minimum wage, and millions of unemployed Americans don’t have access to that wage. To establish a universal minimum, there must be a standing offer to bid for labor at some positive price. The job guarantee establishes that minimum bid, making the job guarantee wage the de facto minimum wage throughout the economy. Once established, any other form of employment would be expected to offer a premium over the base wage.28 We already do this with interest rates, where the Federal Reserve sets the overnight rate, which becomes the base rate against which mortgages, credit cards, auto loans, and so on are priced. When the Fed raises the short-term rate, other rates usually move higher.29 By anchoring the price of labor, the job guarantee imparts greater stability across a spectrum of wages and prices in the economy. Finally, the job guarantee helps to fight inflationary pressure by maintaining a ready pool of employed people from which businesses can easily hire when they’re looking to expand production. We know from surveys of employers that the least appealing job applicant is the one who has suffered a long bout of unemployment. Employers just don’t want to take a chance on hiring someone who has no recent employment record.30 To the extent possible, they want to know what they’re getting. Hiring the unemployed involves substantial risk. There’s no way to find out whether the long-term unemployed have retained good work habits, if they can be expected to interact well with others, and so on. An efficient typist or a skilled craftsman may have seen their skills deteriorate from lack of use. You’re rolling the dice when you hire someone who’s been out of work for a relatively long period of time. To avoid the uncertainty, companies often try to lure workers away from their current positions by bidding up wages to the level necessary to entice them to switch jobs. If every employer follows suit, then we’re in a game of musical chairs, where those with chairs are constantly moving to better-paying chairs and those without chairs stay locked out of the game. Bidding up wages in this way introduces an inflationary bias that is mitigated when businesses have the option to hire from a pool of employed public service workers instead. With the job guarantee in place, employers have an expanded pool of potential workers from which to hire. It benefits not only employers and those who would otherwise languish languish in unemployment but the rest of us as well. Because it’s an automatic stabilizer, the job guarantee moves the federal budget up and down—more money is spent when the economy is weak and less is spent when it grows stronger—ensuring that deficits move countercyclically to avoid overspending in this area of the budget. Of course, Congress would still retain discretionary control over other parts of the budget. As the currency issuer, Uncle Sam wields the power of the purse, and he can always decide to spend more on things like infrastructure, education, or defense. If there are goods and services for sale and Uncle Sam wants them, he has the power to outbid the rest of us. He’s not financially constrained. As the currency issuer, he has the power to commit to spending money he doesn’t have, and he can’t go broke as a result. That’s the reality that MMT exposes. Kelton, Stephanie. The Deficit Myth (p. 69). Public Affairs. Kindle Edition.
There really are no financial limits – the government can fiat paying for what it wants
Dr. Stephanie Kelton, 2020, Stephanie Kelton is an American economist and academic. She is currently a professor at Stony Brook University and a Senior Fellow at the Schwartz Center for Economic Policy Analysis at the New School for Social Research. She was formerly a professor at the University of Missouri–Kansas City. She also served as an advisor to Bernie Sanders’ 2016 presidential campaign, . The Deficit Myth Kindle Edition.
