…We, and many others, expect the banks of all the major OECD economies to collapse over the next few months. This will drag the UK, Eurozone and US down. In other words, and to be absolutely clear:the Eurozone and the world will be dragged down by the banks, not vice versa.

Politicians, advised by deranged and culpable economists, will hasten, and intensify this global private banking collapse by accelerating austerity. It is those policies that will prolong and deepen the global economic crisis.

So prospects are bleak. Unless and until, that is, politicians in the UK and Eurozone get real, and face reality. It is time now to stop blaming the victims – public sector workers, pensioners, single mothers, the frail and vulnerable – for a global financial crisis designed by bankers, technocrats, economists and politicians.

It’s time now to address the solution: first, subordination of the private banking sector to the interests of society; and second, policies for employment. Only jobs can now generate the income needed to revive the economy, to pay down private debts, and to stabilise the global economy. “Look after employment” said Keynes, “and the budget will look after itself.”  (link to article)

So whilst many Germans might think they want a smaller, more cohesive euro zone without the troublesome profligates, the policy elites in fact recognize that a “United States of Germany” under the guise of a United States of Europe, actually suits their aspirations to dominate Europe politically and economically. Which is why the outlines of a deal along the lines of increased ECB involved as a quid pro quo for greater German control of fiscal policy across the euro zone, is emerging. It’s the equivalent of the golden rule: “He who has the gold,rules.”

Not a good outcome for Ireland either apparently as he goes on to quote Warren Mosler:-

And the austerity looks likely to not only continue but also to intensify, even as the euro zone has already slipped into recession.

So from what I can see,  there’s no chance that the ECB would fund and at the same time mandate the higher deficits needed for a recovery, In which case the only thing that will end the austerity is blood on the streets in sufficient quantity to trigger chaos and a change in governance.” (our emphasis)

At least we will have bought some time to prepare for an exit to our own sovereign currency as described by Pilkington and Mosler. 

…But this is where Germany now is. It must either immolate itself and dismantle the Bismarckian state for the cause of EMU, or prepare to finance an orderly withdrawal from monetary union (with the Finns, Dutch, and Austrians) so that the South can breathe again and hope to recover.

That is the choice. All else is can-kicking, denial, obfuscation, muddle, and self-delusion. As is now becoming obvious, the failure to resolve the matter one way or the other is becoming a danger to the global financial system. It threatens to uncork a global depression. Germany must at last decide.  (Link to full article)

Cross posted with Naked Capitalism

By Warren Mosler, an investment manager and creator of the mortgage swap and the current Eurofutures swap contract and Philip Pilkington, a journalist and writer based in Dublin, Ireland

Recently the Greek economist Yanis Varoufakis responded to the euro exit plan that we published on Naked Capitalism a few days ago. While Varoufakis was broadly supportive of the plan if an exit was absolutely necessary, he criticised some of the details therein.

Before we deal with some of the issues he raised – some of which are very important – we should first note as clearly as possible that neither one of us is advocating exit from the Eurozone for any countries therein. We both agree with Varoufakis that this would probably be a more painful option than simply staying in the currency union even with the current austerity programs in place.

In addition to this, both of us have published pieces arguing that the Eurozone will likely weather this crisis and the ECB, in some shape or form, will probably step in to backstop the debt of the peripheral governments in the coming months.

We merely published our sketch of an exit plan because both of us believe that it is always good to have a Plan B at the ready should any contingencies arise. We also think that having a viable plan in hand strengthens peripheral governments bargaining power vis-à-vis their neighbours.

But more on this in a moment. First, let us deal with some of the issues that Varoufakis raised. (All numbered points in italics are Varoufakis’, below is our response):

1. All contracts by the government to the private sector (abroad and domestically) will be renegotiated in the new currency after the initial depreciation of the latter. In other words, domestic suppliers will face a large haircut instantly. Many of them will declare bankruptcy, with another large lump sum loss of jobs.

First of all, there may not be any initial depreciation of the new currency if the government initiating the exit gets the exchange rate right. Since the new currency is required to pay taxes we anticipate that there should be a fairly consistent demand for it especially when it is first introduced.

Take the example of a domestic industry – say, a cement manufacturer that sells its goods to the government. It would be paid in the new currency and provided that the currency’s value remains somewhat constant the new currency can then be used to pay workers. In addition to this they will, as they do now, price their output relative to their costs so there would be no threat of bankruptcy.

