The Economic Viability of Universal
Guarantees in Sovereign Currency Nations
article evaluates the strategies of guaranteeing unconditional basic income
against those of guaranteeing employment. It is argued that, moral
justifications notwithstanding, an open-ended implementation of these universal
guarantees does not stand a chance without a clear grasp of their macroeconomic
effects and institutional aspects. Drawing on the tax-driven approach to money
(also known as ‘modern money’) the paper explains that government funding for
either proposal is not ‘operationally’ constrained. Financing, however, is
important as it produces disparate economic outcomes, depending on the program
design of the universal guarantee. A modern money critique of the basic income
proposal reveals that, in a monetary production economy, the unconditional
supply of the monetary unit is inherently inflationary. By contrast, job
guarantees can provide an important safety net by simultaneously stabilizing
prices. Additionally, job guarantees offer an institutional vehicle for
achieving other social goals that are important to all advocates of universal
assurances. The paper offers further points of comparison and concludes that, to
provide for all members of society, a joint policy option is necessary. Thus,
the broad contours of what such a policy might look like are herein advanced.
As modern economic systems continue to
leave many members of society behind, support grows for policies that guarantee
a just standard of living to all. The two specific proposals discussed here are
those aiming to secure unconditional basic income for all and those aiming to
guarantee employment. Both proposals are motivated by compelling visions of
social justice and, although there is heated debate over the effectiveness of
each, they share some important common ground. First, both policies envision an
open-ended commitment to universal government assurances, which are not
means-tested. Second, both share many similar and highly-desirable social and
economic objectives. For example, they aspire to bring viable alternatives to
the inadequate modern welfare policies, as well as to the failing, and often
exploitative, labor market mechanisms. In addition, the proposals aim to
enhance individual freedom, economic opportunity, advanced citizenship, and
social inclusion. They also target similar specific outcomes such as poverty
eradication, human capital enhancement, community revitalization, and
But how all of
this can be accomplished is vigorously contested. There are multiple sources of
the disagreement. Basic income supporters object to job guarantees on the
grounds that modern economies are moving towards increasingly precarious labor
markets and thus jobs cannot be the answer to a better life (Aronowitz and
DiFazio 1994). Furthermore, it is argued that any just policy must enhance
realfreedom, which ultimately allows individuals to determine their
own destiny and choose their own pursuits. Real freedom then requires that all
people have equal access to endowments, without the coercion to work for
income (Van Parijs 1995). A just system, in other words, cannot force some
people to work for income, while others have access to all necessary resources,
yet remain exempt from employment due to inheritance, for example.
Consequently, real freedom also means the power to say ‘no’ to demeaning,
coercive or simply compulsory labor (Widerquist 2004). There are many other
reasons why basic income supporters consider capitalism to be inherently unjust,
but the dependency on work for income is critical. Thus, the core objective of
the basic income policy is to sever the link between the two.
job guarantee supporters argue that basic income advocates have misconstrued the
problem of income insecurity (Harvey 2003, Mitchell and Watts 2004). A
well-structured guaranteed employment that offers opportunities for meaningful
work at a living wage unavoidably counters the precariousness of the labor
market, by eliminating unemployment, drastically reducing poverty, and enhancing
the individual freedom to say ‘no’ to bad jobs. In other words, many of the
observed labor market problems stem from insufficient availability and
quality of jobs. Only after the right to work has been secured for all, can we
adequately evaluate the failures of market and welfare policies (Harvey 2003).
The other set
of objections from the job guarantee camp concerns the economic viability of
basic income proposals. The main charge is that basic incomes are inherently
inflationary with potentially disastrous consequences for the currency (Mitchell
and Watts 2004, Tcherneva and Wray 2005a). The present article elaborates on
this last objection to stress the crucially important context of modern
The argument proceeds as
follows. The first section draws on the literature of tax-driven money to
dispel flawed notions of public finance, which underpin most basic income
proposals. The next section argues that, because basic income supporters
misunderstand the nature of sovereign financing, they are not cognizant of the
destabilizing potential of their proposals. Specifically, it explains the
inherent inflationary character of the basic income guarantee and the
possibility for setting off stagflation. By contrast, the job guarantee
proposal advanced here provides the mechanism for stabilizing the currency,
prices, and the business cycle.
out the macro-implications of each policy, the paper proceeds with additional
comparisons of the two, stressing certain advantageous institutional
characteristics of the job guarantee, conspicuously missing from the basic
income proposal. Since it is a shared goal to provide a decent standard of
living to all (and not just to the economically active population), the paper
concludes with a joint policy proposal, which is economically feasible and
environmentally friendly. The discussion suggests some of the features of such
a policy, which can foster individual freedom, enhance human capital and provide
opportunities for meaningful pursuits benefiting both the individual and the
2 Can we pay for basic
income or job guarantees?
False notions of public finance are
perhaps the single most important obstacle to implementing important government
policies. Similarly, universal job or income guarantees are not likely to yield
the necessary support, unless we dispel misconceptions about the effects of
modern government spending.
explaining the principles of modern finance, it is important to identify the
type of income and job guarantees that will be examined here. The basic income
guarantees (BIG) of interest are those which supply a universal payment to each
citizen, irrespective of gender, marital status or market participation.
Secondly, the income support is at a level sufficient to purchase the basic
necessary standard of living.
guarantee program discussed here is one where the government offers a job to
anyone who is ready, willing and able to work but who has not found adequate
private sector employment. It provides a living wage and decent working
conditions. The program is essentially the same as most proposals for public
service employment (PSE), buffer stock employment (BSE), and the government as
the employer of last resort (ELR).
There has been
much discussion about the costs of these universal guarantees.
