Great Leap Forward


OK for the next few weeks we are going to play a game called Bop a Mole.

Here’s the deal. For more than two decades a small group of scholars hashed out what became Modern Money Theory. We’ve written many books, a hundred chapters for edited volumes, hundreds of published articles, and thousands of blogs presenting the theory and defending it against critics.

Yet practically every day a Mole pops up to ask: “Why doesn’t MMT ever talk about XXX?” You’ve seen the claims:

Mole 1: MMT never deals with inflation.

Mole 2: MMT never talks about exchange rate effects.

Mole 3: MMT cannot relax the consolidation assumption.

Mole 4: MMT ignores the private banks.

Mole 5: MMT is just like slavery; it forces people to work for welfare.

Mole 6: MMT promotes unbridled growth, ignoring environmental sustainability.

We Bop one Mole and another jumps up. In fact, every possible critique of MMT has been addressed in at least a dozen different academic papers and probably a hundred blogs. The problem is that the Mole Bopping is sometimes buried deep in the paper, perhaps in an argument that is too academic. Or it is too hard to find the exact blogs where we’ve dealt with the issue. Heck, I cannot remember 95% of the stuff I’ve written, much less find it.

So I thought we’d play a game, Bopping Moles, and try to keep these Mole Boppings organized for future reference. When Mole 1 Pops up again, we can just pull out Mole Bopping #1. No reason to re-Bop if you’ve Bopped ‘em once.

We’ll Bop a Mole today. I’ll open up the comments section to your suggestions for the next Mole Bopping.

Remember, it is a game. No animals—whether two-legged or four–are really going to get Bopped. This is just a metaphor. No animals will be harmed in the making of this game. And don’t call any real humans Moles. Some people would take that as an insult, and I suppose most Moles would, too.

Any resemblance between any real person and today’s Mole is sheer coincidence.

Mole #1: Does MMT really require a Job Guarantee program?

Before we dig into this, we need to set the rules of the game. We can only Bop one Mole per game. There could be a number of related Moles, but we can only do this one today.

To make things a bit more difficult, the Moles Pop Up randomly. If you think about it that has to be true: if they Popped up in sequence they’d be easy to Bop. No sport there. But what that means is that you have to take for granted a lot of the other elements of MMT.

For example, the “why would anyone accept a fiat currency” Mole cannot be Bopped today. Nor can we Bop the “government cannot possibly afford to hire everybody” Mole today. You will see that these Moles are related to today’s Mole. We will take it for granted that “taxes drive money”, as MMT says in short-hand. You accept fiat currency because you need it to pay taxes and other obligations to the state. Obviously there is a Mole who claims that currency is accepted because there is a belief that others will accept it. I call that the BillyBob and BuffySue infinite regress theory of currency. We won’t play that game today. And we will take it for granted that sovereign government that issues its own currency can always afford to “keystroke” its spending. We won’t Bop the Moles who claim that “given institutional constraints, the US government needs to get money from taxpayers and bond buyers” today, either. We’ll have fun with them later.

So, given that we accept that taxes drive currency, and that sovereign government can “afford” to spend on labor, we want to discuss what “anchors” the value of the currency. It is not enough to say that you want currency to pay taxes—that is, that existence of taxes ensures a demand for currency. But we want to know why currency retains value in exchange.

Now, orthodox economists just love the “scissors” of demand and supply. They always have it ready-at-hand to explain the price of everything. Given essentially unlimited wants facing scarce supplies, the equilibrium price does the business of efficiently allocating to highest bidder.

In my view, “demand and supply” do not explain prices or anything else of interest in the economic sphere. But leaving aside my skepticism, those “scissors” cannot work when we are talking about sovereign currency—or “finance” more generally. Neither currency nor finance is a naturally scarce resource. We can have as much of them as we want, by keystroking them into existence. So what we actually have is a practically infinite supply of finance facing what in many circumstances is a limited supply of stuff to buy.

The old neoclassical approach used to try to finesse this by proclaiming that the supply of finance is limited by available savings—the loanable funds approach. There are still some orthodox economists and virtually all Austrian economists who remain confused about this. But anyone who understands banking and government finance knows that finance is not in any way constrained by saving.

Indeed, it is nearer the truth to reverse that and say that supply of finance might on some conditions constrain saving. Keynesians, of course, know that investment (plus the budget deficit and net exports) creates saving. Saving is the “pecuniary accountancy” of investment (plus the budget deficit and net exports); that is, saving is just the accounting record of autonomous spending. But you don’t need to understand that to follow the argument here.

Indeed, almost everyone understands that we need to constrain private financial institutions in their credit creation—because they might create too much finance that bubbles up prices of goods, services, and assets. That’s the idea behind my claim that finance is essentially unlimited, but the supply of stuff to buy is normally finite. (I’m going to skip over caveats that are not essential to understanding the argument.)

And this goes doubly for the constraints most want to put on government’s spending. This is precisely why orthodoxy reacts in horror at the implications of MMT: if government can “print money”, it will spend until it drives the nation to Weimar hyperinflation. Government’s fiat money is essentially unlimited and it will bid up prices of everything it buys until the currency becomes worthless.

While MMT doubts the political economy of this argument, we certainly do agree that government can “spend too much”, causing inflation. Since government cannot “run out of money” we do need to constrain its spending. The budgeting process in a democratic nation seems to us to be sufficient to prevent hyperinflation.

But it is not always enough to prevent inflation. MMT from the very beginning has always wanted to make our economy less inflation-prone. Indeed, the two research groups that contributed the most to developing MMT included price stability in their mission statements: at UMKC it is the Center for Full Employment and Price Stability; at the University of Newcastle it is the Centre of Full Employment and Equity. Both centers have pushed for full employment but with price stability, and both reached the conclusion that we need a better “price anchor”. This concern follows directly from the recognition that we cannot rely on natural quantity constraints on government finance to keep its spending low enough to prevent pressure on prices. And we recognize that inflation pressures normally arise before full employment is reached. So if we are going to pursue full employment, we need a better price anchor.

