The Work Programme. Is this the best we can do?

“…we’re overturning the convention of recent times: the idea that it’s governments that create jobs. No, they don’t – businesses do.”

David Cameron writing in the Daily Mail, 1 Oct, 2011

When the coalition took power in May 2010, one of their first acts was to scrap Labour’s Future Jobs Fund and to announce they were replacing it and all other Labour unemployment programmes with a cheaper alternative – The Work Programme.

The success of the Work Programme depends upon (mainly) lead private sector welfare to work companies helping the long term unemployed find work. They have a great deal of flexibility in the methods they use to achieve this, and the Work Programme is compulsory once someone has been unemployed for 12 months (and earlier for young people). They are paid on the basis of payment by results.

The only problem is that the Work Programme does not seem to be working (e.g. see here and here) and many of the organisations involved are starting to have doubts their continuing involvement. The Government insists all is well, but they have been very coy about releasing official data on performance.

The basic problem with the Work Programme can be explained with the following simple analogy. Imagine there are 100 dogs and I bury 95 bones in the ground and send the dogs out to find them. It’s easy to see that at least 5 dogs will return without a bone. In order to improve their chances of finding a bone, I might provide some extra training to the 5(+) dogs who came back empty-pawed. Now when I rebury the bones, the dogs that I trained come back with a bone. Unfortunately 5 other dogs returned without a bone. No matter how much training I give the dogs, as long as there are only 95 bones,  there will always be some dogs who cannot find a bone. The only solution then is for me to bury an extra 5 bones*.

The Work Programme however, does not create any jobs (other than for a few thousand ’employment advisors’ and contract managers), and can only ‘shuffle’ the unemployed. Some will find work, but only at the expense of others.

The Work Programme is what economists would call a supply side policy. The idea is that unemployed people lack the skills and/or attitude that employers are looking for and if these attributes can be instilled into those looking for work, the private sector will jump at the chance to hire them. You hear this a lot from  Government and in the media. This misses the wood for the trees though. The problem not that the unemployed are not employable (though some may be). The problem is a lack of jobs. The Work Programme cannot address this problem.

This post began with a quote from David Cameron, because there seems to be a prevailing view that only the private sector can create jobs (though hundreds of thousands of doctors, nurses, teachers etc might disagree). Private sector good, public sector bad. Because of this, our politicians fiddle with schemes like the Work Programme, while all around them millions of people are unable to find work. Think of the lost potential! The young people leaving school and university with little of no prospect of a fulfilling career. Imagine how much more prosperous we could be as nation if we could just put those unused resources to work!

So to return to the title of this post, is the Work Programme the best we can do to address our unemployment crisis? I think not only can we do better, we must do better, and a failure to act represents a gross dereliction of duty by our Government.

So what could we do? My last post tackled the canard that “There’s no money left”. Armed with the knowledge that this is not true, what policy options are there?

One option would be to just do what a lot of commentators on the left are advocating at the moment – to raise demand through increased spending on capital projects or reduced taxation on low earners. Without question, that would reduce unemployment quickly, but there would come a point where the impact would reduce as the new jobs would be unevenly spread around the country and large capital projects tend to require higher skills nowadays. For example, in the 30s, the WPA in the US provided millions of jobs to low skilled workers on ‘shovel-ready’ projects. Today, sophisticated machinery does the job that in the past was done by hand.

The option I prefer is called a Job Guarantee (JG) or Employer of Last Resort (ELR). This is a concept proposed by Minsky and expanded upon and developed by economists from a branch of economics know as Modern Monetary Theory. For more scholarly articles, I recommend reading this comprehensive explanation of the JG, or a series of articles which can be found at the Levy Institute here.

What is a JG/ELR then? In simple terms, it is a backstop provided by the government. The government would provide the funding to provide a job for everyone who is willing and able to work, but who cannot find a job in the private sector or regular public sector. While central government would provide the funding, the jobs could actually be created in the voluntary sector or local government, doing work which provides community benefit. There are almost limitless types of work which could be provided which the private sector for whatever reason do not find profitable. Just because they are not profitable, doesn’t mean they are not socially useful. Examples of jobs would be caring for the elderly, community gardening, youth work, sports coaching, music lessons, after school clubs and many, many more.

The JG wage could start at the minimum wage and be gradually increased to a living wage level. In effect, the JG wage would become the de facto minimum wage. Any employer trying to pay less would be unable to recruit staff. This could mean some low wage work becomes no longer profitable. These will tend to be the worst jobs in society, so in general, that would be a good thing.

