Forced Unemployment is a Human Rights Issue

Economics is full of jargon. This is not unique to economics but even more so than in most professions the jargon is used to conceal information: sneaking dubious assumptions about the world past casual audiences, packaged in abstract-sounding terminology.

In this post I introduce one such term: NAIRU, or Non-Accelerating Inflation Rate of Unemployment. If your eyes glazed over reading that, it’s by design. Please read on because this impressively abstract acronym has been, and continues to be used to inflict economic misery on millions upon millions of people. In my opinion it is used as a justification to deprive people of a fundamental human right: the right to work.

Bad enough if adherence to NAIRU were a utilitarian decision society has to make in order to remain financially stable, sacrificing some for the well-being of most. Worse yet if the theory behind NAIRU is actually wrong, as it almost certainly is. And even if there is some truth to it, there is a better way to provide price stability for the economy but that will be the topic of a future post.

In this post I’ll talk about the actual causes of unemployment, and the cost to individuals and society. The purpose of this post is to show that involuntary unemployment is a creation of the government, and only the government can solve it.

What is NAIRU?

NAIRU is often referred to as the “natural rate” of unemployment, which was actually a previous theory that NAIRU sought to improve on. NAIRU refers to the rate of “acceptable” unemployment, under which inflation would inevitably increase at an accelerating rate.

According to the theory, once unemployment rate falls below NAIRU, employees have too much power to bargain for higher wages, as employers can’t simply threaten to fire them and hire a replacement from the pool of unemployed people. The increased cost of labor pushes up the general price of goods and services, resulting in cost-push inflation. Higher income for workers then increases aggregate demand, bidding up the prices further (known as demand-pull inflation, because aggregate demand is pulling up the general price level).

I am not equipped to argue how sound the NAIRU concept is — suffice to say here that many economists reject it, but it is considered such economic orthodoxy that it is accepted without a question by mainstream economists and those they advice. Since my focus is Canada and the US, both the Bank of Canada and the Federal Reserve use NAIRU to target their monetary policy. Both define Full Employment as being equal to NAIRU which as I will show below makes a mockery of the idea of full employment.

Canada

• Working age population: 29.3 million
• Labor force participants: 19.3 million
• Unemployment rate: 6.9%
• Unemployed people: 1.3 million
• Estimated NAIRU: 6.4%
• People left unemployed at “full employment” under NAIRU: 1.2 million
• Difference between current unemployment and “full employment”: 96,000 people

United States

• Working age population: 204 million
• Labor force participants: 158.9 million
• Unemployment rate: 4.9%
• Unemployed people: 7.8 million
• Estimated NAIRU: 4.8%
• People left unemployed at “full employment” under NAIRU: 7.6 million
• Difference between current unemployment and “full employment”: 188,000 people

Looking at those numbers, keep in mind the following: long-term unemployed who have been discouraged from even looking for work are not included in the unemployment rate as they’ve dropped out of the labor force. It also doesn’t distinguish between fully employed people and underemployed part-time workers. This is how the US employment stats look good on paper, until you realize labor force participation has dropped and most new jobs are part-time minimum wage jobs. Nothing to brag about, Obama.

You’ll also note that most unemployed people would remain so even if the unemployment rate reached NAIRU. Even as policy makers in Ottawa or Washington celebrated “full employment”, 1.2 million Canadians and 7.6 million Americans would remain involuntarily unemployed. These are not people who are unemployed for any fault of their own, there are simply not enough jobs in the economy for them to take, and that is because government action.

Economists sometimes refer to this cohort as the “Reserve Army of Unemployed“, because they act as a buffer stock against inflation. I like the metaphor, so let’s take it further:

US Armed Forces have about 2.1 million active and reserve personnel, so the US Reserve Army of Unemployed is roughly 3.6 times larger.

Canadian Armed Forces have some 119,000 personnel, making the Reserve of Unemployed just about 10 times larger.

