unemployment Archives

Don’t Be Afraid of Robots: Technology is What We Make of It

Rapid technological change, if it is even happening, does not necessarily need to lead to mass unemployment or even major disruptions in people’s lives. In all cases, new technology is what society makes of it — that is, it should be used to broadly improve lives and work, not reorient the world around the technology itself or redistribute wealth upwards. Ride-hailing services like Uber and the promise of self-driving cars illustrate both sides of this point; polices like a job guarantee provide a path forward.

Illustration: Heske van Doornen

Don’t Be Afraid of Robots: Technology is What We Make of It

By Kevin Cashman

There is a lot of talk of the rapid development of technology leading to changes in the way people work as well as mass automation and thus mass unemployment. However, the data generally don’t support this story (the most recent data being a notable, but very limited, exception). Nevertheless, the story has currency among the public and politicians, in part due to the novelty and allure of technology — and the political power of its promoters. Throughout recent history, the promises of revolutionary technology have captivated imaginations but also come up far short. Instead of flying cars, there are apps for refrigerators and ordering cat food over the internet.

It is important to note that the gains from technological advancements do not necessarily need to go to the rich or lead to mass unemployment. If shared fairly, the gains could lead to social benefits, such as increased social services, and broad individual gains, such as more leisure time. And there can be concerted action to help those directly affected by technological change. While there are many policies that could be implemented, a job guarantee — where the government provides jobs to all those that need them — is the simplest and most straightforward way to deal with job loss. If people lose their jobs due to factors outside of their control, why not simply provide them with new jobs?

If the gains go to the top, it is important to point out that this is because of deliberate policy. It is not a natural outcome. The rich and their allies in politics promote this redistribution to the top as inevitable — as the “future of work,” for example — whether or not advancements in technology pan out or not. Since advancements in technology do not fundamentally necessitate a change in social relations, this is intentionally deceptive at worst and wishful thinking at best. To see this dynamic, looking at particular jobs and industries is instructive, for example, in taxis and buses and trucking.

The ability to use smartphones and the internet to mediate services is not particularly revolutionary or unique but it does provide some benefits. Uber, the ride-hailing company, brought investment and these ideas to the taxi industry and quickly took over a large part of the market, despite many issues with its service and sustainability. In Uber’s case, appealing to the political power of affluent residents in cities and the supposed innovation of its app was enough to negate its blatant disregard for regulations, questionable safety record, exploitation of drivers, and unprofitability. In this sense, Uber’s investment allowed it to provide some benefits to its relatively wealthy passengers at the expense of the disabled, regular taxi drivers, and others. Most importantly, because it subsidizes every ride (Uber loses money on every ride taken), it was able to undercut the regulated taxi industry. The government’s lack of interest in maintaining fairness in the taxi industry effectively led to Uber being handed the market.

How could this have been different? The taxi industry on a whole is not an industry with large margins or much investment. In part, this is due to underlying characteristics of the industry as well as regulation, including those aimed at limiting the number of taxis operating in a city (which is good policy). To realize the benefits of technology, taxi commissions or groups of taxi drivers in various places could have developed their own app and infrastructure to facilitate ordering of cabs on the internet. This would have required substantial organization and money, which could have been facilitated and provided, respectively, by the government. The result could have been an app that allowed taxi authorities to continue to maintain standards for safety and operation and also provide the seamless service that certain groups of consumers desire. Indeed, competitor apps are being developed this way and existed before Uber, but they must now claw market share away from Uber. This is quite difficult because Uber is still subsidizing rides and keeping prices artificially low.

Let us now assume that rapid technological advancement is inevitable: self-driving cars and buses are finally right around the corner, as has been promised for years. (Indeed society could be on the cusp of this sort of technology, although the challenges shouldn’t be understated.) There would be massive benefits if self-driving vehicles are implemented successfully: increased mobility for the elderly, many fewer accidents, lower operating costs, increased productivity when in transit, etc.

Along with these benefits, there would be significant disruptions to the labor market. Ideas around how to approach these changes were discussed in a recent report, Stick Shift: Autonomous Vehicles, Driving Jobs, and the Future of Work.¹ It discusses two questions that are central to evaluation rapid disruptions to the labor market: How fast will the technology develop? How much of an impact will it have?

Regarding the first question, and assuming that these technological hurdles are overcome,² the report notes:

If the technology is successfully developed, the rate of the adoption and popularization of autonomous vehicles will depend greatly on whether necessary infrastructure is built, and whether and how regulation responds to these advances in technology. One of the inevitable debates will be between those who wish to ensure that autonomous vehicles are safe and reliable and those who want to get them to market as soon as possible. The outcome of this debate could greatly determine how the labor market is affected. Thorough vetting of the technology, along with phased rollouts, would allow time for workers to adjust to incoming shocks, and would dampen those shocks as well.