Perhaps the key point here is that we do not anticipate a severe shortfall of demand for the new currency. Since it is released into the system slowly, and since it is required to extinguish tax liabilities, and finally since there will be an immediate need for cash in circulation, it should be widely sought after by economic actors.

If, on the other hand, a company has loans outstanding in euros they may need to convert some of their profits from the new currency into euros to service these obligations. Again, this has as much to do with how large the profits they accumulate are, as it does with the exchange rate between the two currencies. If their real income falls they might take a hit. But such is business.

Then there is the question of where these businesses get their inputs. If these inputs come from the domestic economy they will be able to pay for these in the new currency. If they come from abroad they will cost more money, if indeed the new currency does depreciate when introduced and even then the costs would be passed on to the consumer.

2. The banks will run dry and will not be kept open by the ECB. Which means that the only way Ireland or Greece or whoever adopts this plan can keep its banks open is if they are recapitalised in the new domestic currency by the Central Bank. But this means that bank account deposits will, de facto, be converted from euros to the new currency; thus annulling the beneficial measure of no compulsory conversions of bank holdings into the new currency.

This seems to us the most important point that Varoufakis raises. European banks do indeed have problems with both euro and dollar denominated liquidity and these problems will only worsen should there be a default and exit. Hence, we are back to the prospect of bank runs and other financial nasties.

In this case the government in question would, of course, only be able to provide liquidity in the new currency. The problems caused by this will only be as substantial as the amount by which the exchange rate between the new currency and the euro diverges. In the meantime, depositors will be exchanging euros for the new currency in order to meet ongoing payments (payrolls, taxes etc.). Once again, we underline the fact that we believe that the demand for the new currency would be quite strong and devaluation limited.

However, if a bank’s net worth (equity capital) falls below required minimums for any reason, the government will have to take it over and reorganise it. Options will then include: selling the bank as an ongoing business or selling the assets to other institutions. Both of these could lead to large losses for equity holders and, if the losses are severe enough, losses for depositors. It is not unheard of for depositors to suffer losses of the order of 25% during liquidation. We do advocate full deposit insurance be put in place to protect deposits denominated in the new currency, but deposits in euros will still be at risk and in this sense Varoufakis’ concerns have merit.

3. The authors claim that the above ill effects will be lessened by the government’s new found monetary independence which will enable it to discontinue austerity programs immediately and adopt counter-cyclical fiscal policy, as Argentina did after its default and discontinuation of the pesos-dollar peg. This may be so but all comparisons with Argentina must be taken with a large pinch of salt. For Argentina’s recovery, and associated fiscal policies, was far less due to its renewed independence and much more related to a serendipitous rise in demand for soya beans by China.

The extent to which soya bean price rises led to the Argentine recovery is subject to much debate. Certainly, it allowed Argentineans access to foreign reserves which they could use to extinguish foreign loans, but to what extent it was the cause of the recovery is a definite grey area. We hold that the fiscal policies initiated by the Kirchner government that removed substantial fiscal drag played a significant role in the recovery.

Varoufakis, by saying: “Argentina’s recovery, and associated fiscal policies, was far less due to its renewed independence and much more related to a serendipitous rise in demand for soya beans by China”, seems to imply that the fiscal policy expansion was somehow ‘allowed’ by the rising soya bean demand and the influx of foreign currency reserves. This is not the case. When Argentina ended the dollar peg they became able to extend government spending in as large quantities as they saw fit – that is, practically speaking: reducing fiscal drag by as much as the inflationary pressures created thereby were tolerated.

After depegging, Argentina’s fiscal position could be run into deficit without risking insolvency or causing interest rates to skyrocket, both of which were the key constraints on government spending throughout the dollar peg era. In this way, the Argentinean example is perfectly viable as a comparison to a Eurozone country undertaking an exit. If the exit is undertaken and a floating exchange rate adopted, fiscal policy can be run into deficit until political limits, devaluation or inflation allows it to run into deficit no more.

4. While it is true that the weaker currency will boost exports, it will also have a devastating effect: The creation of a two tier nation. One nation that has access to hoarded euros and another that does not. The former will acquire immense socio-economic power over the latter, thus forging a new form of inequality that is bound to operate as a break on development for a long while – just like the inequality that sprang up in the post 1970s period did enormous damage to our countries’ real development (as opposed to GDP growth numbers) in the second post-war phase.