No one asked to serve in the Armies of The Unemployed, even though they are supposedly doing the critical task of stabilizing the value of national currencies.

Nor are the involuntarily unemployed compensated for the toll this takes on them financially, socially, mentally, and physically. Where they are compensated, there are lots of strings attached; and they are stigmatized, blamed and humiliated at every turn. No one receives a Purple Heart for being a casualty of unemployment that is built into the system — unemployment without which the system believes it couldn’t operate.

Costs of Unemployment

Putting aside whether NAIRU is true or not; or if there might be an alternate, better and more humane way to stabilize the value currency (spoiler alert: there is), let’s talk about the what adherence to NAIRU costs to the society, the economy, and individuals.

Bill Mitchell has estimated that in 2011 the US was missing out on $US6 billion to $US9.7 billion of national income (real GDP) daily, as compared to pre-2008 financial crisis levels of employment. That’s $2.2 trillion to $3.5 trillion over the course of a year lost in economic output alone. As a comparison, by 2015 the US had spent some $4.4 trillion in wars in Iraq, Afghanistan and Pakistan; or $314 billion per year (not taxpayer-funded, despite what you may have heard on occasion).

Those figures of loss of potential output don’t account for skill loss. The private sector generally considers anyone who has been unemployed for more than six months as unemployable, which leads to an understandable drop in motivation and further depreciation of marketable and productive skills.

On a societal level, it’s easy to shrug off the costs of unemployment: just blame it on structural unemployment, automation, taxes and over-regulation, minimum wages, unions, and the unemployed themselves. Turns out, government is almost entirely to blame, but perhaps not for the reasons most people think. More on that later.

On a personal level, however, the costs are devastating. Loss of income leads to a loss of financial freedom, safety, and autonomy; if one ever even had those. It affects levels of stress, impairs sleep, can trigger depression and its resulting downward spiral that in turn can create a cascading series of effects: loss of motivation, anger, hopelessness, substance abuse, or other self-destructive behavior, alienation from the rest of society, stressed, fractured, or abusive relationships with family and friends. Involuntary unemployment can cause or exacerbate a number of mental or physical conditions, and the effects can be multi-generational.

Is it any wonder, then, that after Thatcher and Reagan adopted free-market policies, suicide rates go up under Conservative governments?

Of course, the poor also cannot afford decent nutrition, or even housing: even the most basic of needs, sometimes even if they are employed. While there’s talk of raising retirement ages because the average life expectancy is creeping up, this is not the case for the poor and the marginalized.

Speaking of marginalized people; unemployment falls heavily on the shoulders of racial minorities, especially black people; on LGBT people, especially transgender people. It’s easy to legislate non-discrimination clauses into employment and call it a day, but this does little to counter actual bigotry or unconscious biases — just come up with any other reason to fire or not hire someone and give that as the reason.

Now that previously well-off people, mainly working class white people, are suffering job loss or under-employment at increasing rates we’re seeing an all too predictable shift in politics, and people like Donald Trump are benefiting by adopting right-wing, populist, reactionary politics. White supremacists, militia members, and actual neo-Nazis are proudly coming out of the woodworks because they feel empowered and enough people are willing to listen to them on who they should actually blame for their hardships.

The media, of course, following their “both sides do it”-doctrine tries to dig out examples of similar behavior on the left, but Bernie Sanders and Jeremy Corbyn and their supporters are a far cry from the right-wing hate machinery that’s propelling Trump and his ilk elsewhere.

Aside from potential violence from political radicalization, what about crime that arises from need or lack of opportunity? What would it do to crime rates (that have been steadily decreasing over time, despite frantic fear-mongering from tough-on-crime politicians) if everyone who wanted or needed a job could get a full-time job at a living wage, even former felons?

Clearly involuntary unemployment is a societal responsibility to fix, a public good, and so cannot be left in the fickle hands of the private sector to fix. Simply giving adequate unemployment benefits or other compensation, or even instituting a Guaranteed Basic Income, helps in alleviating the worst effects of unemployment and poverty. But income alone, even if unconditional, won’t help fix the problem of involuntary unemployment. Many unemployed people would choose a job over free money, for all the other perks they’d get from being a fully-participating member of society. And it doesn’t need to be either-or.

