Saturday, January 14, 2012

The Ultimate Job Guarantee Implementation: Can we Achieve Zero Wasted Labor AND Zero Material Waste Simultaneously?!?

Discussion in the MMT blogosphere has focused recently on the "Job Guarantee" (also known as "Employer of Last Resort", "Transition Job", or to some, "Workfare".) The concept is that everyone should have the option of a federally funded but locally administered minimum wage job. The economic motivations include (1) achieving loose "full employment" even when there is insufficient aggregate demand (spending) to create private sector jobs for everyone who wants one, and (2) enhancing macroeconomic price stability (low and stable inflation), and (3) raising the long term productivity of the economy. Job Guarantee (JG) proponents are among those who consider mass involuntary unemployment to be an enormous waste of willing human labor, resulting in many direct and indirect costs to society. And even Ben Bernanke has said:
"Long-term unemployment imposes severe economic hardships on the unemployed and their families, and, by leading to an erosion of skills of those without work, it both impairs their lifetime employment prospects and reduces the productive potential of our economy as a whole."
One of the recurring topics of JG debate is "what would all these people do?" Some commenters have a variety of constructive answers to this question, while others suggest than any job tasks chosen by the government (even local government, as opposed to Congress) would be a "boondoggle." I am not familiar enough with the academic research and modeling to weigh in with strongly held opinions for or against the JG concept in general (though I lean strongly toward giving it the benefit of the doubt), but this post will outline a concrete JG idea I have not seen described elsewhere. There are aspects of the idea I find highly compelling, but I expect some people may hate it.

First, some brief context. Modern economies have major problems with their environmental sustainability. One of these problems is that they have evolved to treat natural resources as an "input" to human activity and accepted a large waste stream as an "output", as though the economy were the center of reality. There have always been some observers warning that economies exist WITHIN the natural environment, not APART from it, and economies must adapt to function in a sustainable closed-loop way just like natural ecosystems -- where the output of every system of production and consumption is ultimately an input to another such system. Here is a diagram from reflecting the current economic system's material flows:

Here is a diagram reflecting the conceptually ideal zero-waste closed loop system:

Three of the major problems with the current system as shown in the first diagram are external costs, that is, costs borne by society at large:
  1. Land fills consume finite land (for which available locations are diminishing), and can be unpleasant and costly to administer.
  2. Garbage incineration contributes to air pollution that adversely effects health, and consumes many materials that might have had better forms of reuse.
  3. The economy's raw material input requirements are larger than would be necessary if we reused more of our waste stream. In addition, the methods we use to extract new raw materials typically have large external costs as well (e.g., habitat destruction and pollution from mining). These external costs go down when we reuse more materials.

What if the role of job guarantee work was to "intercept" the not-currently-recycled part of the waste stream with the goal of reclaiming recyclable, reusable, and organic (compostable or biofuel-ready) materials to the maximum extent possible? Source separation (such as separate curbside bins) should certainly still be encouraged wherever possible to create pre-separated streams of recyclables, organic waste (yard and food scraps), and general trash, however many localities don't do any separation at all, and even general trash streams will inevitably contain recoverable waste. So a JG zero-waste program would focus specifically on reducing the waste streams that are currently going to landfills or incinerators.

The pie chart below shows the composition of the 250 million ton annual waste stream in the US, of which only 34% is currently recycled! (Source: EPA). That 66% currently going to landfills and incinerators contains extraordinary amounts of valuable material! Separating it further would be labor intensive work, and would probably not be profitable for individual companies extracting only the materials they could sell for more than the cost of labor. But, the job guarantee concept isn't intended to be "profitable" in such a narrowly focused sense!