Once again, the currency may not depreciate very significantly but even if it does, as the economy is brought back to full employment and output through reduced fiscal drag and increased exports, the government is then free to address distributional issues as it sees fit. The key point here would be to highlight these issues clearly prior to the exit taking place.

5. Last, but certainly not least, even if one country exits the eurozone in this manner, the eurozone will unwind within 24 hours. The European System of Central Banks will break instantly down, Italian spreads will hit Greek levels, France will turn instantly into a AA or AB rated country and, before we can whistle the 9th Symphony, Germany will have declared the re-constitution of the DM. A massive recession will then hit the countries that will make up the new DM zone (Austria, the Netherlands. possibly Finland, Poland and Slovakia) while the rest of the former eurozone will labour under significant stagflation. The new intra-European currency wars will suppress, in unison with the ongoing recession/stagflation, international and European trade and, therefore, the US will dive into a new Great Recession. The postmodern 1930s that I keep speaking of will be a tragic reality.

We should again reiterate that we are not actually calling for an exit. We simply believe that the governments should have a contingency plan and, most importantly, that this contingency plan would steer them away from the very real desire to peg their new currency to either the euro or to some other foreign currency in the case of default. As we wrote in the original plan, should this happen we expect another Argentinean/Russian style financial collapse within a few years of the new currency peg being adopted.

We should also point out that having a viable exit plan and having this exit plan and its possible results openly talked about gives the peripheral countries more bargaining power vis-à-vis their austerity loving neighbours. At the moment we should be focused on drafting any sort of national strategy that can give power back to sovereigns vis-à-vis the Eurozone. (In this, we know that Varoufakis sympathises as he has recently shown interest in our jobs program funded by tax-backed bonds which one of the authors [Pilkington] is currently trying to flog in Ireland).

We also think that it is unlikely that an exit will actually occur. We both think that the ECB will almost undoubtedly step in to backstop the unruly debt burdens of the periphery. However, this will probably mean that the periphery will be kept on ‘life support’ while austerity continues to be imposed upon it. Once again, it is imperative that countries within the periphery have as many bargaining chips as possible in their negotiations with their fellow Europeans.

Lastly, we should note that, should a nation exit the Eurozone in the manner we have outlined, a worldwide deflationary collapse might actually work to their advantage. Why? Because with their new currency they could undertake an Argentinean-style jobs guarantee program which would maintain full employment domestically while real terms of trade shifted dramatically in their favour as worldwide prices fell. Or, to put it another way: peripheral countries like Ireland would no longer have to rely on export-oriented growth in a world plagued by massive deflationary contraction. Instead they could run fiscal deficits to maintain full employment and high living standards while having little concern for the potential devaluation of the new currency caused thereby because worldwide prices would be falling at the same time.

A critique of the European Commission’s Green Paper on ‘Stability’ Bonds, by Stuart Holland published by Yanis Varoufakis,

…This (Stuart Holland’s) paper both critiques the Green Paper and proposes Twin Track approaches for Union Bonds to stabilise the crisis and Eurobonds to finance growth. It claims that this should be acceptable to Germany and other surplus Member States on the grounds that neither such proposal needs Joint Guarantees, Fiscal Transfers or Debt Buyouts, that a conversion of a share of national debt to the Union could be on an enhanced cooperation basis, and that Eurobonds for the recovery of growth would be funded not by German or other taxpayers but by inflows to the Union through their purchase by the central banks of emerging economies and sovereign wealth funds…..

Stuart concludes his critique thus..

..The Green Paper not only displaces the vital importance of growth, and fails to refer to the Delors White Paper whose aims resonated for more than a decade at the highest political level.

It also is recommending proposals which imply not only mutual guarantees and therefore potential fiscal transfers, but also Treaty revisions and new institutions.

In so doing it neglects to cite other proposals for bonds both to stabilise the crisis and to fund growth which could be effected without the need for Treaty revisions. These include “Twin Track” alternatives with Union Bonds for Stability and Eurobonds for growth.[7] This approach:

► does not imply joint guarantees, fiscal transfers – or a general buying out of national debt – to which Germany and other key Member States are opposed;

► recognises that this could be by an enhanced cooperation procedure which would not bind all member states and with the key political advantage that Germany and other member states could keep their own bonds;

► distinguishes Union Bonds for stability which would not be traded from Eurobonds for growth which would be traded and attract inflows from the central banks of emerging economies and sovereign wealth funds.