The mainstream view has long been that “full employment” and “price stability” are incompatible goals. They claim that you must have substantial unemployment to keep prices in check. You can call it NAIRU, you can call it the “natural rate” or you can call it the “reserve army of the unemployed”. It is a view shared by virtually all economists outside the MMT camp. According to all of them, the unemployed serve as a price anchor; the suffering of the unemployed does the duty of keeping the currency scarce and valuable. Unemployment is the “cost” to achieve the “benefit” of low inflation.

We reject that view as unnecessarily defeatist.

However. And here’s the Big However. We do agree with the mainstream that you need a price anchor, or otherwise pursuit of true, full employment probably would, at least much of the time, cause inflation. So, we, too, want a price anchor. We object to the (usually implicit) claim of just about everyone outside the MMT camp that unemployment is the only possible price anchor. Other economists do not have the imagination to come up with any alternative price anchor for a fiat currency.

In our view, that is wrong.

Here is Warren Mosler’s response, in what is almost a Haiku in its simplicity:

It comes down to this:

 With ‘state currency’

 There necessarily is,

 Always has been,

 Always will be,

 A buffer stock policy.

 Call that the MMT insight if you wish.

 So it comes down to ‘pick one’-

1.       Gold

2.       Foreign Exchange

3.       Unemployment

4.       Employed/JG/ELR

5.       Wheat


 I pick employed/JG/ELR

 As it works best as a buffer stock based on any/all criteria for a buffer stock.

 So yes, it’s an option.

 You are free to pick one of the others.

So…. You can have MMT but you’ve got to choose a price anchor. Some want a commodity buffer stock (usually gold). Others want to tie the domestic currency to a foreign currency. Most want unemployment. By contrast, MMTers follow Warren Mosler in choosing an employed bufferstock—the Job Guarantee or Employer of Last Resort program.

Let us look at these alternative buffer stocks in turn

  1. Gold (and other commodities)

I won’t go into the history of the “gold standard”—most people misunderstand how it actually worked, and you can read more in my 2012 primer, Modern Money Theory, published by Palgrave. Let’s just use the imaginary version in which government agrees to back its currency against gold at a permanently fixed exchange rate (say 1 ounce equals $1). You can bring your gold to the government and it will give you currency at that exchange rate (less a fee); if you get tired of holding currency you can take it to the government and get gold (less a fee). Government gets some seigniorage based on the fees. In order to spend more than its seigniorage fees, government has to tax or borrow its currency.

Gold supplies are increased through mining, by melting down the family jewels, or through gold inflows (current account surpluses or international borrowing). Private banks could issue IOUs (notes or deposits) converted on demand to government currency. To ensure they could make those conversions, they’d need some currency reserves—less than 100%, leading to the notion of a deposit multiplier. Normally, augmentation of the gold supply would be slow (except for a new discovery), hence, expansion of the “money supply” (currency, notes and deposits) would also be slow. Government spending would be constrained since seigniorage fees, taxes, and ability to borrow its own currency would all be limited by the slow growth of currency.

Hence, the belief is that the value of the currency would be well-anchored by the gold stock. Barring new, large, gold discoveries or (amounting to the same thing) technological advance in gold mining techniques that greatly reduces costs, prices would be anchored. For evidence, goldbugs often point to the long-term trend of  prices in the US in the 19th century—which began and ended with approximately the same price level. The US national government was small and frugal outside major wars. And since gold acted as the international reserve, the so-called specie-flow mechanism operated to keep trade reasonably balanced (net importers lost gold, deflating their economies until trade balance was restored).

At least, that is the way it works in the popular imagination. (That it never actually worked that way is not too important for this discussion.)

Gold is a finite resource with enough demand for non-money use to keep it reasonably valuable in monetary use. If it were rather equally distributed around the globe such that unemployed resources could always be devoted to mining gold, it could serve as a reasonably good anchor. When the demand for currency rises, you mine more gold; when the demand for currency falls, you stop mining. The price of gold relative to the price of everything else sends signals to the miners, and the government can tweak its buy price and sell price to increase or reduce the rate of accumulation of gold reserves and currency emission.

Recall Keynes’s famous argument that if you cannot find anything better to do with the unemployed, then you could hire them to dig holes—think, mine gold. After mining the gold, they could dig holes for a safe basement under the Federal Reserve to rebury the gold. We could tie the currency to the reburied gold, and promise to issue no more currency unless we put labor to work again to unbury new gold supplies and then rebury the mined gold under the Fed. We’d pay these workers in paper receipts for the gold they unburied and reburied. Those paper receipts would be our currency, kept strong by our bufferstock of gold unburied and reburied by hardworking gold miners.

Government could also allow private enterprise to mine the gold, which would be brought to the Fed’s basement for reburying in exchange for the warehouse receipts. In mean times, when private enterprise in other endeavors found it hard to sell anything else, it would devote its efforts to mining more gold; in good times, productive resources would flow out of gold mining toward other prospects.

There are several disadvantages of using gold as a buffer stock in this manner. First, the resources devoted to mining gold to be reburied at the Fed are essentially wasted—which was Keynes’s point about hiring the unemployed to dig holes. We could just as well simply conduct a geological survey to estimate the nation’s buried gold reserves then issue currency against the unmined gold. After all, whether it is buried all over the nation, or buried in the Fed’s basement vaults doesn’t really matter.

The government could issue currency against the unmined gold reserves to hire workers–who would have devoted all their efforts to digging holes to find the gold, and then digging more holes to rebury it—to do something more useful than hole digging. They instead could build the nation’s infrastructure, clean-up the environmental messes created by our capitalistic undertakers, provide elder and child care, and so on. In this way, we could pretend the unmined gold would back the currency and we’d waste no resources in the unnecessary task of digging holes. Labor would be unleashed to serve a public purpose.

Some of you might recognize that this is remarkably similar to another buffer stock proposal that we’ll turn to below.