An underlying presumption in this idea is that the more human labor is available for sorting, separation, and dis-assembly of complex items, the higher would be the percentage of the waste stream that can be reclaimed for new uses. There would likely be diminishing returns in adding new labor as separation of reusable materials approaches 100% of the waste stream -- since some portion of the waste stream may be too complex or contaminated for separation -- but this also means a potentially huge number of JG workers could be usefully employed, so the JG program could be exclusively focused on this goal! Here is a purely speculative graph of this labor vs output relationship (I have no detailed knowledge of the waste industry, so this could be inaccurate!):

Of course, automation should be used in waste stream separation to the maximum extent possible, and we shouldn't abuse "cheap" labor if there are reasonable automation options available! Single-stream recycling facilities already have impressive technology for separation of material types, and technologies for processing "dirty" trash streams appear to be advancing too! But based on my limited knowledge, even these advanced "dirty" processing facilities still require some human labor in the sorting process, and may also be too expensive for many municipalities. We are probably still decades away (I'm guessing!) from sophisticated enough computer vision and robotic dexterity to achieve everything a human can in this type of process.

I expect this to be a controversial suggestion, in part because of the "trash" association and concerns about human dignity (perhaps this is an inherently bad idea!) but I'll run through some of the pros and cons I can think of.
Here are some advantages:
  • Job guarantee workers would be providing an obvious-to-all public service with broadly shared benefits, because the waste stream is produced by just about everyone, and the negative externalities being reduced would otherwise be suffered widely also. With other JG roles sometimes suggested by commenters (reading to the elderly, planting trees in parks, removing graffiti, etc) there might be concerns by voters about jobs benefiting some demographics more than others, or about potentially poor choices of projects in general. But everyone benefits from a zero material waste economy!
  • If a program of this type intercepted the part of the waste stream not already being reclaimed, it would not compete with the private sector or charities (or perhaps very minimally). Presumably this work is too labor intensive to be cost effective for private industry, but cost effectiveness (with the typical narrow definition of a single entity's cash flow) is not the goal of the job guarantee.
  • It is inherently local (which is one of the MMT design choices for implementing a JG), because waste streams are produced everywhere people live and work!
  • The financial costs of waste handling are often already paid for by municipalities (source).
  • The savings in materials-flow-related external costs alone (pollution, landfill space, and raw material inputs to the economy) could significantly offset the program's "costs" in terms of wages paid to JG workers (not that a JG program should be required to be provably "profitable" to be considered a success).
  • After also accounting for the benefits to society of reduced involuntary unemployment (e.g., reductions in mental illness, crime, family breakdown, soup kitchen spending, safety net transfer payments, etc) such a program would look even more cost effective!
  • It would scale easily with the ever-changing size of the JG's buffer pool of workers. If the economy booms and the JG pool shrinks and there is no fiscal adjustment made by federal government to increase the pool (potentially needed if inflation were accelerating), then more of the waste stream will simply end up in the landfill or incinerator as is the practice today. Thus "zero" waste would be an exaggeration, but the waste reduction might still be large. Conversely, if the economy contracted and the JG pool of workers grew large, perhaps the sorting process could focus on reclaiming a much larger percentage of the waste stream, possibly even with extra time to break down and disassemble complex waste into component parts. What would the "typical" size of the JG pool of workers be? At least one MMT economist has suggested it might average around 3% of the work force.
  • Waste sorting and separation jobs would be easily filled by unskilled labor, consistent with the "hiring off the bottom" goal of the JG.
  • A job guarantee is widely recognized as setting a floor on economy-wide wages. However, it might also set a floor on conditions. Some commenters have expressed concern that having too many jobs viewed as "easy" in a JG (reading, tutoring, etc?) could be a problematic competitive force attracting workers from private sector jobs to the JG. An assumption in this thinking is that society relies on some industries in which the work can't be made "fun" and "easy" and while there should certainly be safe and humanitarian working conditions enforced, those industries' attempts to pay enough to retain workers might result in problematically large shifts in private sector wage structures, potentially raising the general price level by enough to force the nominal JG wage too far below a "living wage" to be politically acceptable. Thus, for better or worse, waste stream handling as a choice of JG program would be likely be seen by voters as not setting an overly "cushy" floor for work conditions.
  • Waste handling is a large enough problem that it might (?) be able to absorb ALL JG workers (even if that represents 3% or more of the work force).
  • Waste handling is a national and global problem so best practices could be shared widely across implementations.
  • Such a program might be able to piggy-back on some existing infrastructure.
  • Such a program might not be seen by voters as "make work" (see CETA-related quote here), and thus have higher political feasibility than some JG suggestions?

