On why Bill Gross supports a job guarantee despite railing against the deficit

In the end, I hearken back to revered economist Hyman Minsky – a modern-day economic godfather who predicted the subprime crisis. “Big Government,” he wrote, should become the “employer of last resort” in a crisis, offering a job to anyone who wants one – for health care, street cleaning, or slum renovation. FDR had a program for it – the CCC, Civilian Conservation Corps, and Barack Obama can do the same. Economist David Rosenberg of Gluskin Sheff sums up my feelings rather well. “I’d have a shovel in the hands of the long-term unemployed from 8am to noon, and from 1pm to 5pm I’d have them studying algebra, physics, and geometry.” Deficits are important, but their immediate reduction can wait for a stronger economy and lower unemployment. Jobs are today’s and tomorrow’s immediate problem.

Those who advocate that job creation rests on corporate tax reform (lower taxes) or a return to deregulation of the private economy always fail to address dominant structural headwinds which cannot be dismissed: 1) Labor is much more attractively priced over there than here, and 2) U.S. employment based on asset price appreciation/finance as opposed to manufacturing can no longer be sustained. The “golden” days are over, and it’s time our school and jobs “daze” comes to an end to be replaced by programs that do more than mimic failed establishment policies favoring Wall as opposed to Main Street.

School Daze, School Daze, Good Old Golden Rule Days, Bill Gross, Investment Outlook Jul 2011

Bill Gross has certainly continued to have a populist flair to his writings since the credit crisis began. However, the conclusion of his latest missive on education and debt, that the government should offer a job guarantee to workers, is surprising because Gross has been much more concerned with the issues of financial repression and fiscal profligacy in his most recent writings.

I first mentioned this job guarantee idea (promulgated by the MMT school) in November 2009. See  Unemployment insurance for the 21st century. Marshall also talked about this in his post More on Unemployment Insurance for the 21st Century just last month. Given Bill Gross’ comments about fiscal profligacy and my own concerns about malinvestment, Marshall’s last paragraph was interesting:

Given the nature of today’s “predator state” (to use Jamie Galbraith’s felicitous phrase), politicians have a proclivity to reward those who “pay to play”. They tend toward wasteful spending and give goodies to campaign contributors. But we could take this power away from sock puppet politicians through a mechanism that automatically adjusts to insure the private sector can actually realize its desired net nominal savings position. This would help to free the system from political parasites while increasing the freedom of the private sector to achieve its savings goals. What better way to celebrate the anniversary of the WPA’s inauguration?

To me, Marshall’s commentary ties all of these subjects in together.

First, as Marshall points out earlier in his post:

The Obama Administration remains fixated by deficit reduction at the expense of reducing unemployment. This is not helpful to recovery: In addition to inflicting lasting damage on an individual’s labor market prospects, unemployment is associated with increased rates of physical and mental illness, alcohol and drug abuse, child and spouse abuse, failed relationships and family dissolution, suicide and attempted suicide, and a host of other personal and social ills.

Jobs have to come first. We are already seeing cyclical unemployment turn into structural unemployment – and that permanently lowers output and increases deficits. Stephanie Kelton is right when she says that “as long as unemployment remains high, the deficit will remain high.”

The jobs crisis is not just about demand though. It is also about debt. Differences within the G-6, within the euro zone and between the U.S. and Germany, “speak to the over-riding importance of high private sector debt and deleveraging after a credit bubble.”

If the US wants job growth, it will need to reduce private sector debt levels – and that takes time. It does not follow "that the central objective of national economic policy until sustained recovery is firmly established must be increasing… borrowing and lending," as Larry Summers asserts. The government can act as a counterweight to the demand drag but I am very sceptical of claims like Summers’ that doing so would solve a jobs crisis borne out of a debt crisis.

If you look at Felix Salmon’s charts on structural unemployment, combine that with David Beckworth’s link to research that estimates 40% of the current jobs problem in the U.S. is structural in nature – as should be anticipated after a credit crisis.

It makes sense then to have unemployment insurance in the 21st century focused on maintaining employment, reducing skills loss, and re-tooling people for employment in other fields. I do think there are Lessons We Can Learn On How Stimulus And Jobs Programs Failed in Eastern Germany as the Germans dealt with their own structural unemployment problems. We should not expect miracles overnight. However, when people ask Why is Germany doing so well?, I believe it is “about investment in human and physical capital. And that is definitely worthy of emulation.” These results are bearing fruit – five, ten and fifteen years later.

To me that’s the larger story, that we will have high unemployment levels in the U.S. for some time to come.

Rather than adding stimulus with the aim of goosing demand by whatever means available to help the economy reach escape velocity, I would say that the central objective of economic policy is to help the economy reach full employment. Doing so will increase demand, increase output, and cut budget deficits tremendously.

Roach: Return of the Living Dead

I think this is a very important point because of the anti-government rhetoric coming from different circles. So let’s finish this off by talking about malinvestment. 

As I said two years ago:

in theory, fiscal stimulus can cushion the downturn and hasten real recovery by preventing a spiral into a non-equilibrating economic state.  However, in practice, stimulus has been used as an excuse to maintain the status quo, prop up zombie companies and forestall the inevitable.  This only lengthens the downturn, misallocating even more resources to less efficient uses. And all of the worries I had about social unrest, populism, and protectionism are coming true nonetheless…

Rather than use the period of fiscal stimulus to promote private-sector deleveraging and saving and to purge malinvestment, politicians will simply use this period as a way to continue business as usual, making the problem even bigger down the line

Moving away from stimulus happy talk to focus on malinvestment, Dec 2009

Isn’t this the case with the financial sector bailouts, the HAMP programs and so on? Moreover, in terms of actual stimulus, as early as February 2009, I argued that the President took a middle road on stimulus and taxes that leads nowhere which would discredit stimulus as a policy tool. And that is indeed what has happened. Fiscal stimulus is off the table because President Obama has discredited it by continuing the bank bailouts, by providing a stimulus package that was too little by half, and by not focusing on jobs.

What is the Fed to do in that scenario if they have a mandate to support economic activity? Politically, the whole thing looks a lot like Japan. To my mind, the right approach then is to de-emphasize “increasing… borrowing and lending” and re-emphasize increasing jobs and employment. Whether we choose work sharing as we see in the Netherlands and Germany or a job guarantee, this could deal with the deficit and structural issues that conservatives care about and the demand issues that liberals care about.


Edward Harrison is the founder of Credit Writedowns and a former career diplomat, investment banker and technology executive with over twenty years of business experience. He is also a regular economic and financial commentator on BBC World News, CNBC Television, Business News Network, CBC, Fox Television and RT Television. He speaks six languages and reads another five, skills he uses to provide a more global perspective. Edward holds an MBA in Finance from Columbia University and a BA in Economics from Dartmouth College. Edward also writes a premium financial newsletter. Sign up here for a free trial.