A Few Words on UBI and the Job Guarantee

Members of the general public were probably unaware that several months ago, an intense debate raged between two differing camps on macro policy, namely those in the federal Job Guarantee camp and those promoting a UBI. Briefly, I wish to discuss the two proposals for the benefit of the public. Before I begin, however, I’d like to mention my approach with the public.

As always, when posting to social media, I write with the general public in mind who haven’t studied macroeconomics in any formal way and so, I like to simplify as much as possible various concepts for the purpose of facilitating understanding. That simplifying is at my discretion and I am constantly devising different methods to communicate basic concepts. Much of the time, doing so requires that I initially allow a few details to fall by the wayside, which inevitably leads to someone with more advanced knowledge disagreeing with my explanations, or perhaps pointing out what they consider to be an “error”.

Everyone who teaches has a style, if you will – a certain approach that they take with students or the layperson when discussing macroeconomics. Mine involves humor at times, but ultimately, my preference is to disseminate information in a language suitable for the layperson, which means ignoring certain details. In other words, I prefer to stay on the surface and keep their head above the water. I want to get these peoples’ thinking pointed in the right direction – that’s the key thing here. When a basic understanding is achieved, then I can discuss with them the intermediate and advanced details. In my experience, that approach has worked pretty well.

Of course, that is education anyway, isn’t it? We start at the beginning and work our way up. But, it is the approach that the professor takes with his/her students that is critical to success and the same applies to the layperson. Some will throw everything at the public and expect them to understand. I don’t. When dealing with the general public, I take my time and if there are a few details that can initially fall by the wayside, I let them fall. Language is the other critical detail. My articles on social media do not read like a working paper for a good reason: the layperson wouldn’t understand what I am saying. If they don’t understand, what’s the point? I feel, at times, the amateur who possesses a great understanding and wishes to participate in macroeconomic discussion, might be too eager to disseminate all he or she knows at once, or perhaps feels the need to qualify himself or herself with the layperson. We must bear in mind at all times that we are dealing with a public that has been gulled into a false view of how the monetary system operates and with some sympathy for that, we must take great care if we wish to cure them of their false notions. After all, it is laypersons en masse who will vote to change the economic narrative for the better. Speak the layperson’s language and give them a solid foundation to build on.

Anyway, that being said: UBI and the Job Guarantee

The abbreviation UBI stands for “Universal Basic Income” and it is a proposal for the US Government to guarantee everyone an income for life. Many proponents feel that this guarantee should be a living wage. Such a benefit would then allow all to pursue a life of personal fulfillment, laboring for themselves as they see fit, rather than being forced to seek employment from others to meet their needs. Automation lies at the heart of this proposal. It is claimed that with the level of automation we have reached today, technology would allow for robots to do the work. There are two distinct problems with this approach.

The first is the automation argument itself. Yes, robots in factories can produce goods and yes, a gas station or checkout lane at Walmart can be manned by a computer. But, this is the same argument used by people since it was first discovered that machines could perform labor: “Machines are taking my job” and that argument has always failed. What is usually never considered is that there is always a need for human labor and as such, how a person labors shifts to other needs when machines make a certain type of labor obsolete. Here then, the problem is one of foresight; being unable to predict what a future economy will look like – how labor is applied and how that economy will function. Since we can imagine a future economy, but cannot know exactly, then in the here and now, we can only lay the foundations of a hoped for future economy. In other words, we must do the best with what we have now and what we have now are machines capable of doing certain types of labor. So, we allow machines to perform that work and we redirect human labor to other tasks, especially sustainable growth. One day, perhaps, if we lay the correct foundations, a future economy will exist where humans can labor for the love of something and not the need for something. Until that day, we must do the best with what we have.

The second problem, is the potential inflationary aspect of a living wage basic income. Denial runs rampant on this issue. The truth is that a living wage basic income strategy will most likely reduce the pool of available labor. If the US Government gave every unskilled laborer enough income not to seek employment, then most won’t seek employment. It’s just that simple. And so, the pool of available labor will shrink. This presents us with a possible demand-pull inflationary episode.

Demand-pull inflation occurs when continuous excess spending exceeds the real ability of the economy to produce goods and services. True, while the US might be capable of producing quite a lot, the fact is that labor plays a significant role in the process and if the labor supply is intentionally reduced, then the real ability of the economy to produce goods and services is also reduced.

