Category: Job Guarantee

The Homeowners’ Association

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August 18, 2019

by Steve Stofka

Two quick asides before I get into this week’s topic. A cricket perched on the top of a 7′ fence. It drew up to the edge of the top rail, learned forward, raised its rear legs as though to jump, then settled back. It did this twice more before jumping 8′ out then down into a soft landing on some ground cover. How far can crickets see, how often do they injure a leg if they land incorrectly and do they get afraid?

The bulk of the personal savings in this country is held by the top 20% of incomes, and it is this income group that received the lion’s share of the 2017 tax cuts. It’s OK to bash the rich but that top 20% probably includes our doctor and dentist. Before you start drilling or cutting me, I want to make it perfectly clear that I was not criticizing you, Doc.

In 2016, the top quintile – the top 20% – earned 2/3rds of the interest and dividend income (Note #1). Due to falling interest rates over the past three decades, real interest and dividend income has not changed. Real capital has doubled and yes, much of it went to those at the top, but the income from that capital has not changed. That is a huge cost – a hidden tax that gets little press. The real value of the public debt of the Federal Government has quadrupled since 1990, but it pays only 20% more in real interest than it did in 1990 (Note #2). Here’s a graph of personal interest and dividend income adjusted to constant 2012 dollars. Thirty years of flat.

Ok, now on to a story. Economists build mathematical models of an economy. I wanted to construct a story that builds an economy that gradually grows in complexity and maybe it would help clarify the relationships of money, institutions and people.

Let’s imagine a group of people who move into an isolated mining town abandoned several years earlier. The houses and infrastructure need some repairs but are serviceable and the community will be self-sufficient for now. The homeowners form an association to coordinate common needs.

The association needs to hire lawn, maintenance and bookkeeping services, and security guards to police the area and keep the owners safe.  How does the association pay for the services?  They assess each homeowner a monthly fee based on the size of the home. How do the homeowners pay the monthly fee?  Each homeowner does some of the services needed. Some clean out the gutters, others fix the plumbing, some keep the books and some patrol the area at night. They work off the monthly fee.

How do they keep track of how much each homeowner has worked? The association keeps a ledger that records each owner’s fee and the amount worked off. The residents sometimes trade among themselves, but it is rare because barter requires a coincidence of wants, as economists call it. Mary, an owner, needs some wood for a project and Jack has some extra wood. They could trade but Mary doesn’t have anything that Jack wants. He tells Mary to go down to the association office and take some of her time worked off her ledger and credit it to Jack’s monthly fee. Mary does this and they are both happy (Note #3).

As other owners learn of this idea and start trading work credits, the association realizes it needs a new system. It prints little pieces of paper as a substitute for work credits and hands them out to owners who perform services for the association. These pieces of paper are called Money (Note #4).

The money represents the association’s accounts receivable, the fees owed and accruing to the association, and the pay that the association owes the owners for the work they have done. Then the association notices that there are some owners who are not doing as well as others. It assesses an extra fee each month from those with larger homes and gives that money to needy homeowners.  These are called transfers because the owners who receive the money do not trade any real goods or services to the association. In this case the association acts as a broker between two people. Let’s call these passive transfers. We can lump these transfers together with exchanges of goods and services.

Then some people from outside the area start stealing stuff from the homeowners. The association needs to hire more security guards, but homeowners don’t want to pay a special one-time assessment to pay for the extra guards.

Instead of printing more Money, the association prints pieces of paper called Debt. Homeowners who have saved some of their money can trade it in for Debt and the association will pay them interest. Homeowners like that idea because Money earns no interest and Debt does. The association uses the Money to pay for the extra security guards.

But there are not enough people who want to trade in their Money for Debt, so the association prints more Money to pay the extra security guards.

Let’s pause our story here to reflect on what the words inflation and deflation mean. Inflation is an increase in overall prices in an economy; deflation is a decrease (Note #5). Inflation occurs when the supply of money fuels a demand for goods and services that is greater than the supply of goods and services. Ok, back to our story.

So far so good. All the Money that the association has printed equals a trade or a passive transfer. Let’s say that the association needs more security guards and no one else wants to work as a security guard because they can make more Money doing jobs for other homeowners. The association makes a rule called a Draft. Homeowners of a certain age and sex who do not want to work as security guards will be locked up in the storage room of the community center.