JG jobs could come with accredited training so that workers can build the skills necessary to transition to permanent work elsewhere. Jobs suitable for those looking to return to work after a period out of the labour market due to ill health could also be created. A JG could operate alongside existing benefits so the decision to take a JG job would be entirely up to the individual. It may be that they would prefer to look for a regular job whilst remaining on benefits.That would be fine.

As well as being a path the full employment, a JG would mean that booms and busts would be shallower. At the moment, when a recession hits, things economists call automatic stabilisers kick in. This means tax receipts fall and out of work benefits rise and this stops the economy from falling into the abyss. The problem is, at the moment the automatic stabilisers are not powerful enough to reignite the economy. A JG would change this by lessening the severity of the slump. The size of the pool or JG workers would rise and fall depending on the state of the economy. In recession, the pool would be large, but as the economy recovers, the majority would transition back to regular jobs.

Another macroeconomic impact would be to ensure a modicum of price stability. At the moment, economists and politicians place a great deal of emphasis on inflation. The Bank of England has a target for inflation of 2.5% and Mervyn King must write a letter to George Osborne every month that inflation exceeds that target (he’s been writing a lot of letters lately).

The trouble is, as the economy starts to reach full capacity, the risks of inflation increase. Mainstream economists believe that there is a trade-off between inflation and unemployment, which is the main reason why we haven’t had true full employment for about 40 years. Keeping unemployment above a certain threshold has been deliberate. A JG changes this because the JG sets a floor on wages which prevents wages elsewhere in the economy from rising too fast as the economy reaches full capacity. So we can have full employment and price stability. At the moment there is a belief that it is either all, and price stability is considered more important.

I want to finish with a quote from Michal Kalecki’s masterful 1943 essay “Political Aspects of Full Employment” (I highly recommend reading the whole thing which can be accessed here):

A solid majority of economists is now of the opinion that, even in a capitalist system, full employment may be secured by a government spending programme, provided there is in existence adequate plan to employ all existing labour power, and provided adequate supplies of necessary foreign raw-materials may be obtained in exchange for exports.

So we already know how to achieve the goal of full employment. It is practical and affordable. We just need the political will and determination to get there. The Labour Party are currently doing a lot of soul searching to try to win back the support of the British people, but if they truly want to become the party of working people again, they need to get serious about full employment. There have been some promising noises from certain quarters. The IPPR, supported by David Miliband back a type of JG for young people and those unemployed for over 12 months, but it lacks ambition. They need to be braver. They need to be bolder.

PS. There is a very good video here of a presentation given by Bill Mitchell (one of the architects of the JG concept) to the European Commission’s recent “Jobs for Europe” conference. It’s encouraging these ideas are being discussed at this level. The video’s about 25 minutes long. It’s well worth a watch.

*For a more detailed version of the dogs and bones example, see this post by Bill Mitchell.

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There’s No Money Left?

“The British Government has run out of money because all the money was spent in the good years,”

George Osborne, Feb 2012

“…in the years of plenty they put nothing aside. They didn’t fix the roof when the sun was shining”.

David Cameron, March 2008

“There’s no money left”

Letter left by Liam Byrne, May 2010

For the last 4 years you will have seen or heard quotes like this in the media. How we were on the brink of bankruptcy and how “there is no money left”.  Those advocating a “Keynesian” response to the current crisis are rebuffed with the argument that we cannot increase borrowing now because we didn’t run budget surpluses in the years before the crisis – “Gordon Brown spent all the money”. Keynesianism has now been reduced to “surpluses in the good times, deficits in the bad”.

Liam Byrne’s famous note left as Labour left office was particularly heinous and the Coalition never miss an opportunity to use it as a stick with which to beat Labour. It may surprise you to hear this, but Liam Byrne is not an expert on the economy (or anything else), and should be ignored on all matters economic.

The Government say Labour want to increase borrowing by £200bn, and this would be disastrous as, if the ‘markets’ thought we were increasing borrowing, they would start to worry that we would be unable to repay our debt (or “pay our way in the world” as David Cameron is fond of saying), and interest rates would start to rise. This is basically what has happened in some of the states in the Eurozone, and Coalition ministers have not been shy in pointing this out (repeatedly and at length). Currently, Labour have no coherent response to this.

But is there any truth to this narrative? Is there an alternative path?

