GDP Redistribution and The Federal Job Guarantee Proposal

Today, I’ll be discussing what GDP is, how it is moved to profits (the 1%) and how we can reverse 35 plus years of GDP redistribution by initiating a federal Job Guarantee. For part of this discussion, we will review material from previous posts that are relevant to the topic at hand. 

We recall from previous discussions on the sectoral balances that the fundamental rule in macroeconomics, which is ignored by the mainstream, is that somebody’s spending is somebody’s income. It’s just plain reality. If you give me $30,000 for my car, you get my car and I get your $30,000. That $30,000 is my income. That $30,000 was your spending. If Walmart pays a worker $500, that $500 is Walmart’s spending and it is the employee’s income. 

Believe it or not, there was a time when business understood that good wages were a stable means to ensure that what we produced as a nation, got sold to consumers. This is an important point, so let’s examine it. 

Apple makes iPads, therefore, it produces them. But Apple doesn’t just make iPads because it’s fun. Apple spends dollars to produce them and then intends to sell the iPads to somebody and that somebody needs the dollars to buy them. Clearly, an employee of Apple is allowed to buy an iPad, and Apple would like the employee’s dollars in return. So, if Apple pays a good wage to its employees, its employees can then purchase iPads. Applied to the whole economy, we can see that if wages are good, then what we produce as a nation can easily be sold to consumers. 

Today, however, partly because of the mantra “wages are a cost”, wages are held down through wage suppression, which is sold to the public with the idea that business is our economic salvation. To insist that wages are merely a cost is to insist that workers never spend their paychecks. The notion is absolutely absurd, yet daily, workers who receive paychecks and then spend some or all of those paychecks, swallow the neoliberal “free market” myth that wages are nothing but a cost. 

Think about it for a moment. According to this fantasy economic theory of “wages are merely a cost” peddled by the establishment of both political parties, business and mainstream “economists”, workers are parasites and when they are paid wages, they hoard them. That’s all they do: hoard dollars that business needs to keep our economy thriving. Thus, if we pay workers more, business loses more dollars and must defend itself from running out of money by laying off workers, so unemployment results. 

Puerile nonsense. When you are paid by your employer, do you not spend your paycheck on food, clothing, utility bills, mortgage or rent, gasoline, toys, oil, TVs, etc.? Of course you do. And who are you buying all these goods and services from with your paychecks? You are buying goods and services from businesses who spend US dollars to produce those goods and services, of course! You do not need a Ph.D in Economics to see that the argument “wages are merely a cost” is absurd. So, we understand that:

1. Somebody’s spending is somebody’s income – always.
2. Wages are not just a cost.

Next, we need to eliminate a few common myths about business.

Business Is Not The Centerpiece of The Economy and Business Is Not The Job Creator

Business is not at the head of the economy. Business does not create jobs and the economy does not revolve around the needs of business. In short, neither you, I nor the US economy are dependent on business. This is not a political statement, but one of reality. It is not the centerpiece. The centerpiece of a modern monetary economy is the currency issuer, which is the US Government. The US Government issues the US dollars necessary for both business and consumers to use. Now, why does the US Government issue US dollars? 

The US Government issues US dollars with the intention to buy goods and services with its own currency and to accomplish this, it lays a tax payable only in US dollars. However, if nobody has US dollars (at the beginning of the United States), then nobody can pay the tax. Nevertheless, everyone must pay the tax. So the question is, how does everyone obtain the US dollars to pay the tax? Well, the US Government stands ready to buy goods and services with its own currency from the private sector. So, the market agrees to sell its goods and services to the US Government in exchange for the US Government’s currency: The US dollar. Now, business in turn pays its workers in US dollars and everyone can obtain US dollars. Hence, business does not determine the level of unemployment – The US Government does and the US Government determines the level of unemployment through deficit spending. 

By agreeing to sell goods and services to the US Government, the US Government becomes the currency issuing and regulatory authority, which it is constitutionally empowered to do and so, the US Government commands the US market and the US economy. Period. 

There is no such thing as the “Free Market”. 

Regardless of your political “feelings”, there is absolutely nothing you can do about this reality, but deal with it. So, where does this leave business now? It leaves business at the same level as workers, consumers and foreign entities. Business is a currency user. And as a currency user, unlike the US Government which issues the currency, it must “earn” US dollars like the rest of us. The US Government doesn’t earn US dollars, but business must. The US Government doesn’t run out of US dollars, ever, but business can.

