(This is a prequel, Part 1 on BIG; I already did Part 2. Sorry it is longish, but not technical.)

Last week I criticized an article by Allan Sheahan who argued that “Jobs Are Not the Answer” to America’s unemployment problem. The thesis was based on two propositions. First, labor productivity has grown so we’d never be able to find sufficient work for all. Second, we don’t need jobs anyway because:

“Job creation is a completely wrong approach because the world doesn’t need everyone to have a job in order to produce what is needed for us to live a decent, comfortable life. We need to re-think the whole concept of having a job. When we say we need more jobs, what we really mean is we need is more money to live on. One answer is to establish a basic income guarantee (BIG), enough at least to get by on — just above the poverty level — for everyone. Each of us could then try to find work to earn more.”

I devoted most of the space in my response to the first point. Labor productivity has been rising since caveman first grabbed a club. Productivity’s importance as a cause of unemployment is at best of second order importance and certainly not new. The real cause is money. To be more specific, it is because we choose to organize a huge part of our social provisioning process through the monetary system, with much of our production controlled by capitalists. It is a monetary production economy—capitalists will not employ labor if they do not believe it will be profitable. (Note that is a statement of fact, not a criticism.)

The problem is not that we cannot find useful things for people to do. Any one of the readers of this blog could come up with a list of hundreds of useful things to do that are not being done because no one can think of a way to make profits at them. So we can use the JG/ELR to put people to work doing useful things without worrying about profiting off their labor.

And if all else fails, we can share the work that we can imagine by cutting the work day and the work week, and providing vacations to Americans. Why not the 30 day type of vacation that other rich nations provide? Four day work weeks? A legal right to six months paid paternal and maternal care? Paid sabbaticals for all, one year off out of every seven? (Why should tenured faculty have all the fun?)

Ok, ‘nuff said on that one. I think many readers agree with me. All we need is the Job Guarantee/Employer of Last Resort and we will get everyone employed. And we can simultaneously work toward more paid time off—if the JG/ELR program offers it, private employers will, too.

So what we need to do is to look at the second argument in more detail. Many readers apparently do not know what a BIG is. And just how BIG a BIG is supposed to be. In other words, what it is supposed to accomplish. continue reading…

Dimitri Papadimitriou, Gennaro Zezza, and Michalis Nikiforos have put together a stock-flow consistent model for Greece in order to analyze the path of that nation’s struggling economy and assess alternatives to reigning austerity policies. This is a macroeconomic model based on the New Cambridge approach of Wynne Godley and is the same sort of model used for the Levy Institute’s US strategic analysis series.

One thing the results of their simulations make clear is that the European Commission (EC) and International Monetary Fund (IMF) have been consistently too optimistic about the Greek economy and the effects of continuing with austerity policies — and still are, even after the IMF’s admission that it had overestimated the benefits of fiscal contraction. Here, for instance, are the EC’s past and current projections for Greek unemployment, compared to the actual results and the Levy Institute’s projections through 2016.

As you’ll notice, the baseline projection generated by the Levy Institute model for Greece (LIMG) shows a rather more dire path for unemployment going forward, compared to the EC’s latest projections. If current policies continue, the unemployment rate could rise from its ruinous 27.4 percent to almost 34 percent by the end of 2016.

The troika’s (EC/IMF/ECB) “internal devaluation” strategy — based on the idea that forcing a reduction in wages will increase competitiveness and boost export-led growth — isn’t faring well. Cutting wages by government fiat has contributed to a drop in domestic consumption. And as you can see below, while there was an increase in Greek exports that accompanied the onset of fiscal contraction, exports have not risen by nearly enough to compensate for the decrease in the other components of aggregate demand (from their trough, exports grew by almost 8 billion euros; over the same period, government expenditure alone fell by 13 billion euros).

The authors acknowledge that it’s possible exports could grow further, but it’s unlikely that the increase in net exports will be sufficient to make up for plummeting investment, consumption, and government expenditure (and the latest data show that Greek exports were actually declining in the last quarter of 2012). “The implication of our findings,” they conclude, “is that achieving growth in exports through internal devaluation will take a very long time, and furthermore, declining fortunes of the country’s major trading partners do not bode well for [Greece’s] exports.”