You’ve probably already seen MMT’s central insights in action. I saw them up close when I worked in the US Senate. Whenever the topic of Social Security comes up, or when someone in Congress wants to put more money into education or health care, there’s a lot of talk about how everything must be “paid for” to avoid adding to the federal deficit. But have you noticed this never seems to be a problem when it comes to expanding the defense budget, bailing out banks, or giving huge tax breaks to the wealthiest Americans, even when these measures significantly raise the deficit? As long as the votes are there, the federal government can always fund its priorities. That’s how it works. Deficits didn’t stop Franklin Delano Roosevelt from implementing the New Deal in the 1930s. They didn’t dissuade John F. Kennedy from landing a man on the moon. And they never once stopped Congress from going to war. That’s because Congress has the power of the purse. If it really wants to accomplish something, the money can always be made available. If lawmakers wanted to, they could advance legislation—today—aimed at raising living standards and delivering the public investments in education, technology, and resilient infrastructure that are critical for our long-term prosperity. Spending or not spending is a political decision. Obviously, the economic ramifications of any bill should be thoroughly considered. But spending should never be constrained by arbitrary budget targets or a blind allegiance to so-called sound finance. Kelton, Stephanie. The Deficit Myth (p. 4). … Take military spending. In 2019, the House and Senate passed legislation that increased the military budget, approving $716 billion, nearly $80 billion more than Congress had authorized in fiscal year 2018.15 There was no debate about how to pay for the spending. No one asked, Where will we get the extra $80 billion? Lawmakers didn’t raise taxes or go out and borrow an extra $80 billion from savers so that the government could afford to make the additional payments. Instead, Congress committed to spending money it did not have. It can do that because of its special power over the US dollar. Once Congress authorizes the spending, agencies like the Department of Defense are given permission to enter into contracts with companies like Boeing, Lockheed Martin, and so on. To provision itself with F-35 fighters, the US Treasury instructs its bank, the Federal Reserve, to carry out the payment on its behalf. The Fed does this by marking up the numbers in Lockheed’s bank account. Congress doesn’t need to “find the money” to spend it. It needs to find the votes! Once it has the votes, it can authorize the spending. The rest is just accounting. As the checks go out, the Federal Reserve clears the payments by crediting the sellers’ account with the appropriate number of digital dollars, known as bank reserves.16 That’s why MMT sometimes describes the Fed as the scorekeeper for the dollar. The scorekeeper can’t run out of points. Kelton, Stephanie. The Deficit Myth (p. 29). Public Affairs. Kindle Edition.
Every dollar of debt creates money and savings in the private economy
It’s a most powerful observation, and one that deals a fatal blow to the simple crowding-out story. To see why, let’s translate Godley’s model into even simpler language. We’ll need just two buckets. The goal is to look at the part of the crowding-out story that claims that government deficits eat up part of our savings. First, let’s look at an example of how financial payments move between the two parts of our economy. Suppose the government spends $100 on a fleet of new vehicles for the presidential motorcade. The vehicles will be produced by workers and businesses in the nongovernment part of the economy. Every dollar the government spends has to go somewhere, and there is only one place those dollars can go—into the nongovernment bucket. Let’s also assume that the rest of us, collectively, pay the government $90 in the form of taxes. If these were the only payments made by and to Uncle Sam, the CBO would report that the government had run a fiscal deficit, and it would record a minus $10 in its annual budget report. But wait! That’s not all that happened. The government’s fiscal deficit is mirrored by an equal and opposite financial surplus in the nongovernment part of our economy. Uncle Sam’s red ink is our black ink! His deficit is our financial surplus. Just follow the money: $100 goes into our bucket; $90 goes back out to pay taxes; $10 is left in our bucket. Every fiscal deficit makes a financial contribution to the nongovernment bucket. Godley was a stickler for details. His models were, as he put it, stock-flow consistent. It’s a fancy way of saying that all of the financial contributions that flowed into our bucket over time would exactly match the stockpile of dollar assets we must end up accumulating. In other words, every financial outflow had to become a financial inflow, and over time, those flows must accumulate into corresponding stocks of financial assets. To grasp the point, think of your bathtub. Water flows into the tub when you turn on the faucet, and water flows out of the tub when you open the drain. If the water is draining at least as fast as it’s flowing in, the tub will never accumulate any standing water. But if you add water faster than you siphon it away, the water level will rise as the tub begins to fill. That’s what’s happening in Exhibit 3 above. The government is letting $100 dollars flow into our bucket and only siphoning $90 down the drain. The flow of red ink lamented by Jason Furman fills our bucket with dollars. Fiscal deficits don’t eat up our savings; they enlarge them! If Uncle Sam continues to deficit spend at this pace, he will drop another $10 into our bucket every year. Over time, those dollars will accumulate and build up our financial wealth. At this pace, a decade from now, we’ll end up with a stockpile of $100 in our bucket. We’ll get to the borrowing in just a bit. But first, let’s consider what would happen if Congress had followed Furman’s advice, eliminating budget deficits and running its budget on a PAYGO basis, as shown in Exhibit 4. Kelton, Stephanie. The Deficit Myth (p. 108). PublicAffairs. Kindle Edition.