(Note that if the unmined earthly gold supply can serve as backing to the currency, it is no intellectual leap to include the yet-to-be-discovered gold supply on Uranus as backing to global currencies. So long as the gold-backed-currency is issued to employ labor to do useful things, it can serve as an effective price anchor. Keep that in mind when we explore MMT’s preferred buffer stock below.)

Another problem is that given the resource constraints on gold mining, there’s no guarantee that the gold stock will grow at a pace that is close to economic growth. If economic growth does outpace growth of gold reserves, this can take place only by “leveraging” the gold supply. We won’t go into all the dynamic effects—the three balances and so on—but the increased leverage makes the economy more susceptible to the dangers of a “run” to gold, as everyone tries to convert claims on claims on gold to the real thing. Indeed, this is what the historical record shows. Typically, in a financial crisis the government goes off gold as it tries to quell the crisis through lender of last resort activity. A more-or-less fixed gold supply conflicts with the necessity to “lend without limit” in a run to liquidity.

And there’s the problem with the specie-flow mechanism, which never worked as smoothly as imagined. In practice, a dominant currency would be used as the international reserve so that the gold really did not flow. A center like London would lend pounds to importers, accumulating claims on them. Beggar-thy-neighbor Mercantilism depressed economic activity as creditors tried to maintain their dominant status and as debtors tried to avoid digging themselves into deeper debtor holes.

The gold standard was not dropped capriciously. Indeed, rather than arguing that nations abandoned the gold standard in the Great Depression it is probably closer to the truth to say that the gold standard abandoned them. The promise to redeem currency for gold reduced fiscal and monetary policy space so much that governments were impotent to deal with the problems they faced in crises and downturns. Indeed, the realization that gold was a big part of the problem meant that there was no stomach for returning to gold after WWII. Instead a sort of hybrid was created that relied on the US dollar as the international reserve currency, with the dollar pegged to gold. That system failed, too, after scarcely one generation. When the dynamics turned against the US, the gold standard abandoned Nixon. The gold standard never came back, and never will.

There was another clever alternative proposed during the Great Depression, but it was not adopted. Benjamin Graham—who is perhaps better known for the value investing strategy he taught Warren Buffet—proposed to peg currencies to a basket of commodities. The idea was that you want to anchor your currency not to one commodity (gold) but to a number of commodities that go into production of much of the consumer basket. There are two benefits to such a scheme. First, if you think of the operation of a commodity standard, it keeps the dollar price of that commodity constant as the government stands ready to buy or sell at the pegged price. Pegging the price of a precious metal like gold offers very little advantage because gold is not important to very many production processes (aside from filling cavities and adorning fingers and earlobes, and occasionally some unmentionable body parts). Hence, that provides very little in the way of price stabilization. But if you stabilize the price of the entire commodities basket that goes into producing most output (say, you include oil, corn, soybeans, pig bellies, copper, wheat, iron, and so on) then that would go a long way toward stabilizing the price of the consumer basket.

(If you think about it, there are two inputs that are essential to the production of virtually everything. What are they? Hint, think energy and human effort. More later.)

The second advantage of using a range of commodities as the buffer stock rather than just one precious metal, is that you’ve got a better inbuilt process to help resolve the problem of unemployment in downturns. When unemployment is high, you do not need to send all of it into gold mining, but, rather, labor can get busy producing all the things in the commodity basket that anchor the currency. You don’t have to rely on the luck of the draw with respect to the distribution of gold ore across the planet. You have a range of commodities, some of which can be produced almost anywhere (pig bellies). As unemployment causes wages to fall, labor gets cheap relatively to piglets so that it can be put to use to grow and butcher pig bellies that flow into the government’s buffer stock used to stabilize prices of commodities.

Of course it all works in the opposite direction in a boom—labor and prices start rising, so the government puts on the merchant’s apron and starts pushing pork. Clever, huh?

A couple of decades ago, Bill Mitchell learned about the operation of commodities buffer stocks (in his case, it was wool) and realized a third advantage: whatever you choose to serve as the commodities price anchor for the currency, those commodities will always be fully employed. Nice for the piglets (or sheep, in the Australian case).

Hmmm, wouldn’t it be better to keep humans fully employed? Retain that thought.

2. Foreign exchange

The second alternative is to peg to a foreign currency—usually the currency of a dominant nation.

We can be brief. Ask the Greeks how’s that working out for them?

The problem with a fixed exchange rate is that you lose domestic policy space. Of course some think that is good, and indeed it was the major argument for euro. We know how that turned out.

But even if you don’t like domestic policy space, a pegged exchange rate means you become dependent on exports, or on borrowing, or like Blanche DuBois on the kindness of strangers. Again, exhibit A is the EMU. Witness Germany—which relies on exports as it literally sinks all the economies of its neighbors. Witness almost everyone else: relying on borrowing. Witness Greece: the Teutonic strangers are not kind.

Now, you could argue that the EMU was extreme because it wasn’t just a matter of pegging rates but of going whole hog and adopting a foreign currency. However, the fundamental problem of pegging is that for every exporter there is an importer. Pegging can work for some well-situated exporting nations, but it necessarily creates internal instability for most others—an internal instability that cannot be remedied by fiscal policy that becomes impotent because of the currency pegging.

And it is impossible as a recommendation for all countries since you’ve got to have net importers. Most peggers peg to the US dollar, and the US is a relatively happy net importer. However, when the US catches a cold the exporters come down with influenza. So even the net exporters are subject to forces beyond their control.

3. Reserve Army of the Unemployed

Among employed economists, the favorite price anchor is unemployment (of others, of course; funny how that works). The unemployed fight inflation through their desperation as they try to bid jobs away from the employed by offering to work at miserable wages. And their utter failure to obtain work serves as a lesson to the fortunate, who will accept wage cuts and horrible working conditions to retain their jobs.

