In defense of employer of last resort: a response to Malcolm Sawyer.

Author:Mitchell, William
Position:Notes And Communications

While we welcome a chance to discuss the merits of employer of last resort (ELR) proposals, it is difficult to respond to Malcolm Sawyer's (2003) assessment. (1) First, many of his critiques are superficial because he attempts to cover just about every issue even tangentially related to ELR. Second, he has relied to an alarming degree on critics of ELR (Aspromourgos 2000; Kadmos and O'Hara 2000; King 2001; Kriesler and Halevi 2001; and Mehrling 2000) for statements of the principles of ELR and, thus, misrepresents the program we endorse. In our response, we focus only on what we believe is the main thrust of his critique, that

  1. ELR could increase employment without setting off greater inflationary pressures than those that are already present in other policies designed to reach full employment, but it cannot enhance (improve) price stability--it faces a "NAIRU" constraint.

  2. ELR increases employment by stimulating aggregate demand and, hence, operates no differently from any "Keynesian" fiscal policy or monetary policy.

  3. ELR is a "make work" program or, more negatively, another name for unemployment and, at best, replaces unemployment with underemployment.

  4. ELR proposals have ignored the substantial logistical problems generated by cyclical fluctuation of participation in the program.

    We will deal with the first two claims in the next two sections and with the other claims in the following section. In the final section, we briefly discuss interest rate and financing issues that are muddled in Sawyer's exposition.

    Aggregate Demand and Employment

    In this section, we contest Sawyer's (repeated) claims that ELR increases employment by raising aggregate demand and that any benefits achieved by ELR could just as well be achieved by raising general government spending, lowering taxes, or "dropping money from helicopters" (Sawyer 2003, 887).

    The ELR approach is not equivalent to pump priming. An ELR program offers a basic wage (and benefits package) to anyone ready and willing to work and, in this sense, guarantees "full employment." It "hires off the bottom," operating as a buffer stock program. When private firms downsize in recession, dismissed workers can find employment in ELR. In an expansion, private firms hire workers out of the buffer stock "pool." The size of the buffer stock is thus related to the performance of the private sector plus non-ELR government employment. Indeed, government "demand management" can manipulate the size of the ELR pool through countercyclical pump priming (Wray 1998, 139-140). However, with the ELR program in place, "loose full employment" is maintained no matter what the level of aggregate demand happens to be. (The implications of "loose full employment" are discussed later.) We thus reject Sawyer's claim (2003, 884) that the "ELR scheme seeks to remove demand-deficient unemployment through the provision of required aggregate demand" as overly simplistic and misleading. Importantly, one could envision a deflationary government policy (increased taxes and/or reduced overall spending) accompanying the introduction of ELR to reach and sustain full employment. We do not recommend such a policy (unless there were excessive overall demand), but it shows that Sawyer has mistakenly conflated ELR with Keynesian pump priming.

    Sawyer rightly argued that ELR workers will need some capital and office/management support. Hence, total ELR spending will be higher than the sum of wages and benefits spent on ELR workers. However, implementation of ELR also allows some savings to be made (outlays which support unemployment programs would be shifted to the employment program). In any case, ELR represents the minimum stimulus required to achieve full employment and does not rely on market spending and multipliers--and "works" regardless of the level of demand.

    ELR and Inflation

    Following the previous argument, we could dismiss Sawyer's fear that a demand stimulus necessarily generates inflationary pressures as being irrelevant to the ELR proposal because ELR achieves full employment without regard to the level of aggregate demand. However, the inflation debate reveals fundamental differences in the assumptions which underpin our ELR proposal and appear to account for Sawyer's erroneous reasoning about ELR and inflation.

    Sawyer claimed that ELR faces a NAIRU constraint (2003, 898) and said "the stock of unemployed under present policies [NAIRU policies] ... and the stock of ELR employees are viewed as analogous," with inflation accelerating should unemployment fall below some "natural level." Sawyer then claimed that the "NAIRU" under ELR (following Mitchell 1998, he called this NAIBER for "non-accelerating inflation buffer employment ratio") could be higher than the current NAIRU (see Mitchell 1987 for discussion about the nonnatural rate microfoundations of the NAIBER and its fragile, multiple, and cyclically sensitive nature as a macroequilibrium), wrongly attributing this to higher aggregate demand levels that he believes inevitably accompany an ELR--a mistake we dealt with earlier. Further, Sawyer presumed that the inflationary impacts are the same no matter what method is used to move the economy to full employment. By ignoring the distinctive ELR dynamics, Sawyer was left to rely on a Friedman "natural rate argument" against full employment achieved through general demand stimulus to mount his criticism, a critique that cannot be applied to a buffer stock employment program.

    Is the NAIBER higher than the NAIRU? We juxtapose two buffer stock approaches to inflation control: (a) a NAIRU-buffer stock of unemployment to inhibit real growth and (b) an ELR involving an open ended (elastic quantity), fixed wage buffer stock of employed workers (see...

To continue reading