A job guarantee rebuilds our communities and protects individuals
Although they saved us from a darker fate, the automatic stabilizers weren’t strong enough to prevent an enormously painful recession. It took seven years to claw back all of the jobs that were lost in the aftermath of the financial crisis. Millions lost their homes. Some even lost their lives as a direct consequence of long-term unemployment. As the journalist Jeff Spross put it, “the damage done by long-term joblessness to mental and physical health is rivaled only by the death of a spouse.”21 To better protect our economy—and more importantly, the people, families, and communities in it—MMT recommends the addition of a powerful new automatic stabilizer, known as a federal job guarantee. We first encountered the idea in Chapter 2, where it was shown that we could achieve genuine full employment—a job for every person who wants one. Today, the Federal Reserve defines full employment as a level of unemployment that leaves millions locked in a game of musical chairs, searching for jobs that don’t exist. MMT resolves the problem by directly funding employment for those without work. Because it’s a driverless stabilizer, the steering wheel will always turn in the right direction at the right moment in time. To understand the economic logic behind the job guarantee, think back to Chapter 1 and the story of Warren Mosler’s business cards. Remember that Mosler wanted a tidy house, clean cars, and a nicely manicured yard. To get these things, he subjected his kids to a tax, payable only in his own business cards. The purpose of the tax was to motivate the kids to perform the work that was required to earn the cards. Similarly, when a government demands that taxes and other obligations be paid in its own unique currency (e.g., the US dollar), it does so to motivate people to spend some of their time working to get the currency. It might want a standing army, a court system, public parks, hospitals, bridges, and so on. Unemployment is defined as people seeking paid work in the government’s unit of account. The US dollar is basically a tax credit. MMT is the only macroeconomic approach that understands this, and the job guarantee follows directly from this understanding. Once you realize this, it becomes clear that any currency-issuing government has the power to eliminate domestic unemployment simply by offering to hire the unemployed. If it decides not to exercise this power, then it is choosing the unemployment rate. As of this writing, the official unemployment rate (3.5 percent) is low by historical standards. A broader measure of unemployment, one that comes closer to capturing the true extent of the problem, is nearly twice as high (6.5 percent). This measure, known as U-6 by the Bureau of Labor Statistics, tells us that there are nearly twelve million Americans who are looking for a way to earn more currency, but the jobs just aren’t there. The government could hire them all. Currently, the federal government chooses not to do that. Instead, it provides unemployment insurance as a way to cushion incomes when people lose jobs. Assuming workers qualify to receive benefits, unemployment insurance replaces a portion of the wages that are lost when someone becomes unemployed. The average payout is $347 per week. This helps to cushion the economy when aggregate demand begins to fall off, but it doesn’t protect the worker from a bout of joblessness. Some workers will find new jobs relatively quickly, while others will languish among the ranks of the unemployed for months or even years. In a deep recession, many will experience long-term unemployment, eventually seeing their benefits run out and their skills atrophy. While unemployment insurance is considered the most important automatic stabilizer we have today, it is not the most powerful stabilizer we can design. Part of the problem is that not everyone who is unemployed is eligible to receive benefits. That’s because not all work is covered by unemployment insurance. Some people are ineligible because they quit their jobs or are terminated for misconduct. Others aren’t employed long enough to qualify, or they have previously exhausted their benefits. Even many eligible workers don’t receive benefits. According to the government’s Bureau of Labor Statistics, “In 2018, 77 percent of the unemployed people who had worked in the previous 12 months had not applied for unemployment insurance benefits since their last job. Of the unemployed who had not applied, 3 out of 5 did not apply because they did not believe they were eligible to receive benefits.”22 The federal job guarantee would eliminate the uncertainty by establishing a universal right of employment to all.23 Here’s how it would work.24 Instead of leaving millions jobless, the government would establish an open-ended commitment to provide job seekers with access to the currency in exchange for performing public service work. Participation would be purely voluntary. No one is required to work in the program. To ensure that we’re not just creating make-work jobs but good jobs, MMT economists have recommended that these jobs pay a living wage and that the work itself should serve a useful public purpose.25 Since the job guarantee would establish a permanent commitment, it would become a mandatory (as opposed to discretionary) l federal spending program. As with other mandatory programs—for example, unemployment insurance or food