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Why a Job Guarantee will require higher taxation

July 31, 2020 - 14:53 -- Admin

Ever since I wrote Work for All with John Langmore back in 1994, I’ve been pushing the idea that a path to full employment requires an expansion of publicly provided services. For about the same length of time, Bill Mitchell has been putting forward similar (but not identical) proposals. At some point in this process, Bill became one of the advocates of what’s called Modern Monetary Theory, which makes the point that taxes don’t (directly) “fund” public expenditure. Rather, they ensure that the total demand for goods and services (for consumption and investment) don’t exceed the productive capacity of the economy, thereby generating inflation.

This reframing raises the question: does a Job Guarantee require higher taxation? The answer, using MMT reasoning, is “Almost certainly, yes”.

Suppose the economy initially has two groups of workers, employed and unemployed. Employed workers produce some quantity of marketed goods and services, as well as freely provided public services. They receive a wage, while unemployed workers get a (low) benefit. As well as workers, there are people receiving profits, interest and so on.

Now we introduce a Job Guarantee in which all unemployed workers are hired, at the minimum wage or more, to produce public services (say, extra contact tracing for pandemics), that would otherwise not be provided. The newly employed workers spend their wages (over and above previous benefits) on marketed goods and services. But where are these goods and services to come from? It can only be from reducing the consumption of those who are already receiving wages or other market incomes. Shifting the consumption to public use is the job of taxation (alternatively, the government could cut existing services, freeing the workers there to produce market goods and services, but I won’t explore this).

We can refine this a bit by allowing for a multiplier effect. Instead of employing all the previously unemployed workers, the Job Guarantee would only need to employ some. Their demand would increase employment in the market sector, providing jobs for the remaining unemployed workers. But it would still be the case that the additional output of marketed goods and services from those workers would be less than the total wage being paid to all formerly unemployed workers. The only exception is in situations where the unemployment benefit is very high relative to the minimum wage, so that the extra consumption of all the newly employed workers is less than the extra output of those who go to work in the market sector.

That doesn’t mean a Job Guarantee is a bad idea. The newly employed workers would be better off, and those already employed would get additional services in return for their higher taxes. But this isn’t a free lunch. As Oliver Wendell Holmes put it, taxes are what we pay for civilised society.