Defense Department Minskyites

Michael Stephens | July 2, 2012

A few months ago we wondered why it was that business groups hadn’t been pushing harder for more stimulus.  My proposed (unoriginal) explanation had to do with inequality and decoupling; Paul Krugman suggested social pressures might also play a part.  But as it turns out, there’s another answer:  they are pushing!  The National Association of Manufacturers (NAM) recently endorsed expanding a government program with the intent to directly and indirectly create one million jobs.

Bruce Bartlett (former Treasury Secretary in the Reagan administration) highlights the fact that the influential NAM has released a report detailing how the defense spending cuts scheduled for 2013 as a result of the Budget Control Act (the debt ceiling deal from last summer) will harm employment and growth.  So technically this isn’t really an example of pushing for more stimulus; we’re just talking about preserving levels of funding and preserving jobs.  But the logic of the NAM position goes a long way.

For instance, they argue that the knock-on effects of restoring the public spending cuts would create a substantial net number of jobs in the private sector.  In other words, they have implicitly abandoned the argument that increasing government spending or public job creation (above scheduled 2013 levels) would “crowd out” private spending and job creation, embracing instead some version of a multiplier effect.  And if you follow the NAM that far, what reason is there to assume that we’re currently sitting (which is to say, before the Budget Control Act cuts take effect) right at some optimal level of spending and employment beyond which a direct job creation program would no longer be effective?

And if increasing defense production is deemed a worthy investment of public resources, why not early childhood education or environmental renewal?  Mathew Forstater presented at the Levy Institute’s Minsky Summer Seminar on the concept of an employer-of-last-resort (ELR) program that would fund community organizations to hire anyone willing and able to work at a “green job.”  The program would address our current unemployment crisis and, because it’s designed to operate at all phases of the business cycle, the failure to reach full employment, all while helping tackle environmental challenges.  (A recent working paper by Antoine Godin does some modeling of the likely effects of a green jobs ELR.)

The Minsky-inspired ELR is also designed (or can be designed) to offer jobs at the low end of the wage scale; to hire “off the bottom,” as it were.  As Randall Wray has argued, this gives ELR programs more non-inflationary bang for the buck than NAM-style military Keynesianism:

… military Keynesianism requires hiring off the top, taking the most technically proficient workers away from other work, and hoping that some jobs might trickle down. How many missiles would the government have to order before a job trickles down to Harlem? With ELR in place, when private aggregate demand is not sufficient to employ all resources, the ELR program kicks in at just the right level to employ workers and raise aggregate demand. Once full employment is reached, ELR raises aggregate demand no further. This is all a result of automatic policy and does not have to rely on markets. If private demand were to rise further, ELR spending and employment automatically fall.


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