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Sunday, May 19, 2024


We Need a Government That Has Our Back With a Job Guarantee Program

The Challenges We Face

In July, Canada set a record with an inflation rate of 8.1 %, the highest since 1983 but lower than had been expected. Canada is not alone but among other Western developed economies, being hit by inflation. Increasing production costs and consumer prices have emerged as worldwide problems, being countered by widespread interest hikes across the board by national central banks, including the Bank of Canada, to cool the rise in inflation.

A dramatic increase in the interest rate by the BoC, the fifth so far this year, had been expected for July 13but the magnitude of the increase by a full percentage point to 2.25 % came as a surprise and shock. It was an aggressive move, aimed in particular to cool the housing market, although housing prices had been declining already due to the previous interest rate hikes.

In theory inflation is a similar and broadly distributed increase in prices across the economy. But it never works this way. The effects of inflation always differ widely as price increases tend to vary wildly for specific commodities and services. For instance, when interest rates shift consumer spending from purchasing a house or condominiums to renting, rents will rise, replacing an overly competitive ownership market with a tighter rental market. Winners are individual rental property owners but placing many renters in precarious situations.

The long-standing approach to bringing down inflation has been to use rising interest rates to slow down economic growth and increase unemployment. The challenge is that this is a blunt tool, and doesn’t directly address the price increases that are driving it. Also, how much can you increase rates before sending the economy into recession? 

Traditional financial experts, such as Christine Lagarde, President of the European Bank advocated for a more cautionary approach to tackling inflation. She was, however, severely criticized when she raised interests in the Euro zone only by a quarter of a percent on July 21. The move was widely dismissed as not enough and coming too late as inflation there had soared to a whopping 8.9%.

Lagarde considers it unlikely that “we are going to go back to an environment of low inflation.” She wants to move gradually to tackle soaring consumer prices to avoid stifling the economic recovery. The BoC thinks otherwise. Its latest drastic rate increase has set a clear signal that it will not stop raising interest rates until inflation has been overcome. The fallout of this approach, undermining a post-pandemic small business recovery and rising unemployment, is ignored.

High inflation is squeezing Canadians’ budgets, leaving many worried about their ability to afford necessities like food and housing. Photo Credit:  CBC

Obsolete monetary thinking that had been put on halt during the peak of the pandemic, is re-emerging and drowning out more accurate assessments of the real reasons for the current inflation. We are facing neither a demand nor a wage generated inflation. But one that is defined largely by a host of factors, many beyond Canada’s control. The most salient ones include supply chain bottlenecks, and further interruptions caused by Russia’s war against Ukraine; droughts and floods brought about by climate change driving up food prices; and Covid-19 with the emergence of its many variants, slowing overall levels of economic activity.

The BoC has no influence over these causes. They fall outside the scope of the BoC. They cannot be controlled through higher interest rates, but high interest rates can put the recovery of our fragile economy further at risk.

Economists, bankers, financial experts, and policy makers are divided on the issue of controlling inflation. Fiscal hawks predictably are urging for a quick return to the 2 per cent inflation rate of pre-Covid years, claiming erroneously that the current inflation is the result of excessive government spending. Yet many, previously although often reluctantly, had supported deficit spending to protect people’s purchasing power and the operation of businesses in the private sector as necessary and inevitable during the peak years of the pandemic.

Modern Monetary Theory, not yet well known in Canada, approaches the issue quite differently. Its proponents resist increasing payments on people’s mortgages and credit cards as an unfortunate fallacy that will not lower prices for gas, groceries, and rent. When their consumption levels fall, income for businesses decline and unemployment rises, economic growth slows, possibly triggering a recession.

Influential organizations such as the International Monetary Fund and the Organization for Economic Co-operation and Development have recognized high interest rates as a threat to living standards and advised governments to support the economically most vulnerable to mitigate the most undesirable distributional aspects of inflation. Social benefits would have to compensate for the damages inflicted by the loss of jobs and increasing consumption prices which would contradict demands to reduce government spending levels.