There are five main arguments for maintaining an unemployed buffer stock:

a)      If you give them jobs, the poor will want to eat, which would cause inflation by driving up the price of foodstuff. Economists see the unemployed poor as inflation fighters. They perform a public service by keeping aggregate demand low so that prices don’t rise. (For example, Tom Palley complains that if a JG provides jobs to everyone, the poor will want meals, sparking inflation; see here:


b)      If you give them jobs, the poor will want to eat, which will increase production of foodstuffs, causing more environmental damage. Ultimately, this is unsustainable. Such economists see the unemployed as doing their part to promote environmental sustainability.

Note that in either case, the poor deserve rewards, acclamation, emulation. We all ought to live that way. The problem, of course, is that many people won’t take their turn as unemployed dumpster diving inflation fighters and environmental activists.

c)       Many economists and others see the threat of unemployment as a necessary labor disciplining device. Unemployment spells build character and promote entrepreneurship. (For example, Cullen Roche argues: “You guys see no need for unemployment. I do. I think it serves an incredibly important psychological component to any healthy economy. I’ve feared for my job and been unemployed. Those moments shaped who I am and what I’ve become. They were invaluable in retrospect. If I’d been able to apply for a JG job I might not be half the man I am today. Maybe it’s just personal entrepreneurial experience speaking here, but I know what it means to hunt and kill for ones [sic] dinner.“  I think the unintentional irony of arguing that the unemployed might kill for their dinner was lost on him; indeed, the unemployed engage in lots of anti-social behavior, including robbery, drug-dealing, and, yes, murder as they struggle to obtain “dinner”.)

Others prefer unemployment over full employment even if they do not accept the claims for the supposed benefits of unemployment.

d)      One group promotes a basic income guarantee over jobs. The argument is that everyone should get as much as they need (I would say “want” rather than “need”, for otherwise an authority has to decide what they need) whether they work or not. Obviously this view is somewhat at odds with the previous three arguments for unemployment. It is also inconsistent with the search for a price anchor, so far as I can tell. I cannot follow the Bigger’s argument that this would NOT be an experiment to prove your mom wrong when she warned you that “money doesn’t grow on trees”. Your mom understood the problem. Biggers never learned the lesson.


e)      Others argue that while it might be nice to have full employment, there’s no way to get there. The private sector obviously is not going to let everyone work who wants to work, so the responsibility must fall to government. However, these critics argue that government cannot implement and run a full employment program. They raise political objections as well as objections related to affordability, management of the program, lack of useful jobs, and so on.

I’m not going to say more about these final two arguments against full employment as I’m convinced both are fallacious, and because neither of these critiques offers a price-stabilizing anchor for the currency in place of the JG/ELR. So the main arguments for an unemployed buffer stock are: the unemployed help keep prices down as their incomes are low; the unemployed enhance environmental sustainability because they cannot afford to consume much, which lowers production that damages the environment; and the threat of unemployment is motivational.

4. Fully Employed Buffer Stock

Let me close with a defense of the JG/ELR as a stabilizing anchor. I’ll repeat some of the argument from the final part of the MMT 101 series that Eric Tymoigne and I posted some weeks ago.

Note from the clues scattered above, we can analyze the JG as a program that uses labor as its buffer stock. Labor goes into all output. It is a domestic resource that can be found in every nation. Providing jobs to those who want to work but cannot otherwise find paid work is consistent with an internationally recognized human right. It has many individual, familial, and social benefits that go far beyond earning an income. Keeping the labor buffer stock employed maintains that buffer stock in good shape. Enforcing idleness on those who want to work is like letting the rats invade your buffer stock of corn. A reserve army of the employed is much better than a reserve army of the unemployed as the unemployed are perceived to deteriorate in quality at a rapid pace.

The JG program is quite explicitly a “rightly distributed” spending program in which government spending is directed precisely to those who want to work but cannot find a job. This places no direct pressure on wages and prices because the workers in the program were part of the “surplus” or “redundant” labor force and are still available for private employers (at a small mark-up over the JG program wage—the minimum wage).

For that reason, employing workers in the JG program is no more inflationary than leaving them unemployed. Indeed, the JG should lower recruiting and hiring costs as employers would have an employed pool of workers demonstrating readiness and willingness to work, which should reduce inflation pressures.

Turning to effects on aggregate demand, many critics worry that if, say, 10 million people obtain jobs and thereby increase their incomes above their pre-employment levels, consumption would increase and drive up inflation. This seems to be a major concern of our critics. By logical extension, they would also worry about a private-sector led expansion that created minimum wage jobs in, say, the fast food sector. We find such a position to be overly defeatist—a “let the poor eat cake” response to unemployment and poverty.

This criticism is also often combined with the claim that workers in the JG would just “dig holes”, adding nothing to national output. Again, we see that as overly pessimistic—since a jobs program can be designed to produce desirable output, as the New Deal’s jobs programs did.

However, let us imagine that the JG program is extremely successful at creating jobs and income, so much so that the economy moves from slack to full employment of all productive capacity, resulting in rising prices. The presumed problem is that while JG workers get wages (and thus consume) they do not contribute any production that is sold (hence, does not absorb wages). The “excess” wages from newly employed workers induces spending to rise.

What could government do in that case? It would have at its disposal the usual macroeconomic policy tools: raise taxes, lower government spending on programs other than the JG, and tighten monetary policy. (We won’t get into an argument here about the relative effectiveness of these.)

Indeed, this is what government would do in the absence of the JG if the private sector achieved full employment through creation of 10 million new minimum wage jobs in the private sector. The only difference is that government would not be able to fight inflation by increasing unemployment—because the macro policies used to fight inflation would dampen demand but any worker losing a job could turn to the JG program for work.

What this means is that with a JG in place, the inflation-fighting adjustments to spending will occur among the employed rather than by causing unemployment and poverty. In other words, the costs of fighting inflation can be made to be borne at higher income levels. We are surprised that our critics appear to prefer to use unemployment and poverty to fight inflation, which forces the least able to bear more of the costs.

