Lately, I find myself having a recurring conversation. The people and the places change but the basic premise stays the same. I meet friends whom I haven’t seen in some time, I ask them how they are, what they’ve been up to. They shrug. “Nothing” they say. They are either unemployed or working in an area divorced from that of their training, part-time in a bar perhaps. These are people from a wide variety of backgrounds; qualified carpenters and electricians, science and engineering graduates, graphic designers and academics. When I tell them I am working I suffer from a vague sense of embarrassment, as if I somehow cheated and escaped the recession that we are all embroiled in. I know in reality this is not the case. I am also caught up in the noxious landscape of austerity. I may not be as victimised as some others but I am not immune. I am the 99%…..

He compares the current neoliberal economic mindset to restricting early software architecture created by chance that establish lock-in…

The computer scientist Jaron Lanier in his book You Are Not a Gadget describes a process he terms ‘lock-in’.  Lock-in describes what happens when particular programmes, despite their limitations, become the standard, and because it proves impractical to change or dispose of all the software and hardware that has been developed using this programming, the technology remains stagnated through its basic underlying architecture.  Lanier uses the example of MIDI, a programme that represents musical notes.  When developed in the 1980s, MIDI offered a very crude way to represent music digitally – it could represent the rather static expressions of a keyboard but not the transient expressions of a saxophone for example.  What perhaps started as a first step towards digital musical expression became widely used and, thus, became locked-in.  Thirty years after its inception then, MIDI remains the standard scheme to represent music in software, to the ultimate detriment of musical expression.  This occurs, Lanier suggests, because while it is easy to build small programmes from scratch, it is extraordinarily difficult to change existing larger programmes.

I think that lock-in offers a good metaphor for role of the state in terms of the current crisis.  For the past thirty years, nation states have been programmed into a mode of neoliberal thinking.  This mode of thinking is now to a large extent locked-in.  We can see this in the response of nation states to the financial crisis.  This crisis was brought about by an excess of neoliberalism – an all too optimistic faith in markets and the retraction of state oversight and regulation – but the solutions being proposed use the same neoliberal architecture as their foundation.  Like MIDI does to the musical note, these solutions diminish democracy so as to make it compatible with the limitations of the neoliberal programme.  Moreover, nation states do not stand in isolation, but are routed into global political and financial systems.  Thus, the ‘big’ programme gets bigger.

If the neoliberal project is the cumbersome ‘big’ programme, Occupy is the ‘small’ programme.  For the participants, it is a joy no doubt to watch it grow and flourish.  But the greater challenge for the group is to influence the architecture of the ‘big’ programme.  This is no small feat.  There is a lot at stake in the status-quo.  This is partly, as Marxists rightly suggest, because powerful interests exert political influence in order to retain or enhance their position in the system.  But it is also, I think partly down to a lack of political imagination.  The system stays the same because our leaders can’t imagine what it would be like to create something different.  There is a broad consensus calling for reform, but the programme is so big and so many interests are involved that these reforms become more and more inconsequential and we are left with lock-in.  Leaders are interested in fixing the bugs in the programme, not changing the underlying architecture.  (link to full article)

 

…..

How’s poor old Ireland, and how does she stand?
Posted on Monday, December 19, 2011 by Bill Mitchell in BillyBlog

Last Friday (December 16, 2011), Ireland’s Central Statistics Office published their – National Accounts – for the September quarter 2011 and guess what? Things just became worse. Ireland is now nearly two years in the enforced austerity and all the deficit terrorists have been watching it closely for signs of life. The slightest upturn in GDP growth has brought a salvo of attacks on any one daring to oppose the harsh austerity. Well, I also watch it closely and the pattern that is unfolding is consistent with predictions. Things are getting worse not better. The only growth “engine” has been exports and with austerity spreading that market will not be strong enough to sustain growth when domestic demand is being ravaged by austerity…..

Here are the most telling charts

Bill finishes his well referenced and data-rich article with..

Ireland was the first nation to heel-click to the Euro bullies and in early 2009 imposed a very harsh austerity program on the nation. We were told that it would be tough but growth would come. The Irish people are still waiting while many cannot wait any longer and are leaving the nation behind.

Ireland will struggle while they remain in the Eurozone. The system is geared heavily against them.

This UK Guardian article (December 16, 2011) –
Ireland’s problems are far from over – provides an accurate assessment of what is going on in Ireland at present.

The article says:

Listening to Irish finance minister Michael Noonan you would think that exporting lots medical devices and gallons of milk is enough to support a vibrant economy. More than that, a few minutes in his company and you might be forgiven for believing this export fever will also bring down one of the biggest debt-to-GDP ratios of any nation in modern history.