- Without Joint Guarantees, Fiscal Transfers or Debt Buyouts  

The precedent that neither transfer of a share of national debt to the Union nor net issues of bonds need joint guarantees, fiscal transfers of debt buyouts is that of the European Investment Bank which has issued bonds without them for more than 50 years and has been so successful that it now is more than twice the size of the World Bank and the world’s largest multilateral development bank.

- By Enhanced Cooperation

The case for introducing Union Bonds for stability by enhanced cooperation by whichGermanyand other surplus member states could keep their own bonds has not been considered by the Commission Green Paper. But the precedent is strong in the introduction of the Euro itself which was a de facto case of enhanced cooperation.

The procedure for enhanced cooperation within the institutional framework of the EU requires nine member states. The voting procedure for enhanced cooperation depends only on the consent of the member states instigating it, not a qualified majority decision. ^[8]

- Union Bonds

On lines similar to the Bruegel proposal (Commission Green Paper Proposal 2) a conversion of national debt of up to 60% of GDP could be converted to Union Bonds for debt stabilisation by those member states consenting to them.

Unlike the Bruegel proposal, these need not be traded but could be held in a consolidated EU debit account. Such a debit account could not be used for credit creation any more than a credit can be drawn on a personal debit card.

Since the converted bonds would not be traded they would be protected against speculation by rating agencies. But they would not need fiscal transfers between member states. Member States whose debt is converted into Union Bonds would service their share of them.

The Bruegel Institute has proposed a new institution to hold the conversion of such a share of national debt to theUnion. But a new institution is not needed. The converted Union Bonds could be held by the European Financial Stability Faculty and, after it, by the ESM.

- Eurobonds

Eurobonds to finance recovery and growth would be traded and attract inflows to theUnionfrom the central banks of emerging economies and sovereign wealth funds. Brazil, Russia, India, China and South Africahave re-stated in September 2011 that they are interested in holding reserves in Euros in order to help stabilise the euro area.

Doing so by investing in Eurobonds rather than by national bonds both could strengthen the Eurozone and enable the BRICS to achieve their ambition of a more plural global reserve currency system.

- Not Counting on National Debt

Eurobonds would not count on national debt since they would be the bonds of theUnionrather than member states. An analogy is US Treasury Bonds which do not count on the debt of member states of the American Union such asCaliforniaorDelaware. They would not need member state guarantees anymore than do European Investment Bank bonds, while EIB bonds also do not cunt onMemberStatenational debt (see below).

- Union Bonds and the ECB or the EIF

Parallel proposals have suggested that the converted national debt should be held by the European Central Bank and net bond issues also managed by it.[9]

Alternatively eurobonds could be issued by the European Investment Fund which was set up by Delors to issue Union Bonds and now is part of the European Investment Bank Group. The EIF would gain from the EIB’s vast experience and expertise in bond issues while the ECB could back them withut any further backing from the member-states or anyone else. The case that net issues of Eurobonds (for financing growth rather than existing debt-conversion) should be by the EIF as part of the EIB Group also makes operational sense in that the EIB has decades of experience of net bond issues whereas the ECB has none.

- Growth

Growth would be enhanced since Eurobonds would co-finance EIB investment projects which are serviced by the revenues of the Member States benefiting from them, rather than fiscal transfers between Member States.

None of the major Eurozone Member States, nor Ireland, Portugal or Greece, count EIB project funding against their national debt, nor need any member state do so. The decision whether or not to do so is governmental and does not depend on a Treaty revision.

- Cohesion

Cohesion would be enhanced in that, since the Amsterdam Special Action Programme, the EIB already has a cohesion and convergence remit for investment projects in health, education, urban renewal, the environment and green technology, as well as financial support for small and medium firms and new high tech start-ups.

- Competitiveness

Competitiveness would be enhanced by a share of the net inflows into Eurobonds financing a European Venture Capital Fund for small and medium firms, or a European Mittelstandspolitik, which was one of the original aims of the European Investment Fund.^[10]

- Maastricht Compliance

With a conversion of debt of up to 60% of GDP to Union Bonds all Member States other thanGreecewould beMaastrichtcompliant on their remaining national debt.Greecewould remain a special problem, since still well in excess of the 60%Maastrichtlimit but, as such, an exceptional case meriting continued debt buy outs.

- Stability and Growth Pact

The “Twin Track” strategy of Union Bonds for debt stabilisation and Eurobonds to finance growth also would give political and public credibility to the SGP where growth has been sacrificed to stability and would further be so by the proposals in the Commission Green Paper.