In such a regime, the market will have to offer wages higher than what the basic income is to entice those who wish to live a life of luxury out of retirement and into employment. Doing so can lead to a wage spike, thus in turn, causing the price level to rise and the value of the basic income to drop, which might then prompt a demand for an increase in the size of the basic income from those who choose not to work to meet the new price level. If granted, the possibility of a demand-pull inflationary episode would increase substantially unless the US Government found a way to increase available pool of labor (relaxing immigration for instance). A currency issuing government like the US Government can always find a way to destroy its own economy if it so chooses. One way to accomplish that goal is by reducing its own labor supply and so, on these grounds, I am opposed to a living wage basic income guarantee. That being said, I wish to make it clear that I am not opposed to a basic income, but only a living wage initiative. We need a positive impact on output and some type of anchor against inflation for stability and the Universal Basic Income provides neither. So then, that brings us to the federal Job Guarantee proposal.

The Job Guarantee (JG) eliminates involuntary unemployment by creating a buffer stock of employed persons, rather than the current methodology we use, which is maintaining a buffer stock of idle workers. The JG creates a pool of workers employed in their communities to perform work that is beneficial to society (Constructing nature trails, protecting valuable habitats, road clean-up, etc.) Private sector employers may then hire from this pool at any time. Because the JG is a voluntary initiative, in good economic times, the pool of JG workers will shrink as that labor moves to higher paying private sector jobs. In a recession or downturn, the JG pool will expand as more workers who lose their private sector jobs transfer into the JG. As a result, the federal deficit will automatically expand and contract, based on the state of the economy. Therefore, the JG acts as a superior automatic stabilizer for the economy, as it has a greater positive impact on output than that which unemployment insurance and welfare payments currently provide.

What we know logically, is that an unemployed person has zero market value. Should the US Government buy the labor of that unemployed person at a minimum wage, then such spending cannot be inflationary since there is no competition with the market for the worker. So then, using the currency-issuing authority of the US Government, local communities will employ the unemployed, putting them to work at a fixed minimum wage, which then becomes the national minimum wage. This leads us to two major questions concerning the fixed JG minimum wage:

1. What a minimum wage is
2. How much should that wage be

Many view the minimum wage as a poverty control initiative. It is not. The minimum wage is a wage-price floor through which wages cannot fall. What this means is that if we set the minimum wage at $8 per hour, then that is the floor and so, the least an employer can pay is $8 per hour. It thus prevents a $10 per hour job from becoming a $2 per hour job. That is what the minimum wage is. But how much should it actually be?

The minimum wage is not only a wage-price tool, but it also determines the lowest standard of living that a particular nation will accept. The price then is determined on those grounds. Once the wage-price of JG labor is set, the market must then match or exceed that price in order to entice workers out of the JG and into private sector employment. This is similar, but not the same thing as would happen with a UBI. If the US sets the fixed JG minimum wage higher than current, say $20 per hour, then yes, we would expect a price level increase. However, unlike what would occur with a standalone UBI, the price level increase would be a one-time phenomenon and then stabilize to accommodate the new national minimum as no further anticipated increase would be expected. From there, as aggregate demand increases, the private sector will hire labor from the JG pool to meet production needs. Since the fixed JG wage has the effect of stabilizing the growth rate of money wages in the private sector, it provides a nominal anchor against inflation. However, it must also be understood that the JG provides a real inflation disciplinary mechanism that does not result in lost output. As mentioned, one feature of the JG is that the private sector can hire from the pool of JG workers. The reverse is also true. Private sector labor can transfer into the fixed wage JG. It is this labor transfer that attenuates inflationary pressures.

When wage demands within the private sector threaten a rise in the price level, the federal government will make fiscal or monetary policy adjustments to reduce inflationary pressures. The act of the federal government reducing spending power will result in unemployment. However, unlike the current methodology we use to discipline inflation by keeping people in a state of involuntarily unemployment, in a JG regime labor will become unemployed from private sector work and then transfer from the inflating private sector into the fixed wage Job Guarantee, thus eliminating inflationary pressures and involuntary unemployment, resulting in a positive impact on output and a stable inflation rate.

As we must still address the poverty question and also, since the JG is voluntary, some may not wish to participate, or some might have been fired from JG work, this is where I feel that a basic income guarantee of some kind is favorable were it combined with a federal Job Guarantee. For these reasons, I support the initiation of a federal Job Guarantee combined with a small basic income guarantee. Were it only possible to have a JG or a UBI and not both, then I would support the Job Guarantee for the aforementioned reasons.

It is my opinion that the time for a living wage UBI is still far into our future. As we cannot predict what that future will be, we can only lay the foundations for that future by making the best of what we have to work with. At present, we have a sovereign currency issuing government whose supply of US dollars is always equal to infinity. It can afford to purchase anything for sale that is priced in US dollars. With the unemployment rate currently at 9.7% there is plenty of labor for sale. We should then seek to use that currency issuing power to employ all those who are willing and able to work and in the process, ensure the economic security of every citizen. We have the means to end the nightmare of both involuntary unemployment and poverty and that should be our priority.

A Job Guarantee and basic income aren’t entitlements or welfare. Instead, we should consider them for what they are: the benefits of citizenship.