Perhaps surprisingly considering they have provided the intellectual cover for austerity, economists have long known that the idea of balancing budgets over the cycle is a bit like a fairy story we tell to frighten the kids. Here’s Paul Samuelson, “father of modern economics” and Nobel Prize winner, being interviewed in 1995:

“I think there is an element of truth in the view that the superstition that the budget must be balanced at all times [is necessary]. Once it is debunked [that] takes away one of the bulwarks that every society must have against expenditure out of control. There must be discipline in the allocation of resources or you will have anarchistic chaos and inefficiency. And one of the functions of old fashioned religion was to scare people by sometimes what might be regarded as myths into behaving in a way that the long-run civilized life requires. We have taken away a belief in the intrinsic necessity of balancing the budget if not in every year, [then] in every short period of time. If Prime Minister Gladstone came back to life he would say ‘uh, oh what you have done’ and James Buchanan argues in those terms. I have to say that I see merit in that view.”

So the idea that budgets must be balanced is a myth. Samuelson believed this myth was necessary to place a leash of governments who might be tempted to spend, spend, spend, but a myth it is never the less. But why is it a myth? Aren’t governments limited in their spending by what they can raise in taxation plus the amount the private sector is willing to lend them?

Categorically no! A country like the UK which issues its own floating currency, does not depend on anyone else for money. It can issue more currency at will and without limit. Therefore, it can never go run out of money and can always afford to purchase anything for sale in its own currency. This is a very simple (and perhaps obvious) point, but one that is generally ignored in all discussions about government finances. When it is discussed, it is discussed in somewhat hysterical terms: “PRINTING MONEY!! HYPERINFLATION!!” etc. etc. More sensible people realise that government creation of money is no more inflationary than bank creation of money. Creation of new money could be inflationary, but only at the point where output is unable to expand any more in response to new demand.

But if a government doesn’t need to collect taxes or borrow from the markets in order to spend, why does it do these things? In a country like the UK, taxes serve a number of purposes. Firstly, tax ensures there is a demand for the government’s currency. We must all pay taxes in pounds (some more than others), so we accept pounds as payment for goods and services so we can pay our taxes. Secondly, taxes make room for government spending. If the government just spent without taxing, very quickly we would reach maximum output and start to experience accelerating inflation. Taxation helps keep a lid on inflation. Finally, taxation is used to meet social aims. These may be to redistribute wealth or to discourage harmful activities, like polluting or smoking.

Why does the government sell bonds? It does this primarily to maintain its target rate of interest. If the government wanted, it could stop selling bonds altogether. This would mean the overnight interest rate would fall to 0%. Bonds also serve as a risk free asset which institutions like pension funds like to hold as part of their portfolios, so they serve a purpose in that way also.

So armed with this knowledge about government finances, what should government do?

  1. The do nothing approach. Like Paul Samuelson says, we can accept the truth about government finances, but also be concerned about letting governments spend without constraint, and so continue to tie our hands with regards to policy options. Taking this approach means we are in for a prolonged slump and a very slow recovery. We could still borrow more from the markets for investment, but this adds no new money to the system, just brings old money back into use.
  2. Use the knowledge that a government is not constrained by revenue and borrowing to actively pursue policies which would restore full employment and raise living standards. One possible approach would be to adopt an idea devised by the economist Abba Lerner (a contemporary of Keynes), known as functional finance. Lerner set out three rules for fiscal policy under functional finance:
    1. The government should ensure there is sufficient aggregate demand to ensure there is full employment. It should do this by lowering taxes and/or raising spending. If inflation beckons, government should do the opposite.
    2. Government should borrow money when it wishes to raise the interest rate and repay debt when it wishes to lower it.
    3. The government press shall print any money that may be needed to carry out rules 1 and 2.

I prefer option 2 as clearly it offers the shortest path back to prosperity. There are issues around how our political system would cope with functional finance, but this is a political problem, not an economic one. If the general public were fully aware of the realities of our monetary system, and the policy options that presented, we could all have a much more grown up debate about which course we should take.

For a full discussion of the nature of modern money, I recommend this video of a presentation given recently by Michael Hudson and L. Randall Wray. It’s a bit long, but well worth the effort:

http://mikenormaneconomics.blogspot.co.uk/2012/09/randy-wray-and-michael-hudson.html

Further Reading

The following are a few blogs I find useful for helping to understand economics:

http://moslereconomics.com/mandatory-readings/

http://mikenormaneconomics.blogspot.co.uk/

http://bilbo.economicoutlook.net/

http://neweconomicperspectives.org/

http://www.3spoken.co.uk/

http://www.creditwritedowns.com/