- Debt Restructuring and Reducing National Debt

None of the above is to the exclusion of debt restructuring in the sense of debt write downs. Nor does it deny the case for reducing national debt. But this could be phased over the medium to longer term in line with the “Twin Track” Strategy for combining stability through Union Bonds with growth through Eurobonds.

The case for reducing national debt through for growth has been demonstrated in the US case by the adoption of such a strategy by the Clintonadministration and that in each of the four years of its second term the federal budget was in surplus.[11]

sholland@fe.uc.pt

Interesting.  Stuart Holland is an insider with long experience.  He worked with the original visionaries of the European Project as a very young economist.  It does seem extraordinary that the current mandarins do not pay more attention to his prescriptions.  

Abandoning a sinking ship? A plan for leaving the euro

27 Nov

As regulars of this blog know, I am of the view that the eurozone’s collapse will be a harbinger of a postmodern 1930s. While virulently opposed to the eurozone’s creation, in its time of crisis I have been campaigning for saving the euro. Of course, as Alain Parguez wrote aptly here, it is impossible to save someone, or something, that does not want to be saved. In this post, while not going back on my personal commitment to keep trying to save a monetary union bent on self-destruction, I shall relate to you an idea on how a peripheral member-state could try to minimise the (huge) socio-economic costs of an exit from the eurozone forced upon it by the latter’s steady disintegration.

The said plan was put together with Ireland in mind. Its authors are Warren Mosler (an investment manager and creator of the mortgage swap and the current Eurofutures swap contract) and Philip Pilkington, a journalist and writer based in Dublin, Ireland. Their starting point is a (perfectly spot on) diagnosis: “austerity programs” are “an abject failure and yet European officials continue to consider them the only game in town. So, we can only conclude at this stage that, given that European officials know that austerity programs do not work, they are pursuing them for political rather than economic reasons.”  (Link to full article)

Only yesterday, La Stampa (Turin’s daily newspaper) reported that Brussels is contemplating three possibilities regarding Eurobonds. The paper is quoting from the so-called Green Book on the Feasibility of Stability Bonds:

(1) complete transfer of national treasury bonds to a European agency with joint guarantees (EU and member states)

(2) Blue vs Red bonds, with the former covering the Maastricht compliant debt 60% (as per our Modest Proposal and that of Breugel)

(3) Keep national sovereign bonds but have them deposited and guaranteed by some EU agency.

My reaction? It is good to see signs of intellectual life coming from Brussels. Alas, the proposals, while in the right direction, are similarly flawed in one particular respect: They require Treaty changes that will never come on stream before the eurozone has collapsed. They insist on the notion of eurobonds backed by member-states (jointly and severally guaranteed by national treasuries); a notion that is not only in contravention of the Lisbon Treaty but also financially problematic as the interest rates these bonds will incur will be some weighted average of Germany and the periphery (rates, that is, which are too high for Germany and not low enough for the periphery). If only Brussels could take one more subtle, yet crucial, step in the direction of the Modest Proposal, their plan would acquire both credibility and persuasive powers. Which step? The recommendation that the blue bonds are issued (or backed) by the ECB. In its own name. Without German guarantees.

Lastly, I very much fear that Mr Baroso’s Commission is putting these ideas about in a game of chess with Berlin and Paris; in order to assert his authority; as a protest at the effective sidelining of the Commission. If so, the Green Book’s eurobond proposals will be blasted out of the water by a German government determined to take matters in its own hands and to, in this sense, push Brussels into the margins of EU decision making.

The Road to Serfdom

(With apologies to Friedrich Hayek)

“Having followed the German political scene closely for the last five months, it is clear to me that almost the entire German political establishment is out of its depth, ideological, sometimes smug, apt to view the EMU debt-crisis as a Calvinist morality tale, and lacking in deep understanding of what it has got itself into.

One can understand German worries about money printing – and especially the loss of fiscal sovereignty and democratic control – but matters have already moved on. It is too late for that.

As for the EU authorities with their mad contractionary fiscal and monetary policies in an accelerating slump, they seem to have achieved little by toppling two elected governments in one week.

In Italy they have already made matters worse. I doubt that much will change with “technocratic governments” in either Greece and Italy, yet immense damage has been done to democratic accountability.