Now there’s a problem. Because the association has taken some homeowners out of the customary work force, those people are not available for doing jobs for other homeowners, who must pay more to contract services. This is one of several paths that leads to inflation. To combat that, the association sets price controls and limits the goods that homeowners can purchase. After a while, the outsiders are driven off and the size of the security force returns to its former levels.

Now all the extra Money that the association printed to pay for the security force has to be destroyed. As homeowners pay their dues, the association retires some of the money and shrinks the Money supply. However, there is a time lag, and prices rise sharply (Note #6).

Over the ensuing decades, there are other emergencies – flooding after several days of rain, a sinkhole that formed under one of the roadways, and a sewer system that needed to be dug up and replaced. The association printed more Debt to cover some of the costs, but it had to print more Money to pay for the balance of repairs. Because the rise in the supply of Money was a trade for goods and services, inflation remained tame.

There didn’t seem to be any negatives to printing more Money, so the homeowners passed a resolution requiring that the association print and pay Money to homeowners who were down on their luck. These were active transfers – payments to homeowners without a trade in goods and services and without some offsetting payment by the other homeowners.

So far in our story we have several elements that correspond with the real world: currency, taxes, social insurance, the creation of money and debt and the need to pay for defense and catastrophic events. Let’s continue the story.

With the newly printed Money, those poorer homeowners could now buy more goods and services. The increased demand caused prices to rise and all the homeowners began to complain. Realizing their mistake, they voted on an austerity program of higher homeowner fees and lower active transfers to poorer homeowners.

Because homeowners had to pay higher fees, they didn’t have enough extra Money to hire other services. Some residents approached the association and offered to repair fences and other maintenance jobs, but the association said no; it was on an austerity program and cutting expenses. Some residents simply couldn’t pay their fees and the problem grew. The association now found that it received less Money than before the higher fees and Austerity program. It cut expenses even more, but this only aggravated the problem.

Finally, the association ended their Austerity program. They printed more Money and hired homeowners to make repairs. Several homeowners came up with a different idea. There is another housing development called the Forners a few miles away. They are poorer and produce some goods for a lower price. The homeowners can buy stuff from the Forners and save money. There are three advantages to this program:

  1. Things bought from the Forners are cheaper.
  2. Because the homeowners will not be using local resources, there will be less upward pressure on prices.
  3. The homeowners will pay the association for the goods bought from the Forners and the association will pay the Forners community with Debt, not Money. Since it is the creation of Money that led to higher prices, this arrangement will help keep inflation stable.

As the homeowners buy more and more stuff from the Forners, the money supply remains stable or decreases. After several years, homeowners are buying too much stuff from the Forners and there is less work available in the community. As homeowners cannot find work, they again fall behind in paying their monthly fees.

Several of those in the association realize that they don’t have enough Money to go around in the community. There is a lot to do, and the homeowners draw up a wish list: repairs to the roads and helping older homeowners with shopping or repairs around their home are suggested first. A person who is out of work offers to lead tours and explain the biology of trees for schoolchildren. The common lot near the clubhouse could use some flowers, another homeowner suggests. I could use a babysitter more often, one suggests, and everyone nods in agreement. I could teach a personal finance class, a homeowner offers. Another offers to read to homeowners with bad eyesight and be a walking companion to those who want to get more exercise.

Everyone who contributes to the welfare of the community gets paid with Money that is created by the association. What should we call the program? One person suggests “The Paid Volunteer Program,” and some people like that. Another suggests, “The Job Guarantee Program” and everyone likes that name so that’s what they called it (Note #7).

So far in this story we have two key elements of an organized society:

  1. Money – a paper currency created by the homeowner association.
  2. Debt – the amount the association owes to homeowners (domestic) and the Forners (international).

Next week I hope to continue this story with a transition to a digital currency, banks and loans.

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Notes:

  1. In 2016, the top 20% of incomes with more than $200K in income, earned more than 2/3rds of the total interest and dividends. IRS data, Table 1.4
  2. In 2018 dollars, the publicly held debt of the Federal government was $4 trillion in 1990, and $16 trillion now. In 2018 dollars, interest expense was $500B in 1990, and is $600B now.
  3. In David Graeber’s Debt: The First 5000 Years, there is no record of any early societies that had a barter system. They had a ledger or money system from the start.
  4. In the Wealth of Nations, Adam Smith – the “father” of economics – defined money as that which has no other value than to be exchanged for a good. This essential characteristic makes money unique and differentiates paper money from other mediums of exchange like gold and silver.
  5. An easy memory trick to distinguish inflation from deflation. INflation  = Increase in prices. DEflation = DEcrease.
  6. The account of the increased force of security guards – and its effect on prices and regulations – is the simple story of money and inflation during WW2 and the years immediately following. The process of rebalancing the money supply by the central bank is difficult. Monetary policy during the 1950s was a chief contributor to four recessions in less than 15 years following the war.
  7. A Job Guarantee program is a key aspect of Modern Monetary Theory.

Working Class Blues

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July 7, 2019

by Steve Stofka

This week I had a chance to watch two documentaries hosted by journalist Bill Moyers several years ago (Note #1). They featured the shifting fortunes of two blue-collar working-class families in Milwaukee. Each family had enjoyed the security and benefits of middle-class life – a house and dreams that they would send their kids to college one day. When each breadwinner lost their jobs in the manufacturing industry, they realized just how precarious their situation was.

With more education and skills, these blue-collar workers could have made a better transition. Higher education is certainly a solution for some but how will more education help the butcher, the baker and the candlestick maker? These professions play a part in our complex society and the marketplace has not found a viable solution for those workers and their families.

What is the middle class? The Census Bureau defines it as the middle three quintiles of income (Note #2). What does that mean? If incomes range from $0 to $100 the range of the middle class is from $20 to $80. Some economists use $25 and $75 as the upper and lower bounds of the middle class. A hundred years ago the middle class was a small sliver of the population in the middle. They were between the working class who relied almost entirely, if not exclusively, on work for their income, and the upper class whose major source of income was not work – profits, interest, dividends and rents.

When economists talk about the middle class, it is usually the lower middle-class or working class that they use to represent the fortunes of a wide range of people with far different circumstances, education and skills. Both videos focused on that working-class segment because the stories are poignant and the solutions difficult, if not intractable.

The Golden Age of the working class was after World War II when unions were strong and blue-collar incomes grew much faster than inflation. After the productive capacity of much of developed world had been destroyed during World War II, America was the factory for the world. The workers in those factories enjoyed strong bargaining power and could command a good benefit package and wage gains from employers.

Until the Roosevelt administration established housing and mortgage programs during the decade of the Great Depression, most families had to put a third to a half down on a house and pay off the mortgage in five to ten years. The FHA (1934) and FNMA (1938) lowered those requirements to as low as 10% (Note #3). The GI bill that was passed in 1944 promised returning GIs a home for little to nothing down and low-interest long-term mortgages.  Residential construction boomed.

As the European nations and Japan recovered in the 1960s and 70s American firms were challenged by low cost imported goods. As their pricing power eroded, they became more resistant to wage and benefit demands by working-class unions. Protectionist policies guarded against competition from foreign auto makers, but consumer buying power in America was a magnet for appliances and electronics from Japan and Germany, and foodstuffs from France, Spain, Italy and Mexico (Note #4).

The 1970s was beset by a series of bitter strikes in both private industry and in government service. The benefit and wage packages that union workers had negotiated in the 50s and 60s proved uncompetitive in the revived private international marketplace. Those who could afford the higher taxes to pay city workers began to move out of the cities to the suburbs. Cities like New York suffered under successive waves of strikes by fire, police, sanitation and transportation workers. If the firefighters got a 4% raise, other city workers wanted a similar wage package.

Rather than invest in refurbishing decades-old factories, manufacturers built new factories abroad, where labor costs were much cheaper. The savings more than offset the shipping costs of finished products back to America. Those shipping costs had been drastically reduced in 1955 when a transport owner and an engineer designed a shipping container that could be stacked and survive the rigors of an ocean voyage. They gave away the patent and the world adopted the new containers (Note #5).

As the manufacturing plants in the northern states, particularly the Rust Belt, began to shutter their doors, some families moved. Many families who had bought homes now found that the value of their homes had depreciated. Some with strong ties to the community and a lack of savings struggled on at lower paying jobs. Some lost their houses, their cars, their dreams. The two families that Bill Moyers interviewed exemplified this broad trend. 

For some journalists and economists, this short-lived post-War era became a benchmark for the way it should be. That benchmark may have been a historical anomaly, an aftermath of a global war.

What is to be done? Since the Johnson Administration ushered in the War on Poverty fifty years ago, the percentage of the population in poverty has not changed (Note #2). 42% of children born into poverty remain in poverty. Either the programs have been poorly designed, or the problems are complex and resist solutions.

Will raising taxes on the rich help? Most of the capital gains go to the upper class who pay lower taxes on those gains. Is that the solution? To fund their retirement, millions of seniors each year are selling some of their IRAs and 401Ks, and incurring capital gains when they do so. Will politicians change the rules in midstream on a generation of Boomers? Old people vote in high percentages. Probably not.

Some suggest that the government stop subsidizing rich people and give that money to people who need it. This would include means testing Social Security, but also include a plethora of “gimmes” that pass unnoticed to most of us from government to those who are well-off. Some farmers receive a check from the government to not grow crops in order to control the supply. “Dear Santa, do not give me money this year.” Who is going to write that note?

Some have suggested we implement a Universal Basic Income (UBI) program, a program which would give $1000, for example, to everyone. That would be a nice subsidy for Walmart and McDonald’s who could then pay their workers even less than they do now. Some economists argue that there are even more problems (Note #6).

What about a higher Federal minimum wage? $15 is a popular suggestion on the campaign trail. A $15 wage in Los Angeles has much less buying power than it does in Alamosa, CO. Why not implement something indexed to the median wage in each area? The BLS, the same agency that produces the employment report each month, has the data to implement such an idea. Why a one size fits all minimum wage? Those who prefer local solutions are not without compassion.

History tells us that large government solutions can exacerbate the very problems they were meant to solve. The housing assistance and student loan programs are examples of the bureaucratic bramble that characterizes active Federal programs. Given that caveat, I do think that a Job Guarantee program that operated at the state and local level but was funded by the Federal government would provide stability to the more vulnerable in our work force. It would reduce the cyclical and structural unemployment that corrodes our society (Note #7). There are several proposals to implement some trial programs in the states and I support those efforts. What do you think?

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Notes:

  1. Frontline’s Two American Families and Moyers & Co. Surviving the New American Economy
  2. A 2018 Census Bureau presentation (PPT) of income and poverty in the U.S.
  3. History of Government housing programs
  4. In 1964, the Johnson Administration enacted the “chicken tax,” a 25% import tax on imported autos
  5. History of Shipping Containers and the free of patent innovation that changed international commerce
  6. Economist Daron Acemoglu argues against a UBI program
  7. Search for Job Guarantee and choose the depth that you want to explore on this topic. On Twitter, #JG for many sources.

The Start of the Beginning

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April 7, 2019

by Steve Stofka

In 1971 former President Nixon announced that the U.S. was abandoning the gold standard of fixed exchange that had existed for almost thirty years. Within a short time, other leading nations followed suit. Each nation’s currency simply traded against each other on a global currency, or FX, market.

Since oil was priced in dollars and the world ran on oil, the U.S. dollar became the world’s reserve currency. Each second of every day, millions of US dollars are traded on the international FX markets. The demand for US dollars is strong because we are a productive economy. The euro, yen and British pound are secondary currency benchmarks.

When the U.S. wants to borrow money from the rest of the world, the U.S. Treasury sells notes and bills collectively called “Treasuries” to large domestic and foreign banks who “park” them in their savings accounts at the Federal Reserve (Fed), the U.S. central bank (Note #1). The phrase “printing money” refers to a process where the Federal Reserve, an independent branch of the Federal Government, buys Treasury debt on the secondary market. It may surprise many to learn that the Fed owns the same percentage of U.S. debt as it did in 1980. The debt in real dollars has grown seven times, but the percentage held by the Fed is the same. That is a powerful testament to the global hunger for U.S. debt. Here’s the chart from the Fed’s FRED database.

FedResHoldTreasPctDebt

In 1835, President Andrew Jackson paid off the Federal debt, the one and only time the debt has been erased. It left the country’s banking system in such a weak state that subsequent events caused a panic and recession that lasted for almost a decade (Note #2). Government debt is the private economy’s asset. Paying down that debt reduces those assets.

About a third of the debt of the U.S. is traded around the world like gold. It is better than gold because it pays interest and there are no storage costs. Foreign businesses who borrow in dollars must be careful, however. They suffer when their local currency depreciates against the dollar. They must earn even greater profits to convert their local currency to dollars to make payments on those dollar-denominated loans.