It is the cheery, optimists version of economics he subscribes to, with the cavalry, in the form of the IMF, rescuing everyone in the final reel …

But Noonan’s strategy is not built on firm foundations. As such, it is not so much a confidence boost as a trick. And one that is being perpetrated on the Irish people to keep them thinking they are best served by remaining in the euro currency zone and paying back all their debts.

The article concludes that the recent Irish National Accounts data “are testimony to Noonan’s ridiculous optimism. The economy contracted by 1.9% in the third quarter, far worse than expected”.

The confidence trick is that the Irish government and the IMF and OECD and all the rest of them keep hoping that “the growing export sector will distract the Irish public from the fundamental problems of paying back debts with a smaller and slower-growing economy”.

Conclusion

In this blog from July 2010 – The Celtic Tiger is not a good example – I noted that Ireland’s growth was coming from the modest growth in the US economy. As the Euro depreciated against the US dollar, Ireland’s exports (pharmaceuticals, software, food and services) became increasingly cheaper and more attractive to its two major trading partners Britain and the US.

Exports were driving Ireland’s growth. I noted then that with the UK economy now being deliberately whiteanted by its own government (via the very harsh budget cuts) and the US economy slowing again, the Irish recovery will be stopped in its tracks. The lack of any spending recovery in the domestic components and the rising unemployment will take care of that.

That is what has happened.

Austerity begets austerity and trade is one way that the transmission occurs.

Exactly!

Spiegel Online repeats Wall Street Journal reports “from insiders” that central banks around Europe are preparing for a break up of the eurozone – even looking into where they can get revived national currencies printed – in particular the Irish central bank are looking into where they can print new money in case in “in the short term they
have to introduce a national currency” (“A spokesperson for the bank refused to comment” – well they would, wouldn’t they?)

http://www.spiegel.de/wirtschaft/soziales/0,1518,802395,00.html

Could changing the way we purchase and own property make a difference?

In the current market developments are designed to sell rather than serve as an instrument of long term cash flows, the conundrum for sellers and NAMA alike is that they want sales but not at current firesale prices.

At the same time bank funding has dried up, this year we are likely to see mortgages issued at a rate last seen 40 years ago in 1970! Let us not forget that even in 1972 there were more mortgages drawn down and that was a year that had a 6 month bank strike included in it!

Private investors have short term problems of annual leases and this means incentives to keep the general property in top condition become limited, anybody who rents knows the difference between ‘rental standard’ and ‘selling standard’.

Smart Taxes is a taxation think-tank in Dublin and one of their members, Architect James Pike is championing the cause of ‘Equity partnerships’. This is where a development is rented out entirely and if a person pays over the standard rent they can buy equity in the property.

The financing of the property would come from pension funds who like the idea of lots of cashflows within an investment (it tends to provide lower risk) and most importantly it provides flexibility – if you found you had less money you could stop buying equity and just be a renter without moving. Equally you could sell your equity if you want to move, or if you bought your equity outright you would only have to pay service charges.

If a person had a severe inability to pay in the short term they might repay with the equity they bought already, the options and ideas are endless, but the main ingredients of removing banks from the equation and forming more realistic working solutions for buyers is inherent.

An Equity Partnership has four key members:

• Equity Partnership – holds the freehold of the land, through a trustee, in perpetuity
• Occupier – the individuals who occupy the properties on the land.
• Investor – the consortium of individuals and enterprises who invest money and / or money’s worth (such as the value of the land) in the equity partnership.
• Developer / Operator – who provides development expertise and manages the equity partnership once the development is complete.

So you are left with a developement where people can have some level of control on their property outgoing to suit their lifestyle but without having multiple landlords (who may not all have the same agenda/standards of upkeep etc.), and also providing the option of ownership where it is wanted, too good to be true? Why don’t we debate it a little?

Does an idea like this make sense? Do you see any pro’s or con’s with it? As always, we are looking to you dear readers to point us in the right direction!

Karl Deeter

(Twitter @karldeeter)

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.

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)

The general consensus amongst economists and property specialists is that the housing market is yet to reach its price floor. Prices have fallen by 40-50% across the country and are expected to fall by c.60% by the time they are fully unwound. There has been some speculation that the market might recover quite quickly, especially in the cities, with population growth cited as the prime factor to drive such a turnaround. The hope is that Ireland might mirror the reasonably rapid recovery of the mid-1990s Finnish property crash, rather than the stagnation of the Japanese crash from the late 1980s wherein present property prices are still below those twenty years ago. My own view is that the Irish crash will be nearer to Japan’s experience than Finland, with property prices unlikely to rise to peak 2007 prices for at least another ten to fifteen years, and longer for some parts of the country. There are six reasons why.  (link to article in Ireland After NAMA)

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/

Marshall Auerback on Ireland’s Vincent Brown show.

