MANY COMMUNITIES have suffered economic devastation similar to that experienced by Detroit. Capitalism, while it is very good at producing new goods and services, is a very dynamic system, which simultaneously destroys old jobs and technology. "Creative destruction" is the term that economist Joseph Schumpeter used to describe this process. Residents in communities destroyed by this process face many obstacles to employment. In addition to facing severe job shortages, and as a result of this high unemployment; high crimes rates, a poor educational environment and even bad credit records, leave many of the community's residents essentially unemployable in the private sector. This serves to exacerbate the already severe economic conditions experienced in these communities.
Peaceframes believes that the only way out of this mess, is for the federal government to act as an employer of last resort (ELR). In this role, the federal government would guarantee a job, to any person who desires a job. This would be funded through public money creation, as opposed to the current supply-side private sector money creation scheme. This scheme has played a major role in the decline of many older communities.
For a more detailed discussion of these topics, with a greater emphasis on the money creation process, see the essay below. At the bottom of that essay there are links to supporting materials.
FEDERAL GOVERNMENT AS EMPLOYER OF LAST RESORT (ELR): FUNDED through PUBLIC MONEY CREATION
Peaceframes believes that the current money creation process has played a significant role in the decline of our urban communities. Most new money in the economy is created through loans from the commercial banking sector. Banks, of course, will not make these loans unless it believes that the private sector actors will become and remain profitable, which will enable them to repay these loans over the course of time. The firm, in order to remain profitable in our highly competitive free enterprise system, is under constant pressure to seek-out cheap labor markets and low cost geographic locations. This creates a very dynamic system in which firms are constantly shifting to lower cost settings while abandoning their current base of operation. Left in the wake of this very dynamic process, are the older, higher cost, less efficient and aging industrial urban cores. Peaceframes believes that the only way to permanently fix the low wage and high unemployment environment left in the wake of this dynamic process is to create a federal jobs program, funded through public money creation.
Public money creation, as opposed private money creation, is central to any scheme which addresses the urban crises for the following two reasons. First, the public sector's reclamation of a portion of the money creation process will slow private sector geographic outward growth and as a consequence slow the rate of simultaneous expansion and abandonment into and out various communities. Second, public money creation will allow the federal government to fund deficit spending through interest free money creation. Before we get to this, however, we must first understand how the current money creation process works.
Congress delegated money creation to private banking system through the Federal Reserve Act of 1913. The role of the Federal Reserve in this supply side system is to create and destroy reserves in the banking system through the purchase and sale of treasury securities and other forms of indebtedness. These reserves, otherwise referred to as the monetary base or as high-powered money, are the foundation upon which commercial banks create their own money. When the Federal Reserve purchases a security, it simply, through a computer entry, credits the bank account of the seller. The Federal Reserve does not have the money to make this purchase, it simply creates this high-powered money through a credit to the sellers account. This increases the seller's bank balance and by an equal amount increases reserves in the banking system. When the Federal Reserve wishes to shrink the availability of money in the system, it does the opposite, it sells a security from it's portfolio. When the sale is made, the buyer's bank account is reduced by the amount of the purchase price and bank reserves are reduced by the same amount.
These reserves are the foundation upon which the commercial banking sector creates the real money which fuels the economy. Banks are required to hold reserves of roughly 10 % against its transaction accounts (checking accounts, NOW accounts...). When a bank creates a loan, it creates new money. The borrower's bank account is credited by the amount of the loan. This new money is referred to as M1 ( cash and checkable deposits ) Traditional monetary theory argues that a bank's ability to create new money is limited by the amount of reserves it has on deposit with the Federal Reserve. If the bank's reserve requirement is 10%, and the bank has $100 in reserves, this will enable the bank to create loans, or new money of $1,000. This is called the multiplier effect. In this case the multiplier equals 10 ( $100 enabled the production $1,000 in new money ). As loans are repaid, spendable money (M1) is destroyed.
A more recent and growing school of thought, called Modern Monetary Theory, argues that banks create loans/money and then find reserves later. A point of emphasis among Modern Monetary Theorist is that sovereign currency issuers, such as the U.S., because of its ability to create its own money can always afford to invest in quality projects. This includes Job Guarantee programs.
Regardless of which theory that one subscribes to, the main point is that currently banks create money. About this, there is very little dispute, among either academics or central bankers.
Now back to the major point of the essay. Peaceframes recognizes that private sector profit potential is the factor which determines when and if new money is created. Not accounted for in the profit determination calculation, are the many cost associated with private sector growth that are not directly incurred by the private firm but are imposed on the public at-large. Some of these cost, referred to in economic circles as externalities, are urban blight and poverty. The cost of urban blight and poverty are manifested through crime, increased police and fire protection; the high cost of incarceration, unemployment, stress related health cost and welfare payments; broken homes, social and class conflict....and the list goes on.
These cost can be greatly reduced through a system which guarantees a job to anyone who wants a job. The proposal here is that the Federal government act as an Employer of Last Resort (ELR). This would act as the low rung on the economic ladder from which people can move on to the private sector. Let's be real, there are many people who, because of criminal histories, poor credit, poor education and other factors are simply unemployable in the private sector. This imposes horrible cost on our society and can most readily be resolved through a federal jobs program which guarantees employment to any person regardless of their history.
So how to fund this program? The federal government currently funds its operations through taxation and borrowing. The federal government pays roughly around $400 billion annually in interest expense on its outstanding debt. The question to pose is this: why does the federal government borrow any money from the private sector, when it can, through appropriate legislation, create its own money, just as the private sector creates its own money to fund private sector growth? The federal government can fund its operations simply by writing a check, just as the Federal Reserve creates reserves through a computer entry when it purchases a security, and just as a commercial bank creates new money when it makes a loan.
The question may arise: if the federal government can simply pay its expenses by writing a check, then why does the federal government need to tax at all? Without taxation, too much money would be created and this could cause asset bubbles and run-away inflation. Taxation would still be needed to absorb excessive money (M1) out of the economy. Under this scenario, federal government spending is more accurately viewed as money creation while taxation would be viewed as the destruction of money. This falls within the Chartalist and more recently the Modern Monetary Theory schools of thought on money creation.
The beauty of the scheme, is that the federal government can run deficits without incurring interest expenses. In fact, the federal government can run perpetual deficits which never need to be paid back. The major considerations are that there is an appropriate balance between public and private sector money creation and that there is an appropriate level of taxation to absorb excess money out of the economy.
People need jobs. The private sector is good at many things, but it is not good at providing stable and permanent employment. If we are to come together as a nation, we need common life experiences. Employment can be that common experience. With the federal government as an employer of last resort which guarantees employment to any person regardless of their history, we can eliminate many social and economic cost associated with the current over reliance on the very dynamic private sector, while assuring a common life experience which will bring us closer together as a nation.
BELOW ARE LINKS WHICH DETAIL THE MONEY CREATION PROCESS & ARTICLES WHICH SUPPORT THE NOTION OF THE FEDERAL GOVERNMENT AS AN EMPLOYER OF LAST RESORT ( ELR ).
Economist L. Randall Wray has been advocating an ELR program for many years.While the suggested wage figures are outdated in this article written in the year 2000, it is an excellent analysis of the potential of an ELR program. http://www.cfeps.org/pubs/wp/wp9.html