The idea of government as the Employer of Last Resort (ELR) has been present in the Institutionalist literature since the early twentieth century. In 1919, well before Keynes recognized that capitalist economies lack an inherent mechanism to create full employment, John Dewey wrote:
The first great demand of a better social order, I should say, then, is the guarantee of the right, to every individual who is capable of it, to work--not the mere legal right which is enforceable so that the individual will always have the opportunity to engage in some form of useful activity, and if the ordinary economic machinery breaks down through a crisis of some sort, then it is the duty of the state to come to the rescue and see that individuals have something to do that is worth while--not breaking stones in a stoneyard, or something else to get a soup ticket with, but some kind of productive work which a self-respecting person may engage in with interest and with more than mere pecuniary profit. Whatever may be said about the fortune of what has technically been called socialism, it would seem to be simply part of ordinary common sense that society should reorganize itself to make sure that individuals can make a living and be kept going, not by charity, but by having productive work to do. ( 1939, 420-421) Several prominent institutionalists such as Morris Copeland (1967), Wendell Gordon (1980; 1997), and Hyman Minsky (1986) have strongly expressed their support to an ELR policy to deal with persistent unemployment. This paper argues that Fagg Foster's theory of Institutional Adjustment (IA) provides an insightful contribution to the way in which ELR might be introduced to ensure successful implementation. Foster argued that "... all answers to all real economic problems necessarily take the form of institutional adjustment" (Foster 1981a, 946). Therefore, ELR too should be viewed as a process of institutional adjustment. This paper demonstrates that ELR with IA planning addresses many of the challenges that ELR critics predict. Consequently, it provides a brief overview of the ELR program and Foster's theory of IA, followed by an assessment of how IA planning can help ELR deal with structural and technological unemployment problems, and closes with concluding remarks.
Contemporary ELR policy, a la Hyman Minsky, proposes that the government ought to create "an infinitely elastic demand for labor at a floor or minimum wage that does not depend upon long- and short-run business profit expectations. Since only the 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, 308). As such, the government guarantees a real job opportunity for anyone ready, willing, and able to work at a fixed socially-established basic wage (plus benefits), thus exogenously setting the price of labor. With ELR, the government will provide a price anchor and establish greater price stability. During a recession, the size of the ELR pool increases to absorb workers displaced from the private sector, and when the economy booms it automatically shrinks when ELR workers find employment in the private sector, hence it operates as a buffer stock employment program. The ELR wage is fixed while the quantity of labor in the buffer stock fluctuates. Private sector employers can obtain labor at a mark-up over the ELR fixed wage; hence, the price-stabilization feature of the program. ELR is a decentralized program, to be financed by the national government, and is not meant to substitute for private sector (nor public sector) jobs but rather complements "the market" by acting as a buffer stock for labor (Wray 1998a; 1998b; 1999).
Building on Abba Lerner's functional finance theory, ELR proponents argue that the government always has the financial capacity to pay for the program. Unemployment only develops "because government spending is insufficient relative to private savings" (Mitchell 2001, 23). The size of the deficit necessary to maintain full employment is irrelevant; and so is the national debt for the simple reason that the logic of government finances is totally different from that of households or firms. ELR proponents show that tax payments do not and cannot finance government spending; for at the aggregate level, only the government can be the "net" supplier of fiat money. As a result, the starting point is government expenditure. Once government spends (creates or supplies) fiat money to purchase goods and services, it provides the private sector with the necessary amount of money to meet tax liabilities, save, and maintain transaction balances. The government can safely run a deficit up to the point where it has provided the quantity of non-interest-earning fiat money and interest-earning bonds desired by the public (Wray...