stamps—spending would bounce up and down as people enter and exit the program. If the economy slips into recession, more people will tran sition into public service employment, and the budget will automatically register higher spending to support those jobs. When the economy improves and the private sector is ready to begin hiring again, workers will move out of the program and the budget will automatically shrink. This makes the job guarantee a powerful new automatic stabilizer, one that would fortify the existing driverless mechanisms in the federal budget.26 From a purely economic standpoint, the major advantage of the job guarantee is its ability to stabilize employment over the business cycle. This doesn’t just benefit those who are able to quickly find new jobs. It benefits all of us. As of 2020, the US is in the midst of the longest expansion—that is, uninterrupted job growth—in recorded history. But at some point, the expansion will come to an end, and the economy will slip into recession. That’s just the nature of capitalism. Businesses hire and invest when they’re swamped with customers. Eventually, demand will slack off (often because people decide they’ve taken on too much debt), and people will start to close up their wallets.27 As customers begin to disappear, businesses scale back production and begin laying off some of their workers. If we had a job guarantee in place today, it could employ many of the twelve million people who are currently without the work they need, and it could catch many of the people who would otherwise experience unemployment when the next recession comes. It would weave stronger fibers into the existing social safety net, catching people with new employment opportunities the moment they’re laid off. Whether you own your own business or work for someone else, your own economic security is probably closely tied to the income security of others. Relying on unemployment insurance isn’t good enough. Not everyone is eligible, and most states only pay benefits for thirteen to twenty-six weeks. When the Great Recession began (December 2007), there were already 1.3 million people experiencing long-term unemployment (more than twenty-seven weeks). In August 2009, after the recession had officially ended, 5 million Americans had been without work for twenty-seven weeks or longer. A year later, that number had climbed to 6.8 million. Even though Congress voted to extend the benefit period, those extensions eventually ended, leaving millions without jobs or income. Businesses and communities across America felt the blow. As the unemployed struggled to pay their mortgages, homes were foreclosed on, property values plummeted, revenue from property taxes shriveled up, state and local governments slashed spending on everything from education to transportation, classroom sizes swelled, infrastructure deteriorated, and on and on. The deep and protracted recession hurt us all. Congress could have pulled the discretionary lever again, authorizing a new round of fiscal stimulus to sustain aggregate demand. But it didn’t. By that point, lawmakers were more focused on fighting against the budget deficit than allowing bigger deficits to help heal the ailing economy. So, Congress left it up to the Federal Reserve to do what it could. That failure to act cost us. Things would have been very different with a federal job guarantee in place. The economic steering wheel would have automatically turned in the direction of bigger fiscal deficits. Turning the wheel in the direction of even bigger deficits didn’t feel right to Congressman Cleaver and his colleagues, but it was exactly what was needed in that moment. Think of it this way. Suppose you’re driving through a winter storm and you hit an icy patch that sends your car skidding out of control. What would you do? Instinctively, most of us would probably turn the steering wheel in the opposite direction. If the car is drifting rightward, yanking the wheel to the left just feels like the right thing to do. It isn’t. As they teach us in high school driver’s ed class, we need to turn into the skid to regain control. It feels wrong, but it’s the only way to avoid a potential collision. The job guarantee equips the federal budget with an automated feature that overrides lawmakers’ natural impulse to turn against deficits when the economy is skidding off course. As the economy gets back on track, companies begin hiring workers out of the federal job guarantee program. When this happens, those workers fall off the government budget, and the steering wheel automatically adjusts to reduce the size of the deficit. So, the job guarantee is a powerful economic stabilizer. By maintaining incomes and keeping people employed throughout the business cycle, future recessions would be shorter lasting and less severe. That’s because people can enter the program as soon as the economy begins to soften and exit more quickly as hiring conditions improve, since businesses are reluctant to hire people who have been unemployed for long periods of time. Staying employed and building new skills while in the program improves the odds of getting recruited out of the program when the economic tides begin to turn. What kind of work would these people do, and how can we make sure there are always enough jobs available for everyone who wants to work in the program? How much would workers get paid, and who would administer a federal program of this size? Has