Here are some potential drawbacks:

  • There could be a large social stigma for JG workers handling society's waste in this way. But would it be worse than the social stigma of unemployment? And might society's notions of dignity be able to evolve? After all, one of nature's waste handlers, the scarab (a type of dung beetle), was considered sacred in Ancient Egypt...
  • Concerns may arise about the moral hazard for households and businesses in knowing that someone will "clean up after them." But with a national emphasis on good practices in sustainability, hopefully there could be ways to minimize this. And certainly manufacturers and such whose waste output is already regulated should continue to bear a higher responsibility (enforced by regulation) for minimizing their waste streams. (Often this process turns out to be profitable for them anyway.)
  • Such a program might not be "transitional" enough -- does it adequately prepare workers for transition to the private sector when a job becomes available? I don't know, and I'm not sure how favorably it would compare in this respect to other job types suggested for unskilled labor in JG programs.
  • Could the potential for unsanitary organic waste (dirty diapers!), sharp metal or glass, hazardous chemicals, etc make it too dangerous? Are there standards for hazmat suits and assistive tools and technology that would suffice? Even assuming so, there would need to be some sort of externally administered inspection process to ensure safe working conditions.
  • Could such work inherently lead to repetitive stress injuries? I'm not sure how highly repetitive such sorting tasks would be given the nature of a mixed waste stream -- it could include some interesting dis-assembly of a big variety of items (toys, electronics, furniture, etc) into their component pieces. Perhaps every certain number of hours would involve a shift in the "creative project" room designing and building the [mini-]pyramids for the 21st century and other art out of the waste not useable for other applications!
  • Separability of materials might be too difficult if organic waste can cause too much contamination... but this might be addressed with larger source separation initiatives (curbside food and garden waste containers) along with a willingness to send unrecoverable bags or clumps of trash to the landfill-bound conveyer.
  • Energy use for sorting, transportation, and reuse might be more of a limiting factor than the needed human labor. If getting the separated materials back into the industrial production stream in a useable form required too much energy, such a project might not be popular (at least until further strides are made in renewable energy). Of course, the organic waste stream may itself be an energy source given ongoing innovations in waste-to-energy technology.
  • Some new infrastructure (facilities and equipment) might be required. This could actually be beneficial to the economy if there was enough spare economic capacity to build and produce what was required within putting undesirable upward pressure on prices.
Aside from the drawbacks above and whatever else I've overlooked or gotten wrong, this almost seems too good to be true! What do you think?

To repeat, the high level aspiration outlined here is to "kill two birds with one stone" by matching the goal of reducing human labor waste (involuntary unemployment) with the goal of reducing other external costs currently borne by society. This post focused on the "other external costs" related to materials flow and associated environmental sustainability, but are there other large-scale external costs a JG could potentially address?

Friday, January 13, 2012

What are the lessons of CETA? (a 1973 US jobs program)

Last May I ran into a reference to a jobs program started in 1973 called CETA (Comprehensive Employment and Training Act) that at its peak employed more than 700,000 people. At the time I searched the major MMT blogs as well as the papers I could find on Job Guarantee / Employer of Last Resort policy and implementations, and I didn't find any discussion of it. I posted comments asking about it on a couple major MMT blogs, but no one weighed in at the time. It occurred to me given the recent JG discussions to ask again, and a search in my feed reader hasn't uncovered any new references to it. (Disclaimer: my lack of results could be entirely my failure to search thoroughly enough.)
Overview from wikipedia: “a United States federal law enacted in 1973 to train workers and provide them with jobs in the public service… The program offered work to those with low incomes and the long term unemployed… The intent was to impart a marketable skill that would allow participants to move to an unsubsidized job. It was an extension of the Works Progress Administration program from the 1930s. The Act was intended to decentralize control of federally controlled job training programs, giving more power to the individual state governments.”