Business is nothing more than a currency user, subject to the authority of the US Government, like the rest of us. Business is not the centerpiece of our economy; it is not sovereign and it is not the job creator. 

Job creation is a by-product of consumer spending pressure on business to increase its production. For instance, let us use Walmart as an example. If consumers begin spending more and more at Walmart, the shelves at Walmart empty faster. At this point, Walmart can do one of two things:

1. It can do nothing, keeping the same amount of workers it has now and try to keep up with demand and risk empty shelves, losing customers to competitors.
2. It can hire more workers and keep the shelves full meeting the new demand, thus keeping its market share.

What if consumers spending remains constant? Then Walmart has no incentive or need to hire more workers and jobs are not created. But now, what if consumer spending at Walmart drops and continues to drop? Walmart will experience full shelves, but the product on those shelves is not selling. Walmart will begin to lay off workers to defend the loss of income as a result of falling consumer spending.

So much for business being the job creator.

If you still disagree, then let’s do a test. You go out and start a business. Buy your initial inventory and hire your initial workforce. Open your doors for business and we will make certain that very few customers ever buy anything from you. How long will you be in business? But to the point at hand, with very few customers, will you continue to hire more workers? No, you will not.

As I said, so much for business being the job creator.

Job creation is a cooperative effort between consumers, labor and business with the US Government at the head. Without the US Government’s US dollars, there will be involuntary unemployment. Each unemployed person creates another unemployed person, because employed persons earn paychecks which they spend and somebody’s spending is somebody’s income. I cannot be more clear on this concept. As unemployment increases, consumer spending decreases and the economy enters a downturn, because somebody’s spending is somebody’s income and the main somebody’s spending which everyone is dependent on is the US Government’s spending. Without it, recession is inevitable when the nation’s imports are exceeding its exports. 

So, what then does this all mean? Simply put, it means that the US economy is a cooperative effort of every citizen, both rich and poor. The US economy belongs to every US citizen as the US Government is a public entity that issues US dollars for the public purpose and so, all should derive good benefit from the US economy. How do we all derive good benefit? Proper GDP distribution. However, for the last thirty-five years, GDP has been redistributing to the few.

GDP Redistribution

For the layman with no background in macroeconomics, to understand what GDP is and how its distribution is important to all of us, we must first define four concepts:

1. The Real Wage
2. The Nominal Wage
3. The Price Level
4. GDP

The Real Wage: Workers do not have any control over the real wage. The real wage is determined by the nominal wage and the price level.

The Nominal Wage is the wage that is agreed upon between employer and employee at the time of hiring. So, when you are offered a job, the employer might say, “Ok, we’ll start you at $9.50 an hour” and you agree and sign on the dotted line.

The Price Level is the level of the prices of goods and services in the economy. You know, the thing that the mainstream worries endlessly about, screaming “Oh my God! Inflation!” whenever government spending is mentioned.

GDP is the Gross Domestic Product, which is also known as the National Income. All of us share in GDP. To get any useful insight into the redistribution of GDP to the 1% and why such a thing is undesirable, we need to be able to know what we call “the wage share”. Now then, here comes the free college education, so pay close attention. There will be no simple, fantasy TV talking points. The wage share is expressed as:

Wage share = (W.L)/P.GDP

Where wage share equals total labor costs (W.L) divided by real GDP valued by the price level (P.GDP). 

We can rearrange the expression (W.L)/P.GDP as:

(W/P)/(GDP/L)

Where (W/P) is the Real Wage and (GDP/L) is Labor Productivity. At this point you might be saying, “Stop! What has this to do with anything.” It has everything to do with it. First, we’re going to prove that what I am saying about GDP redistribution isn't political, then we will finish up. Hang in there.

So, then, (W/P)/(GDP/L) is equivalent to a thing we call “Real Unit Labor Costs” which is the ratio of real wages to productivity. When this ratio falls, workers have a smaller share of GDP and capital has a greater share. Therefore, when growth in productivity rises faster than real wages, national income, or GDP, moves away from workers, redistributing to capital. In other words, all of our national income moves away from you, both liberal and conservative alike and into the pockets of the 1%. There you have it. No politics, just macroeconomic reality. This redistribution of GDP, if left unchecked by the US Government, results in vast income inequality. Why is income inequality important?

Because wages contain both a cost and a demand element. 

