Tag Archives: MMT

Did We Ever Have Full Employment?

Did we ever have full employment? It seems like a simple question – just a matter of checking the historical data and answering yes or no. But strangely, it is not so simple. And nor it is just a curiosity of history. It is a question loaded with contemporary significance.

The Long Boom

The golden era of full employment was the Long Boom (or the Trente Glorieuses in France – because everything sounds better in French!) which followed the Second World War and lasted until the 1970s. In Australia, with post-war construction and Keynesian economic strategies dominating economic management, the unemployment rate averaged 1.9% from 1941 to 1974 – with most of that accounted for by frictional unemployment as people changed jobs. Further, the employment model was largely full-time, under-pinned by a centralised wage-fixing system and industries protected by significant tariff barriers (as well as the expense of pre-containerised shipping – which also meant mass employment on the waterfront).

So, question answered. We did, for all practical purposes, have full-employment in that long boom. Since then, the world has changed. Unemployment has generally hovered between 5% and 8%, peaking in December 1992 at 11.2%, and a different policy mix is clearly required to re-establish full-employment in the modern economy. But the data clearly suggests that it is possible to have full employment in a capitalist economy.

Hmmm – not so quick. Firstly, given the historic record before and after the Long Boom, that period may have simply been an aberration – a one-off event caused by a unique coincidence of factors which can’t be repeated. More importantly, it should be remembered that these very low unemployment rates were obtained in part by culturally or legally excluding parts of the workforce.

Women who had been employed through the Second World War were forced out by cultural norms, or social pressures to give up their jobs for returning heroes or later for men who had families to feed, or women were simply barred from work. Indeed, the marriage bar in the Commonwealth public service (and in other major employers like banks) lasted officially until 1966, and probably informally in some instances for much longer. Women like my mother simply lost their jobs on marriage and were out of the workforce for years, but they were not “unemployed”.

Similarly, given the long history of Aboriginal exclusion, wage theft and the ambiguous labour force status of station workers and domestic servants, it is likely that the unemployment data did not capture the reality of Aboriginal employment and unemployment.

And many people with disabilities who are now in the labour force (but not necessarily employed) were kept at home and either not expected to work, or placed in sheltered workshop “employment”, both potentially hidden forms of unemployment.

So, on closer inspection the golden age of full employment was not – at best it was full male employment with caveats. To refer unproblematically to the full employment of the long boom is to take a gender-blind and privileged view of history.

Participation Rates and Full Employment

The crucial factor here is the labour force participation rate, that is, the proportion of the adult population in the workforce. The graph below shows the significant rise in participation rates since that golden age, from 60.2% of adults in the workforce in 1966 rising to 66.5% in January this year. This growth was driven largely by the increasing proportion of women entering the workforce, from 36.6% of adult women in the workforce in 1966 to the current 62.1%.

Line graph of labour force participation rates from August 1966 to January 2023, showing rate increasing the through the 1970s, dropping back to around 60% in the late 1970s early 1980s and then a long term secular growth since then.
Source: ABS Labour Force, Historical Charts.

This increasing participation rate is important because, if today’s participation rates applied in 1966, then there would have been 515,000 more people in the workforce (my calculation from ABS Labour Force data). If there were same number of jobs at that time, then the unemployment rate would have been 11.1%, not the 1.8% in the ABS data. Again, not exactly the “full employment” of legend.

Of course these counter-factual statistics are flawed because if the labour force participation rates were higher and those hypothetically unemployed people were actually “in the workforce” then the price of labour may have been lower (especially as this was pre-“equal pay” so women were cheaper to employ). Further, expenditure patterns would have been different if some of those people found employment (and the non-market production of cooking, housework and childcare may have been monetised sooner creating more jobs). All of which may have created more employment.

The counter-factual data therefore does not definitively give us a negative answer to the question of whether we ever had full employment. Rather, it reminds us that the statistics are not neutral. The statistic data, like the very notion full employment, is in part socially and politically constructed by the social patterns and expectations of the time.

Theory and Policy

This social construction immediately makes me suspicious of any economic theory that posits employment dynamics (full or un/under-employment) as being driven solely by market dynamics, for example aggregate supply and demand.