Our position is similar to Keynes’s: “No one has a legitimate vested interest in being able to buy at prices which are only low because output is low.” (Keynes 1964 p. 318) So while Palley argues against creating jobs on the argument that those with jobs would have more income, and this could cause what Keynes called “semi-inflation” (increased demand drives up prices in those sectors with an elasticity of output below one), that is not a defensible position. Normally, as Keynes said, a rise of effective demand “spends itself, partly in affecting output and partly in affecting price” and only if the elasticity of output approaches zero does a rise of effective demand cause “true inflation”. (Ibid p. 285) Below that point, there is no “legitimate vested interest” in keeping labor unemployed. Instead, inflation must be fought by alternative means.

It must be recognized that increasing the number of private sector workers in the fast food industry will cause the same sort of “semi-inflation”, raising prices in the same sectors that consumption by new workers in the JG program would affect. It does no good to argue that hamburger flippers are “productive” (they flip burgers) while JG workers are not (they provide, for example, public services to the aged), because the “semi-inflation” will occur in all sectors where increased spending faces anything less than perfect output elasticity.

Hence, if our critics were consistent, they would always fight against job creation if any sectors that would experience increased sales to workers had less than perfect output elasticity. Their argument against the JG is a red herring.

Note also that with a JG, the government’s budget would be made more strongly countercyclical, as government spending increases in the slump when workers move from higher-paid employment to the JG; the process is reversed in a robust expansion, where when the private sector hires out of the JG pool. These stabilizers might be enough to stabilize aggregate demand. After all, most unemployment in developed countries is cyclical in nature so unemployment is largely due to a lack of aggregate demand. The JG pool raises that demand (by paying wages) and so will encourage hiring. If not, government can use discretionary policy interventions.

Using a JG to anchor prices preserves fiscal and monetary space, since, as mentioned, the JG reserve army is domestic. An employed buffer stock is more effective at constraining wages and prices than is an unemployed reserve army because employment keeps labor in better shape. Employment also has substantial benefits for the individual, the family, and society as a whole.

Unemployment has few (questionable at best) benefits and lots of horrendous costs to individuals, families, and societies, including divorce, deteriorating physical and mental health, abuse of children and spouses, gang activity, and crime. Use of gold as the anchor ensures that gold is fully employed, but that is of questionable value. Mining gold is highly destructive of the environment and produces relatively few jobs in most countries. As William Jennings Bryan said, it ties the nation to a “cross of gold”, constraining economic growth and limiting the ability of the nation to use monetary and fiscal policy to pursue the public purpose. Tying the currency to a foreign currency throws the fate of a nation to the mercy of “kind strangers”– strangers who rarely see it in their interest to help.





Now the next time a mole asks you whether MMT requires a JG, you know how to bop the mole: ask the mole which price anchor he wants. MMTers know you must choose one. We prefer the JG over the alternatives.



eaandersDecember 28th, 2013 at 5:27 pm

Good job of providing a logical basis for selecting JG over the other alternatives! But, the world is not subject to logic alone. In many cases propaganda rules. People believe a certain dogma because their peer group believes it. It's comfortable to believe what your peer group believes because it reduces conflict. The answer to this is the old saw, "Repeat something over and over again and people start to believe it." So, just sustain the MMT effort over the long haul. The whack a mole idea is one way to do it. Another, is to expand the number of MMT economists one by one and get them out on the stump promoting it to anyone that will listen, including government forums, conferences, political rallies, etc. One option is to corner and convince some high visibility political progressives like Bernie Sanders and Elizabeth Warren of the merits of MMT and JG. It might not be that hard. They are already fighters for the people. Another way is to get wealthy sponsors to fund the effort, or do a crowd sourcing campaign to get the money to fund the effort. That's why the Tea Party has more visibility than they deserve. And, finally there is a precinct by precinct local grass roots campaign for MMT. Some of these measures are already happening. The small cadre of MMTers has done a great job so far. Now we need others to become MMTers and the money to spread the word far and wide.

Ralph666December 29th, 2013 at 12:56 pm

L.R.W. says JG “places no direct pressure on wages and prices because the workers in the program were part of the “surplus” or “redundant” labor force…” That all depends on how generous the pay for JG work is. E.g. if pay is above that paid for min wage regular work, then JG will push up the price of the lowest paid. (That may be desirable on social grounds, but that’s a separate issue which should be dealt with by upping the min wage.)

Second, if the wage of JG work is EQUAL TO min wages (as proposed in the forthcoming Mitchell/Wray text book), that will still draw SOME LABOUR away from regular min wage work. (If I start selling apples at the existing or going rate, you’ll inevitably take SOME BUSINESS from existing apple sellers.)

Third, there are no commercial pressures on JG employers (unlike the private sector where employers have to keep employees noses to the grindstone). Thus for anyone looking for an easy money, JG has BIG BIG attractions compared to private sector min wage work.

L. Randall Wray L. Randall WrayDecember 29th, 2013 at 1:17 pm

Ralph: 1. We’ve dealt with the wage setting issue hundreds of times. Yes, if we set it above the current minimum wage there will be a one-time upward adjustment of non-JG wages (and benefits if those are also set higher). That is not inflation, which is defined as a continuing rise.
2. Note a similar thing would happen if WalMart increased wages across the USA by a buck. Would you be concerned about that, too?
3. If you read the piece carefully you will note I dealt with “semi-inflation” that could result even before full employment, whether the hiring is in the private (what you would call “productive”) sector or in the JG. If you oppose semi-inflation, then you’d be against job creation no matter who does it.
4. “Easy money” is I suppose in the eye of the beholder. Everyone working in the JG will be working. And rewarded for that with a wage. “Productive” is also in the eye of the beholder. New Deal workers built stuff we still use. Millions of passengers land on their runways; millions of kids went to their schools. What we need now, mostly, is services that improve peoples’ lives.

NeilWDecember 29th, 2013 at 8:34 pm

"Thus for anyone looking for an easy money, JG has BIG BIG attractions compared to private sector min wage work."