The EU Project has become both dangerous and insane.  (link to article)

2012 Jobs Program for Ireland

Submission for Budget 2012 Ireland 6.11.2011

Today policymakers are becoming increasingly aware that, while exports are doing well, the domestic economy remains trapped in a cycle of low-growth. As set out below, these problems are essentially due to high unemployment and a lack of spending power in the domestic economy. The economy needs stimulus and the most effective way to do this is to implement an immediate jobs program backed by newly issued, low-yield tax-backed Jobs Bonds. This will provide the financing necessary for such a program without adding to Ireland’s already substantial interest burden. If the newly issued Jobs Bonds have a guaranteed clause that, in the case of default and only in the case of default, they can be used to extinguish tax liabilities within Ireland, this will provide an effective floor below which the value of said bonds  cannot drop. This provides investors with 100% confidence that their investment will always be realised so that a moderate rates of return is acceptable. In addition to this, the bonds could be targeted at Irish savers who would not only have a 100% safe investment for the future in these uncertain times, but would also be partaking in helping bring about a national economic recovery. Large-scale jobs programs have worked many times before to kick start flagging economies. The most famous being the Work Progress Administration (WPA) enacted under Franklin Delano Roosevelt during the Great Depression. A more recent example is the Jefes program which was enacted under the administration of Nestor Kirchner in Argentina after the economic collapse that took place there in 2001. (See: Tcherneva, P. 2005).

The 2012 Jobs Program will focus on green jobs in particular. These are not currently undertaken by either the public or the private sector, so if unemployed workers are channelled into this sector there will be no ‘crowding out effect’. Green jobs are also important if we are to maintain our national natural resources of biodiversity , clean waters, soil fertility and carbon stores etc. Before going into the details of the plan, the causes of the present and persistent unemployment should be laid out clearly.

What went wrong?
As can be seen from the chart below, when the housing bubble began to seriously deflate in 2007, consumer confidence took a sharp hit. As consumers stopped purchasing as many goods and services as they had before, firms cut back on investment and the economy fell into a serious recession (indicated by the grey bars in the chart below). But unlike a typical recession, growth failed to re-establish itself and unemployment continued to climb despite the economy coming out of recession in late 2009. The reasons for this are quite straightforward. During the Celtic Tiger years Irish households took on an inordinate amount of personal debt. As of 2009 Goodbody economist Dermot O’Leary estimated Irish household debt at 176% of GDP, making Irish households some of the most indebted in the world. In 2011 the ERSI released a report that indicates that these levels have probably increased over the past two years. As household spending declined businesses noticed that there was far less demand for their products. This led – and continues to lead – to businesses closing their doors or cutting back on staff which, in turn, increases unemployment and further dampens consumer spending and overall demand. The result is a downward deflationary spiral not unlike what occurred in Japan after their housing and stock markets bubbles burst in 1991. This is not a typical recession. Instead it is similar to what the economist Richard Koo calls a ‘balance sheet recession’. (See: Koo, R. 2009). A balance sheet recession occurs when households take on far too much debt and due to having to repay this debt they become unable to purchase enough goods and services from private firms. This lack of demand for their products leads firms to invest less and lay off workers, which in turn further perpetuates the cycle. The economy then stagnates into a protracted period of extremely slow growth, high unemployment, high budget deficits and intermittent recession.

How do we fix it?
The household sector is not going to increase spending in this environment unless its own income is boosted. With demand falling businesses are not going to increase investment and employment until they see an uptick in sales. This is why supply-side schemes aimed at increasing credit to businesses will not work.  A lack of access to finance is a minor reason for the lack of business investment; the greater cause is uncertainty about the future. Ask any business-owner what their main concern is right now and they’ll tell you that their main concern is a chronic lack of customers. Indeed, Minister for Jobs Richard Bruton recognised this recently when he said that the announcement regarding Aviva layoffs in September 2011 was due to a fall in domestic demand. Again, programs that seek to enhance access to private sector credit will not prove particularly useful in such an environment. At this moment in time, schemes that work to increase purchasing power on the demand-side are a much more promising policy choice. The government’s NewERA infrastructure and investment project is a start in this regard but it does not directly tackle the problem of unemployment. A separate approach is required to deal specifically with the problem of unemployment and deficient demand;-  i.e.  a direct government-funded jobs program.

The 2012 Jobs Program is a targeted jobs scheme that offers jobs to the unemployed at a level of pay commensurate with the minimum wage. This allows Irish people access to income streams that will boost their spending power, help them make debt repayments and boost overall domestic demand. The 2012 Jobs Program will get the economy back on its feet again, after which the workers in the program can transition back into the private sector.