What Can Government Do And How Is It Responsible?

I understand common objections, especially from conservative ideologues: “Government can’t create wealth! Only the private sector can create jobs!”

Both are obviously absurd claims. Government spending is private sector wealth, this is not an opinion but an accounting fact. The existence of police, firefighters, armed forces, teachers, and other government employees refute the second point pretty empirically.

They’re not describing what is, but what (according to them) ought to be. They define and value a job as something that the employee does that makes the employer more money than what they put in (as in, what they pay back in wages and material costs). This definition of work is, of course, inherently exploitative as the worker is paid less than what their labor is actually worth.

Outside of cooperative structures, this is what work in for-profit sector is about, and most people are fine with that so long as they feel fairly compensated and at least see their wages rise with productivity (which we all know has not happened). I don’t think there’s necessarily anything wrong with that kind of work.

It’s easy to quantify for-profit work. It can all be reduced to a simple “dollars in, dollars out” calculation, but focusing on this at a societal level leads to a fixation on output and efficiency. Mainstream economics and people who claim governments should be “run like businesses” suffer from this fixation, and it’s bled over to how we even think about work.

But it’s not the only kind of work. There’s also work that has primarily social value: work that benefits the society or community, not to make money for a third party. It’s the only kind of work there was until money came alone, and money is a creature of the government. There was little need to fish, hunt or gather more food than what was needed to sustain your community, and that could be preserved for winters and emergencies. Resources were pooled and distributed equitably in earlier cultures, and there is no evidence that an internal barter economy has ever existed in human cultures. Surpluses could be traded with outsiders, but to benefit all of the community.

Only when power was taken by or ceded to what can be called a ‘government’; be it a chieftain, warlord, king, emperor, senate, or federal government; does money enter the picture as means of provisioning the government.

All of a sudden, people owe taxes to the government. At that moment everyone is unemployed as no one’s getting paid for their labor. So the government issues money (perhaps in the form of tally sticks) — in exchange for goods and services — that people can then use to settle their taxes to the government.

Now we have an economy. There’s money: a unit of account, that can be used to establish credit, settle debts, and assess value of goods and services. There’s demand for the money itself as it has to be redeemed to pay taxes (hence: money is a tax credit) and avoid the punishment that would follow if one were to defy the government and not pay them.

The government can now simply pay for the goods and services it requires, instead of having to seize them by force. This is still coercive, but most people agree that taxes are the price we pay for our societies.

From this simplified but fairly universal account we see that taxes create unemployment, even in a modern economy. They also give value to a currency without which markets just can’t operate, and so give rise to private sector economy. Taxes create the need for paid work in the first place, and so a just society should ensure that everyone who wants a job can get one.

Conclusion: Forced Unemployment Is a Human Rights Issue

Which is why I’ll make the following argument: Adherence to the NAIRU concept ensures a significant portion of people who want to work remain involuntarily unemployed. This amounts to forced unemployment.

The Universal Declaration of Human Rights, Article 23 states:

“Everyone has the right to work, to free choice of employment, to just and favourable conditions of work and to protection against unemployment.”

In my opinion, this leaves most countries in violation of Article 23. Governments create unemployment — it’s time we demand it steps in where private sector will not. It’s good to incentivize the private sector to create as many jobs as possible, but it’s not enough.

My next post will introduce the solution, the Job Guarantee, aka. the Employer of Last Resort, and why it is superior to the NAIRU as means of stabilizing the value of money.

Taxpayer vs. Public Money

Have you ever noticed a pundit or politician talk about public spending, or funding, or money; then correct their word choice from ‘public’ to ‘taxpayer’?

