In my previous article, “In Appreciation of William Vickrey,” I told the story of Vickrey’s dedication to the goal of widened opportunities and presented a few of the elements of his policy agenda for providing livable wage jobs for all Americans. However, I did not present many specifics on how this would work on the ground. For this entry, I would like to provide detail about a more current full employment proposal by Vickrey “disciple,” economist L. Randall Wray.
Wray, a professor at the University of Missouri at Kansas City, is a “Post-Keynesian,” who believes that today’s capitalism, even in its New Economy guise, has an intrinsic flaw that leads to a “growing gap between private demand and private supply of assets, and that private investment cannot be relied upon to recycle the full employment of savings.”
Wray believes net job creation can occur with price stability if government serves as “the employer of last resort” and establishes a system of “buffer stock employment.” A buffer stock is usually some commodity which1 sells more when there is upward pressure on its price or bought when the price is low. The twist on this idea is that labor is the buffer stock commodity and the government through its function of employer of last resort will aim to stabilize its price. It’s what professor Wray calls a “fixed price/floating quantity” model for creating Public Service Employment (PSE) jobs.
Therefore, government spending on full employment will act counter-cyclically. Automatically, government spending will rise, but not prices because the wage paid is fixed. A necessary budget deficit grows, the private sector expands and starts hiring workers out of the buffer stock pool. At a certain point, the process reverses as the number of those actively seeking work approaches zero, thereby shrinking government spending and thus reducing deficits. It is an automatic stabilizer.
Here are few other important details. The program would be devolved to state and local governments, which would put together plans for employing these Americans. Wray describes one potential scenario, succinctly:
- “It should offer a job to anyone who is ready, willing and able to work; regardless of gender, regardless of education, regardless of work experience; regardless of immigration status; regardless of the performance of the economy. Just listing those conditions makes it clear why private firms cannot possibly offer an infinitely elastic demand for labor. The government must play a role. At a minimum, the national government must provide the wages and benefits for the program, although this does not actually mean the PSE must be a government-run program.
- “We want PSE to hire off the bottom. It is an employment safety net. We do not want it to compete with the private sector or even with non-PSE employment in the public sector. It is not a program that operates by ‘priming the pump’, that is by raising aggregate demand. Trying to get full employment simply by priming the pump with military spending could generate inflation. This is because military Keynesianism hires off the top. But by definition, PSE hires off the bottom; it is a buffer stock policy—and like any buffer stock program, it must stabilize the price of the buffer stock—in this case, wages at the bottom.
- “We want full employment with loose labor markets. This is virtually guaranteed if PSE hires off the bottom. With PSE, labor markets are loose because there is always a pool of labor available to be hired out of PSE and into private firms. Right now, loose labor markets can only be maintained by keeping people out of work—the old reserve army of the unemployed approach.
- “We want the PSE package to provide a decent standard of living even as it helps to maintain wage and price stability. We have suggested that the wage ought to be set at $6.25/hour in the USA to start. A package of benefits could include health care, child care, sick leave, vacations and contributions to Social Security so that years spent in PSE would count toward retirement.
- “We want PSE experience to prepare workers for post-PSE work – whether in the private sector [for- and non-profit] or in government. Thus, PSE workers should learn useful work habits and skills. Training and retraining will be an important component of every PSE job.
“Finally, we want PSE workers to do something useful . . . things that are not already being done, and especially should not compete with the private sector.” (Source: L. Randall Wray, “How To Implement True, Full Employment” (IRRA 2001)
This is exciting stuff. Be sure to check out his rethinking of monetary policy in Understanding Modern Money: the Key to Full Employment and Price Stability (1999), along with his scores of articles and papers at the Levy Economic Institute at Bard College.
This fellow is really “thinking outside the box.”
1 Some critics agree that initially this idea of achieving full employment with price stability looks pretty sound. But they worry that this program will reduce the incentive to work, increase shirking on the job, and encourage workers to boldly demand higher pay. Others say that it will be too expensive and the federal government cannot afford it. Wray and others have written rebuttals.