Lending support to a certain program based on the size of its costs, however,
diverts attention from the important aspects of public finance. This section
demonstrates, as Wray 1998 and Mitchell and Watts 1997 have emphasized, that any
government with sovereign control over its own currency can afford to pay for
its program of choice, no matter how ‘expensive’ it is. Although the ideology
of the ‘tax-payer’s money’ is entrenched in all contemporary discourse, it is
crucial to dispel its false premises, to understand adequately the nature of the
universal guarantees. This is the purpose of this section.
I will not
discuss in detail the modern money approach; instead, I will isolate the key
ideas behind the tax-driven nature of money to make three points. First,
governments with sovereign control over their currency face no technical
constraints to financing either a basic income or a job guarantee. Second,
sovereign governments can set the terms of exchange of their currencies and,
therefore, determine their value. And, third, unemployment is a monetary
phenomenon which can be effectively addressed by embracing the principles of
2.1 Sovereign currency control
There is no
great mystery behind government spending and taxation, but to fully grasp the
logic of sovereign financing, one must make the analytic distinction between the
government and non-government sectors. For the private sector, spending is
indeed restricted by its capacity to earn revenue or to borrow, but this is not
the case for the public sector, which ‘finances’ its expenditures in its own
money. This is a reflection of the single supplier (or currency monopoly)
status of the latter. Modern money is tax-driven money; the purpose of
taxation, however, is not to ‘finance’ state spending, as it is commonly
believed. This is because for modern sovereign governments, such as in the
United States, United Kingdom or Japan, the currency (the dollar, pound, and
yen, respectively) is not a limited resource of the government (Mosler 1997-98:
p. 169). Taxation today functions to create demand for otherwise unbacked state
currencies so that the money-issuing authority can purchase requisite goods and
services from the private sector. Taxation is, in a sense, a vehicle for moving
resources from the private to the public domain.
If the purpose
of taxation is to create demand for state money, then logically and
operationally, tax collections cannot occur before the government has provided
that which it demands for payment of taxes. In other words, spending comes
first and taxation follows later. Another way of seeing this
causality is to say that government spending ‘finances’ private sector ‘tax
payments’ and not vice versa.
Thus, the three
important insights of the tax-driven nature of money are:
·Sovereign governments have a public monopoly
over the domestic currency.
·Government spending precedes taxation. Spending
always creates new money while taxation always destroys it; therefore, taxes
are never stockpiled and cannot be re-spent in order to ‘finance’ future
·Any budget balance is an ex-post accounting
result as spending and taxation are two independent operations. Whether a
policy is ‘budget-neutral’ is entirely irrelevant, because budget-neutrality
aims to gauge this ex-post accounting outcome and gives no knowledge of the
economic consequences of that policy.
The tax-driven nature of money reveals
the consequences of universal guarantee policies for the value of the domestic
currency. While governments are not operationally constrained, it is still
important which programs they choose to finance. Furthermore, as sole suppliers
of the currency, they also have the responsibility for maintaining its value,
and certain policies are better suited to do that than others.
2.2 The value of the currency
create demand for government money, they also impart value to it. Innes
stressed that: ‘A dollar of money is a dollar, not because of the material of
which it is made, but because of the dollar of tax which is imposed to redeem
it’ (1914: p. 165). He also argued that ‘the more government money there is in
circulation, the poorer we are’ (ibid.: p. 161). In other words, if government
money in circulation far exceeds the total tax liability, the value of the
currency will fall. So it is not only the requirement to pay taxes, but
also the difficulty of obtaining that which is necessary for payment of
taxes, that give money its value.
This important relationship between leakages and injections
of high-powered money (HPM), however, is difficult to gauge. Since the currency
is a public monopoly, the government has a direct method at its disposal of
determining its value. For Knapp, payments with state fiat measure a certain
number of units of value (1973 : pp. 7-8). For example, if the state
required that, to obtain 1 unit of HPM, a person must supply 1 hour of labor,
then money will be worth exactly that – one hour of labor (Wray 2003: p. 104).
As a monopoly issuer of the currency, the state can determine what money will be
worth by setting ‘unilaterally the terms of exchange that it will offer to those
seeking its currency’ (Forstater and Mosler 1999: p. 174).
What this means is that the state has the power to
exogenously set the price at which it will provide HPM, i.e., the price at which
it buys assets, goods and services from the private sector. While it is hardly
desirable to set the prices of all goods and services it purchases, it
nonetheless has this prerogative. As it will be discussed later, through the
job guarantee, the money monopolist need only set one price to anchor the
value of its currency. By contrast, the basic income guarantee does not set
any terms of exchange for the sovereign currency; instead it provides it
2.3 Unemployment: a monetary phenomenon
point to make in this section is that unemployment is a monetary phenomenon.
This has been well-demonstrated by Keynes in the General Theory, but the
tax-driven approach to money sheds new light on what Keynes meant by ‘money is a
bottomless sink of purchasing power…[and] there is no value for it at which
demand [for it] is diverted … into a demand for other things.’ (Keynes 1964
: p. 231).
Government deficit spending necessarily results in increased
private sector holdings of net financial assets. If the non-government sector
chronically desires to save more than it invests, the result will be a widening
demand gap (Wray 1998: p. 83). This demand gap cannot be filled by other
private sector agents, because in order for some people to increase their net
savings, others must decrease theirs. In the aggregate, an increase in the
desire to net save can only be accommodated by an increase in government deficit
spending. Mosler explains:
Unemployment occurs when, in aggregate, the private sector wants to work
and earn the monetary unit of account, but does not want to spend all it would
earn (if fully employed) on the current products of industry… Involuntary
unemployment is evidence that the desired holding of net financial assets of the
private sector exceeds the actual [net savings] allowed by government fiscal
policy. (Mosler 1997-98: pp. 176-177)
Wray concludes that ‘unemployment is de facto evidence that the
government’s deficit is too low to provide the level of net savings desired’.
In a sense, unemployment keeps the value of the currency, because it is a
reflection of a position where the ‘government has kept the supply of fiat money
too scarce’ (1998: p. 84). While traditional economists argue that we must
force slack on the economy in order to maintain the purchasing power of the
currency, as this paper will explain, well-designed full employment government
policies can do the job.
To sum up,
sovereign governments are not operationally constrained in funding public
programs. And as the money monopolists, they also have the responsibility of
maintaining the value of the currency. Because presently, they do not set the
terms of exchange for the currency, they use unemployment to maintain its
purchasing power. Unemployment is a monetary phenomenon and a reflection of
keeping the currency too scarce. With this in mind we can evaluate the economic
impact of implementing basic income and job guarantees.
3 Macroeconomic effects of
the basic income guarantee
A focal point of the basic income
proposal is its budget-neutral stance (Atkinson 1995, Van Parijs 2004). Such
analysis presumably stems from efforts to quash neo-liberal objections to
government deficit spending (Mitchell and Watts 2004: p. 8). This section
argues that preoccupation with budget-neutrality is wrong-headed for two
reasons. First, it obfuscates the inflationary nature of BIG by relying on
conventional notions of public finance. Second, because taxes are largely
endogenous, attempts to ‘raise’ sufficient tax revenue to counterbalance the
increased spending on BIG is likely to be self-defeating with perverse
3.1 The inflationary nature of
the basic income guarantee
As the tax-driven approach to money
makes clear, taxes impart value to the currency by creating demand for it.
Additionally, currency’s value is determined by what
is required to obtain it. In the case of BIG, there is no such
requirement, as income payments are disbursed universally and unconditionally.
If a program is instituted whereby the population can obtain freely the unit,
which fulfills the tax obligation, the value of the currency will deteriorate
sharply. While this may not happen overnight and may take months or years to
occur, the value of an unconditionally provided currency will ultimately tend to
zero. It must be stressed that the basic income
guarantee is not inflationary because it is financed by ‘fiat’ money, but
because the currency is essentially provided for ‘free’ (Tcherneva and Wray
2005a). Some would object that governments today supply ‘free currency’
through programs such as unemployment insurance or social security, which do not
require anything in exchange. Do those programs similarly devalue the currency?
The answer is ‘no,’ because these programs are limited by the number of the
elderly or the unemployed, and therefore currency is not promised on demand to
everyone. In other words, in the presence of a tax requirement, at the margin,
there are still people who need to work (or sell goods and services to the
government) to obtain the unit which settles the tax liability. If everyone had
the option of requesting and receiving social security or unemployment insurance
on demand, these programs will clearly devalue the currency the same way basic
income does. In the case of BIG, at the margin, no one needs to work to get
that which is required to pay taxes.
If we institute
a basic income of $20,000 today, it does not mean that everyone will suddenly
stop working for money; but the logical conclusion of the tax imperative behind
money is that people need not sell to the government to get dollars. The
provision of the currency for ‘free’ via a basic income guarantee invalidates
the purpose of taxes—to create demand for the government’s currency. We can
then easily envision a scenario where private sector agents re-price their
transactions in terms of some other (stronger) currency, as the value of the
domestic unit deteriorates to its logical limit of zero.
replete with such examples. Take the case of the Turkish currency, the lira.
The policy of the Turkish government of continually providing rising interest
payments on public debt is Turkey’s main tool of unconditionally supplying the
domestic currency. Part of the rationale is that the interest rate is to
compensate asset holders for the deteriorating purchasing power of the currency
and prevent flight to foreign assets. In the 90s, for example, interest rates
on public debt had often outstripped the rate of inflation, sometimes by more
than 30 percentage points (Mitchell 2002). This policy, as the tax-driven
approach to money informs, has disastrous consequences for the Turkish lira.
The ‘free’ supply of liras further devalues the currency necessitating
additional increases in interest rate payments to catch up with inflationary
pressures. Turkey is thus caught in an on-going inflationary spiral. The
consequence is that, in the face of what is essentially a worthless currency,
all private sector transactions are denominated in dollars and, even though the
lira continues to circulate, its purchasing power is negligible. This is but
one example of the effects of the unconditional provision of currency.
Uncollateralized lending in some Easter European countries during the
transition period from planned economy is another example of such inflationary
(and sometimes hyperinflationary) practices. Similarly, the massive failure of
the Russian government to collect tax revenue in the late 90s precipitated the
Russian ruble crisis (Hudson 2003). In all of these cases, the common
denominator for these devaluations is the phenomenon of ‘free currency’. And
such is likely to be the case with BIG, especially if it is large enough to
attempt to buy the minimum necessary standard of living for all.
As we have
demonstrated previously (Tcherneva and Wray 2005a), if the government paid a
public worker $20,000 year (for approximately 2000 hours of work), the value of
the currency would be equal to the effort expended to earn this income, i.e.,
$10 an hour. In other words, $1 would buy 6 minutes of work. In the case of
BIG, it may take up to 30 minutes to get the BIG check of $20,000, go to the
bank and deposit it into one’s account. The value of the currency would then be
infinitesimally small, as $20,000 purchase only 30 minutes of work, i.e., one
dollar buys 0.0015 minutes of work (30min/$20,000).
As we will
show, with the job guarantee, each additional worker knows exactly what she is
going to earn by offering her labor in the public sector—the fixed wage. In the
case of BIG each additional recipient (regardless of labor market participation)
knows that they must only expend half an hour of work (running to the bank) to
get the benefit. This will likely induce workers in some $20,000-paying jobs
(after tax), to opt out of the labor force (especially if those are ‘bad’ jobs).
So the next question to investigate is the impact of the basic income guarantee
on labor force participation, market wages, prices and economic activity.
3.2 Labor force participation,
prices, wages and economic activity
Since tax-collections are largely
endogenous, the preoccupation with budget-neutrality of BIG policies can produce
tax schedules that may have perverse market effects. In fact, it may prove
impossible for the BIG proposal to be budget-neutral.
proposed that the basic income guarantee is ‘financed’ by a flat tax (Clark
2002, 2004, Atkinson 1995). It is reasonable to expect that the provision of
$20,000 basic income guarantee will induce some people in ‘bad’ $20,000-paying
jobs to exit the market (a desirable effect according to BIG advocates). The
resulting impact on employment, income and tax collections will be negative.
Budget deficits will result when tax revenues fall, and, although deficits do
not in themselves pose a problem, the compulsion will be to raise tax rates to
achieve intended budget-neutrality. This tax increase would induce a new cohort
of workers now earning $20,000 after-tax income to leave the labor market in
hope to live on the BIG benefit. All additional tax rate increases attempting
to compensate for the falling tax revenue and pay for BIG will further
deteriorate employment and output (again, with a logical limit of zero).
If taxes are
progressive (as advocated by Aronowitz and Cutler 1998, Aronowitz and DiFazio
1994, for example), this substitution effect may take somewhat longer to
materialize, but if they are regressive (as proposed by Van Parijs 1995 and
Meade 1989), the labor force drop-out rate will be considerably higher, since
regressive taxes carry larger disincentives to work in low-wage jobs. In any
event, BIG is unlikely to achieve budget-neutrality because of the endogenous
nature of tax collections.
The impact on
the labor force and output is also negative. It may seem that this voluntary
exit from the labor force is BIG’s solution to unemployment. This is a
contrived result, as full employment is achieved by ‘engineering artificial
reduction in labor supply’ (Mitchell and Watts 2004: p. 13). In effect, full
employment takes the form of ‘forced inactivity.’ In order to coax BIG
recipients back into the labor market, some employers will need to offer higher
wages (which, at first approximation, is a desirable result). However, soon
thereafter, these same employers will also raise prices, to cover the increases
in wage costs. As a consequence, rising prices will erode the purchasing power
of the BIG payment, which will affect particularly those recipients who did not
return to the labor market. To maintain the objective of the universal
guarantee and provide just levels of standard of living, there will be pressure
to revise the BIG benefit upward. If this happens, it will further induce some
exit from the labor market, drop in output, a compensatory rise in wages and
prices and further drop in BIG purchasing power. This vicious cycle renders the
income guarantee self-defeating. Note that, if the benefit is continually
increased—the income guarantee becomes not just inflationary, but
if taxes are raised, to achieve budget-neutrality, they will also induce workers
on the margin to exit the labor force. The negative effect on the labor force
participation due to the rising BIG benefit and tax rates, coupled with the rise
in prices would lead to increasingly lower output, lower employment, and higher
prices than before BIG was implemented. If policy makers continually increase
the benefit to compensate recipients for the loss of purchasing power and
simultaneously continually increases taxes to ‘fund’ this rise in expenditure,
the likely result will be stagflation—low employment and high prices.
Since BIG never
quite manages to give people the necessary purchasing power, some individuals
will be forced back into the labor market and quite possibly into ‘bad’ jobs.
So the implementation of BIG will probably produce an environment of
involuntary unemployment and higher prices.
In sum, we have
to be mindful of how the government supplies the currency to the population.
Erroneous logic of public finance leads to concerns with budget-neutrality
which tries to gauge some ex-post accounting identity that says nothing about
4 Macroeconomic effects of
the employer of last resort
Keynes argued that ‘unemployment
develops…because people want the moon;—men cannot be employed when the object of
desire (i.e. money) is something which cannot be produced and the demand
for which cannot be readily choked off’ (1936: p. 235). As the tax-driven
approach to money further makes clear, unemployment results from the chronic
desire of some private sector agents to hoard net financial assets, a desire
which can only be accommodated by the government. Minsky recognized that
unemployment is a monetary phenomenon, and indicated how desired financial
resources can be supplied by simultaneously implementing a successful full
The main instrument for such a policy is the creation of an infinitely
elastic demand for labor at a floor or minimum wage that does not depend upon
long- and short-run expectations of business. Since only government can divorce
the offering of employment from the profitability of hiring workers, the
infinitely elastic demand for labor must be created by government. (Minsky
1986: p. 308)
Lerner also argued that it was the
government’s job to keep spending ‘neither greater nor less than that rate which
at the current prices would buy all the goods that it is possible to produce’
(1943: p. 39). Spending below this level results in unemployment, while
spending above it causes inflation. The goal is to keep spending always at the
‘right’ level in order to ensure full employment and price stability.
virtually identical in design, that embrace Minsky’s full employment strategy
and Lerner’s functional finance approach are the Employer of Last Resort (ELR)
(Mosler 1997-98, Wray 1998) and the Buffer Stock Employment Model (Mitchell
These policy prescriptions aim to eliminate unemployment and simultaneously
stabilize the value of the currency. The proposals are motivated by the
recognition that sovereign states have no operational financial constraints, can
discretionarily set one important price in the economy, and can provide an
infinitely elastic demand for labor.
ELR, the government sets only the price of public sector labor, allowing all
other prices to be determined in the market (Mosler 1997-98: p. 175). The fixed
public sector wage provides a sufficiently stable benchmark for the value of the
currency (Wray 1998: p. 131). Since governments are not fiscally constrained,
the program is implemented on a fixed price/floating quantity rule, i.e. hiring
in the ELR is not limited by budget caps (more below), and spending fluctuates
countercyclically. Therefore, the key stabilization features of ELR, missing
from BIG proposals, are the ability to stabilize the business cycle, the value
of the currency and the overall price level.
4.1 ELR stabilizes the business
With the job guarantee, government
spending on public employment fluctuates countercyclically. In downturns,
private business establishments lay off workers who find employment in the
public sector. Government spending automatically increases, providing the
necessary economic stimulus. Conversely, as the economy improves and private
sector employment expands, workers are hired away from the ELR pool reducing
government deficit spending. This serves as a powerful automatic stabilizer
that ensures that government spending is always at the ‘right’ level to maintain
full employment. By contrast, the basic income guarantee has a destabilizing
effect on the business cycle, due to its inflationary bias and negative impact
on participation rates and output.
4.2 ELR fixes the value of
Since the value of the currency is
determined by what must be done to obtain it, with an ELR in place, it is linked
to the public sector wage ($10/hr in our example above). To illustrate the
effect of a change in the wage on the value of the currency, let’s assume that
instead of paying $20,000, the government decides to pay $40,000 to ELR workers.
The hourly wage jumps from $10 to $20/hr. It now takes workers half the time
to earn what they used to before the increase in the public sector wage. All
else equal, the purchasing power of the currency falls by half (i.e. $10 now buy
half an hour of work). If by contrast, the government cuts the yearly salary to
$10,000, workers will need to work twice as much to obtain the same amount of
dollars as before, which raises the currency’s value.
power is measured in terms of the labor units currency can buy. As it is with
BIG, the implementation of an ELR will cause a one-time jump in prices. However,
since the purchasing power of the currency is tied to the labor hours purchased,
and thus its value does not deteriorate as it does with BIG, there is no
imperative to continually redefine the wage upward. The public sector wage
provides an internally stable benchmark for prices.
4.3 ELR enhances price
‘priming the pump’ such as military Keynesianism are inflationary, as they
primarily hire ‘off the top’ by competing for the most desirable workers (Wray
1998: p. 179). ELR by contrast hires ‘off the bottom’ and does not
introduce these inflationary pressures. In fact, it enhances price
stability for two main reasons. First, the ELR is a buffer stock program, which
operates on a fixed price/floating quantity rule, and, second, deficit spending
on public service employment is always at the right level.
ELR is a buffer stock program
operating on a fixed price/floating quantity rule
Economists usually fear that high levels
of employment will introduce wage-price spirals. Therefore, it is necessary to
show how the ELR contributes to wage stability which in turn promotes price
stability. As Mitchell (1998) andWray (1998) have stressed, the key is
that the ELR is designed as a buffer stock program, which operates on a fixed
price/floating quantity rule. The idea is to use labor as the buffer stock
commodity, and, as is the case with any buffer stock commodity, the program will
stabilize that commodity’s price.
In a nutshell,
during recessions, jobless workers find employment in the public sector at the
fixed ELR wage. Total government spending rises to relieve deflationary
pressures. Alternatively, when the economy recovers and non-government demand
for labor increases, ELR workers are hired into private sector jobs at a premium
over the ELR wage. Government spending automatically contracts relieving these
inflationary pressures. In other words, when there is an upward pressure on the
buffer stock’s price, the commodity is sold, and when there are deflationary
forces, it is bought. Public sector employment thus acts as a buffer stock that
shrinks and expands countercyclically.
operates on a fixed price/floating quantity rule, because the price of
the buffer stock (the public sector wage) is fixed, and the quantity of the
commodity (public sector employment) is allowed to float, i.e., there are no
budget caps on program spending. The exogenous public sector wage is internally
stable and, since labor is a basic commodity (employed directly and indirectly
in the production of every other kind of commodity), it serves as a perfect
benchmark for all other commodity prices. It is in this sense that the public
sector wage provides a stable anchor for prices in the economy. This important
inbuilt feature of the ELR program has no comparable counterpart in income
Deficit spending on ELR is
always at the right level
This buffer stock mechanism ensures that
government spending is, as Lerner had instructed, always at the ‘right’ level.
The tax-driven approach to money informs that there is nothing inherently wrong
with running deficits.
For ELR advocates the ‘right’ level of deficit spending is that which ensures
full employment. However, the countercyclical design of the job guarantee
program also ensures that deficit spending will counteract inflationary or
deflations occur when aggregate demand is too large or too small relative to
aggregate production or productive capacity of the economy. The key to
offsetting these pressures is to boost income and spending just to that level
sufficient to purchase the entire full employment level of output, not more and
not less. By design the ELR program guarantees that any resulting budget
deficit is never too big or too small. Government spending will increase until
unemployment is eliminated, at which point deficits will stop growing ensuring
that aggregate demand does not exceed the full employment level of aggregate
supply. Conversely, if unemployment grows again, so will deficit spending to
bring the two into equilibrium. In other words, the automatic countercyclical
and stabilizing feature of the ELR program guarantees that spending will grow
only up to the full employment level of output.
By contrast, basic income programs cannot claim any such countervailing force to
also support a non-inflationary environment by enhancing human capital and
private sector efficiency and growth. Unlike BIG, ELR directly provides
for the maintenance and appreciation of human capital as training and education
are explicit features of the program (more below). Furthermore, by addressing
the problem of unemployment head-on, ELR also reduces the social and economic
costs associated with it. Finally, private sector productivity is enhanced by
directing ELR projects to develop public infrastructure, provide for costly
environmental cleanup, and reduce rigidities linked to high levels of capacity
characteristics and other points of comparison
Ensuring price and currency stability
and providing a powerful stabilizer to the business cycle are the key advantages
of job guarantee programs over income guarantees.
Apart from these macroeconomic effects, the job guarantee also offers an
institutional vehicle for a structured and direct response to address other
desirable social and economic objectives.
5.1 ELR improves the investment environment
Both BIG and ELR intend to alleviate the
problem of poverty. To the extent that they are successful and poverty is
reduced (or eliminated, according to BIG supporters), many other social ills
will also be addressed, such as poor health, certain ‘economic’ crimes,
homelessness, malnutrition, school drop-out rates, and racial and ethnic
antagonism. These added benefits are expected to improve the investment
climate. ELR however, has a clear advantage over BIG as it maintains an
employable and visible pool of labor that can be tapped by private
firms should they need trained and skilled workers. Furthermore, this large and
productive pool of labor is available for hire at a stable compensation
package. By contrast, BIG does not deal with the loss of skill and
deterioration of human capital that result from unemployment. ELR further
enhances the inducement to investment by promoting maximum output and consumer
Widerquist and Lewis (1997) have argued
that the administration of public employment will be a logistical nightmare. It
is true that mailing out a single check to BIG recipients is administratively
simpler than organizing, implementing, and coordinating an ELR program. There
is little reason to believe, however, that the administrative costs of running
an ELR will be large and unmanageable. Currently in the United States, the
social security program involves writing a social security check to
beneficiaries, much the same way that the basic income guarantee is proposed to
work. The disability part of the social security system, however, involves a
very complex and difficult administration as it deals with the thorny issue of
screening and determination of eligibility for disability benefits. Regardless
of the intricate management of this program, the total administrative cost for
OASDI (old age, survivors, and disability insurance) is less than 1% of the
total budget (OASDI Trustee Report 2005).
As BIG imposes
no eligibility requirements for receiving the income benefit, its management is
considerably simpler. It is unrealistic, however, to think that BIG will end
the relative disadvantage certain groups suffer with respect to others (Harvey
2003: p. 24). To remedy this problem, more targeted remedial measures may be
necessary to achieve social justice, in which case the administrative problems
associated with screening for eligibility will reemerge (ibid.). It is thus
unclear that BIG truly offers a vast improvement with respect to program
administration has not thwarted the implementation of many important policy
programs. Managing the military or the national space agency involves very
complex administration, but few argue for scrapping these programs. Policy is a
matter of national priority and political will. Organizing and carrying out the
ELR program may be more complex than simply writing a government check to BIG
recipients, but its relative merits are far more compelling.
Recipients of government assistance have
often been stigmatized. It is likely that both BIG and ELR beneficiaries will
suffer from this problem. Stigmatization, however, depends in part on the
design of the program. Two popular income support policies are ‘workfare’ and
‘fair work.’ Nancy Rose explains the distinction:
Workfare is shameful and
stigmatized, mandatory programs for the ‘undeserving’ poor to make them prove
that they are not ‘shirking work’, and to therefore end ‘welfare dependency’;
fair work encompasses voluntary programs for the ‘deserving’ poor who become
unemployed due to recessions, depressions, automation, and natural disasters,
i.e., ‘through no fault of their own’. (Rose 2000: p. 2)
Both BIG and ELR want to guarantee
income or employment universally, without any demeaning means-tests. If BIG is
instituted and accepted as a truly universal program, similar to the current
social security program in the U.S., beneficiaries will not be stigmatized
simply for receiving these benefits. But they will likely be stigmatized for
the fact that they are not working.
By contrast, if
properly designed, the ELR can be associated with other fair work programs.
Stigmatization may still be a problem, especially if disadvantaged groups of
certain race, gender or age group become disproportionately represented in the
ELR. The problem of stigmatization cannot be fully avoided but it can be
alleviated with active government involvement. The ELR program can be marketed
as a support program for private sector activities. Also, the kinds of jobs the
ELR offers can be creatively designed so as to carry more weight and prestige.
Wray suggests that an ‘ELR can be promoted as a universal ‘AmeriCorps’ service,
open to all who would like to perform community service.’ It is feasible,
through various incentives, to create an ELR that is perceived as an advantage
on the resume, rather than a stigma (Wray 1998: p. 146).
5.4Incentive problems and human development
questioned the ability of the labor market to provide meaningful and dignified
work (Aronowitz and DiFazio 1994). The argument is that, in a world of job
scarcity and because of the demeaning nature of many existing jobs, the right to
work is much less appealing than the right to income. Harvey responds to these
claims that ‘judgments … made on conditions that exist when the right to work
has not been secured … [cannot] call into question the benefits that could be
achieved if the right was secured’ (Harvey 2003: p. 20). Baetz similarly argues
that, we cannot properly evaluate if the marketplace can offer adequate
conditions for human development, until ample opportunities for meaningful work
to all have been provided (Baetz 1973: p. 16). Thus, we can begin understanding
the effect of government policies on work incentives, only after all members of
society enjoy equal access to employment. For this reason, securing the right
to employment must be our first task.
An ELR program can
meaningfully address both the incentive and the human development problems. By
offering a carefully determined fixed (but adjustable) wage, it provides the
necessary means of subsistence. Simultaneously, since the wage does not compete
with those offered in the private sector, it encourages ELR workers to seek
higher remuneration from private sector work. Through its training and
education component, the ELR program additionally improves the working skills of
the ELR workers, keeping them employable. Most importantly, the ELR sets the
standard for private sector employment: it determines the requisite
working conditions and the minimum necessary wage/benefit package, which private
firms must offer if they desire to employ ELR workers.
5.5 The meaning of work
The design of the ELR recognizes that
there is dignity in work; thus the program aims to enhance individual
self-esteem by offering people opportunities to do something useful for their
communities and for themselves. ELR activities do not to compete with private
sector jobs; instead they are designed to promote social integration and
community involvement. The ELR enables workers by providing them the
institutional support, resources, and services that would not be otherwise
available to them.
America Boyte and Kari (1996) advance a roadmap to civic duty, community
involvement and citizenship, which redefine the meaning of work. It is no
longer seen as obtaining the means to an end, but as part of the larger context
of social provisioning. These considerations should guide the choice of
activities to be included in the ELR program. Work is at the center of
citizenship (ibid.: p. 7) and the ELR can incorporate certain forms of socially
useful work that have not been traditionally remunerated, such as care for the
young, the sick and the elderly.
6 The road to participation
and the promise for a joint proposal
goal is to provide for all members of society, and not just for the economically
active population, a joint proposal is necessary. To be economically viable,
however, it needs to have two key ingredients. First, it must tie the provision
of income to public service work, in the form of fixed hourly pay and, second,
it must provide unconditional income support for the young, the elderly and the
Such a proposal is desirable, because inactivity, especially due to involuntary
unemployment, has far-reaching consequences beyond the single dimension of a
loss of income (Sen 1999: p. 94). Therefore, BIG’s focus on the provision of
income alone will not offer the necessary remedy. By contrast, ELR’s concern
with currency stability should not take precedence over the objective of
creating ‘good’ jobs. Given the many common goals income and job guarantees
share, a joint proposal is a promising alternative for providing the requisite
standard of living to all.
There are many sources we can consult for guidance in
designing such a proposal. For example, Atkinson’s participation income (1995)
and White’s civic minimum (2003) offer some possibilities for marrying ELR with
These proposals emphasize the need to define work very broadly, to foster
social inclusion, enhance human capital and improve the overall ‘socio-economic
situation’ (Clark 2002, Fitzpatrick 2003). Minsky’s vision of the ‘the road to
participation’ also provides some of the ingredients for such a joint policy.
For him the road to participation meant creating permanent programs whose main
purpose is to provide ‘public services, environmental improvements … as well as
the creation and improvement of human resources’ (1986: p. 312).
This paper explained the economic imperatives which make it
necessary to tie the income benefit to the number of hours of public sector
work. Nonetheless, this ‘coercive’ feature will still trouble BIG advocates.
So the challenge is to design a proposal which enhances individual freedom by
allowing people to determine their own pursuits. One way to do this is to let
individuals choose, and even define, the kind of activities they will perform.
So although involvement in the community is compulsory, the kind of work
performed is not.
To see how this can be accomplished we turn to the job
guarantee program, which was recently implemented in Argentina.
While this program is only available to the unemployed heads of households, it
offers insights for designing a joint policy. The plan (usually referred to as
Jefes) intended to deal with the massive poverty, unemployment and social
dislocation that escalated during the 2001-2002 crisis.
After the decision was made to fund the job guarantee, the
federal government only provided the general guidelines for administering the
program. The actual management and administration was done at the local and
municipal level. The municipalities evaluated the general needs of their
communities and the available resources. Subsequently, they made requests for
proposals for projects that would provide the goods and services that were most
needed in these communities.
The Jefes plan was in fact started as a form of basic
income guarantee. After all the unemployed heads of households were registered,
they immediately started receiving an income. In the transition period, many
beneficiaries did not work, as it took some time to design, approve, and
implement the proposed projects. However, the program was up and running in
four months, and soon thereafter beneficiaries started taking up the newly
created public sector jobs.
In fact, most of the actual activities were designed and
proposed by NGOs, local government organizations, labor movements and the
unemployed themselves. But they had the forum and institutional support which
allowed them to organize the kind of activities they wished to do. Naturally,
as nutrition is a top priority in the poorest communities, many such projects
include community kitchens, bakeries, or pastry shops. Other projects convert
previously barren plots into arable land, where the beneficiaries set up their
own agro-cooperatives. Yet others, prepare toys for poor kids, organize
recreational activities for them, or build libraries with scrapped books and
materials from wealthier neighborhoods (for details see Tcherneva 2005).
Official surveys of program participants indicate that having
an income is not among the main reasons for satisfaction with the Jefes
plan. Beneficiaries enjoy being in the program, because they have the
opportunity to ‘do something’, to work in a ‘good environment’, to ‘help the
community’ and to ‘learn’.
Our recent evaluation of the gender aspects of this program
shows that it brings important benefits to women (Tcherneva and Wray 2005c).
Many of them have begun to organize small knitting cooperatives, sewing
micro-enterprises, bakeries, tailor shops and other. All women we interviewed
(without exception) reported that if given the choice to work for income or to
get income without working, they would prefer to work. The reasons were mostly
the same as those of the official survey above. It is worth noting that, those
women who wanted private sector jobs, either didn’t find any available or those
they found were not ‘mother ready’ (i.e., they did not have flexible hours,
proximity to the home, health and other benefits).
In other words, it is possible to design a program that will
guarantee an income to all, but which will require able-bodied persons to
participate in community work. Such a program can be structured to give people
considerable freedom (subject to some general guidelines) to determine the kind
of community work they would like to perform. These activities can include not
only helping in the community but also engaging in individual artistic pursuits.
By marrying the participation income with the job guarantee,
we design a policy which offers the institutional vehicle for achieving many
other desirable social goals. Whether the objective is to assist young parents
with family planning, or to address issues of domestic violence, spousal and
child abuse, or to reduce male high school drop-out rates, public sector jobs
can be oriented to deal with such problems. In fact Argentina gives many
examples of Jefes projects that deal with all of the above. Once the
institutional framework for community work is established, it can be directed to
address other social problems as well.
Finally, such a joint policy, must be motivated by an
awareness that valuable work is not only that which is profitable, but also that
which is socially useful. In other words, the activities in this program will
be targeted toward adequate social provisioning and not toward profit-making.