An opinion writer at politicsdaily that had came up in my quick search results said: “That was the crux of the policy dilemma: The voters did not want make-work and the unions did not want real work.” And, “CETA employees did perform useful work — from asbestos removal to assisting in libraries and senior citizen centers.” And, “Following the questionable gospel that state and local governments always know best, CETA programs were decentralized.” And, “But the problem with CETA was not that it embodied Big Government, but that it was not big enough.”

The program sounds like it shares a number of characteristics with the Job Guarantee as proposed by primary MMT authors, and it's more recent than the Great Depression work programs that people often mention in comments. So, what did it do right? What did it do wrong? What are the lessons learned? Why is it not being used as an example in these discussions, or mentioned by primary MMT authors? (Perhaps it has been and I've just missed it). Was it successful for its size (despite not being an unlimited offer of work positions at the policy wage, as proposed under a JG) but just not big enough to matter? Were there major unintended consequences that weren't addressed? Was it ultimately sabotaged on ideological grounds by free market fundamentalists? Did the voters and the unions reject it on the grounds quoted above? Anyone know or have useful links that I've overlooked?

UPDATE 1/15/2012: Corrected the first paragraph. It had falsely referenced Jimmy Carter as associated with the start of this program (either I mangled the notes I took a year ago or the original source I found was wrong -- I should have caught that presidential year mistake -- oops!)

Wednesday, January 11, 2012

Kaldor on Money Supply Endogeneity

Some of my posts starting in October 2010 (the most recent one is here, with some conceptual graphics) have focused on the endogeneity of the money supply independent from the broad Post-Keynesian observation that loans create deposits. That is, the dynamism of the economy (largely courtesy of the financial sector) seemingly allows households and businesses on aggregate to self-determine their portfolio composition -- i.e., how much "money" they hold -- independent of both government policy and private debt levels.

Whether due to lack of familiarity or considered relative unimportance, there seems to be very little attention to this dynamic in the MMT-oriented econoblogosphere, even among the "primary" MMT bloggers when they discuss QE. If money supply endogeneity were only about loans creating deposits, then one should still expect to see QE changing broad money supply from whatever trend(s) it was already on, since QE isn't generally assumed to change people's propensity to borrow or their rate of deleveraging. Here are two updated charts of the MZM (Money Zero Maturity) measure of broad money supply:

Money supply did not grow as much as the QE operations alone would suggest. The actual trends are very volatile (probably having to do with uncertainty and liquidity preference during recession and expanding financial assets in line with a growing economy during economic growth) and so it's difficult to say anything conclusive other than that QE did not provide a 1-to-1 increase or obviously "shift" the trend lines while active.

Ramanan recently posted two great quotes from Nicholas Kaldor's The Scourge Of Monetarism (Oxford University Press, 1982). First, via Ramanan (emphasis mine):
"As it is, a highly developed banking system already provides such facilities on an ample scale, since it is prepared to accommodate the public’s changing demand between different types or financial assets by altering the composition of the banks’ assets or liabilities in a reverse direction. If the non-banking public wishes to switch its holding of gilts for interest-bearing bank deposits, the banks are ready to supply such deposits at the minimum of inconvenience, and at the same time to place their surplus funds into the gilts which were previously held by the public. Similarly the banks provide easy facilities to their customers for switching balances on current accounts into interest-bearing deposit accounts, or vice versa. Hence, while the annual increment in the total holding of financial assets of the private sector (considered as a whole) is nothing more than the mirror-image of the borrowing requirement of the public sector (in a closed economy at any rate), neither the Government nor the banks can determine how much of this increment will be held in the form of cash (meaning notes and current deposits) and how much in the near-equivalents to cash (such as interest-bearing demand deposits) or in various forms of public sector debt. Thus neither the Government nor the central bank can control how much or the total financial assets the public prefers to hold in the form of ‘money’ on one particular definition or another."
Kaldor certainly appears to have these concepts mastered (including financial sectoral balances) and this was 1982! It's amazing to me that virtually none of this could "rub off" onto the economics mainstream over a period of three decades! Ramanan quotes more interesting details from Kaldor in a second post (follow the link to read it).

