5-Sectorally Balanced Monetary Expansion
This is the fifth in a series of posts which expand upon a talk delivered on Modern Monetary Theory at the State Bank of Pakistan on 7th Jan 2020. The previous post (4-Job Guarantee Program) explained some aspects relevant to Pakistan. This portion deals with how we can avoid inflationary consequences of the money creation required for large scale job guarantee programs.
The Job Guarantee Program is designed to spend money to bring into productive use the most valuable unemployed resource within the economy, namely the human beings. If designed properly, this can add enormously to the productive capacity of the economy. The general objection to such a strategy is – how can we FUND a Job Guarantee Program, which would create millions of jobs? MMT answers that we can print money to do so. This immediately generates the objection that printing money on such a large scale would cause massive inflation, even hyper-inflation, de-stabilize the currency, and ruin the economy. The fact is that if it is poorly managed, a job guarantee program can indeed have all of these disastrous consequences. However, having millions of unemployed laborers is itself disastrous not just for the economy, but for human lives, families, and children. Therefore, it is worth making the effort required not just to create a job guarantee program, but to run it well so that it does not lead to hyperinflation or other bad consequences.
Some details of the Job Guarantee, and how it differs from standard approaches to job creation, are discussed in “Employment for All” (shortlink: bit.do/weae4a) One of the key differences is that Job Guarantees attempt to provide jobs to people “as they are” and “where they are”. That is recognition of the fact that the private sector jobs are structurally limited in number, and capacity expansions are slow and painful. Instead of re-tooling people to fit them to jobs, we should create jobs to match available population, and provide on-the-job training to increase skill levels.
Coming to the question of inflation, note that if jobs are productive, they will add to the supply of goods. So the additional supply of money will be matched by additional production of goods, and hence not be necessarily inflationary. However, there are several caveats involved. Billions of dollars will be given in wages to previously unemployed people using freshly created money – where is that money going to go? As a first round approximation, we can anticipate the demand that will be generated by using the HIES (Household Income and Expenditure Survey) data. We can calculate demand by sectors that a million laborers earning bottom income levels would generate. If this demand goes into sectors where production is not increased, then this will create high inflation in those sectors. The remedy for this problem is to make sure that SUFFICIENT Additional resources are directed to the relevant sectors where excess demand will be generated. In particular, we can be sure that there will be additional demand for food, and we can even get a rough first estimate of how much. So we must make sure to allocate some of the Guaranteed Jobs to production of food. Fortunately, in Pakistan, production of food and vegetables on a large scale using unskilled labor is relatively easy. Similarly, we can anticipate additional demands in health, education, housing, and other sectors where the first round impact of billions of rupees placed in hands of low income laborer will go. We must make sure that the Guaranteed Jobs are provided in the sectors where we anticipate the creation of extra demand.
Regardless of how we do the calculations, it is possible, even likely, that some imbalances will take place. There are timing problems, so that additional demand might arise quickly and the supply response might be slow. Temporary imbalances can create pressure on prices inflationary tendencies in certain sectors. This is actually desirable because this is how the price system works. The imbalances will be signally via inflation, which will generate the price signals required to create a supply response. Thus, some relative inflation WILL take place and IS TO BE WELCOMED. Short term imbalances will lead to capacity creation in sectors where there is excess demand. More important is the fact that the structure of economy will change due to massively increased spending power in the hands of the masses. This change will create WINNERS and LOSERS. Typically, winners will be WEAK and powerless and LOSERS will be STRONG and POWERFUL.
It is the politics of Job Guarantees that create major difficulties with implementation. Empowering the masses necessarily reduces the power of the plutocrats. The rich corporations and firms cannot exploit laborers, because everyone has a living alternative available. For an example of how creating full employment played out in the USA, in the context of the Keynesian Revolution, see “The Power of Economic Theories: Graphically Illustrated” We briefly summarize: After World War II, Keynesian economics made full employment possible in USA and Europe and created unprecedented prosperity for the masses for about thirty years. This also created movement towards equality of income distribution, and reduced the income share of the top 1%. A counter-revolution was created by the Chicago school which reversed all of these gains, and led to increasing concentration of power in the financial sector and corresponding massive increases in inequality. The point of all this is that prosperity for all is a political battle. There are ways to persuade the rich and powerful to rejoice in the progress of nation, instead of selfishly benefitting from holding it up. This is the crucial job of national leadership, intellectuals, and philosophers, to create a common vision and a shared goal of prosperity for all. This task, of unifying the nation around common goals, is discussed in “Sovereign Development: Outline of a Grand Strategy for Pakistan” by Dr. Arshad Zaman.
To Be Continued.
Related: Detailed Discussion of the Keynesian Revolution and the Chicago Counter-Revolution are provided in the full length lecture on Basic Concepts of Macroeconomics linked below: