...against fictions and other tall tales

Sunday, 9 March 2014

When the Fed supported a Job Guarantee policy (and the economist who made it happen)

Circuit here. I'm back from a few months hiatus following the birth of my second child, a baby girl. Thanks to all readers for your continued interest in this blog.

A few weeks ago, Rolling Stone magazine ran a piece by Jesse Myerson supporting the idea that the government should guarantee a job to anyone who is willing to work. In their recent work, Dean Baker and Jared Bernstein also give support to this policy proposal. Randy Wray, Warren Mosler and other modern money (MMT) economists have been pushing for this idea for a long time. On the center-right and right, the idea is being promoted by Peter Cove and Kevin Hasset.

This is good news. I certainly welcome a good debate on this idea. That said, it's too bad that commentators who are skeptical of the idea simply dismiss it as a non-starter for policymakers.

This, of course, is overstating the case somewhat. It's worth recalling that in the 1970s none other than the Chairman of the Federal Reserve supported the idea that the federal government should be the "employer of last resort". Here's the former Fed Chairman Arthur Burns back in 1975:
I believe that the ultimate objective of labor market policies should be to eliminate all involuntary unemployment. This is not a radical or impractical goal. It rests on the simple but often neglected fact that work is far better than the dole, both for the jobless individual and for the nation. A wise government will always strive to create an environment that is conducive to high employment in the private sector. Nevertheless, there may be no way to reach the goal of full employment short of making the government an employer of last resort. This could be done by offering public employment -- for example, in hospitals, schools, public parks, or the like -- to anyone who is willing to work at a rate of pay somewhat below the Federal minimum wage. 
With proper administration, these public service workers would be engaged in productive labor, not leaf-raking or other make-work. To be sure, such a program would not reach those who are voluntarily unemployed, but there is also no compelling reason why it should do so. What it would do is to make jobs available for those who need to earn some money. 
It is highly important, of course, that such a program should not become a vehicle for expanding public jobs at the expense of private industry. Those employed at the special public jobs will need to be encouraged to seek more remunerative and more attractive work. This could be accomplished by building into the program certain safeguards -- perhaps through a Constitutional amendment -- that would limit upward adjustment in the rate of pay for these special public jobs. With such safeguards, the budgetary cost of eliminating unemployment need not be burdensome. I say this, first, because the number of individuals accepting the public service jobs would be much smaller than the number now counted as unemployed; second, because the availability of public jobs would permit sharp reduction in the scope of unemployment insurance and other governmental programs to alleviate income loss. To permit active searching for a regular job, however, unemployment insurance for a brief period -- perhaps 13 weeks or so -- would still serve a useful function.
The idea was even supported by one of the most respected names in economics at the time: Franco Modigliani.  When asked to comment on Chairman Burns's proposal during a testimony before the Congressional Banking committee in 1976, Modigliani said the following:
...the idea of a public employment program as an employer of last resort, which is an alternative to unemployment compensation, strikes me as a very sound idea (p. 110).
Interestingly, the economist who got Burns and the Fed to put serious thought into the idea of a job guarantee was another well-respected contributor to US public policy during that period: Eli Ginzberg.

Job Creation through Public Service Employment

Eli Ginzberg was a Professor of Economics at Columbia University and author of numerous books on human resources and manpower economics. He was also -- in the language of Harold Wilensky and organizational sociology -- a "contact man", a person who provides ideas and furnishes intelligence to decision-makers on the political and ideological tendencies in the society at large. Ginzberg played this role throughout his career as presidential adviser for many administrations and through his affiliation with the Manpower Demonstration Research Corporation (MDRC), which recently marked its 40th year of operation.

Ginzberg was an institutional economist in the tradition of John M. Clark and Wesley C. Mitchell who believed fervently that "people, rather than physical or financial capital, were the principal source of productivity and wealth" (1987:107). For this reason, Ginzberg believed it was critical for the government to eliminate unemployment as quickly as possible through the use of a publicly-funded jobs program.

Another reason why Ginzberg believed the government ought to be employer of last resort is that he understood that economies sometimes face a shortfall in jobs that makes it impossible for all unemployed workers to find work:
Just as reality has mocked the ethos of equality of opportunity for many minority children, the counterpart doctrine that adults are responsible for their own support and that of their dependents has been undermined by the continuing shortfall in jobs. The existence of high unemployment rates make it socially callous, even reprehensible, for a society to continue to affirm the doctrine that all adults who need income should work and then not provide adequate opportunities for many of them to fulfill this imperative. 
Although the US experimented with federally financed job creation in the 1930s and again in the 1970s, the record in retrospect must be viewed as equivocal. Most students believe that on balance the New Deal was right to put large numbers of the unemployed to work on governmentally financed programs rather than to keep them on the dole as the British did. (1987:162) 
On this last point concerning whether income transfers or guaranteed work should be the centerpiece of US social policy, Ginzberg's view was informed by the work he did during the Great Depression. Here's how Ginzberg summarized the conclusions of a 1947 book entitled The Unemployed that he co-authored on the topic of unemployment during the Great Depression:
The principal lessons I extracted included the superiority of work relief over cash support...; the cause of unemployment being rooted in a shortfall in demand for labor, not in the inadequacies of the unemployed; the centrality of work and self-support for the integrity of the individual worker, his family, and the community. By the time our investigation was concluded, [we] were convinced that no society concerned about its security and survival could afford to remain passive and inert in the face of long-term unemployment. We argued that in the absence of an adequate number of private sector jobs, it was the responsibility of government to create public sector jobs. (1987:111)
Ginzberg also believed that guaranteed work for those who are able and willing would find greater acceptability among Americans than a policy that would require government providing a guarantee income to everyone. According to Ginzberg, providing guaranteed income to everyone would conflict with the powerful American ethos of self-reliance and the American population's highly favorable view toward the culture of work:
There is no simple way, in fact, there is no way to square the following: to provide a decent minimum income for every needy person/family in the US, given the differentials in living standards, public attitudes, and state taxing capacity, and at the same time avoid serious distortions in basic value and incentive systems that expect people to be self-supporting through income earned from paid employment. (157)
For this reason, Ginzberg believed that a job guarantee should play a key role in social policy:
Accordingly, I would like to shift the focus from welfare to work, from income transfers to the opportunity to compete, from dependency status to participation in society. In advocating this shift toward jobs and earned income and away from unemployment and income transfers, the planners must focus on two fundamentals: the developmental experiences that young people need in order to be prepared to enter and succeed in the world of work; and the level of employment opportunities that a society must provide so that everybody able and willing to work, at least at the minimum wage, will be able to do so. (157)
In the 1970s, Ginzberg held the position of Chairman of the National Commission for Manpower Policy, a government-mandated commission that produced some of the best policy-oriented research on the topic of public service employment, including an excellent paper entitled "Public Service Employment as Macroeconomic Policy" by Martin Neil Baily and Robert Solow (1978) that explains how public service employment (PSE), while not necessarily more stimulative than the normal kind of fiscal policy (e.g., government spending on goods and services and tax measures), can be a perfectly sensible policy if the program is well-administered and the jobs that are created provide useful social output:
Solow and Baily
We conclude that the main advantages of PSE over conventional fiscal policy are: (a) that it can be targeted to provide jobs for hard-to-employ groups in the labour force, and for especially depressed cities and regions; (b) that PSE employment, correctly targeted, may be slightly less inflationary than the same amount of ordinary private sector employment, so that total employment can safely be a little higher with a PSE component; and (c) that PSE can be coordinated with other forms of social insurance -- public assistance and unemployment insurance, for instance -- to make them perhaps more effective and certainly more acceptable to public opinion. (1978:30)
Solow later revisited the issue of public service employment in Work and Welfare (1998), in which he argued that any attempt to reform the welfare system in order to get the unemployed back to work would only succeed if every able and willing worker is given access to a job through public service employment and/or by offering incentives to businesses to hire the unemployed.

The Deal 

It was in the 1970s that Ginzberg persuaded Chairman Burns to call on the US federal government to become the employer of last resort.  Here's Ginzberg's account of how he was able to get the Fed Chairman to support the job guarantee:
I made a deal with Arthur Burns when he was the head of the Federal Reserve, that I would try to control the amount of money we asked for from the Congress for manpower training if he would come out in favor of the government as the employer of last resort. And he did it. It took him a year, but I negotiated with him and he did it.
A final word. Although Ginzberg supported the idea of a job guarantee, he fully recognized the high budgetary cost that such a policy would entail and the practical challenges facing public administrators in terms of successfully implementing a public service employment program. To address these concerns, he believed the government authorities should make improvements to the program using trial and error and cautious experimentation. But the key, he would argue, is to ensure that the jobs created through these measures provide productive social output:
There is no big trick to put more and more people on public service employment. If that is the only thing that one is interested in, obviously, the Federal Government can create the money by fiat and put more people on public service employment. The question is what are the short- and long-run implications of doing that in terms of keeping our economy productive, competitive and innovative....So I do not think it is just jobs; it is productive jobs and that is another way of saying that the Federal Government can go only part of the way in terms of assuring that we have a productive economy. 

Baily, Martin N. and Robert Solow, "Public Service Employment as Macroeconomic Policy", National Commission for Manpower Policy, 1978

Ginzberg, Eli, The Skeptical Economist, Boulder and London: Westview Press, 1987

National Commission for Manpower Policy, "Job Creation through Public Service Employment: An Interim Report to the Congress", 1978

Solow, Robert, Work and Welfare, Princeton, NJ: Princeton University Press, 1998


  1. I enjoyed this post. I think it's important for anyone who is advocating an ELR to explain how the jobs created will contribute to raising productivity. Nothing kills a good policy like an answered question.

    I have been thinking about the merits of ELR for a while and I am very pleased to learn that a lot of thought was put into these issues in the past

  2. Although you focussed on the U.S. here, I believe there was some Canadian experimentation with something similar to a Jobs Guarantee. Is there a good summary of why the idea was abandoned (beyond the rightward lurch of politics)?

    Also, congratulations on the birth of your daughter.

  3. @KP: Thanks KP. It's been a while. Good to have you back!

    @Anon: We have to keep in mind that there are other reasons for PSEs, one of which is simply to keep people active and working. I think in general you are right but another purpose of PSE is to help workers retain their skills. I also like Ginzberg's point about providing a second chance; I'm sure some workers face some barriers. PSE can address this problem.

    @Brian: Ginzberg discusses how the PSE experience in the 1970s came to an abrupt end in his 1987 book referred to above. It appears that, while the PSE did do a lot of good, it wasn't very well targeted. For instance, some jobs paid considerably higher than the minimum wage. Also, President Carter decided to expand the PSE program as a tool to stimulate the economy. The pace at which this occurred led to a bloated administrative infrastructure to support the program. Finally, the lack of focus on remedial training and skills acquisition during that period resulted in a poor record of workers transitioning to regular jobs. In the end, it was easy for Reagan to get the program phased out. As for the Fed, putting a lid on inflation became the priority.

    To me, it seems like many of these problems could have been addressed fairly easily. In my view, the rise of conservatism and impatience with policy experimentation were other big factors.

  4. And thanks for the kind words!

  5. You've really hit it out of the park with this one. Nice job!

  6. I’m always amazed by the way people, when discussing PSE, don’t address the basic theoretical reason for thinking PSE can raise aggregate employment. That (nearly always unstated) reason is presumably that the public sector GIVES AWAY its output, thus no increase in demand is needed to raise employment that way.

    But the problem with that answer is that we’ve had a huge increase in the public sector over the last century with no corresponding increase in employment. So the above answer is obviously flawed.

    A better answer is that as long as PSE creates jobs which BOTH don’t raise demand, AND leave aggregate labour supply untouched (i.e. leave the incentive to seek regular employment untouched) then PSE can raise numbers employed.

    But there’s a problem with that answer, namely that exactly the same point can be applied to the private sector. That is, if private sector employers are supplied with free labour, the marginal cost of labour for those employers becomes zero, so it will pay private sector employers to take on such labour, and effectively give away the output of that labour. E.g. a used car dealer could use such labour to keep cars cleaner than before, and charge customers nothing for the service.

  7. Thanks for posting this, I like learning more about the evolution of economic ideas.

    That said, these old school JG'ers share the same hangups as today's JG'ers -- they have no specific plans for creating meaningful jobs out of thin air, and instead their JG is motivated primarily by their conservative moral values.