How will it work?
The program will be funded at a national level and implemented at a local level. People will liaise with organizers who will determine their skill-level and their interests and channel them into job suited to them. Although all the jobs will pay the same wage – which will be given to the employee on a daily basis – we recognise that some of Ireland’s unemployed labour force will be more qualified than others. So, while a relatively unskilled person might be suitable for one job – cleaning graffiti or the eradication of invasive species, for example – a more skilled person might be more suitable for another –day-care or teaching assistant, for example. What jobs are in fact available will be determined at a local level. Employers and community organizers can pitch job ideas to those managing the jobs guarantee program and they can determine whether they are suitable for the program or not.

The 2012 Jobs Program should not subsidise private sector jobs or threaten to undercut unionised public sector jobs. Any jobs that have a set rate of pay or are in the private sector should not be considered for the program. Only those jobs that directly benefit the public purpose and do not infringe on other workers should be considered. Those directing the program should remain in contact with both unions and consumer groups who should have input into such decisions. This makes many green jobs perfect for the program. These jobs are not currently undertaken by either the public or the private sector and so if the program hired unemployed people to work in this sector there would be no ‘crowding out effect’. The extensive academic literature on the jobs guarantee program provides numerous other possible positions that can be filled, including but not limited to: companions for the elderly; public school classroom assistant; safety monitor; neighbourhood cleanup; low-income housing restoration; library assistants; community or cultural historian; musician and event organizer. The rate of pay for employees is set at the minimum wage. This ensures that the program does not draw employees away from minimum wage private sector job and instead picks up the slack left by present high levels of unemployment in the country.

The 2012 Jobs Program is not conceived as a means to replace other social programs such as social welfare. Many people are not able to work and safety nets for these people must be kept in place. It should be noted that a major problem in Ireland’s job market is that many people have been sitting idle for so long that they become almost unemployable. The 2012 Jobs Program will allow people to maintain their skills and hence their employability. Employers will be relieved to find a large pool of workers who would otherwise have been sitting idle for so long that their skills may have dried up.
How much will it cost?
The costs of such a program will be determined by its size. However, if the program is kept to a certain level the costs should not be too great. The easiest way to control costs is to outline a set budget constraint for the program and then employ as many people as possible on this budget rather than setting a target for the amount of people employed. Current Irish GDP is estimated to be €158bn (Source: European Commission Economic Adjustment Programme for Ireland, September 2011). The jobs program should start at a conservative 1.5% of GDP and can be increased from there. This adds up to a total spending allowance of around €2.37bn for the entire program. The program will require equipment, resources and administration. Administrators should be paid more than the workers and so we include their salaries with the costs of equipment and resources. A very rough estimate indicates that around one third of the total budget should be put aside for the costs of administration, equipment and resources. This amounts to 0.5% of GDP or around €790m. The cost of hiring each jobs program worker at the minimum wage (€8.65 an hour) for a thirty-five hour week will be around €15,743 a year. After administration, resources and equipment are paid for it is estimated that there will be a total of €1.58bn available to hire workers. That should facilitate the hiring of approximately 100,362 workers in total. As of September 2011 there were a total of 437,441 people on the live register, collecting either Jobseeker’s Benefit or Jobseeker’s Allowance. The program should be expected to put almost 23% of these people back into full-time employment. Given that unemployment benefits are estimated to cost the state roughly €3.7bn this year we can expect these to fall by a corresponding 23%. This should add up to a net saving of around €851m. When this saving shows up it can be channelled back into the jobs programs to hire yet more people and take more people off social welfare. This cumulative process should ensure that after a year the number hired under the jobs program should be substantially larger than the original estimate of 100,362 workers. As this increased spending power is injected into the economy we also expect tax revenues to rise which will further alleviate the burden on the main government deficit. In this the program will act on the budget ‘counter-cyclically’.

How will we pay for it?
The 2012 Jobs Program will be funded by newly issued tax-backed Jobs Bonds. These bonds will be similar to standard Irish government bonds except that they would have a clause included in them that ensures their yields remain low. This clause states that should the government default on these Jobs bonds the defaulted bonds will be acceptable to extinguish Irish tax liabilities. We anticipate that the Irish government would not actually default on these bonds and so the tax-backing of the bonds would only be in place to assure investors of their value. With such a guarantee in place investors can be 100% certain that the bonds will always be ‘money good’ or ‘liquid’ and so will be willing to accept yields on these bonds far below current yields on Irish government bonds. The Irish government will agree to pay these bonds back as they fall due out of general government spending and in this they will resemble standard Irish government bonds. The bonds not expire for perhaps 8-10 years as this will give the economy time to recover before repayments have to be met. Ideally, the bonds would be backed by EU law. This way investors would be sure that, in the case of a default, the Irish state would not default on their obligation to take them in tax payment as any case of non-payment of tax liabilities while holding a bond would have to be settled in the European courts.