At this point, some of you are now saying “Ah, I get it!” Hopefully so. When wages are low, demand will drop and unemployment will rise. The US government controls the level of aggregate demand through deficits (cutting/raising taxes, or net spending greater than that of taxation). If the deficit is too small, unemployment results. However, what do you do when wages are suppressed as they are today and the US government is slashing the deficit? 

If the US Government is reducing its deficit when the external sector is in deficit and wages are low, a critical spending gap will exist. The spending gap must be filled by someone to ensure that production is sold, or the economy will experience a downturn. How we manage the economy today and fill that spending gap is by relying on bank credit. In other words, credit cards, loans, etc., to ensure consumption of production. In our low wage, underemployment economy, consumers must rely more and more on credit cards to purchase necessities that otherwise were purchased with wages fifty years ago. So, by suppressing wages, business profits even more without earning and banks profit from the interest on bank credit. In a culture of deficit terrorism, such a concept is highly unstable. Why?

The process leads to a private debt build-up in the private sector. As the level of private debt expands, demand increases. But that demand is short lived. The private sector cannot take on endless amounts of private debt as it is not the currency issuer. It is merely a user of currency and must earn enough to pay back the debt. In the absence of enough federal deficit spending, when the private sector cannot take on any more debt, spending will contract. When that happens, demand drops, business will enter the inventory cycle shedding jobs and unemployment increases, SNAP applications increase and along with that, the federal deficit automatically increases. That’s right: the federal deficit automatically increases without any input from Congress. Hence, SNAP is an automatic stabilizer for the economy, ensuring that there is a floor in the drop of aggregate demand. The deficit rises automatically and consumer spending on food is maintained to some level. Now then, what happens to the economy when politicians cut SNAP benefits to stop these lazy “takers” from “mooching”? They end up harming poor people, companies like Walmart and the entire economy. Everyone takes a hit. So, this is why it seems that the economy booms and then heads south repetitively. 

1. We keep reducing the federal deficit
2. We keep wages low
3. We push private debt to ensure production gets sold

And in doing so, we redistribute the national income (GDP) to the 1% and away from all of us. That’s no way to operate an economy. Or, as Daffy Duck said, “Brother, what a way to run a railroad!”

What we should be doing is relying on credit for production and more government spending for consumption of that production. We can achieve that with a federal Job Guarantee.

The Federal Job Guarantee: A Review

The chief weapons used against government spending today are inflation, deficit terrorism and national debt hysteria, allowing neoliberalism to maintain its control over the economic narrative. Austerity, in the wake of the GFC, is now a "fad" for world governments at present, resulting in an incalculable loss to output, deflationary environments and millions of lives injured.

We also note the rise over time in crime and other social, medical and economic ills which now plague nations, especially the United States, which are a direct result of the abandonment of policies of full employment; welfare and unemployment insurance over jobs being the choice automatic stabilizer for the economy.

We look to reverse this negative trend by introducing a federal Job Guarantee (JG) that pays a living minimum wage to anyone willing and able to work, funded by using the currency issuing power of the United States Government. As we understand, unemployed workers have no market value. Therefore, there is no inflationary pressure created as a result of government hiring these workers at a minimum wage.

The US Government will buy up any unused labor that the market does not want. Funds will go to local communities which will administrate the program and do the hiring. In other words, the US Government does not provide the jobs, only the funding. It has no control over who is hired/fired nor over administration. In other words, it's not a federal job. It's not "big government". It's not socialism. It is proper macroeconomic policy.

To obtain a JG job, one only needs to walk in to their local JG office and sign up. Unlike how current employment is administered, where we first create a job and then find people who fit that job, the JG takes the person as they are and then fashions a job around that person. The worker can choose his/her schedule, working from one hour per week to full-time if they so choose. Child care for single and working JG parents will be provided free of charge. The person will be paid from the moment they sign up, even if no work is yet organized for that person.

The types of jobs created for workers are endless. JG workers are employed in their communities addressing issues that the private sector either cannot or will not. Such jobs might be road clean up, clearing urban blight, constructing nature trails, protecting valuable natural habitats, planting flowers, caring for the elderly and working with children. The JG will also offer job training and education, thus making the worker more appealing to private sector employers.