    Burns: "offering public employment -- for example, in hospitals, schools, public parks, or the like"

    Uh.... EXACTLY what would JG workers do in hospitals, schools, and parks that is not already currently being done?

    Is there a shortage of orderlies or nurses aids? NO!.

    Is there a shortage of teachers or teacher's aids? NO!

    Is there a shortage of park maintenance workers? NO!.

    However, there is often a shortage of FUNDING to hire nurses aids, teachers, park maintenance, etc.. We don't need another government program, we just need to fund existing programs. That would create jobs, no JG necessary.

    Attempting to shoehorn JG temps into existing government programs like hospitals, schools, and parks would likely result in displacing existing permanent positions and driving down wages.

    My counter proposal: make a list of public purpose things that need to be done, and hire people to do them. They need not be temp jobs or minimum wage jobs or even government jobs -- in some cases it may be fine to outsource the work to private contractors.

    I.e, maintain hiking trails on public lands. You could either outsource to contractors (which is how it is currently done, but constrained by funding) or create summer jobs for young people to maintain trails.

    I.e., formal studies on wolves in in Idaho. You could either contract with a wildlife biologist or else hire a wildlife biologist as a government employee. Instead of paying minimum wage, you pay the going rate for wildlife biologists.

    What I'm trying to say is that it makes more sense to create jobs that fill a specific need, and pay the going rate for that type of work, instead of creating make-work jobs out of thin air and paying minimum wage.

    Then there is the question of who determines what these public purpose needs are. JG advocates sweep this question under the rug but it's a huge, huge issue. According to our system of government, the proper way to determine the needs is to have Congress decide, not to delegate to bureaucrats or heaven forbid, to NGO's.

    And if Congress has to decide, then it's not really a self-regulating job program, is it?

    1. Dan, thanks for your comments. In fact, I'm glad you stopped by. I've noticed your comments down at MNE during the last few months on the JG and always thought you made lots of sense.

      I certainly agree with you that one needs to be careful about what kind of jobs are offered through ELR/JG. My own take is that the type of jobs offered should be aligned with the general trend toward service oriented jobs rather than the jobs people typically think of when talking about JG such as bridge and road construction. As mentioned, Robert Solow has argued that combining JG with some sort of offering subsidy to the private sector to hire the unemployed may help partly solve this problem. I'll think more about your comments and get back to you.

  8. Thanks. This is one of the better posts I have read on the concept of the job guarantee. I still don't understand how the federal government would manage it (has anyone written on this aspect??). It's good to know a broad range of economists think the concept has merit.

  9. @Ryan: Thank you very much for your comment. On the issue of administration, although I think it would be a challenge at first, I do not believe it would be impossible to implement the proper controls for such a program. Surely it would difficult (in the 90s in Canada, a huge public scandal surfaced as a result of a badly managed program to boost employment), but I think there is sufficient desire from elected officials these days to get the most bang for the buck for every dollar spent.
    @Dan: I think you would need to delegate. I don't think Congress would have the time or desire to make every decision concerning the amount and type of jobs created. I agree it would have to be a private-public partnership of sort (yes, including the NGOs)

  10. FRB is a warm and sunny welcome to an otherwise overcast and humid end-of-winter-morning. Congratulations on your beautiful newborn baby girl and the same appreciation for your most recent policy issue. !!! to see Ginzberg, Solow and Bailey pictured on the Blogs of 2014. Men that made the difference especially when it comes to employment policy. We certainly had a few of those in Canada but they were not very successful during the depicted period. Full employment has been anathema in Canada for years, suffering from rhetorical noise and non-operational policy resonance as a result of lack of political courage and inadequate political vision at the legislative and government level. Hopefully, you'll bring back motivation to address the most significant public policy issue of our time in this country and many countries world-wide: full employment. Craw would have liked your Ginzberg-Solow platform. Maybe the times are not all past.

    Stay the course young man-as someone would say-stay the course!!!

    1. Thanks so much, Swells, on both counts. Doing the research for this post was a real eye opener. As you can tell, I stumbled on a several gems along the way!

      I'm interested in knowing a bit more about the Canadian side of things. Brian Romanchuk (who has an excellent blog by the way) left a comment above saying that Canada experimented with these programs in the past. Do you have any suggested readings? Or maybe just a nudge in the right direction?