We Don’t Need an Unemployment Rate and Charities are a Market Failure
I have made an argument as to how MMT can be used to manage the extent of government policies and inflation. I have argued that instead of managing debt and deficits we should be managing inflation and unemployment. But if we can manage unemployment, why let it exist at all? Economists often talk about a “natural” level of unemployment. This is counter-intuitive. If there is demand for work, and society demands work be done, we must envisage a way to remove this friction. Long-term unemployment isn’t natural, and if policy makers exist to serve us, eliminating – not balancing – unemployment should surely become a rhetoric.
The topic of unemployment can be quite controversial. For most of this argument I have loosely described the role of both parliament and the Reserve Bank as “government”, elected or unelected. However, these two entities have different goals. Politicians, on both sides of the political spectrum have tried to take credit for the current low levels of unemployment. However, the Reserve Bank is tasked with fighting inflation and maintaining “natural” or “full” employment. The current low level is almost certainly below the NAIRU given its near record low status has coincided with record low unemployment . The NAIRU, or the “natural” rate of unemployment, is the point at which employment can be sustained without causing wages and inflation to rise or fall.
Such conflicting interests are most explicit from the current Reserve Bank Governor, Philip Lowe, who has argued that interest rates (and thus unemployment) must continue to rise to combat real wage growth and its “mechanical” relationship with inflation .
So should our government(s) be pushing for an unemployment rate consistent with the NAIRU to combat inflation and to protect the wealth of most Australians? Or, should it pursue a rate as low as possible at the cost of higher inflation and less collective wealth?
MMT shows we can have our cake and eat it too.
Think back to the example from Part One in a perfect, simple economy. With no structural unemployment, no taxation or any government interference. Once the government creates a legitimate currency and begins taxing its people it creates unemployment by introducing deadweight loss into the economy. It has also taken the private market’s monopoly on job supply away as the government creates new industries and services. Yet by forcing new jobs into an economy there is a mismatch between jobs supplied and jobs demanded. Equally, the public sector is not profit seeking and sets wages differently to the private market. Shortages in nurses, paramedics and child care workers exemplify this well. This problem is exacerbated when the government pulls more from the economy than it returns as growth and employment underperformance compound.
Throughout this argument I have used the term “public service” to mean the jobs and funding provided by the federal government. These inputs can be split into the public funding supply and the public job supply. And so long as inflation is adequately managed there is no limit to how much of either can be provided.
If parliament dislikes unemployment so much, they could get rid of it. It sounds fictitious, almost implausible. How should the government be expected to supply an unlimited supply of jobs?
Well, it has. Near complete employment has existed. In 1943 Australia’s unemployment level was 0.93%, its lowest ever level .
Yes, this was during wartime, the military and industry took up far greater proportions of jobs than they do today. But work in the military doesn’t create anything. Bombs, soldiers and tanks too heavy to be deployed anywhere to actually defend the country (yes, really ) are geopolitical pawns with no direct impact on our welfare.
I am not at all promoting conscription as a way to erase unemployment, rather, we should know that if our government wanted to provide jobs for us all, they could.
India has attempted a targeted program where poor rural farmers have been offered some form of job guarantee, however the program has been plagued with logistical and bureaucratic issues .
Every year, billions of hours are spent in the public service , and over half a billion hours are done in the not for profit sector . Note that if our society values a service enough that people would work in it for free, but our government is unwilling to fund it, that is an immense market failure.
Further, the ability for individuals and entities to gain tax credits by donating to charities is equally problematic. We have acknowledged that taxation creates room for the public service. Charitable donations are the opposite, privately funded and elected by those with disposable incomes. Unlike the public service that (in theory) is wholly democratic and representative of the people’s wishes, it is the very wealthy who are capable of gaining the largest tax credit while having the biggest impact on the nation external to the democratic process.
While taxes legitimise a government and its currency, the tax credit status of charitable donation undermine them both.
The dangers of this system are material. A significant portion of Warren Buffet’s unbequest fortune is likely to be donated to pro-life or anti-abortion focused charities in the US . A transfer of wealth that, due to its tax credit status, too crowds out space in the economy for useful public services.
I am not suggesting we abolish charities. However, in a nation where Sanitarium, the group that owns Weetbix, holds tax free status due to their affiliation with the Seventh Day Adventist Church, it is clear there needs to be change in the way charitable donations are handled.
I am arguing is that there is demand for work (shown by the existence of an unemployment number), we have a government capable of providing as much as there is demand for, and a society that values doing work for the community at a low, or zero, cost.
Through a lens of MMT, it should become clear the government of the day can create as many jobs as it pleases. If it is truly proud of the unemployment rate, it should know that for as long as it holds a fiat currency it has the power to choose the unemployment rate.
The view that charities should be treated more like businesses and governments should supply unlimited jobs, for many, will be unpalatable. The political motivation behind such policies is unlikely to ever be great enough to create such change. However, it is an extension of two obvious, yet taken for granted ideas.
1. It is wider society, not the wealthiest individuals, who should discern what services should be provided in society.
2. Governments should be responsible for matters that affect our welfare on a macro level.
The link between these tenets is such:
Currently, the wealthy have too great an impact on allocating capital to the broader public service. The tax credit status of such allocations perpetuate the problem as the government funded public service is crowded out. Yet by eliminating this, and using the principles of MMT to fund the services the public demands we can create the greatest good for the greatest number.
The greatest barrier to realising such idealism is a thorough understanding of economic mechanics.
30. What word is more important to the jobs summit than ‘jobs’? It starts with P and it’s hard to pin down. (2022, August 30). ABC News. https://www.abc.net.au/news/2022-08-31/jobs-summit-productivity-australia-how-well-measure-what-we-do/101387270
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17. Australia, Reserve Bank of. The Spectre of Inflation | Reserve Bank of Australia – Museum. https://museum.rba.gov.au/exhibitions/make-your-money-fight/spectre-of-inflation/#:~:text=At%20the%20outbreak%20of%20the,vast%20numbers%20of%20service%20personnel. Accessed 14 Aug. 2022.
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19. ‘An Evaluation of India’s National Rural Employment Guarantee Act’. World Bank, https://www.worldbank.org/en/programs/sief-trust-fund/brief/an-evaluation-of-indias-national-rural-employment-guarantee-act. Accessed 14 Aug. 2022.
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