Obviously these two terms evoke different ideas. ‘Public money’ collectivizes the endeavor — we’re funding this as a nation. ‘Taxpayer money’ by contrast clearly emphasizes that the money being spent came from hard working individuals.

So it’s about how one wants to frame the argument. Politicians trying to sell a government program might go with the ‘public’ frame, while those opposing it might balk at the cost to the ‘taxpayers’.

But despite the different framing, in this context the terms are basically synonymous, right? Not quite. When talking about federal spending, federal taxes, the ‘taxpayer’ framing doesn’t hold water.

In my first post I asserted that Canadian public debt is best understood as all of the Canadian dollars the federal government has spent into the economy that it has yet to tax out. I’m expanding on that in this post to explain why taxpayers don’t pay for federal spending, and how we knew this over 70 years ago. I’ll give a brief description of how money transfers between the government and its central bank, commercial banks, and individuals.

When Government Spends

First, spending. This could be to purchase goods or services for the government, to pay wages of people on its payroll, or to service social welfare for those who receive it.

The government instructs the central bank (Bank of Canada) to debit the treasury’s (the Receiver General) account and to credit the account of the recipient. Simultaneously, the reserve account of the recipient’s bank gets credited at the central bank. They create money, with keystrokes, by assigning it to recipients.

Central bank reserve accounts are essentially chequing accounts for commercial banks, mainly used for interbank transfers. They are an asset of the bank while the deposit accounts of customers are on the liability side of the ledger, so this operation is cost-neutral to the banks who are acting as an intermediary between the government and the recipients.

This operation also leads to a net increase of reserves in the banking system. When we have excess money in our bank account, often the smart thing to do is to move them to a savings account that offers modest interest but is just as safe as keeping funds in a non-interest paying chequing account. It’s no different for commercial banks: excess reserves don’t accrue interest.

As a sidenote: some central banks now do pay interest on reserves, and some are taxing them, as part of unconventional (read: desperate) monetary policy. The Bank for International Settlements recently said that central banks are running out of policy options, so it’s not working that great.

Excess reserves are an opportunity cost to banks, so they will gladly purchase government bonds with the reserves: move money from their chequing account to a savings account.

“But”, you might say, “banks loan out reserves for new customers”. They don’t, they can’t, and they never have. So much for the fractional-reserve banking system.

Another myth is that government bonds are issued to finance spending with debt, perpetuated by the Bank of Canada itself, but other central banks are coming around to admitting that is not the case. In reality, it’s got everything to do with BoC’s central mission: to maintain the target interest rate set by the central bank. Bonds are issued in order to drain reserves out of the banking system, and so long as banks have excess reserves there is demand for bonds.

Which gets us to the point that all money is a debt, an IOU, of the government. The loonie in your pocket is part of the national debt, it just doesn’t carry an interest.

More on bonds by Bill Mitchell here: There Is No Need To Issue Public Debt

When Government Taxes

Taxation is simply the inverse of spending.  Bank accounts and the corresponding banks’ reserves are debited. This reduces the government’s liability, or what is colloquially known as the ‘national debt’.

Keep in mind the federal government doesn’t need money to operate. When it needs money, it creates it by spending it into existence. So what’s the inverse of creation?

That’s right: federal taxes destroy money. Simple as that.

Federal taxes don’t finance federal spending.

So what are they for?

Lessons from history

Remember when I said we knew this 70 years ago?

Beardsley Ruml served as the Chairman (1941-1946) and Director (1937-1947) of the Federal Reserve Bank of New York. At that time, as now, the US was monetarily in a similar situation as Canada is now: it was a monetary sovereign.

For monetary sovereignty, the following conditions must apply:

1. The country issues its own national currency.
2. The value of the currency isn’t tied, or ‘pegged’, to the value of other currencies. Known as free-floating exchange rate.
3. Not convertible to commodities like gold or silver.

Aka. Fiat money.

The gold standard had collapsed internationally during the Great Depression, and certainly would have made it difficult to finance the US participation in WW2. The gold standard and fixed exchange rates would be resurrected under the Bretton Woods agreement until the 1971, but Ruml knew then what most economists today apparently don’t know or don’t care to admit.

