On Inflation and the Job Guarantee
It’s not easy to pin down exactly what inflation is, but an adequate definition is too much money chasing too few goods and services.
MMT observes that the Federal Government is the monopoly supplier* of money. A monopoly supplier of a commodity has two possible ways to operate. It can offer an unlimited quantity of the commodity at a fixed price and let the market determine the quantity it wishes to purchase, or it can offer a fixed quantity of the commodity and let the market determine the price it wishes to pay.
The gold standard was an attempt by the Treasury to impose a price rule on money by undertaking to buy or sell gold in unlimited quantities at one fixed price. The gold standard was eventually abandoned for various reasons. The reasons include the fact that the quantity of gold was not fixed, at least not outside the short term, and the fact that demand for money varies both seasonally and secularly, leading to fluctuations in the value of money.
The Government now supplies money under what looks mostly like a quantity rule. It basically says we have so much money to spend, and we’re going to buy at the best price we are offered by the market. When we run out of money, we stop spending. The Government does try to control inflation by various means, including interest rate manipulations that are supposed to affect aggregate demand and ultimately prices for goods and services. Without getting into too much detail, this doesn’t seem to work much better than the gold standard.
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MMT recognizes the problem of stabilizing prices, and proposes a Federal job guarantee that would anchor the price of basic labor with a buffer stock of employed labor in the same way that the gold standard anchored the price of gold with a buffer stock** of gold held by the Treasury. Under a job guarantee, the Federal Government undertakes to employ unlimited quantities of basic labor*** at a basic socially inclusive rate. In an economic downturn when labor is being released by the private sector, the Government would absorb the excess. When the economy expands, the Government would release labor to better offers in the private sector.
There are a number of great reasons to try this approach. The social benefits of employment are critically important, and society benefits from increased production. Employers benefit from having a pool of employed people to draw from when hiring, and to release to when downsizing. Social programs like unemployment insurance and welfare benefits are eliminated or reduced. In any case, intentionally maintaining a percent of the population in unproductive idleness to benefit “the economy” has never made economic sense.
*Banks, as has been widely argued, do create money, but bank money is just a claim on Government money. Under normal circumstances it counts and spends like Government money, but circumstances are not always normal.
**Current practice (interest rate manipulation) is effectively a buffer stock of unemployed labor. If you think this is morally unacceptable, you’d be in good company.
***Basic labor is anchored at the fixed rate. Prices for other goods and services are relative to basic labor according to supply and demand considerations.