Equality and Justice Require Full Employment

27/05/2011 By Nat OConnor

One of the enduring failures of developed economies is the persistence of high levels of unemployment, and other involuntary non-participation in the labour force, even at the best of times. There are strong reasons, in terms of justice and equality, for the introduction of job guarantee schemes. As well as being an ethical imperative, it is also reasonable to assume such schemes would be economically beneficial and affordable.

Official unemployment across the EU was 6.5 per cent in 2009. In addition, a further 4.3 per cent of people aged 15-64 wanted to work, but for one reason or another were not working at the time.[1] This means that one in nine (10.8 per cent) of all working age EU residents wants to work but cannot secure a job.[2]

Moreover, the situation was actually worse before the current economic crisis.[3] In 2005, employment was 63.8 percent of the labour force; less than the 64.5 per cent employed in 2009.[4] Even allowing for ‘frictional’ unemployment as people move between jobs, Europe has an ongoing structural problem, regardless of the business cycle, of insufficient employment.

This creates systematic inequality and injustice.

The one in nine Europeans who are not working are on lower average incomes than those with a job, although employment is by no means a guaranteed exit from poverty. Income inequality is compounded by the fact that poverty or socio-economic status can also be a source of direct discrimination.

Other forms of inequality also come into play. For example, in 2009 there were nine times as many women as men in the EU who wanted to work, but were unable to seek work due to family or personal responsibilities. The uneven geographical distribution of work means that certain European regions have lower levels of employment. In addition, certain groups – like young men or ethnic minorities – often experience higher levels of unemployment.

Employment is a social justice issue because a person’s work status is – in part – the result of forces beyond his or her control. Many born poor or in disadvantaged regions will not have the opportunity of paid employment. This is not a failure of incentives – it is a persistent failure to create sufficient jobs.

A further injustice occurs when people are maligned for their inability to secure employment.

The persistent failure to generate full employment is a structural flaw in the way in which our economies are organised.

There are two competing schools of thought on how to address this failure. Champions of austerity seek reductions in welfare provision and wage-reduction measures, in a race to compete with the labour costs of emerging economies.  These policies will destroy many of the achievements of social democracy in protecting workers – and there is little empirical evidence that such measures will increase the number of jobs supplied by the requisite 17 per cent.[5]

A more progressive alternative is to consider new ideas of how the state can bridge the gap left by the market. We need to implement a right to employment, with the state acting as an employer of last resort.

This would not be designed to replace or compete with jobs in the private sector, but would ensure that everyone who wants to work is given the opportunity to engage in meaningful activity. Specifically, the right to employment would entail the state funding a guaranteed job for anyone who wants one, for as long as they want it. This job would be paid at the national minimum wage or equivalent.  Although this would not eliminate poverty, it would improve the situation of the one in nine Europeans who currently cannot obtain employment.

In the context of the EU’s free movement of workers, such a job guarantee might be most appropriately implemented on a pan-European basis – thus also helping redress regional disparities.

Employment strengthens equality. If everyone who wants work had a job, they would benefit from higher self-esteem, less social discrimination in society and be less likely to suffer mental ill health. Crime and anti-social behaviour would decrease.

Employers would benefit from a pool of people who are demonstrably willing and able to work, and who have developed their knowledge and skills through on-the-job training.

Arguments for guaranteed employment are often embroiled in disputes about economic theory, and whether full employment is a theoretical possibility. However, before addressing that question, we can outline the feasibility of the state acting as an employer of last resort in a way that is compatible with our market economies.

Firstly, we have to quantify the scale of the task. Across Europe, this means increasing the supply of jobs by 17 per cent (c. 33 million), but the percentage required will vary from region to region.

For example, in Ireland we had 14.6 per cent unemployment at the end of 2010 (c. 300,000 people) plus approximately 115,000 who were not officially unemployed but want to work.[6] This means we need to create 415,000 jobs in Ireland, an increase in employment of 22.3 per cent.

Secondly, we have to provide meaningful activity – not ‘fake’ jobs. One solution is to harness the creativity and experience of the not-for-profit sector of charities and community organisations to identify socially-useful activities.

For example, in Ireland there are at least 8,500 not-for-profit companies operating for the public benefit. If each, in co-operation with local authorities and other public bodies, could suggest meaningful activity for an average of 50 people that would create 425,000 jobs – always ensuring that the principle of additionality is strictly adhered to and existing jobs are not replaced. This is not implausible, especially as some labour-intensive work, such as environmental improvements or care of older people, would require tens of thousands of people nationally; and the introduction of the job guarantee would be likely to encourage the formation of hundreds of new not-for-profit bodies. Sceptics should be reminded that the job guarantee is not proposed as a panacea; even if 20 per cent of the required jobs could be created in this way (ten per non-profit organisation) that would be a major step towards full employment.

