A Minskian Approach To Recovery

Last week I raised some objections to President Obama's latest proposal to jumpstart the economy through business tax credits. While I am not opposed to these, I believe they are not up to the task at hand. We need a much more ambitious and sustained program. In this column I will provide a general outline of reform based on the work of Hyman Minsky. First it is necessary to emphasize that Minsky was always skeptical of a “pump-priming” approach to government policy. He argued that simply telling government to spend “more” in order to raise aggregate demand on the hope that this could create jobs and growth would be a mistake. It would almost certainly cause bottlenecks and inflation long before full employment was reached. Rather, policy-making is going to have to be specific, with well-formulated regulations to constrain private firms and with well-targeted government spending. The wholesale abandonment of regulation and supervision of the financial sector has proven to be a tremendous mistake. Left to supervise itself, Wall Street created complex and exceedingly risky financial instruments that allowed it to burden households and nonfinancial firms (as well as state and local governments) with debt. Wall Street also managed to shift the distribution of income toward its traders and CEOs—just before the financial crash, the financial sector captured 40% of all corporate profits in the US. The debt to GDP ratio rose to 500% (versus 300% in 1929 on the eve of the Great Depression). Income inequality rose to levels not seen since 1929—with poverty rising in the midst of plenty. Even though Wall Street was booming, real economic growth was not particularly good in the period before the crash; and the average real wage of workers was no higher than it had been back in the early 1970s. And while official unemployment was relatively low, unmeasured unemployment and underemployment has been rising on trend. It is clear that fundamental reform of the financial sector—on a scale similar to what was done in the 1930s—will be required to get the American economy back on track. A similar story can be told about all the advanced capitalist economies. In addition, we need to do something about the rest of the economy to create jobs and rising living standards. If Minsky did not believe that “fine-tuning” is possible, what can be done? First policy should address the obvious areas that have been neglected for more than three decades as well as new problems that have emerged. America's public infrastructure is entirely inadequate—with problems ranging from collapsing bridges and levees, overcrowded urban highways and airports, an outdated electrical grid, and lack of a highspeed rail network. Clearly, President Obama's $50 billion is far too small—off by a factor of 40 if we are to believe the engineers who tally our nation's needs at $2 trillion. Global warming raises new problems that need to be addressed: moving to cleaner energy production, expanding public transportation, retrofitting buildings to make them energy efficient, and reforestation. In all of these areas, government must increase its spending—either taking on the projects directly or subsidizing private spending. Because this spending will help to make America more productive, the spending will be more effective than general pump-priming and will not suffer from the drawbacks mentioned above. Still, it is likely that even if all of these projects are undertaken, millions of workers will be left behind. First there is no reason to believe that the additional demand for labor will be sufficient to create enough jobs; second, there can be a skills-mismatch, problems of discrimination (against ethnic groups, by gender, against people with disabilities, and against people with low educational attainment or criminal records), and geographic mismatch (jobs need to be created where the unemployed live). For this reason, many of his followers have revived Minsky's call for an “employer of last resort”. Minsky argued that only the federal government can offer an infinitely elastic demand for workers—hiring anyone ready and willing to work—at a decent wage. This is also called a job guarantee program. The idea is that the federal government provides funding for a basic wage with benefits. Creation and administration of the program as well as supervision of the workers in the program could be highly decentralized, to local not-for-profit agencies, community development organizations, and state and local governments. The program would take “workers as they are”—designing jobs to fit the worker's needs and abilities. There would be no skills or education requirement, although all jobs would provide training and perhaps even basic education. Jobs would be created where the workers live. Flexible work arrangements could be made (such as part-time jobs) to fit the needs of working mothers (and even students of working age). The jobs could include some of those listed above (retrofitting homes with insulation, for example) but would be expanded to include provision of public services—child and aged care, “meals on wheels” (delivering hot meals to aged, infirm, and those otherwise confined to their homes due to disabilities), playground and subway supervision, litter clean-up, and so on. All of this could require more government spending (although it is possible that reducing spending in areas that do not generate jobs and that do not enhance US production and living standards would partially offset the additional spending). While Washington currently fears budget deficits (with many arguing that they only “crowd-out” private spending), this is because policymakers conflate government budgets with household budgets. A sovereign government's budget is not like the budget of a household or firm. Government issues the currency, while households and firms are users of that currency. Modern governments actually spend by crediting bank accounts. It really just amounts to a keystroke, pushing a key on a computer that generates an entry on someone's balance sheet. Government can never run out of these keystrokes. Remarkably, even the Chairman of the Fed, Ben Bernanke, testified to Congress that the Fed spends through simple keystrokes—hence could afford to buy as many assets as necessary to bail-out Wall Street's banks. All that is necessary is to recognize that the Treasury spends the same way, and then Washington's policy-makers could stop worrying about “affordability” of the types of programs that everyone recognizes to be necessary: public infrastructure investment, “green” investments to reduce global warming, and job creation. To be sure, this is not a call for “the sky is the limit” spending by government. Too much spending will be inflationary and could cause currency depreciation. Government spending must be well-targeted and must not be too large. How big is too large? Once productive capacity is fully used and the labor force is fully employed, additional spending would be inflationary. This is also called the “functional finance” approach to policy, developed by Abba Lerner (a close friend to Minsky). Policy should be directed to resolving problems, raising living standards, and achieving the public purpose as defined by the democratic process. There should be no pre-conceived budgetary outcome—such as a balanced government budget over a year or over the cycle. In other words, the goal should be to use the government's “purse” to achieve the public purpose—not to mandate any specific dollar amount for spending or for its deficit. This does not mean that government spending on programs should not be constrained by a budget—Congress needs to approve the budgets for individual programs, and then hold program administrators accountable for meeting the budgets. The purpose of budgeting is not to ensure that the overall federal government budget balances, but rather to reduce waste, graft, and corruption. Budgeting is one means of controlling projects to help ensure they serve the public interest. Unlike the case of a household or firm, the sovereign government can always “afford” to spend more on a program—but that does not mean it should spend more than necessary. I know that some of this will appear shocking to readers. In coming columns I will try to put fears of deficit spending to rest. Most of the hysteria currently whipped up in Washington is “much ado about nothing”.