anything like this been tried before? There is an enormous MMT literature, spanning more than three decades, that answers these questions and many, many more.28 A complete treatment is beyond the scope of this work, but we can answer the big questions and describe the broad contours of the program as laid out in a 2018 report coauthored by five MMT economists.29 What we envision is a highly decentralized Public Service Employment (PSE) program that offers paid work at a living wage (we recommend $15 per hour) with a basic package of benefits that include health care and paid leave. Both part-time and full-time work should be offered, and work arrangements should be sufficiently flexible to accommodate the needs of caregivers, students, older workers, those with disabilities, and so on. While funding must come from the top (federal government), the jobs themselves would largely be designed by the people living in the communities that will benefit from the work that is performed. As we explain in the report, “the goal is to create jobs in every community, and to create projects that are beneficial to every community, [so] it makes sense to involve local communities in these projects, from the proposal stage through to implementation, administration, and evaluation.” The program budget could reside within the Department of Labor (DOL), and DOL would specify the general guidelines for the kinds of projects that would qualify for funding. The goal is to provide jobs that fulfill unmet community needs. As we envision it, all of the jobs should be oriented around an overarching goal: building a care economy. We are an aging society in the midst of a climate crisis with more than enough useful work to be done. We can address our good jobs deficit by creating millions of good-paying jobs that care for people, communities, and our planet. When it comes to creating those jobs, we think it’s important to recognize that the federal government is not in the best position to identify the community’s most pressing needs. The people who live and work in the community are. That’s why we recommend that government agencies work with community partners to assess and catalogue unmet needs so that jobs can be tailored to meet the needs of the community. Together, states and municipalities would work with their community partners to create a repository of work projects. Think of it like a massively scaled-up Shelf Project, but instead of binders full of pay-fors, the shelves would be filled with a wide variety of available jobs. The idea is to keep the shelves stocked with enough potential work to allow people with different skills and interests to walk in without a job and walk out with one that fits them.30 By design, the demand for public service jobs will fluctuate over time. On average, we estimate that the program would harness the energies of approximately fifteen million people. Some will choose part-time work, but most participants will want full-time employment.31 Suppose we end up with the equivalent of twelve million full-time workers in the program. Assuming two weeks of paid leave, that means these people are offering to devote twenty-four billion hours of time, annually, to public service employment.32 Now imagine just some of the things we could accomplish by using twenty-four billion hours to address tangible deficits in our communities. We could create a twenty-first-century Civilian Conservation Corps—one free of the racist and exclusionary practices of the New Deal era—that puts millions of people to work on projects aimed at caring for the environment.33 The jobs bank should include a wide variety of available work, ranging from fire prevention to flood control and sustainable agriculture. We could care for blighted communities, which have suffered from decades of neglect and disinvestment, by cleaning up vacant lots, building playgrounds and community gardens, designing afterschool full-time workers in the program. Assuming two weeks of paid leave, that means these people are offering to devote twenty-four billion hours of time, annually, to public service employment.32 Now imagine just some of the things we could accomplish by using twenty-four billion hours to address tangible deficits in our communities. We could create a twenty-first-century Civilian Conservation Corps—one free of the racist and exclusionary practices of the New Deal era—that puts millions of people to work on projects aimed at caring for the environment.33 The jobs bank should include a wide variety of available work, ranging from fire prevention to flood control and sustainable agriculture. We could care for blighted communities, which have suffered from decades of neglect and disinvestment, by cleaning up vacant lots, building playgrounds and community gardens, designing afterschool strengthens the bargaining power of labor, reduces racial inequities, decreases poverty, and raises the floor on low-wage work while building stronger, more vibrant, more connected communities.34 Has anything like this ever been tried? No country has implemented a full-fledged job guarantee, but a number of countries have experimented with versions of the idea. In the 1930s, the US fought the Great Depression by directly creating millions of jobs under President Franklin D. Roosevelt’s New Deal. The Public Works Administration (PWA) put hundreds of thousands of men to work building schools, hospitals, libraries, post offices, bridges, and