The private sector needs to step up its investment and advertising then and attract people off the JG. If it doesn't then it goes bust.

Hard luck.

Competition is good remember.

NeilWDecember 29th, 2013 at 9:16 pm

"It is also inconsistent with the search for a price anchor, so far as I can tell."

Devil's advocate hat on here, because I find the MMT argument against Income Guarantees somewhat weak. And I want to see it strengthened.

I appreciate there are some wild income guarantee ideas out there based upon fantasy numbers. I agree they are madness. If you overspend the economy, you get inflation. No doubt about it. And striking out one half of the auto-stabilisers (variable benefits) means that the other half (taxation) has to take the strain. You can't avoid that.

However we have an income guarantee system in our societies that we know works. It's called a state pension and is an income guarantee to everybody over an arbitrary pension age.

We also have unemployment benefit which, if implemented properly and widely as they should be, would represent a 'state pension' for those without an alternative job offer on the table.

So what stops proper compensation for unemployment (whether by age or due to private sector inability to create sufficient jobs) from working – assuming that you adjust taxation sufficiently to ensure that the spending of the compensation does not overload the production capacity of the economy?

Why have unemployment schemes failed in the past, and why do state pensions come under attack, and how would a Job Guarantee scheme avoid those economic and political problems?

ISTM that the income guarantee anchor is a weaker form of the unemployment anchor. Being idle is boring, and the pay for being a mere consumption unit ain't that great. So they will bid the private sector jobs the same as somebody on a JG. And many of those on income guarantee would generate useful output in a self directed manner – as carers, musicians or (in my case) Open Source software developers, which could drive down the cost of many a service. Those self-directed individuals become 'good hires' the same as somebody on a JG.

Similarly income guarantee allows people to operate entirely outside the private sector, as the JG would, and the private sector has to come up with a decent top-up offer if they want to hire the individual.

The universality of income guarantees are an attempt to get around the resentment issue. Just as with a JG, it is available to all who want it.

For me the reason a JG is better is because it keeps the 'reserve army' in better shape – but not just in employment terms. It also keeps them in better shape in social terms – there is less resentment of them from their peers because their income is seen as being 'earned' and therefore valid.

And that is the reason income guarantees always fail. Peers resent them into oblivion – even if they are getting the same payment. Social Security is renamed 'welfare'. So we see universal benefits cut for the 'wealthy', which then gives the wealthy justification to retaliate at the lower end by trimming unemployment benefit. Pension ages are forced upwards when they should be coming down, etc.

The resentment issue also means that the type of work the JG has to offer is one that has sufficient validation amongst those peers. Peers have to accept that your wage is 'earned', or they will agitate to have it removed. If you have a mature society then a wide range of jobs and public services can be staffed with JG workers. If you have a very immature society, then possibly the only work that is seen as legitimate by peers could be breaking rocks.

In summary I would argue that in addition to the normal MMT arguments noted in the article, a JG is superior because the payment is validated in the eyes of other voters because the individual is seen to be genuinely working for a living. And that matters. A lot.

L. Randall Wray L. Randall WrayDecember 29th, 2013 at 10:03 pm

Neil: No, you’ve got a sort of limited min income guarantee for the retired, survivors, and people with disabilities in the form of SocSec but that has operated (so far) only with an unemployed buffer stock. So you cannot predict what would happen if we dropped the reserve army of the unemployed. (and if you do not fit one of the categories there is no income guarantee). Yes, I agree there are different BIG proposals and many are not really BIG at all (ie the Alaska program) in that no one could choose not to work while subsisting on the miserable pay they provide. I do not take those as serious proposals to replace work–as I think you know because I’ve written a number of pieces arguing that is pure bait and switch.

NeilWDecember 30th, 2013 at 2:29 pm

I think the key question that needs an answer is: can work be anything that you want?

The only fundamental difference between JG and Income Guarantee from an anchor point of view is that individuals get to choose what they want to do from a selection of jobs chosen by others on the JG, and get to choose anything they want to do on an Income Guarantee.

So how close can the list of JG jobs get to 'anything you want' before the anchor stops anchoring – and why? What is the required level of reciprocation why does it matters so much?

For me the limit of the list of JG jobs will be due to resentment of others. I think that's a key restriction. You have to avoid the 'stigmatised cohort' at all costs – since that would finish the programme off politically.

L. Randall Wray L. Randall WrayDecember 30th, 2013 at 3:04 pm

neil: the idea behind BIG is that no one would have to work for pay. you work only if you want to. so it still relies on an unemployed buffer stock, but none of the unemployed needs to work. not a very good buffer stock in my view. so yes, some people might still pursue “work” that is unpaid but they cannot be viewed as much of a buffer stock. I do agree with you that the jobs performed by those in JG MUST be perceived as socially beneficial. the program must be designed with that in mind and we have always paid attention to that. it was a key point of minsky’s proposal.

NeilWDecember 31st, 2013 at 8:20 am

"so yes, some people might still pursue "work" that is unpaid but they cannot be viewed as much of a buffer stock"

Why not?

What you do defines who you are. If work is that important to the human condition, then won't the majority undertake useful activities spontaneously?

Is one of the differences in the argument between a JG and a BIG a difference in the belief about the number of people in our society that can and will 'self-start'? Could that be assessed empirically?

What is the actual difference between somebody who tends a public park for a wage and somebody who tends a public park because they like doing that?

It doesn't add to the material production in the economy in either case. It adds to social capital, and it adds to the betterment of the human condition. But, like derivative trading, advertising and pension investment, it is really just a time killer that is, arguably, completely unnecessary in a modern mechanised world.

Why is the coercion to take a job from that on offer from a third party so important to the anchor process? Why can't work be 'anything you want'?

With the JG no one would have to work *in the private sector*, they would work there only if they wanted to. So you have the same argument against the JG in that people could stop working for the 'productive' private sector and drift into a 9-5 career in park management.

The defence against that argument (that most people want something more than is on offer on the JG), is the same defence that BIG can use against the suggestion that nobody will actually work.