In 1945 in a speech he declared: “Taxes for revenue are obsolete”. You can read his article with the same topic here.

I’ll quote Warren Mosler’s summary, but I urge you to read the article itself (emphasis mine):

As Ruml’s stated, with an “…inconvertible currency, a sovereign national government is finally free of money worries and need no longer levy taxes for the purpose of providing itself with revenue… It follows that our Federal Government has final freedom from the money market in meeting its financial requirements… All federal taxes must meet the test of public policy and practical effect. The public purpose which is served should never be obscured in a tax program under the mask of raising revenue.” He goes on to explain how, with Federal spending not revenue constrained, the first function of taxation is to regulate the value of the dollar, which we know as regulating inflation. The notion of the Federal government ‘running out of money’ and ‘dependence on foreign borrowing’ as well as ‘sustainability’ is categorically inapplicable.

Ruml asserts four principal purposes for federal taxes, none of which are about revenue:

1. As an instrument of fiscal policy to help stabilize the purchasing power of the dollar;
2. To express public policy in the distribution of wealth and of income, as in the case of the progressive income and estate taxes;
3. To express public policy in subsidizing or in penalizing various industries and economic groups;
4. To isolate and assess directly the costs of certain national benefits, such as highways and social security.

Taxes create demand for the currency

Other than what Ruml had to say about, at the most basic level taxes have an incredibly important function: they create demand for the currency and so enable an economy of exist. This is often summed up by the phrase: taxes drive money.

How to get a currency accepted by the populace in the first place, be it the Canadian pound or dollar? Simple. Impose a tax obligation to be paid in the new currency, and you’re done. You’ve created demand for the currency. As long as the state is credible enough, people will generally prefer paying taxes to imprisonment.

Luckily, most of us would agree that taxes are a small price to pay for the utility we get from stable money, and government structures and services.

One Canadian dollar, then, is a debt of the Federal government that you can use to pay off one dollar’s worth of taxes. An IOU of the government that you can use to redeem your own IOU (tax obligation) to the government. One dollar’s worth of tax credit.

Conclusion

The federal government does not require tax revenue to finance its spending. Taxes are what give value to the currency in the first place, and they relieve inflationary pressure by removing money from the economy.

In case of a budget deficit, the federal government will ‘borrow’ the balance by issuing bonds. But this is done in order for Bank of Canada to maintain its interest rate, not to finance the spending.

The above is the description of actual monetary operations done in a modern central banking system. At risk of repeating myself, it tells us that taxes don’t finance the federal government. And unlike the abstract version of government finance we’re taught and is hashed out in media and political stage, it has the benefit of being factually correct.

So good news for the people who like to identify themselves as taxpayers: your money doesn’t fund ANY of the federal programs, doesn’t go to any people or provinces or companies you find undeserving. Your tax liability is an asset of the federal government, and by paying it off you are doing your part in maintaining the value of the currency. It also means that at least some of your current tax burden might indeed be unnecessary, unfair, and a drag on the economy. The Canadian Taxpayers Federation should be ecstatic! Unless, of course, they are just a front group for a particular political ideology.

None of this means we shouldn’t worry about inefficient, corrupt, or unfair spending and taxation. On the contrary, it should necessitate more engagement and more transparency. But it does mean that when spending is proposed, the first question shouldn’t be “Yeah? Well how do you suppose we’ll pay for it?”. Both taxes and spending should fulfill the requirement of public purpose, as guided by the needs and desires of the electorate and by established human rights.

The Two Santas That Hold Us Back

I’m watching Canadian liberals and leftists on #cdnpoli on Twitter fall for the same thing their counterparts in the US have been duped by for 40 years: calling out conservative claims of superior fiscal management, by which they mean deficit reductions.