Consumers have no illusions about the impact of soaring price increases on their standard of living. They generally react to having to pay more for food, housing and at the gas pumps with dismay and apprehension. The Angus Reid Institute reported that half of Canadians said they were struggling to  pay for their household expenses. Not surprisingly, 77% of survey respondents expressed little faith in their governments to help them cope with inflation, finding that their provincial governments had done little to control the rising costs of living.

But can they trust the BoC? They have little reason to do so. Those of us old enough to remember the inflation of the 1970s, 1980s, and early 1990s, have not forgotten that workers and unions were held responsible for them. The predominant assumption was that their bargaining power had led to substantial wage increases which in turn sparked the inflation. In each instance, the false assumption pushed the economy into deep recession. Crippling unemployment, punishing interest rates, declining real wages, and stringent government spending cuts both eroded the social safety net and sucked the vitality out of the economy.

The 2007-2009 financial crisis was handled differently. It could not be passed off as the result of excessive government spending or wages but clearly emerged as a speculative private sector crisis. In the US, it was the result of years of cheap credit and easy lending regulations, encouraging risky investments by profit hungry banks and for consumers to overextend themselves. Trouble started when central banks began to raise interests rates. Speculative, high risks lenders were the first to go under but soon the financial pinch was reverberating throughout the global investment sector.

In Canada, no bank or insolvent firm had to be bailed out by governments. The country’s well-capitalized banking sector, coupled with its scale of wide-ranging regulations, governing lending, and borrowing procedures prevented this from happening. Canada did, however, not remain immune to the deep economic recession spreading around the globe.

Notably, the Canadian economy recovered faster than from the three earlier recessions. The speedy recovery can be attributed to the lowering of the target interest rate to its lowest level in decades and healthy levels of household and government spending. Government famously contributed more than one percentage point to growth in each year of the recovery. The BoC understood that spending was the right thing to do to prevent a recession.

Government spending was also the right thing to do to protect the living standards of Canadians and keep businesses going when Covid was ravaging through the country. It allowed the Canadian economy to grow faster than expected throughout 2021 and the first half of 2022. The growth has begun to lose steam since April this year, contracting further throughout May and June. The question now is whether further interest rate increases make any sense.

Both the International Monetary Fund and the Organization for Economic Co-operation and Development have advised governments to support the economically most vulnerable to mitigate the distributional impact of inflation. The question is whether Canadians today will tolerate the return to the painful inflation remedies of decades passed. What if enough people discovered that governments can use its funding authority to benefit of its citizens by offering full employment instead of simply serving corporate interests?

Work Guarantees and Livable Incomes: Sharing Prosperity and Building Community

Modern Monetary Theory (MMT) offers a radically different innovative approach to fighting inflation. Large amounts of money, if spent in the Canadian economy, it maintains, would only fuel inflation if aggregate demand for goods and services exceeded aggregate supply. Such a situation has never occurred in any previous inflationary situation. For people with lots of money, there were always enough goods and services available to buy.

To protect living standards, the theory proposes allowing governments to determine appropriate public spending levels without borrowing and incurring interest charges from private banks.  Additionally, it argues for governments to offer a job guarantee paving a decisive path to full employment. This could happen if enough people encouraged and supported governments to use its authority for the benefit of all its citizens and to stabilize the economy by offering full employment instead of simply serving corporate interests.

It lies within the scope of the state to do what the market cannot do. Capitalist markets have never been able to provide work for all needing and requiring work. Involuntary unemployment is a product of unconstrained market forces. It has created nothing but misery and suffering for people for whom there is no place in the workforce at any given time.

Their individual unemployment, or under-employment, is passed off as an unfortunate but unavoidable situation rather than as market failure and a form of exclusion. Obsolete monetary thinking that had been put on halt during the peak of the pandemic is re-emerging. Increasing interest rates are claimed again to offer the most effective way to crackdown on inflation, regardless of the collateral damage and human pain that comes with them.

