Unemployment insurance for the 21st century

L. Randall Wray has a post up at New Deal 2.0 which puts forward an idea which is pretty innovative. I would label it a private sector replacement for unemployment insurance. It’s the kind of thinking that might bring Obama out of a policy cul-de-sac as the economy hemorrhages jobs.

Let me present an excerpted version and mention a few concerns one might have with this idea. The link to the full post is at the bottom:

The latest jobs report shows that the official unemployment took a huge jump to 10.2% –15.7 million jobless workers. If we add to those numbers involuntary part-time workers, plus those who have given up looking for work, the unemployment rate is 17.5%. Even that seriously undercounts those who would be willing to work if decent jobs at decent pay were readily available–a number I put at 25 to 30 million…

I am advocating… a universal job guarantee available through the thick and thin of the business cycle. The federal government would ensure a job offer to anyone ready and willing to work, at the established program compensation level (including wages and a healthy benefits package). To keep it simple, the program wage could be set at the current federal minimum wage ($7.25 an hour), and then adjusted periodically as that is raised. The usual benefits would be provided, including vacation and sick leave, and contributions to Social Security.

Let’s call this the Job Guarantee (JG) program.

… A permanent and universal JG program should be decentralized, with projects created and administered locally–where the workers are, and for the benefit of their communities. The federal government would provide the wages, plus a portion of capital and supervisory expenses (perhaps capped at 25% of total wages paid for each JG project). Local governments and nonprofits would propose projects and cover the rest of the expenses. State unemployment offices would be converted to employment offices, helping to match workers and projects.

Project proposals would be submitted to regional councils and, if approved, would be evaluated by state councils and then by a federal council. Wages and benefits would be paid directly to workers (using Social Security numbers and direct bank deposits) to minimize fraud. Organizations submitting proposals would be prevented from replacing paid workers with JG workers. For-profit business would be excluded, because the temptation to substitute would be too great. At the same time, businesses would be protected from unfair competition because all JG projects would have to demonstrate they’d fulfill unmet public purposes. If at some future date, a for-profit firm decided to provide services that a JG project is performing, the JG project could be phased out. There is neither need nor desire for the JG program to compete with the private for-profit sector.

…JG workers will be gaining useful work experience and training, making them more appealing to other employers. When firms hire, they will recruit from the JG program, offering a slightly higher wage.

At the same time, the program’s fluctuation allows it to act as an employed “buffer stock”-or “reserve army of the employed”-helping to attenuate the business cycle while maintaining full employment without setting off a wage-price spiral. An economic boom will shrink the size of the JG program; in a recession the program will grow.

Thus, an effort like the Job Guarantee program I am proposing would act as an automatic stabilizer — a feature most would agree is desperately needed in our current rollercoaster economy.

This is definitely outside the box thinking. It is basically a decentralized counter-cyclical works program to largely replace the unemployment insurance program we presently have.

The benefits I see are that it maintains full employment by putting to work those that would be idle and collecting unemployment insurance.  We have an enormous number of unemployed people who are drawing significant social welfare payments (five million are drawing unemployment insurance according to my latest post). Why not use a lot of that same money and deploy them.

This approach also would employ a huge slew of longtime unemployed workers that have benefits expire and skills languish, making them harder to employ and increasing structural unemployment.  The job guarantee could then reduce the level of structural unemployment that results from a steep downturn (see Mark Thoma’s recent piece on structural unemployment for a cogent explanation of that issue).

In my view, full employment is compatible with free market capitalism. In this approach, a job guarantee is there for anyone who wants it. Any structural unemployment will be largely voluntary.

Here are my questions. I am going to present what I consider the standard questions using the standard terminology – not because these are the exact questions I have but because these are the questions I would anticipate. I have run these same questions by a few economists to generate some answers. I have incorporated most of their answers. But, I still would like to hear your thoughts as well.

  1. Isn’t this just an attempt to expand the state i.e. be a move toward big government? Why shouldn’t we expect ‘mission creep?’ Since the idea is designed to fluctuate with changes in the economy, it seems less of a concern. Yes, this is the not-for-profit private sector. But, we would still need to flesh out the safeguards to make sure that it didn’t crowd out investment in the for-profit sector. (You should expect this program to increase the pie and expand investment in aggregate, so that certainly mitigates these concerns as well.)
  2. Won’t this misallocate resources and create malinvestment?  Since it is designed to be an automatic stabilizer i.e. countercyclical, it doesn’t necessarily appear so. But, it still might create misallocations by increasing the propensity to spend excessively on infrastructure. Infrastructure spending in the U.S. is probably too low at present.  But, at some point in the future, this will be a concern. The fact that much of it can be administered in the private sector locally is important in this regard.
  3. How much will this cost? How do we pay for this? As I understand the idea, it is designed to replace unemployment insurance entirely – and that means we will recoup in taxes lost output from cyclical and structural unemployment. But, as the Federal Government is paying not just wages but benefits, it does not seem to be a deficit neutral strategy in a employer-provided health-insurance world. If health insurance became detached from employers that would be less of an issue. But, that’s not going to happen. (I should also point out criminality and imprisonment associated with lack of job opportunities would be reduced, so that certainly decreases any costs – both social and monetary).