This seems to me largely consistent with dynamics I've postulated. A copy and paste from my last post's summary of mechanisms:
Overview of Ways the Private Sector Can Reduce "Unwanted" Broad Money Supply:
  1. Replace loans (which create money) with non-bank borrowing (which does not create money) independent of total debt levels. Examples of non-bank debt include corporate bonds, peer to peer loans, securitized loan pools, housing agency debt, etc. Most of this post focused on this mechanism.
  2. Induce less bank lending by changing aggregated propensities to borrow. For example, many reports indicate a record number of cash buyers have been supporting the housing market. Logically, if there is an "excess" of deposits in the economy, then investors who would rather own other assets may outbid other potential buyers of those same assets who would have bought using debt. Thus, while QE's added money supply in this case doesn't eliminate existing bank loans, it serves to reduce the number of houses bought using bank loans, while at the same time other loans are continually being paid down. The net effect is that bank lending moves to a lower level than it would have been at had QE not occurred. Those who lost the bid for houses (who would otherwise have bought with a bank loan) might rent from the investors instead, so this point does not imply that QE will cause some to have no place to live.
  3. Banks can sell assets (treasuries, loans, etc) to the rest of the private sector. A net decrease in assets in this way causes a net decrease in broad money supply. To see how this works, visit the Macroeconomic Balance Sheet Visualizer, and choose the operation "Bank Loan" followed by "Bank Loan is Securitized" (which is one way banks sell assets to the non-bank sector).
  4. Banks can fund themselves with a higher portion of non-deposit liabilities (e.g., bonds) instead of deposit liabilities. This results in less broad money supply. As I understand it, this was part of the dynamic that RSJ described in this post.
I'm not sure whether I'm odd to find this stuff fascinating or whether my descriptions are not clear and/or don't seem credible (and I admit I still may have some things wrong!). It may just be that this is clearly less important than topics on "fixing" the economy's current primary problems. But I've considered putting together a mini step-by-step visualization on EconViz on this topic (when I can get to it) -- if anyone would find this beneficial in clarifying these interactions, please say so.

The US Becoming Japan... not in the way you may think!

It has become common in recent years to suggest that the US is headed the way of Japan, with the implication being that Japan has been an economic failure in recent decades. (I starting expecting in the early 2000s that the US would follow Japan, also, but for some right and some wrong reasons). Last year and again today I've highlighted the huge degree to which Japan's economic performance is a story about demographics and the confusion about nominal versus real in the context of periodic mild deflation.

However, by failing to adequately support US economic growth (that is, incomes and employment) in the wake of the "Great Recession", policy makers may yet find a way to send us down Japan's path:
"A sharp decline in fertility rates in the United States that started in 2008 is closely linked to the souring of the economy that began about the same time, according to a new analysis of multiple economic and demographic data sources by the Pew Research Center." -- In a Down Economy, Fewer Births

U.S. population grows at slowest rate since 1940s

So, poor economic growth could become a self-fulfilling prophecy via the demographic channel itself!

Of course I'm exaggerating for effect. The drop off in US fertility rate (about a 7% fall from 2007 to 2010) is not yet anywhere near large enough to give the US a demographic outlook like Japan's... plus there are long lags in demographic effects, and other factors such as immigration rate. And according to Eamonn Fingleton the reasons for Japan's demographics are quite different:
"The story begins in the terrible winter of 1945-6, when, newly bereft of their empire, the Japanese nearly starved to death. With overseas expansion no longer an option, Japanese leaders determined as a top priority to cut the birthrate. Thereafter a culture of small families set in that has continued to the present day."

"Japan’s motivation is clear: food security. With only about one-third as much arable land per capita as China, Japan has long been the world’s largest net food importer. While the birth control policy is the primary cause of Japan’s aging demographics, the phenomenon also reflects improved health care and an increase of more than 20 years in life expectancy since 1950."
Nevertheless, if US policy makers were to sabotage the US economy further by actively imposing austerity, we might yet follow in Japan's economic path (or worse) but in a different way than typically suggested!