At one level, this is a critique of most macroeconomic theories, but the proposition that we possibly never really had full employment is particularly problematic for Keynesian and post-Keynesian theories. As noted in my previous post, such theories posit full employment as not just possible, but as the aim of macroeconomic policy. It is also those theories which tend to hark back most to the golden era of “full employment” for real-world legitimacy.

Of course, the historical record does not definitively rule out full employment (even if we did not have it in the past, it may still be possible in a theoretical future), but the long-term record is not promising.

Given the enormous social and economic costs of unemployment, the idea that full employment may not be possible is hard to stomach. But simply wanting it does not make it possible.

By contrast, both the Monetarist-neoclassical and Marxian-classical schools of thought posit some level of unemployment as being inherent in the system – the former with a NAIRU, the later with a reserve army of unemployed. (Again, see previous post).

What is at Stake?

If the mainstream theory or the Marxists are right, then the post-Keynesian full-employment approaches create false hope and may be economically counter-productive, but of course if full employment is possible, then both mainstream economics and Marxist theories may be selling the unemployed short. That is what is at stake in the curious debate over historical full employment.

That said, I do not think that accepting that full employment may not be possible is giving up on the unemployed. Certainly, as I suggested previously, the idea that there is a natural level of unemployment has been deployed by neoliberalism to undermine progressive interventions in the economy (unions, minimum wages, welfare) and limit government spending.

However, the idea that unemployment is inherent in the economic system can equally be deployed to undermine the stigma of being unemployed (because someone has to be unemployed) and to create arguments for minimum income guarantees not attached to workforce participation.

The policy approaches here and are as debateable as the political economic theories which underpin them. I am simply suggesting that, at a minimum, we might want to have those debates without reference to an idealised era of full employment which was socially constructed at best, and fictitious at worst.

An Open Letter to MMT Followers

I find the need to pen this open letter in (hopefully) supportive criticism after attending one-too-many workshops on economics-related topics where a supporter of Modern Monetary Theory (MMT) takes the floor to “explain” (at length and often out of context) that all the social goods we want can be afforded because the government can print/create money.

In writing this, I am not addressing the MMT academics and thought-leaders whose political values I probably share and whose knowledge of economics exceeds mine. Indeed, in part, I write because I think this work is being undermined by some MMT followers.

As I listened at the most recent workshop to the MTT-for-beginners lines I was reminded of my early days of politics where Trotskyists would intervene at every meeting to tell us that the problem was capitalism and could only be solved by revolution (oh, and “do you want to buy our newspaper?”). They appeared not really interested in the issue or immediate problem being discussed. Their main intent appeared to be getting converts to the cause (and selling newspapers).

The content and values of MMT are very different, but at times the behaviour – or at least the vibe – appears eerily familiar. My concern here is heightened by my long frustration with “panacea economics” – which I defined previously as proposing a particular idea as a simple and singular answer to fundamental structural issues. I hate to see MMT, with its detailed analysis and rich post-Keynesian background, presented in this way. Moreover, as I have found in conversations with workshop/audience members after several of these occasions, the MMT intervention is a turn-off which alienates other activists.

Getting Better Informed

The reality is that political economy is complex. I could read Stephen Hawking’s A Brief History of Time, but would not feel confident in publicly arguing astrophysics. Similarly, reading Stephanie Kelton’s The Deficit Myth is not enough to make me an expert on MMT or economics. Both books are great, with much bigger theories simplified for public consumption, but that is also a limitation. For instance, Kelton’s book does not explain or justify many of the macroeconomic relations and assumptions behind the theory – because that is not its point. Similarly, (in my reading) Kelton’s book has no theory of class, power or social change – although I am less clear whether that is because it was just beyond scope, or because MMT has no such theory. Anyway, Kelton’s intro book made me want to dig deeper – not just more MMT, but also critiques from the left and right.

I read a range of critiques from both the right and the left.[1] Some criticisms were lame caricatures of MMT or simply name-calling rather than analysis. However, what emerged in the more serious arguments were pretty grave doubts about the MMT/Chartalist history of money (the state preceding and creating money), some complex theoretical differences around the nature of money, the scope of aggregate demand in stimulating the economy, the role of the state in economic management, and (as I argued in my previous post) what constitutes full employment and whether it is possible.