Personally, I am not especially keen on the ‘New Deal’ terminology in the original piece.  That goes to political/philosophical predisposition. So I have stripped it of that language here.

As an aside, of 1920s and 1930s Democrats, I find Al Smith, the Governor of NY and 1928 Democratic Presidential candidate, far more interesting than FDR. Smith and Roosevelt had a very antagonistic relationship in no small part due to FDR’s co-opting of all of Smith’s 1928 ideas for FDR’s 1932 run. Al Smith was a first-generation Irish Catholic who grew up poor on the lower East Side of Manhattan and owed his rise to Tammany Hall. Prejudice is a big reason he lost to Hoover in 1928. Roosevelt was a blue-blooded Harvard-educated Aristocrat who was much more palatable to early 20th-century Americans. Try “Al Smith and His America,” or better yet “Empire Statesman,” for a good read on Smith.

I suspect Wray’s idea will gain more traction if it can be examined it in a politically-neutral frame.

Economists I have talked to who have studied this idea inform me all studies indicate the proposal has a 1-2% of GDP price tag.

Right now, President Obama seems like he is banking on a recovery that will bring unemployment down. But, this may not end up being so. From a purely political perspective, Wray’s suggestion is the direction Obama should go if he wants any traction on the unemployment issue should recovery not bring unemployment down.  But, Wray’s idea also deserves more discussion irrespective of the political ramifications because it keeps a buffer stock of skilled, employed people ready to hand for the for-profit private sector to employ.

Source

Navigating the Jobs Crisis: Time for a New ‘New Deal’ Jobs Program – L. Randall Wray

11 Comments
  1. warren mosler says

    see ‘Full Employment AND Price Stability’ at http://www.moslereconomics.com under ‘mandatory readings’ at the right margin where your questions are answered.

  2. Scott Fullwiler says

    Hello Edward,

    Nice post. As one who knows Randy well and has been working on this issue for many year, let me suggest the many readings on the topic at the Center for Full Employment and Price Stability (www.cfeps.org), the Levy Institute (www.levy.org), and the Centre of Full Employment and Equity (http://e1.newcastle.edu.au/coffee/). The questions you’ve asked, and others, are dealt with there over and over again and in substantial detail.

    Also, for shorter pieces, one can see blogposts at http://www.neweconomicperspectives.blogspot.com, http://bilbo.economicoutlook.net/blog/, and http://www.moslereconomics.com.

    Regarding your questions, briefly (as I’m short on time):

    1. If the program is successful at generating full employment, then investment in the private sector would be increased. How much private sector investment is going on now with so many unemployed and not spending? Also, we already spend A LOT to deal with problems at least partly created by unemployment (police, security, prisons, unemployment insurance, and so forth).

    2. The total spending on the program, at least in advanced economies, is likely to be about 1-2 percent of GDP, according to every academic study that’s been done (I’ve done a few of them myself). And of course, it’s during times when the private sector slows down that the spending reaches this peak, whereas during private sector expansions this spending will be smaller. I’m thus not too worried about over spending on infrastructure, but at any rate there are MANY other useful things for the involuntarily unemployed to be doing, as again numerous publications at the links above have already pointed out.

    3. Again, we’re talking about 1-2 percent of GDP, most likely, which even governments not issuing their own currencies (unlike the US) could likely afford. At any rate, this question is odd to me . . . why is it that we think we can afford involuntary unemployment and all the attendant problems that go with it but not full employment and all of its benefits? From a societal perspective, the costs of unemployment far outweight the benefits of full employment.

    Best,
    Scott

  3. Brett McMahon says

    A question: what effect would such a program have on prices? Wouldn’t the creation of artificial supply necessarily drive prices up at the cost of the subsidy? Would that cost be offset by the current cost of unemployment insurance? Finally, wouldn’t this concept effectively set a new floor on, for example infrastructure construction, that could be expected to almost continually rise?

    1. Edward Harrison says

      Hey Brett,

      my understanding is this would probably suppress wage prices (at least initially). If we have relatively high unemployment, putting this into effect is going to drive wages down. Longer term, the fact that we would be operating closer to full capacity means wages would rise. But, of course, so would output.