I should also note that I'm not suggesting that higher population growth rates are inherently better, just that they contribute to economic growth (for better or worse). I recognize the planet's finite resources are being strained, but I am also a mild optimistic regarding our ability to accelerate "radical resource productivity" with the right fixes to the political system and the current massive problems of externalized costs.

Myths about Japan's Stagnation Revisited

Almost a year ago I posted two graphs and some comments on Real GDP Per Capita and Myths about Japan's Stagnation. I had realized that demographic factors and mild deflation played a different role than the conventional wisdom which held that they are each merely a factor in Japan's supposed "malaise". It turned out that demographics and the difference in real versus nominal growth entirely account for the illusion that Japan has suffered two lost decades. That is, real GDP per capita growth for the US and Japan since 1980 are remarkably similar, with one [longish] period of meaningful divergence. Here are the same graphs repeated from my post last year:

Annual Growth of Real GDP Per Capita in the US and Japan (1980-2009)

Annual Level (Indexed) of Real GDP Per Capita in the US and Japan (1980-2009)

Recently there has been some discussion among higher profile bloggers on this topic:
Noahpinion may have read my previous post because he or she used my first graph above without changing the file name I had chosen.

I won't discuss all these posts in detail and there are points in each I disagree with.

However, Paul Krugman's second post contains a graph of Japan's Log Real GDP per working-age resident. I had myself been interested in the per-working-age-resident data as compared to the per-capita data, since changes in the participation rate (partly due to demographics) could cause the two to differ, but hadn't gone to the trouble of getting the data. Unfortunately Paul Krugman starts at 1990 rather than 1980 and so I'm not sure his conclusion tells the full story:
"This picture suggests that the Japanese economy was indeed depressed for about 16 years, and deeply so after the slump of the late 1990s. But it may have returned to more or less potential output on the eve of the current crisis."
Look at my second graph (above) and you can see the extraordinary growth in the late 1980s in Japan. Was this growth "above potential"? Was Japan somehow borrowing from the future in the 1980s, and are the Austrians correct that slower growth in the 1990s to undo the "excesses" and get back to the trend line must be an inevitable outcome? (I do think the answer is closer to "no" than "yes", but don't have all the answers for how/why).

Is the correct framing Krugman's, i.e., that Japan stagnated from 1990 onward and didn't return to the potential growth trend line for a decade and a half? Or is the more accurate framing that Japan's growth accelerated above trend line in the 1980s and took a decade to revert to the trend line? (In a mostly smooth fashion, excepting the unfortunate 1997-ish austerity, rather than a crash and depression!)

I believe MMT shows how the "hangover" theory of economic growth is wrong (as opposed to asset prices, which MMTers generally agree must be allowed to adjust after bubbles pop). This is because it is always possible for the flow of national income to be sustained by government deficits or net exports even if the leakage to private sector savings increases. Perhaps there was a massive inventory effect from overbuilding of real estate in the 1980s, requiring less building in the 1990s. Should that or other dynamics have pushed unemployment so low as to cause accelerating inflation? Glancing at some graphs it appears Japan's late 1980s unemployment got down to around 2%, with inflation rising to around 4%. What would have happened if the economy hadn't slowed after 1990? Would inflation have accelerated upwards uncontrollably? It doesn't seem obvious that it would, but I don't know the answers.

If not an "overbuilding" dynamic or a labor force participation dynamic (not yet investigated), then perhaps the majority of the late 1980s surge can be explained by a huge above-trend rise in productivity. If so, is there any implication that productivity will inevitably grow below trend after such a surge? It doesn't seem like such a reversion should be inevitable, but perhaps there are dynamics specific to the types of productivity improvements in Japan in that time frame that would provide more answers.

Comments and insight are welcome.

I'll split a few more observations on demographics into a separate post to keep this from getting too long.