I think that socially beneficial perception is the key difference, along with an understanding that in our current society many will need to be told what to do – because of the way we've trained them since childhood.

Yes it would be great if we could just give people money and forget about it. But we can't. It doesn't work like that. Not in any society with humans in it.

JG is an engineered solution to the problems that we actually face on the ground – people need income, they need something to do, and they absolutely have to be seen to be doing something useful.

TheRadicalBaronDecember 31st, 2013 at 1:56 pm

Randall once again a sound and compelling argument to a real problem that will not go away with economic theories. JG is not only a solution but the only solution to a social chaos which has been claimed to precipitate our modern world into the barbarism of the WWI and WWII. I like to think those who argue other people unemployment as justifiable as the first ones to let others walk into an oven but also the first ones to be condemned by the jury. We should be ashamed that our parents and grandparents wasted their innocence fighting war for us to enjoy a freedom and basic rights to see the next generation defecate on their graves with complete disregard for human dignity.

L. Randall Wray L. Randall WrayDecember 31st, 2013 at 6:50 pm

Neil: I think you answered all your questions in your final 2 paragraphs. I could imagine a world in which a true BIG might do about as well as a JG; I think we’d call it true communism (not the USSR version). Until then, we need more motivation. If I could receive a True BIG I guarantee you I’d continue writing papers without pay but would never again grade a student paper or go to any university meetings–nor would anyone else associated with universities. That would require a kind of masochism I cannot imagine.

windrivenDecember 31st, 2013 at 9:05 pm

"And we will take it for granted that sovereign government that issues its own currency can always afford to “keystroke” its spending."

I hate to intrude on the love fest here but that "can always afford" strikes me as a little open ended. Is this a mole you're going to bop later or is this something that is to be taken as self-evident?

ThomasGWDecember 31st, 2013 at 11:46 pm

Prof Wray:

Re: #1, I suppose whether a price rise is "inflation" or not depends on your time frame. As far as I know, all price changes are in finite steps, so on a short enough time scale no price change is continuous. However, since all measures of inflation (e.g. CPI) measure changes in price levels without distinguishing which are "continuous" and which are "one time," the JG one time change in price level will certainly be seen as inflation.

Re: #4, "easy money". How does the JG deal with the person who shows up and isn't willing to work? Or who signs up for JG and doesn't show up? If the JG program fires them, how is this different from the "threat of unemployment is motivational" reason which you dispute above?

Consider the following, rephrasing one of your unemployment arguments: "Many professors and others see the threat of a failing grade as a necessary educational disciplining device. Failing grades build character and promote student scholarship." Agree or disagree? If you agree with this statement, how does it differ from employment arguments?

L. Randall Wray L. Randall WrayJanuary 1st, 2014 at 12:00 am

Windy: glad you love this stuff and keep coming back for more loving. That is indeed a Mole we’ve bopped literally thousands of times and with no critic ever finding any weakness in the argument. But I’ll put this on the list of future Moles to Bop yet again.

L. Randall Wray L. Randall WrayJanuary 1st, 2014 at 12:04 am

TGW: Inflation is defined as a continuing increase of the price level, not as a one time jump. You can look it up, as they say.
No one has to work in the JG. This is another red herring always raised. JG ADDS choices, it does not eliminate them. If you WANT to work in the JG there will be a job for you.
I DID NOT argue that grades are not discliplining devices. What I said is that without the disciplining device of wages, I would not do grading. Quite different matters.

rik_respondsJanuary 1st, 2014 at 11:45 pm

Professor Wray, essential to getting your notion of JG to work is a counter-cyclic fiscal policy. As Ed Dolan has pointed out on a number of occasions, current US fiscal policy is pro-cycle, though labeling it such implies that it being "pro-cycle" is understood. Likely, this isn't the case. Particularly, since policy makers tend to make rules as if nothing is in motion–and, "cycle" implies motion. More likely current US fiscal policy is simply considered "pro". In making any progress the first step needs to be getting policy makers (and the public) to understand the economy is in motion and that the best means to manage the economy is with a counter-cyclical control system. Once this in understood only then can models of counter-cyclical control systems be put forth as candidates. Getting to this first step of understanding is a significant hurdle. Particularly, since it isn't always clear that the great majority of economists agree that a counter-cyclic control system is necessary for a well functioning economy.

L. Randall Wray L. Randall WrayJanuary 1st, 2014 at 11:49 pm

rik: yes. JG is necessarily countercyclical: JG pool rises in recession, falls in recover so govt spending does so too. Probably up to one percent or two of GDP. Might need more than that, of course.

rik_respondsJanuary 2nd, 2014 at 1:35 am

No doubt JG is necessarily counter-cyclical. And you gave the mole a good whacking. But all that whacking is for naught until the necessity of a counter-cyclical fiscal control model is understood by policy makers and the public. Don't stop whacking moles, my interests find much enjoyment in reading your columns. But until most are convinced that fiscal policy needs a counter-cyclic control system, this and a great deal of other important economic discussion will remain academic. Do you think that the necessity of a counter-cyclical fiscal policy is obvious? Do most economists agree that it is necessary? Is there any evidence that fiscal policy is being based on any control model(s)? How can economics and policy move forward without some fundamental agreement as to a basic control model?