See: (source: twitter)

Here’s the thing: conservatives don’t care that your Prime Minister/President actually achieved the deficit reductions theirs only talked about. It’s factually true, but that’s not the point.

Here’s why: when conservative governments deficit spend, they give out tax cuts to the people who voted for them. To be only slightly reductive, that’s the main reason people vote for conservatives.

Here’s the conservative playbook.

Liberal government in power

• Complain about unsustainability of national debt
• Complain about the federal budget deficit
• Complain about the tax burden on “deserving” people

Conservative government in power

• Claim we can’t afford spending increases
• But here, have some tax cuts!
• National debt? What’s that?

It’s not about economics, it’s about ideology and electoral politics. And it’s a merry old political strategy called the Two Santa Claus Theory.

In short: Republicans realized in the 70’s that their embrace of supply-side economics limited their electoral options a great deal. Democrats were, in their opinion, free to buy the electorate with their social programs. But since the GOP already believed wealth would trickle down from the rich to the poor, tax cuts would be the gift they bestowed on the nation, matching the Democratic Santa with the Republican Santa. And if they could convince everyone about the dangers of national debt, Democrats would have to become anti-Santas themselves whenever they raised taxes to fund welfare programs.

The reason this has worked shockingly well is that while trickle-down economics doesn’t work, they’ve effectively shackled Democratic and Liberal governments from bringing the economy to even close to an optimal performance.

It’s a strategy built on foundations of neoclassical economics, and it relies on liberals and progressives to also buy into the notion that deficits and national debt are bad, at least in the long run. This is widely believed, but is… well, wrong.

National debt is just all the money federal government has spent into the economy that it hasn’t taxed back. It never has to be “paid back”.

Federal budget deficit injects money into the private economy, surplus destroys it. In this three-sector chart of financial flows we have the domestic private sector in blue, public sector in red, and the rest of the world in yellow.

There are nuances to both of these, most obviously posed by the external sector, but those statements in bold are a good starting point to understanding them. Most economists apparently don’t.

Canadian or US federal governments can never run out of money they themselves are the sole issuers of. They can never default on debts denominated in their own currency unless they decide to. Again, there are nuances, but that has to be the starting point. Greece can run out of Euros, but Canada can’t run out of Canadian Dollars.

Inflation is a real restraint, but orthodox economics is wrong about that too. It’s about availability of real resources: demand outstripping supply of goods and services, not about the quantity of money in the economy, and both countries have plenty of real resources for everyone.

Truth is: government could eliminate homelessness, unemployment and extreme poverty with targeted programs, e.g. job guarantee.

Federal government can empower communities, local governments, non-profits and social enterprises to hire everyone affected by involuntary unemployment, at a living wage. Direct, grass-roots, bottom-up job creation funded by the federal government. This will be socially valuable work and can actually eliminate the devastating effects on society and individuals caused by and exacerbated by unemployment, unlike lesser initiatives only aimed at easing unemployment.

Private business would also benefit from the increased aggregate demand, though some may be kicking and screaming about it. It would hardly be a “communist takeover” of the economy. Capitalism remains intact, it will just stop keeping the government from fulfilling its public purpose.

It would still be transformational, especially for the people currently sacrificed for the sake of “economic stability” for the rest.

How’s that working, by the way? Let’s take that previous chart and break down pvt sector further and see who’s taking on debt and who’s accumulating wealth. Spoilers: current Canadian economy is built on record high household debt. You think that’s sustainable? You think warnings of a housing market crash are exaggerated? Well, consider this a prediction.

Bottom line: focusing on debt to GDP ratios or the raw size of the deficit is arbitrary and irrelevant. “Sound finance” has no basis in reality, only in ideology. What we need is functional finance that can actually get us to full employment. It’s not about the size of the budget deficit, it’s about who that money will go to.

I recommend the Modern Money Theory Primer blogs at neweconomicperspectives.org to recalibrate your understanding of money, debt, economics and the role of the government, and what is possible under the current system. No violent revolutions or lawsuits against the Bank of Canada are required.