As to the macroeconomic effects, the JG will act as a superior automatic stabilizer for the economy. The JG creates a pool of employed labor which the private sector can hire from at any time. Therefore, the pool of labor will shrink in good economic times and expand during downturns, as will the federal deficit automatically, thus eliminating involuntary unemployment with a positive impact on output. Over time, the JG will enhance the private sector, resulting in a much smaller JG labor pool at any given time.

Since the JG eliminates involuntary unemployment, the JG disciplines inflation properly. When inflationary pressures rise in the private sector, the federal government manipulates fiscal or monetary policy and labor then transfers from the inflating private sector to the JG, rather than transferring into a state of idleness (Involuntary unemployment) thus reducing the impact of downturns and speeding up recovery.

Further, the JG takes a bottom-up approach to job creation instead of the current "trickle-down" methodology. With trickle-down, we create jobs for highly skilled, highly educated workers first and then hope that a demand for enough unskilled jobs is created. The JG turns the process the right way up and through the labor of the unskilled, a demand for highly skilled, highly educated jobs is then created.

The Job Guarantee is not a silver bullet, but a step in the right direction. Coupled with a Basic Income Guarantee, we move forward toward the elimination of poverty.

The Macroeconomic Function of the Job Guarantee

The Job Guarantee (JG) eliminates involuntary unemployment by creating a buffer stock of employed persons, rather than the current buffer stock of idle workers. The JG creates a pool of workers employed in their communities to perform work that is beneficial to society (Constructing nature trails, protecting valuable habitats, road clean-up, etc.) Private sector employers may hire from this pool at any time. Because the JG is a voluntary initiative, in good economic times, the pool of JG workers will shrink as that labor moves to higher paying private sector jobs. In a recession or downturn, the JG pool will expand as more workers who lose their private sector jobs transfer into the JG. As a result, the federal deficit will automatically expand and contract, based on the state of the economy. Therefore, the JG acts as a superior automatic stabilizer for the economy, as it has a greater positive impact on output than that which unemployment insurance and welfare payments currently provide. 

The Fixed Living Minimum Job Guarantee Wage

Since unemployed workers have zero market value, then if the federal government buys up all unwanted labor, there will be no inflationary pressures that will occur by paying them a minimum wage. That being said, the fixed JG wage will become the national minimum wage. So, if that wage is set to a living minimum wage, the price level might rise, but it will only be a one-time rise and then the price level will stabilize. 

The fixed minimum JG wage is two things:

1.) A definition of what society will tolerate as the lowest standard of living, and

2.) A nominal anchor against inflation

As to point one, society will decide on the lowest standard of living that it will tolerate and then set the JG wage to that standard. We recognize that simply because a low-wage producer wishes to operate within a particular nation’s economy, that does not confer upon the producer a right to success. If that low-wage producer feels that it must manipulate government to force the minimum wage to remain stagnant or to drop below the tolerable living standard, then it clearly cannot afford to operate in that nation’s economy, or outright refuses to respect the will of that society and it should exit that nation’s economy. Therefore, the result of point one will be either low-wage producers must raise pay levels to meet that nation’s standard of living demands, or else be forced to exit that nation's economy.

As to point two, the fixed JG wage has the effect of stabilizing the growth rate of money wages in the private sector and hence, provides only a nominal anchor against inflation. The main inflation disciplinary function of the job guarantee is the NAIBER.

NAIBER

The Job Guarantee proposal eliminates the false and destructive NAIRU concept, replacing it with the NAIBER. The NAIBER (non-accelerating inflation buffer employment ratio) is the ratio of job guarantee employment to total employment and is expressed as:

BER = JGE/E 

Where the Buffer Employment Ratio (BER) equals Job Guarantee Employment (JGE) divided by Total Employment (E). 

As mentioned earlier, one feature of the JG is that the private sector can hire from the pool of JG workers. The reverse is also true: Private sector labor can transfer into the fixed wage JG. It is this labor transfer that attenuates inflationary pressures. 

When wage demands within the private sector threaten a rise in the price level, the federal government will manipulate the (BER) through fiscal or monetary policy adjustments to reduce the upward pressure on aggregate demand. The act of the federal government reducing spending power will result in unemployment. However, in contradistinction to the specious NAIRU concept, which would have the effect of transferring labor into a state of idleness, labor will become unemployed from private sector work and then transfer from the inflating private sector into the fixed wage job guarantee, thus eliminating inflationary pressures and involuntary unemployment, resulting in a positive impact on output and a stable inflation rate. 

So, that’s GDP redistribution, why you should care and what we can realistically do about it.