L. Randall Wray L. Randall WrayJanuary 2nd, 2014 at 2:02 pm

Rik: yes, most academic economists do see the need for countercyclical policy, and all recent credible studies, including those at conservative international institutions that have looked at recent evidence, conclude that stimulus packages implemented in the aftermath of the GFC had big multipliers. Only idealogues and the ill-trained (and politicians whose campaign finance depends on right wing funders) discount that.

rik_respondsJanuary 2nd, 2014 at 10:07 pm

It doesn't seem to me as a software engineer, not an economist, that the need for counter-cyclical policy is well understood or widely agreed. For example, in Wikipedia the article… says the following: "…Other schools of economic thought, such as monetarism and new classical macroeconomics, hold that countercyclical policies may be counterproductive or destabilizing, and therefore favor a laissez-faire fiscal policy as a better method for maintaining an overall robust economy…". I'm trying to understand the extent of what needs to be done to settle the issue for the need of counter-cyclic fiscal policy. You claim that most academic economists understand this and would support counter-cyclic fiscal policy. Is it the case then that this issue is similar to the global warming debate in that the bulk of scientific evidence is being countered by well funded marketing? I ask these questions because I'm trying to figure out what I can effectively do to facilitate the move to counter-cyclic fiscal policy. To do that I need to understand what the real problems are impeding such a move.

scotland10000January 3rd, 2014 at 7:05 pm

The way in which this MMT insight turns a deficit again into a surplus is obviously a solid 2nd base hit. What are the odds of getting this runner to home base as opposed to leaving them stranded? Is this an under engineered solution on one hand and the luxury of satisfying a theoretical position on the other? I agree in theory that a productive use of surplus labor has the advantages outlined. MMT strives for standards of best practice. Can it simply treat a dysfunctional externality( a symptom ) and not treat the causes, the marginalization culpable for varying conditions of under and full unemployment. Perhaps, fully implemented MMT theory would spur a radical improvement in private sector growth and practice, one that could be complimented in the public sector as well. Articulating a growth model as a transition from basic ELR/JG employment status could be better equipped to maximize stable productivity over long term cycles. Some agent must take the lead, aggregate returns of counter cyclical stimulus need some real policy and direction to back them up.

PZ_January 4th, 2014 at 7:03 pm

I think that case for fiscal policy is poorly made. New keynesians refer to statistical measures where fiscal stimulus is associated with economic relief of depressed economies.

I would talk about impact that fiscal stimulus has on private balance-sheets, on its assets or net wealth position. The case would be straightforward if it were understood that amount of consumption depends on net wealth (assets – liabilities) of private sector, and that government deficit spending increases private sector assets. And that the cause of economic slump after GFC was collapse in assets prices (real estate) rather than amount of debt. Private sector had high debt load in years preceding GFC too, but at those times it did not cause consumption slump.

L. Randall Wray L. Randall WrayJanuary 5th, 2014 at 2:20 am

rik: yes these are extreme fringe positions in the discipline. It would be like taking the most fringe elements of Tea Partiers and claiming they represent American views. Note I’m not saying that academics are card-carrying true-blue Keynesians. I’m just saying they are pragmatic and recognize the evidence is overwhelming that there is a government multiplier.

xiypukjeJanuary 5th, 2014 at 12:44 pm

“I could imagine a world in which a true BIG might do about as well as a JG”

As far as I can tell this is the first time that a major exponent of MMT has admitted that both JB and BIG (with the reserve army) are consistent with the MMT framework. Contra Wray/Mitchell I actually think the political feasibility of seeing BIG implemented is significantly greater than that of JB. Lots of people can envision the benefits to themselves of a BIG; while it's painfully clear how unresponsive our political systems have become to the plight of the unemployed (see Wray's NAIRU discussion). BIG has more cachet with segments of conservative movement than Wray seems to relise. For example Tory senator Hugh Segal in Canada (not just for communists). Also the Swiss are going to have a referendum on it: I'm concerned that MMT will be needlessly caught on the wrong side of this. Freely state JB as your preference, just please stop implying that it is necessary to MMT. (Otherwise great post!)

L. Randall Wray L. Randall WrayJanuary 6th, 2014 at 7:58 pm

XPUKJE: Did you read the post? It says you can CHOOSE the anchor you want. The JG is far and away the best anchor, as shown in the piece. However, if you want to tie the currency to something else, you can. Some prefer gold; others prefer unemployment. Those who want to preserve policy space and at the same time protect human rights prefer the JG.

lrwrayJanuary 6th, 2014 at 8:04 pm

XPU: And, of course, by leaving off the final part of that sentence, you have taken what I said COMPLETELY out of context…."true communism". I don't think the Swiss or Canadians have gone totally red yet! However, I'm used to being misquoted. Until we get to true communism, a true BIG will not act as an anchor. It will act as an inflation vector, probably a hyperinflationary vector.

xiypukjeJanuary 7th, 2014 at 1:04 am

“It will act as an inflation vector, probably a hyperinflationary vector.”
I don't understand why when the gov't “would have at its disposal the usual macroeconomic policy tools: raise taxes, lower government spending on programs other than the JG, and tighten monetary policy.” No?

I'm not arguing against a JB. Full employment is an instrumental good for the reasons you list. However a BIG would also go a long way toward alleviating many of the social problems caused by unemployment that we want to address. It just seems that the policy space among those who share our social values can accommodate either.

L. Randall Wray L. Randall WrayJanuary 7th, 2014 at 12:36 pm

OK, so you want a little BIG, and a lot of unemployment to anchor the currency; otherwise you get high inflation or hyperinflation. That is fine. A big BIG cannot anchor the currency. By definition nothing is offered to receive a BIG–it is not an anchor.

ThomasGWJanuary 8th, 2014 at 4:26 am

Where can I find data separating price changes into "inflation" and "one time increases"? Since the government reports the CPI and measures inflation by changes in the CPI, whether a price rise is "one time" or continuous it will be called inflation by official statistics. This might not meet the technical definition of inflation, but by common usage any JG caused price rise will be seen as inflation, and be just as harmful to people as any other price increase.

L. Randall Wray L. Randall WrayJanuary 8th, 2014 at 12:29 pm

Tgw: try an intro econ class at your local college. If OPEC increases the price of oil by a buck this year but doesn’t continue to raise it in following years, that is a one time jump. Yes it will affect lots of prices. But the impact will peter out within a year or two. How much the total impact will be depends on substitutes, on whether we choose to conserve energy, on the degree of indexation in the economy, and so on. Inflation is defined as a continuous increase of overall price level. That is, year after year after year the price level goes up. Can you see a difference?