dams. In its first six years, the Works Progress Administration created about eight million construction and conservation jobs as well as thousands of jobs for writers, actors, and musicians. The National Youth Administration created 1.5 million part-time jobs for high school kids and 600,000 for college students. As MMT proposes, the jobs were federally funded, but the programs weren’t permanent, and they didn’t guarantee employment to all. Argentina’s Jefes de Hogar plan wasn’t a full-throated job guarantee either, but in 2001 it became “the only direct job creation program in the world specifically modelled after” the proposal developed by MMT economists.35 The program was launched as an emergency measure following a financial crisis that plunged the economy into recession and drove the official unemployment rate above 20 percent. It was inspired by the work of Warren Mosler and designed in consultation with MMT economists—Pavlina Tcherneva, Mathew Forstater, and L. Randall Wray—as a way to quickly put people back to work. A first of its kind, the Jefes de Hogar plan created a federally funded, locally administered jobs program that guaranteed four hours of daily work in exchange for 150 pesos per month. As Tcherneva explains, jobs were limited to heads of households with “children under age eighteen, persons with disabilities, or a pregnant woman.”36 At its peak, the program employed some two million people, about 13 percent of the labor force. Almost 90 percent of the jobs were in community projects, and 75 percent of the participants were women. Just six months after launching the program, extreme poverty had fallen by 25 percent. Within three years, half of the participants had left the program, most for jobs in the private sector.37 In 2003, at its annual Growth and Development Summit, South Africa’s government formalized a commitment to “more jobs, better jobs, [and] decent work for all.”38 The Expanded Public Works Program (EPWP) grew out of that commitment. The program created “temporary work for the unemployed to carry out socially useful activities.”39 Two years later, the Indian government instituted the Mahatma Gandhi National Rural Employment Guarantee Scheme (MGNREGS). The program was motivated by a desire to narrow disparities between rural and urban incomes. To create opportunities for those living where unemployment was high, the government guaranteed one hundred days of minimum wage work—with wages equal for men and women—for any rural household. India’s job guarantee remains targeted (rather than universal), but it’s one of the largest federally funded employment guarantee programs in the world. Studies have shown that by establishing a uniform wage, India’s rural employment guarantee helped to foster gender equality and female empowerment, while also improving transparency of the political process.40 So, yes, there are historical and even recent examples of governments adopting targeted forms of an employment guarantee. Most were implemented as temporary measures to cope with a crisis of one kind or another. MMT thinks differently about the scope and the ultimate purpose of the job guarantee. It’s not an emergency measure to be turned on during crisis and then shut down as private sector job growth recovers. Instead, the job guarantee is a way to equip our economy with a more powerful driverless stabilizer. Think about it this way: you wouldn’t have your mechanic remove the shock absorbers in your car just because the city fills some potholes or repaves the roads. You want them there at all times because you know you get a better ride with them than without. The same is true of the job guarantee. Without it, we rely on weaker stabilizers that provide temporary income to the unemployed, while permanently trapping millions of people in an unemployed buffer stock. With the job guarantee in place, we can use full employment to absorb the inevitable bumps in the road. Experience shows that creating jobs for the unemployed works. It brings a myriad of benefits that go well beyond simply providing income to those who would otherwise suffer bouts of unemployment. The idea is not unique to MMT. It’s been called the forgotten leg of the New Deal.41 FDR had hoped that Congress would enshrine a job guarantee in the form of an Economic Bill of Rights, but his party never carried through with a formal commitment after his death.42 Still, the fight for guaranteed employment went on. It was an integral part of the civil . rights movement, and it remains a cornerstone of international human rights law.43 Many now also see it as a critical ingredient in the fight for greater economic equality and climate justice. It’s an opportunity to transform tens of billions of hours of human idleness into a wide array of jobs that will help us build an economy that is both more resilient and more environmentally and ecologically sustainable. A 2017 survey in the Journal of Community Health showed that one in three working Americans believe their job is not secure.9 The experience of that vulnerability is correlated with significantly higher chances of obesity, poor sleep, smoking, lost work days, and worsening health in general. Economists Susan Case and Angus Deaton studied the steep rise in mortality among middle-aged white Americans since 1999 and found the big causes were suicide, drugs, and alcoholism—the so-called deaths of despair. These deaths were driven primarily by economic anxiety.
