There is no trade-off between unemployment and budget deficits

Marshall Auerback here with a few thoughts on employment policy and the limit to government spending in a fiat currency regime.

The Detroit story Edward just posted illustrates that we should start by eliminating the notion that society requires a buffer stock of unemployed people to discipline wage demands and protect profits.  Not only is this immoral and inhumane, but economically inefficient.  We can have both full employment and price stability via a Government as Employer of Last Resort.

This new class of government employees, which could be called supplementary, would function as an automatic stabilizer, the way unemployment currently does. A strong economy with rising labor costs would result in supplementary employees leaving their government jobs, as the private sector lures them with higher wages. (The government must allow this to happen, and not increases wages to compete.)

The reduction of government expenditures is a contractionary fiscal bias. If the economy slows, and workers are laid off from the private sector, they will immediately assume supplementary government employment. The resulting increase in government expenditures is an expansionary bias. As long as the government does not change the supplementary wage, it becomes the defining factor for the currency- the price around which free market prices in the private sector evolve.  It will also enhance the effectiveness of traditional policies designed to improve aggregate demand because it will create a buffer stock of EMPLOYED personnel for the private sector to draw upon, rather than a reserve army of unemployed.

There is no reason for President Obama and his economic advisors blithely to repeat truisms that “unemployment is a lagging indicator” as a means of justifying further government spending (the truisms you cite here should reflect the myths you’ve mentioned, not introduce entirely new ones).  The reality of a double digit unemployment rate is de facto proof that government spending is too restrictive.  His concern for the welfare of America and for the nation’s future is no doubt genuine. However, in the haste to renounce financing decisions which would, in fact, be very harmful if not impossible for a private business or a household, in their eagerness to accept uncritically the myths of neo-classical economics, the Obama Administration is overlooking the important differences between private finance and public finance. Only a misunderstanding of money and accounting prevents Americans from achieving a higher quality of life that is readily available.

Apropos money, we need to get over this notion that the government can’t “afford” something. Functionally, dollars have the same value to our government that Super Bowl tickets have for the stadium.

As you go into the stadium, you hand the man a ticket that was worth maybe $1000, and then he tears it up and throws it away. Why? Because the ticket has served its function: it has enabled you to gain entry to the event in question; similarly, a tax is paid to extinguish a state liability, but as soon as the tax is paid, it has no further value to the government. The tax receipt can be sent to the shredder. How does the govt taking your cash and throwing it in a shredder pay for anything?

The answer is that it doesn’t.

Taxes function to reduce aggregate demand, also known as spending power, and not to collect what the govt needs to spend on something else. As a matter of conceptual clarity, it makes no sense to say that a government ever “builds up a store of savings” that allows for higher spending capacity in the future. The govt neither has or doesn’t have any dollars.It spends by changing numbers upwards in our bank accounts.  Government is the score keeper for the monetary system.  Just like the stadium is the score keeper for the football game.

Awarding 6 points for a touchdown doesn’t use up some stock of points held by the stadium. We can always get another “3 points” each time a team kicks a field goal. We don’t have to “pay it back”.

You don’t “save” what you have the option of creating or not creating (i.e. fiat currency). Not spending, not “creating currency” via crediting bank accounts, simply means less present day economic output.

We all learned this as the paradox of thrift. There is nothing to “save” . The government is never revenue constrained. This is in contradistinction to the way users of the currency, vs. the issuer of a currency, such as a household functions. For them, spending is constrained by income. their checks will bounce if there is no money in their accounts. And for users of the currency monetary savings can be stored to permit higher consumption in the future.