      As far as unemployment insurance goes, this would be a replacement for that. Mind you, some social welfare programs are always going to be in place (disability as an example) but this would certainly eliminate a lot of those programs.

      What I haven’t come to grips yet is your last question, which is the one I’m sure you care about – infrastructure construction. I can’t see how we could reasonably expect this not to compete on some level with for profit enterprises, especially on infrastructure spending.

      If you want to build a bridge in Minneapolis and use the jobs guarantee program to do so. What happens at the company who would have gotten that contract otherwise? Is this a case where the project would not have happened otherwise because it is happening in a period of recession? The mechanics of that issue need to be fleshed out for me.

      I know Scott Fullwiler above might have some comments on this.

      1. warren mosler says

        Hey Brett,

        my understanding is this would probably suppress wage prices (at least initially). If we have relatively high unemployment, putting this into effect is going to drive wages down. Longer term, the fact that we would be operating closer to full capacity means wages would rise. But, of course, so would output.

        ***why would it drive wages down more than unemployment does?

        As far as unemployment insurance goes, this would be a replacement for that.

        ***I’d leave that in place and just add this first, and see how many people go for it.

        Mind you, some social welfare programs are always going to be in place (disability as an example) but this would certainly eliminate a lot of those programs.

        What I haven’t come to grips yet is your last question, which is the one I’m sure you care about – infrastructure construction. I can’t see how we could reasonably expect this not to compete on some level with for profit enterprises, especially on infrastructure spending.

        ****so what if it does? we are going to keep demand high enough to make sure the elr pool is relatively small, which happens when all the other jobs are better jobs due to the high levels of demand

        If you want to build a bridge in Minneapolis and use the jobs guarantee program to do so. What happens at the company who would have gotten that contract otherwise?

        ***there’s enough demand so they get higher paying jobs doing something else. that’s how the ‘math’ works.

        best,warren

        Is this a case where the project would not have happened otherwise because it is happening in a period of recession? The mechanics of that issue need to be fleshed out for me.

  4. Marshall Auerback says

    I don’t think my proposal is a plea for “communism”. It’s an adjunct to a failure of the private sector to provide full employment. I realise that some people think that anything the government does is akin to socialism, but I don’t share that perspective. I’m never going to persuade those people who view this as a theological issue, so I’m not going to try.

    So the question arose: “If you want to build a bridge in Minneapolis and use the jobs guarantee program to do so. What happens at the company who would have gotten that contract otherwise? Is this a case where the project would not have happened otherwise because it is happening in a period of recession? The mechanics of that issue need to be fleshed out for me.”

    The answer is that the more obvious jobs that you describe, such as restoration of public infrastructure and the provision of new infrastructure are probably the types of things that should be done outside the ELR program. Even though WPA workers did engage in these kinds of programs, the level of expertise, the environmental impact stuff, the higher safety thresholds, etc., probably would make these types of programs inappropriate for an ELR worker. Remember, it is not designed to outbid the private sector (and therefore become inflationary) but to provide a pool of employed workers which could eventually be drawn by the private sector. Because the government has control of the “printing press”, it can always outbid the private sector, but you don’t want to do this. You want it to act as a buffer stock, in effect using employed workers as the means by which prices remain anchored. You’re not trying to create an inflationary wage spiral, but to create a floor on wages and!
    employment, thereby arresting debt deflation dynamics.

    Think of it more as something where ELR workers “sell” their time in exchange for dollars, rather than collecting welfare. You’re really not targeting the same people who would build a bridge in Minneapolis, which would be more of a traditional “pump priming” exercise for the government.

    1. Anonymous says

      Thanks to all for a good discussion and especially to Edward Harrison for kicking it off. Scott and Warren provided answers very similar to those I would supply. Let me add a few brief thoughts:

      1. Most jobs will probably be public services–the kinds of things the not for profits are already doing in our communities.

      2. The program should not compete. That said, remember that we have an estimated $2 trillion shortfall in public infrastructure repair and construction. It is not being done because states and local govts cannot afford it. The federal govt could afford it, but believes it cannot. Hence, if JG workers started doing some of this (especially repairs) it seems hard to argue that this is “replacing” private sector employment.

      3. The social and economic costs of unemployment are huge and there are multiplier effects. No complete analysis of these would find that the JG net adds much public sector spending (which bears a lot of these costs) but it would most likely lead to multiplier effects on the private sector.

      4. Scott provided websites that have the relevant papers; let me just add a few names to look for on those sites, my colleagues Mat Forstater, Bill Mitchell, and Pavlina Tcherneva (in addition to Scott and Warren). The research provides much theoretical analysis (including extensions into “green jobs” and unemployment costs) and real world case studies (such as in Argentina and India).

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