Each auction of Treasury debt is oversubscribed. There isn’t enough debt to meet demand. In a world of uncertainty, the U.S. government has a long history of respect for its monetary obligations. As the reserve currency of the world, the U.S. government can spend at will. Even if there were no longer a line of domestic and foreign buyers for Treasuries, the Federal Reserve could “purchase” the Treasuries, i.e. print money. Let’s look at the difference between borrowing from the private sector and printing money.

When the private sector buys Treasuries, it is effectively trading in old capital that cannot be put to more productive use. That old capital represents the exchange of real goods at some time in the past. In contrast, when the government spends by buying its own debt, i.e. printing money, it is using up the current production of the private sector. This puts upward pressure on prices. Let’s look at a recent example.

Quantitative Easing (QE) was a Fed euphemism for printing money. During the three phases of QE that began in 2009, the Fed bought Treasury debt. That was an inflationary policy that countered price deflation as a result of the Financial Crisis. In August 2009, inflation sank as low as -.8% (Note #3). It was even worse, but inflation measures do not include the dividend yield on money. To many households, inflation felt like -2% (Note #4). The Fed’s first round of QE did provide a jolt that helped drive prices up by 3% and out of the deflationary zone.

During the five years of QE programs, the Fed continued to fight itself. The QE programs pushed prices upwards. Near zero interest rates produced a deflationary counterbalance to the inflationary pressures of printing money. Because inflation measures do not include the yield on money, the Fed could not read the true change in the prices of real goods in the private sector. The economy continues to fall below the Fed’s goal of 2% inflation. There are still too many idle resources.

Leading proponents of Modern Monetary Theory (MMT) remind people that yes, the U.S. can spend at will, but that it must base its borrowing on policy rules to avoid inflation. A key component of MMT is a Job Guarantee (JG) program ensuring employment to anyone who wants a job. A JG program may remind some of the WPA work programs during the Great Depression. Visitors to popular tourist attractions, from Yellowstone Park in Wyoming to Carlsbad Caverns in New Mexico, use facilities built by WPA work crews. Today’s JG program would be quite different. It would be locally administered and targeted toward smaller public works so that the program was flexible.

The U.S. government has borrowed freely to go to war and has never paid that debt back. Proponents of MMT recommend that the U.S. do the same during those times when the private economy cannot support full employment. That policy goal was given to the Fed in the 1970s, but it has never been able to meet the task of full employment through crude monetary tools. With an active program of full employment, the Fed would be left with only one goal – guarding against inflation.

There are two approaches to inflation control: monetary and fiscal. Monetary policy is controlled by the Fed and includes the setting of interest rates. If the Fed’s mandate was reduced to fighting inflation, it could more readily adopt the Taylor rule to set interest rates (Note #4).

Fiscal policy is controlled by Congress. Because taxation drains spending power from the economy, it has a powerful control on inflation. However, changes in tax policy are difficult to implement because taxes arouse passions. We are familiar with the arguments because they are repeated so often. Everyone should pay their “fair share,” whatever that is. Some want a flat tax like a head tax that cities like Denver have enacted. Others want a flat tax rate like some states tax incomes. Others want even more progressive income taxes so that the rich pay more and the middle class pay less. Some claim that income taxes are a government invasion of private property rights.

Because tax changes are difficult to enact, Congress would be slow to respond to changes in inflation. The Fed’s control of interest rates is the more responsive instrument. The JG program would provide stability to the economy and reduce the need for corrective monetary action by the Fed. The program would help uplift those in marginal communities and provide much needed assistance to cities and towns which had to delay public works projects and infrastructure repair because of the Financial Crisis. As sidewalks and streets get fixed and graffiti cleaned, those who live in those areas will take more pride in their town, in their communities, in their families and themselves. This makes not just good economic sense but good spiritual sense. We can start small, but we must start.

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Notes:

1. Twenty to twenty-five times each month, the Treasury auctions U.S. government debt. Many refer to the various forms of bills and notes as “treasuries.” A page on the debt
2. The Panic of 1837
3. The Federal Reserve’s preferred measure of inflation is the Personal Consumption Expenditure Index, PCEPI series.
4. The annual change in the 10-Year Constant Maturity Treasury fell below -1% at the start of the recession in December 2007 and remained below -1% until July 2009. FRED series DGS10. John Maynard Keynes had recommended the inclusion of money’s yield in any index of consumer demand. In his seminal work Foundations of Economic Analysis (1947), economist Paul Samuelson discussed the issue but discarded it (p. 164-5). Later economists did the same.
5. The Taylor rule utility at the Atlanta Federal Reserve.