The troika’s continued devotion to faulty intellectual doctrines creates serious contradictions in terms of its deficit targets for Greece and its attendant expectations for growth and employment. This new stock-flow model for the Greek economy makes that all the more evident: the authors show that a fiscal stimulus worth around 41 billion euros would be necessary for Greece to reach the troika’s GDP target for the middle of 2016. That would require Greece’s deficit to rise to 12 percent of GDP. Needless to say, that amount — or any amount — of fiscal stimulus isn’t in the troika’s plans.

Papadimitriou, Nikiforos, and Zezza call for a “Marshall plan” for Greece: an investment, funded by the European Investment Bank (EIB), in an expanded public service job creation program — a program that has had impressive results in other countries and, on a smaller scale, in Greece itself.

The strategic analysis for Greece (download an early look at the full report here) is accompanied by a technical report that explains the specification of the model and discusses in more detail how the data were used.

Segment (in Greek) begins at 49:35.

In this Skai TV interview, Dimitri Papadimitriou focuses on the eurozone banking crisis and rising unemployment in the southern tier, arguing that the approval of 200 million euros to combat unemployment in Greece is far too small to reach the desired outcome.  (Segment, in Greek, begins at 23:30)

In the context of the IMF’s latest release in its mea culpa series, this time on the problems with the Greek bailout plan (pdf), Dimitri Papadimitriou appeared on Skai TV to discuss the worsening crisis in Greece, the failure of austerity, and the need to renegotiate the bailout deal.  Segment (in Greek) begins at 9:35 mark:

A couple of weeks ago, I mentioned Hyman Minsky’s new book, Ending Poverty: Jobs, Not Welfare (there is also a Kindle version).  Take a look at the cover – Minsky looking like a bit of a rougue!

I thought you might enjoy my powerpoint presentation, given at the Levy-Ford annual Minsky conference in NYC in mid-April. It summarizes some of the main arguments of the book. However, you really need the book – it is brilliant, and a good antidote to all the silly arguments made by economists that we “need” to keep tens of millions of Americans unemployed.

As Keynes put it:

“The Conservative belief that there is some law of nature which prevents men from being employed, that it is ‘rash’ to employ men, and that it is financially ‘sound’ to maintain a tenth of the population in idleness is crazily improbable – the sort of thing which no man could believe who had not had his head fuddled with nonsense for years and years….” (J. M. Keynes)

Here’s the powerpoint.

In the LA Times, Dimitri Papadimitriou explains that the link between growth and employment has been steadily weakening over the last several decades, and that this makes getting help from fiscal policy — increasing the deficit in the short run — more urgent than ever.  If we want to get back to pre-crisis unemployment rates (below 4.6%) anytime soon, the private sector isn’t going to be able to do it on its own, and certainly not with payroll tax increases and indiscriminate budget cuts weighing down already-insufficient growth rates:

While we are seeing some economic growth, the unemployment rate is not responding as strongly to the gains as it did in the past.

This slow job growth — today’s “jobless recovery” — isn’t an outlier. It’s a phenomenon that has been increasing over the last three decades, with jobs coming back more and more slowly after a downturn, even when GDP is increasing. The weak employment response has been an almost straight-line trend for more than 30 years.

Our institute’s newest econometric models show that each 1% boost in the GDP today will create, roughly, only a third as much improvement to the unemployment rate as the same 1% rise did in the late 1970s.

Read the op-ed here.

For more on this broken link between output and jobs, the background research can be found here.

Here are today’s big pieces of economic policy news:  (1) net job creation in the month of March (+88,000) was too low to keep up with population growth; (2) the president’s budget proposal will reportedly include cuts to Medicare and Social Security (or as the latter will be described in most newspapers, “adjustments to the way inflation is calculated for the purposes of determining Social Security benefits”).

These two items may seem unrelated, but in reality they form the basis of an unhappy remarriage.  continue reading…

How much fiscal stimulus would the government need to inject into the economy over the next two years in order to get the unemployment rate into the 5.5–5.9 percent range?  In their newest strategic analysis, Dimitri Papadimitriou, Greg Hannsgen, and Michalis Nikiforos provide us with some harrowing answers.