We need better strategies than putting people out of work which we can ill afford at a time when the labour market is tight with more than one million job vacancies across the country. This would be an opportune time to introduce a federal job guarantee as offering a better way. Anyone willing and able to work for a public purpose, either with government or a non-profit, would be offered a job with benefits at a desirable living wage.

The latter is of crucial importance. Firstly, no one should be expected to work for poverty wages that won’t cover basic living expenses. Jobs should also involve pay scales commensurate with similar jobs in the economy. Secondly, employers having to compete for workers would have to offer them comparable wages, upending the spiral of precarious employment and thus help to stabilize the labour market.

With the state acting as an employer of last resort for some and as springboard to new opportunities for others, and as a funder of community-led building public projects we would expect an overall increase in the productivity of the economy and the social cohesion of our communities.

Moreover, some employers have been found to be prejudicial in their hiring practices. They generally not like to hire from the pool of unemployed but to prefer to employ those who are already employed, having proved their employability. A job guarantee would greatly enhance the chances of this group for re-entry or first time entering into the labour market. Opting for a job guarantee may also reduce the number of people caught in the underpaid, precarious employment circumstances. 

In times of economic upturn, the private sector can entice workers back by offering higher wages and more rewarding working conditions. During downturn periods,  JG puts spending money in the pockets of laid-off or unemployed workers and thus helps to avoid a recession when workers continue to have money to spend. JG are widely preferable to involuntary unemployment, but their macro-economic role is, in part, in the interest of price stability and not worker well-being when not tied to a desirable living wage.

A cyclist rides past graffiti stating “People Over Profit No Jobs = No Rent in Toronto during the Covid 19 pandemic.

Job guarantees are not a new idea. They were first advanced by American labour unions and civil rights leaders. In 2020, the city of Marienthal in Lower Austria, introduced a job guarantee program as a three-year experiment for all interested involuntary long-term unemployed who had been unemployed for at least one year. The program was designed by economists from Oxford University and is administered by the Austrian Public Employment Service.

What is most remarkable about a job guarantee program is that it would function as an automatic anti-inflation stabilizer in the way unemployment currently does without the costs of the latter in foregone human and material productivity.

Mitchell/Wray/Watts in their seminal textbook on macroeconomics argue  that both the mainstream and the MMT approach fight inflation in ways that use workers as “buffer stocks.”  While the mainstream approach uses raising interest rates to slow economic growth and putting people out of work, thus creating a buffer stock of unemployed people left to cope on their own, MMT turns this strategy upside down with its job guarantee by putting them on the government pay roll instead of the unemployment rolls.

Moreover, job guarantees could be coupled with broader employment and skills development strategies to reduce the pool of available unskilled and low-skilled workers, enhancing economic productivity. The US economist, Hyman Minsky has pointed out that job guarantees need to hold out a promise of a useful and productive life for our high school dropouts.

Progressive economists have warned that JG could be reminiscent of the workfare programs of the 1990s. Paulina Tcherneva in “The Case for a Job Guarantee”(2020) forcefully rejects the comparison. For her and other proponents of the idea, JG would create a world without job insecurities and its devastating  consequences for individuals and families. It would also provide the additional benefit of bringing down inflation without putting people on the welfare rolls.

The Right to Desirable Work

JG would allow the government of Canada to meet its obligations as a signatory of the Declaration of Human Rights which in Article 23 in Appendix 5 recognizes “the right to desirable work and to join trade unions”.

Also, The International Covenant on Economic, Social and Cultural right states in Part III, Article 6: The States Parties to the present Covenant to recognize the right to work, which includes the right of everyone to the opportunity to gain her living by work which she freely chooses or accepts and will take appropriate steps to safeguard this right.

Canada would enormously prosper with a bold federal job guarantee program. Work gives meaning to people’s life, and they tend to identify with their work. Job guarantees could play a crucial role in the way people connect at the workplace and in society at large in interpersonal solidarity and social community building.

At the economic level, a job guarantee would tackle long-term unemployment, enhance productivity if tied to personal job capacity development.

And last but not least, it would stabilize the economy by shielding against inflation for an all in all winning situation.

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