I am not sure how much the followers of MMT understand these arguments or accept the MMT position on these issues. And maybe a knowledge of academic nuances doesn’t matter, although I am always wary of unexamined political/theoretical assumptions. More broadly, it is always a difficult balance between crediting expert over amateur knowledge (think climate change or vaccines) and not wanting to bar people from public debate because they are not academic experts in a field.

What is Wrong with the MMT Presentation?

Beyond the theoretical differences above, what was of particular interest in my reading was that many of the critiques on both the left and right agree with MMT’s description of how money is made, and the ability of currency-issuing governments to create money. MMT’s big trick is neither new nor unrecognised – but the use and implications of that trick are disputed. And that makes the issues complicated.

The table below is an attempt to summarise a few of the key simplistic MMT claims put forward at the various meetings I am referring to, and why I think they are problematic.

MMT – Simplistic ClaimWhat it sounds like at a community meetingWhy it is more complicated
When governments can issue currency, they can never run out of money.I know this thing about the economy that most economists, central bankers and governments all around the world don’t!The government can issue money, but can it control its value – or other economic variables which make that meaningful? And the MMT argument does not apply to Australian state governments.
Since the government creates money, and taxes it back later, we don’t need taxes to pay for services.We don’t need to pay taxes – hooray!If you need taxes to stop the inflationary impact of issuing money, then you really do need taxes if you are going to pay for services. It is just done in a different order. And as Kelton (and others) note, taxes are needed for other reasons – like redistribution of wealth.
Since we don’t need taxes to pay for services and governments can never run out of money, we can always afford to fund cultural, environmental and social programs.Problems of power and prioritising expenditure don’t matter because there is no scarcity problem and there is money for everything.(As MMT argues) there is a constraint in the full employment threshold, so the extra MMT money we are talking about is only the amount of government expenditure that would take us to full employment (if possible). After that, it is inflation or not funding services.
The government’s debt is simply the community’s surplus – no problem!Instead of taxing the rich, we are going to borrow money from them and create a revenue stream for them.Following Piketty: government debt (bonds) are owned by one sector of the community – the rich – while the interest paid constrains government expenditure on the services to the community more broadly.
Governments usually issue money as debt through the central bank, but they don’t have to. They can change the current institutional arrangements of how we issue money. MMT is right, the system can be changed (so the critique that MMT does not describe how the system works misses the point) . But issuing money as bonds and debt rather than as cash is seen (in theory) as a safeguard because, as Shaikh notes, many governments with the power to issue fiat money have ended up with hyperinflation. So change is possible, but is not without risk.
A Jobs Guarantee is a way to enact social programs, and it acts as an automatic stabiliser for the economy.A Job Guarantee is:
1. A brilliant panacea
OR
2. Just another doomed employment program
OR
3. A contradiction.		There are practical challenges in implementation, and a problematic history of political capture and mixed results. But in theory, is the JG primarily an economic stabiliser (which expands/contracts with economic changes) or a social program which provides jobs and services which would not otherwise be provided? If the former, the social programs disappear in the boom times, and if the later, the JG may not fulfill its stabilising function.

Conclusion

The point here is not what is right and wrong. There are certainly MMT arguments to address some of the complexities here, but there are also strong well-informed critiques from people who share similar values. In the end, much depends on the macroeconomic/philosophical framework and assumptions used. And this is why the simple assertion of MMT “facts” often does not carry much weight. Indeed, such assertions are likely to alienate rather than convince or encourage the audience – especially when people in the room have interrogated their own frameworks and/or have an understanding of heterodox economics.

My final plea to MMT followers is to keep advocating for state economic intervention, for investment in the things that make for a better society, and especially in support of unemployed and disadvantaged people. But don’t make the mistakes of Marxists of the past who tied all political change to a particular theory.

[1]              From the far right, there is this from the Centre for Independent Studies, and this from the Mises Institute. From the left there was a mix of lame and serious political economy critique from Booth, a broad consideration of assumptions and outcomes from Shaikh, plus an ill-tempered but interesting “debate” between MMT guru Bill Mitchell (blogs 1 and 2)and Marxist economist Michael Roberts (blog, reply to Mitchell).