The authors lay out a scenario (“scenario 3” in the analysis) featuring some favorable macroeconomic tailwinds in the form of higher private sector borrowing and increased exports.  As they explain, such developments are not entirely unlikely (and policy changes could help contribute to such an export boost).  Nevertheless, even in these relatively rosy circumstances the government would need to pitch in a spending increase of 6.8 percent* (after inflation) in each of 2013 and 2014 to bring the unemployment rate below 6 percent by the end of 2014.  That would amount to a stimulus program worth around $600 billion over the next two years.  Without these tailwinds from private sector borrowing and exports (“scenario 2”), spending would need to increase by 11 percent per year — or roughly over a trillion dollars of stimulus over two years — in order to bring unemployment down to around 5.5 percent.

As the authors note, Washington is not in the mood for a trillion-plus-dollar stimulus program, or a program half that size.  Congress has consistently rejected a mere $50 billion for infrastructure repair.  If anything, the policy challenge of the moment is to temper the zeal for cutting spending.  Moreover, 5.5 percent unemployment is arguably still shy of what we ought to consider “good enough.” This level is around a full percentage point above where we were before the recession hit in 2007.  In other words, even if this Congress were to approve a stimulus package larger than the 2009 Recovery Act (ARRA) — which is unimaginable at this point — we would still not be back to pre-recession unemployment levels after two years (or even four years, as the strategic analysis demonstrates).

While we’ve been focused on phantom budget menaces derived from assumptions about the state of medical technology in 2080, the jobs crisis has continued to ruin real lives.  Without a dramatic turnaround in our fiscal priorities, it will continue to do so for years to come.  It’s become pretty clear that the actual needs of this economy far outstrip what the political system is willing to deliver.  (The authors actually favor direct job creation, in the form of an employer-of-last-resort policy, but they suggest that this is currently even further outside the realm of the politically possible as compared to traditional fiscal stimulus.)

Assuming no further stimulus is possible, the “best case” scenario over the next four years might be to merely hold off any new attempts at grand bargains or further budget cuts; to maintain the miserable status quo on the budget.  In that case, as the figure below illustrates (the authors’ “Baseline” forecast represented by the black line), unemployment would still be above 7 percent in two years, and above 6.5 percent by the end of President Obama’s term in office (which, as the authors point out, is still in excess of the threshold at which the Fed would consider tightening monetary policy).

The full analysis can be downloaded here.

* Specifically, the increase applies to “real government purchases of final goods and government transfers to the private sector.”

Relative to what might have been, one shouldn’t be too depressed about the fiscal cliff deal.  There are no cuts to the country’s most successful anti-poverty program, Social Security, and no rise in the Medicare eligibility age.  Relative to the basic macroeconomic logic of the situation, however, the fiscal cliff deal is a policy mistake.

Contrary to a wildly successful marketing campaign, the fiscal cliff was a crisis of too much austerity.  The deal approved by the House last night either cancels or delays for two months much of the austerity that was planned for 2013, but in the end we are still left with austerity-lite.

If you insist on looking at it from the old “current law” baseline (which is to say, the law as it would have been if we had “gone over” the cliff), this deal expanded the deficit by some $4 trillion.  However, from the perspective of the baseline that matters for economic growth and employment, fiscal policy in 2013 will be more contractionary than it was in 2012.  Some already-existing measures like the expanded unemployment insurance benefits and a number of tax credits benefiting those with low incomes will continue, but there is no new stimulus in this deal; no infrastructure investment; no move to shore up public payrolls.  And relative to 2012, the government will be sucking even more demand out of the economy in 2013.  The most significant item in this respect is that the payroll tax holiday is set to expire, raising the rate on the employee side from 4.2 to 6.2 percent, meaning substantially reduced purchasing power this year for those who earn less than $110,000 (incomes above that level are not subject to the payroll tax).  Given the still-high unemployment rate—and the fact that this budget constraint is purely self-inflicted—this should be considered a big policy failure.

And this is only the beginning.  At some point, issues other than the budget deficit will be permitted to occupy the policy stage—but not just yet.  The across-the-board “sequester” spending cuts have merely been delayed for two months.  Moreover, the debt ceiling standoff has already begun, and in all likelihood it will produce a deal that leads to an even larger dose of austerity (the executive branch is insisting they will not negotiate over raising the debt limit, but congressional Republicans, quite reasonably, are assuming that the administration will blink first).