How will the program be administered?

The most effective and efficient way to administer the project is to emulate the successful Jefes jobs program that was implemented in Argentina after the 2001 financial crisis. The Jefes program operated on a decentralised model that would fund the program at a federal level while allowing municipal governments to direct the programs through grassroots organisations and NGOs.  In their study of the program economists Randall Wray and Pavlina Tcherneva outlined how such a structure worked in Argentina:

“One of the most distinguishing features of the program’s institutional design is its decentralized model of administration. The Argentinean federal government provides the funding, general guidelines for the execution of work projects, and some auxiliary services for managing the program. Such services include maintaining a national registry of program beneficiaries, as well as databases that track all projects that have been proposed, approved, denied and completed. Note that all these databases are publicly available, thereby increasing transparency and reducing corruption.3

The actual administration of the program, however, is primarily executed by the municipal governments. The municipalities are responsible for assessing the pressing needs and available resources of their communities and for evaluating the projects proposed by the local non-profits or NGOs. For those project that have been approved, the municipality contacts program beneficiaries informing them of the availability, time, and place of work. (Tcherneva, P. & Wray, R. 2005. p.9)

This structure allowed the national government to take a ‘hand off’ approach to the program. Instead of micromanaging the project, they largely restricted their authority to controlling the budgets allowed to municipalities. Not only did this limit administrative costs and ensure that the program did not become overly bureaucratic, but Tcherneva and Wray also stress how it empowered community groups and other organisations who, until then, had little access to funding with which to undertake much needed social projects.

“[O]ne of the most interesting results of the Jefes program is that it demonstrates that a decentralized program can be used to increase political participation and foster grass-roots democracy among groups that had traditionally been marginalized. (Tcherneva, P. & Wray, R. 2005, P.8)

In Ireland, such a decentralised model could be funded by the national government – using the newly issued tax-backed jobs bonds – and implemented at a local government level. The national government could set budget constraints for the local governments based on either a per capita basis or in relation to local unemployment rates. The local governments could then channel funds to already existing organisations – such as NGOs, grassroots community groups or charities – who could in turn use the funds to start up much needed projects and employ workers. If these organisations sought to expand their operations and required additional management staff they could then apply to the local government for an increase in funding. Local governments could also encourage the unemployed to form new organisations.

When can the program be implemented?

With a little organisation and planning the 2012 Jobs Program could be put in place very quickly and could help the Irish economy move toward sustainable recovery. Because it is funded independently of the government budget the program can be enacted at any time. Since the program is decentralised and relies on already existing institutions in order to function it should prove remarkably quick to implement.

Moving into 2012 we need a new vision for the Irish economy. The 2012 Jobs Program promises that to the Irish people. Let’s get unemployment down by enacting the 2012 Jobs Program now.

Key Points:

(1)   The 2012 Jobs Program will seek to reduce unemployment by up to 24%

(2)   The 2012 Jobs Program will target areas not catered for by the economy until now

(3)   The 2012 Jobs Program will provide stimulus to get the domestic economy moving again

(4)   By taking people off social welfare the 2012 Jobs Program will save money on welfare expenditure

(5)   The 2012 Jobs Program will help the government meet its budget targets in the long run by increasing overall GDP growth and tax revenues

References:

Job Guarantee

‘The art of job creation: Promises and problems of the Argentinean experience.’ Pavlina R. Tcherneva. 2005.

‘Employer of last resort program: A case study of Argentina’s Jefes de Hogar program.’ Pavlina R. Tcherneva and Randall Wray. 2005.

‘The holy grail of macroeconomics.’ Richard C. Koo. 2009.

Tax backed bonds

Economist Marshall Auerback “Are We Approaching the End Game for the Euro” http://neweconomicperspectives.blogspot.com/2011/08/are-we-approaching-endgame-for-euro.html

Economist Warren Mosler  “The Mosler Plan for Greece”

http://moslereconomics.com/2011/06/29/the-mosler-plan-for-greece/