Jobs guarantee would permanently boost the economy
Tcherneva, Pavlina R.. “A Job Guarantee Costs Far Less Than Unemployment.” Foreign affairs. January 22, 2020. Web. October 12, 2020. <https://www.foreignaffairs.com/articles/united-states/2020-07-22/job-guarantee-osts-far-less-unemployment>.
THERE IS NO MINIMUM WAGE WITHOUT WORK In a few short years (1933-38), Roosevelt implemented policies that were truly transformative at the time. Imagine a United States without minimum wages, mandated days of rest, collective bargaining, unemployment insurance, and Social Security. But the country endorsed no guaranteed right to decent employment for all, and so its early labor laws were built on weak foundations. The threat of the sack loomed in every negotiation between unions and firms. Employers could easily outsource jobs and hire cheap migrant labor. Job insecurity broke the postwar social contract, eroded workplace solidarity, and helped bust unions, as firms held the threat of unemployment over their workers as a powerful cudgel. Conventional wisdom accepts unemployment as the inevitable collateral damage of economic fluctuations, trade, and shocks, such as pandemics and financial crises. But the social costs of this status quo are staggering. The unemployed often endure permanent loss of income, physical and mental health problems, and increased mortality. Their spouses and children suffer reduced health and educational prospects. Crime, homelessness, recidivism, and political instability are strongly correlated with unemployment. The job guarantee would prevent many of these outcomes and provide a minimum labor standard for all jobs, including a robust wage floor. Without the guarantee of a job, the effective minimum wage for those seeking work but unable to find it is zero. The road to establishing a labor standard has been long. When Roosevelt called on Frances Perkins to serve as Labor Secretary, she agreed on the condition that he support a federal minimum wage, a reduction in the workweek, and a revitalized public-service employment program (among other groundbreaking pieces of legislation). The 40-hour workweek she helped pass was a compromise: a very popular earlier bill for 30 hours had been narrowly defeated. The minimum wage she fought for did not extend to all workers, and over the intervening decades, it has in any case failed to keep pace with the cost of living. More than 40 percent of working people in the United States earn less than $15 an hour, and a campaign to raise the minimum wage has made slow progress in state legislatures. More sweeping federal action is called for. Without the guarantee of a job, the effective minimum wage for those seeking work but unable to find it is zero. The job guarantee would help secure a true minimum wage and benefits package and establish standardized working hours and conditions, because it would eliminate unemployment and offer an alternative to unstable jobs that pay poverty wages. Indeed, poverty-wage-paying employers would be enticed to match or exceed the decent pay and benefits of the job guarantee if they wished to retain workers. But that would not be hard to do, because these firms, too, would be thriving in a stronger and more stable economy. Our research at the Levy Economics Institute demonstrates that a large job guarantee program, employing 15 million people at $15 an hour with benefits, would permanently boost economic growth by $550 billion (more than 2.5 percent of GDP) and private-sector employment by three to four million jobs, without causing inflation. It would furnish considerable relief to state budgets and reduce overall welfare expenditures on other programs. The price tag? Only 1.3 percent of GDP—not a high price to pay for full employment, price stability, and economic security. The fallout from COVID-19 may require the program to be bigger than earlier anticipated, but one thing is certain: one way or another, the government and society will be paying unemployment. The question is how: whether by providing decent job opportunities or by sustaining an economy in which masses of people remain unemployed.