Thirdly, we must estimate the cost of such a programme. It is possible to calculate a nominal cost for the state to employ, at a minimal wage, everyone who is currently unemployed or desires works. What is a reasonable minimal wage varies greatly across EU member states, but can be calculated on a country-by-country basis.

For example, for Ireland to pay 415,000 people for a 35-hour week at Ireland’s minimum wage would cost circa four per cent of GDP (€6.5 billion). Adding an estimated 50 per cent to cover administration, supervision and materials, this cost would increase to circa six per cent of GDP.[7] These costs can be compared with expenditure on social insurance unemployment benefits and unemployment assistance, which are estimated to cost 2.2 per cent of GDP in 2011 (€ 3.7 billion), out of a total social protection budget, including social insurance, of 13.7 per cent of GDP (€22.4 billion). It is likely that further savings in social protection and labour activation expenditure would result from moving people from welfare to guaranteed employment. Moreover, with the added benefits of improved social outcomes, there are likely to be savings made across other areas of public expenditure, such as health or justice, which would counter-balance the cost. At the very least, what is being proposed is likely to be feasible within existing resources. Affordability is likely to be similar in other member states.

The unjust and unequal alternative is to allow millions of people to remain unemployed.

As discussed at the outset, the failure of our economies to generate full employment suggests – at the very least – that we revisit alternative economic models.

One for consideration has been advanced by Prof. Randall Wray of the University of Missouri-Kansas City. Wray’s suggestion is that a job guarantee by states can be funded through increasing the money supply. That is, central banks credit sovereign governments with sufficient resources to fund the programmes. Because only minimal wage jobs are being created, there is little risk of price inflation. On the contrary, Wray argues that the creation of an effective price floor for labour would increase price stability.[8]

Arguments for and against monetary expansion to fund government policies are not new. Even if this particular economic analysis is found to be faulty in some respect, the logic of the state acting as employer of last resort stands on its own merits, as described above. What modern Keynesian analysis, such as that advanced by Wray or Jan A Kregal,[9] may provide are alternative ways of funding such a scheme. In the EU, this would involve using the European Central Bank to expand the money supply and credit national governments to fund such a scheme. One of the flaws of the ECB is that it does not have responsibility to foster full employment, in contrast with the US Federal Reserve, one of whose core responsibilities is “conducting the nation’s monetary policy by influencing money and credit conditions in the economy in pursuit of full employment and stable prices.”[10]

A job guarantee scheme such as outlined above is not proposed as a solution to all problems. It will not be suitable for all people who are unemployed, or even replace all other existing labour activation programmes. However, it is a credible option and suggests that, by thinking outside the intellectual framework that delivered the crisis in the first place, we can find plausible solutions to not only the crisis, but also to the problems of structural unemployment. We can eliminate the inequality and injustice of persistent lack of employment opportunities that will otherwise impair the lives of one in nine Europeans.

---

[1] Eurostat Labour Force Survey ‘Statistics in focus’  57/2010

[2] Eurostat Labour Force Survey ‘Statistics in focus’  57/2010

[3] Eurostat Labour Force Survey ‘Statistics in focus’  18/2006 and 57/2010

[4] Eurostat Labour Force Survey ‘Statistics in focus’  18/2006 and 57/2010

[5] That is to provide jobs for the 10.8 per cent wanting to work, in addition to the 64.5 per cent already employed, will require an increase of 17 per cent in the number of jobs (2009 figures).

[6] Source: Eurostat ‘Inactive population by sex, age groups and willingness to work (1000)’

[7] Ireland’s GDP = €164 billion (2010, preliminary figure); Unemployment = 299,000 (Qtr 4, 2010); Minimum wage = €8.65 per hour. (Source: Central Statistics Office, www.cso.ie). Social Protection and Social Insurance expenditure = €22.4 billion (2011, estimate); Jobseekers Allowance and Jobseekers Benefit = €3.7 billion (2011, estimate) (Source: Department of Finance, Revised Estimates 2011, www.finance.gov.ie).

[8] Wray, L. Randall (1998) Understanding Modern Money: The Key to Full Employment and Price Stability. Edward Elgar.

[9] Kregal, Jan A (1998) ‘Price Stability and Full Employment as Complements in a New Europe’, paper presented at The Fifth Post Keynesian Workshop, Knoxville, Tennessee, 25 June-1 July

[10] http://www.federalreserve.gov/faqs/about_12594.htm (my emphasis)