The ‘production for use’ in the public sector will not compete with the
‘production for profit’ of the private market. Government jobs will provide
services that are clearly outside the purview of profit making enterprises, such
as environmental cleanup, childcare, elderly care, homeless shelters, community
kitchens and other.
dichotomy between policies that provide ‘only income’ or ‘only jobs’ is no
longer constructive. An effective safety net must provide both a guaranteed
source of income and a guaranteed source of job opportunities for
meaningful and life-enhancing work. In a monetary production economy, however,
it is important to tie the provision of income to the participation in the
community by everyone who is able to contribute. This way the socio-economic
situation is improved by creating an economically viable policy which stabilizes
the price level, the currency and the business cycle, while simultaneously
providing meaningful work and enhanced individual freedom.
universal guarantees stand a chance depends largely on the political will and
dominant ideology, but the first step is to gain a full appreciation of their
macroeconomic consequences and institutional aspects. Then we can
constructively move to designing promising and economically viable universal
assurances in the public interest.
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 Partial basic income guarantees
and the negative income tax (NIT) are two similar income guarantee
proposals. The former is unconditionally provided to everyone but
insufficient to purchase the minimum necessary standard of living. The
latter ensures that individuals’ incomes do not fall below a certain tax
threshold, and if they do, people receive a negative tax to bring them
up to the minimum basic income that was promised. The NIT, however, is
contingent on labor market participation—a condition that most basic
income supporters want to eradicate. Thus these two proposals will not
be discussed here.
 A full basic income will be set
at least at the subsistence level (Van Parijs 1992: p. 237n27) or at the
official poverty line (Clark 2004). For Van Parijs, however,
maximization of individual opportunities and freedom requires that it is
set at the highest sustainable level (Van Parijs 1992, 1995,
 History offers an abundance of
direct job creation programs. However, most have been limited in
duration and subject to punitive means-tests – two features which job
guarantee supporters strongly oppose. The ‘green jobs’ proposal
advanced by Forstater in the inaugural issue of the International
Journal of Environment, Workplace and Employment, is one example of
the public service employment policies advocated here. See also Harvey
1989, Mitchell 1998, and Wray 1998.
 See, for example, debates
between Clark (2003) and Harvey (2003).
modern money approach is also known as chartalism, neochartalism,
tax-driven money, or money as a creature of the state. It is most
closely associated with the writings of
George. F. Knapp ( 1973) and Abba. P. Lerner (1947), but finds
support in much of the economic literature from Adam Smith to J.M.
Keynes. (For chartal notions in the history of thought, see Forstater
2006.) Modern contributions to this body of work include Mosler
(1997-98), Wray 1998, and Goodhart 1998, among others.
 This means that government
spending in sovereign currency systems is not limited by the ability of
the state to ‘raise’ revenue. Rather spending in currency can be seen
as supplying tax credits to the population, which faces, in the example
of the U.S., a dollar-denominated tax liability. Thus, government
spending provides to the population that which is necessary to pay taxes
(dollars). The government need not collect taxes in order to spend;
rather it is the private sector, which must earn dollars to settle its
tax liability. The consolidated government (including the Treasury and
the Central Bank) is never revenue constrained in its own currency. It
has also been demonstrated that bonds do not ‘finance’ government
spending either. Bond sales maintain the target interest rate by
draining excess reserves of high-powered money (HPM), which have been
created through government spending (for details, see Wray 1998, Mosler
1997-98, Bell 2000).
 For example in discussing the
experience of the American colonies with inconvertible paper money,
Smith recognized that excessive issue relative to taxation was the key
to why some currencies maintained their value while others did not (for
details see Wray [1998: pp. 21-22]). Wray explains: ‘it is the
acceptance of the paper money in payment of taxes and the restriction of
the issue in relation to the total tax liability that gives value to the
paper money’ (1998: p. 23).
notes: ‘If the state simply handed HPM on request, its value would be
close to zero as anyone could meet her tax liability simply by
requesting HPM’ (2003: p. 104).
 Mitchell and Watts also argue
that stagflation is a likely result because of the expected income
redistribution and deteriorating inducement to invest brought about by
the BIG policy (2004: p. 13).
 This is consistent with Abba
Lerner’s proposal for ‘functional finance’. Lerner (1947) believed that
policy should be guided not by antiquated notions of ‘sound finance’ but
by the effect of finance on economic activity. He argued that the
state, by virtue of its discretionary power to create and destroy money,
has the obligation to keep its spending at a rate that maintains 1) the
value of the currency and 2) the full employment level of demand for
 ELR is Minsky’s terminology,
which will be used throughout this paper as a generic term for these job
 In fact, if the non-government
sector runs a surplus, i.e., it hoards net financial assets, the
government sector (by accounting identity) will run a deficit.
 There has been some confusion
about the operation of the ELR (see Sawyer 2003). It is important to
note that ELR eliminates unemployment by offering a job to everyone
willing and able to work, not by increasing aggregate demand. While a
rise in aggregate demand may result as a consequence of the program,
this does not have to be the case. The government can eliminate
unemployment via the ELR, while simultaneously reducing its spending on
other programs and raising taxes. This is hardly a desirable
recommendation, but it illustrates that ELR can eliminate unemployment
in the face of falling aggregate demand. It does so by offering a job
and not by ‘pump priming’ (for details, see Mitchell and Wray
 Fitzpatrick (2003), Galston
(2001), and Anderson (2001), among others, support some conditionality
on the basis that there needs to be a reciprocal obligation on the part
of the recipient of the basic income.
 The institutional design and
macroeconomic effects of this program have been discussed in detail in
Tcherneva and Wray (2005b).