If the government were to assume the costs of building infrastructure for self-driving vehicles instead of the companies that are selling them, it would be fair for the government to also take a pro-active approach and develop a process to adequately assess the safety of those vehicles. This would somewhat mitigate the effects on the taxi industry and on bus drivers, especially in the early years of their use.

Proponents of self-driving vehicles also often forget to mention that technology will replace individual activities of workers but not necessarily all of the activities that encompass their jobs. Truckers, for instance, perform many other activities besides simply driving:

…in the trucking industry, there are many tasks that are difficult to imagine autonomous-vehicle technology being able to manage, which may limit their adoption or consign them or the driver to a secondary role. This includes many things that truck drivers are required to know, such as how to inspect the vehicle and cargo, perform maintenance and fix emergency problems, put on tire chains and deal with unpredictable weather, refuel the vehicle safely, and carry dangerous materials safely, to name a few.

If self-driving trucks took over the trucking industry, this suggests there would be many more support jobs in the trucking industry.

The other question is more pertinent considering our assumptions. How much of an impact technology will have on society is entirely up to society. The question is then not how much of an impact will self-driving cars have on society but where does society need self-driving cars and how do self-driving cars fit with social goals? There is a convincing argument that cars — self-driving or not — should have much less of a role in cities in the future. While taxis could have a role to play in the future, for example, public transportation and good urban design should be the focus, thus eliminating much of the need for taxis. In this vein, employment in the taxi industry could decline, but in addition to more social benefits from less vehicle use, employment would increase in association with an increase in investment in public transportation.

The social aspects of occupations are also important to consider when asking whether it might be desirable to transition to self-driving vehicles:

There is also the question of more socially oriented driving jobs. Bus drivers are one example. City bus drivers preserve order and safety on buses, provide information, ensure payment, and are generally considered community members and authority figures. School bus drivers have specific responsibilities related to the safety of the children they supervise. For these reasons, it may not be desirable or necessary to replace bus drivers, completely at least, even if the buses were fully autonomous.

In this sense, the elimination of these jobs would be akin to cuts in public services, and they would also eliminate some social benefits. Social aspects of jobs are rarely considered — but they are very important.

Here, a jobs guarantee would be useful, since it is a policy that prioritizes the social aspects of jobs and since social benefits are not prioritized in the private job market. Returning to the example of bus drivers, buses could be self-driving in the future but the “driver” need not be replaced. Rather, the position could be reoriented in a purely social role.

Whether technology will bring small changes, as in the case of Uber, or large changes, as in the case of self-driving vehicles, who benefits is entirely up to society. Gains from technology can be shared broadly with the right policies — just a few of which were described here — so there is no need to inherently fear the robots. A jobs guarantee is one of those policies, and it is perhaps the most important. (And it’s gaining traction in the mainstream.) A broad coalition, focused on the appropriate use of technology and promoting a job guarantee, could keep the actual threat — those wanting to harness the benefits of technology for themselves — at bay. Whether or not robots and mass automation are around the corner, it’s good policy, too.

Why You’re Not Getting a Raise

By Nikos Bourtzis.

Much of the developed world has experienced stubbornly low real wage growth since the financial crisis of 2007. Currently, the British people are seeing their earnings decline in real terms. Even in Germany, where unemployment keeps falling to record lows, wage growth is stagnating. This phenomenon has squeezed living standards and has been one of the main culprits behind the rise of anti-establishment movements. Faster pay rises are desperately needed for the global recovery to accelerate and for ordinary people to actually be a part of it. This piece explains why rising labor compensation has been relatively minuscule during the current economic upturn and how this phenomenon could be remedied.

A bit of history

The lack of meaningful pay rises is not a phenomenon that started with the financial crisis of 2007. It can be traced back to the 1970s and 1980s, when monetarism started sweeping into academia and politics. The stagflation of the 1970s, the simultaneous rise of inflation and unemployment, led some governments to abandon the Keynesian policies of the past because apparently these policies could not deal with the stagflation. Monetary policy became the preferred tool to control inflation, together with a revived notion that markets, if left to their own devices, would bring the best social outcomes. The Thatcher and Reagan governments are some of the most famous examples of States adopting and implementing these beliefs. The first institution targeted for deregulation was the labor market. Wages increases were frozen and employment protection was scaled back, because it was believed that demand and supply forces would restore full employment. However, unemployment in the UK exploded after Thatcher came into office in 1980, increasing to over 10% and never returning to its post-World War II lows of between 1% and 2%.

Labor unions are one of the most important institutions regarding pay rises. In most industrial countries, they are responsible for wage and working conditions negotiations between employers and employees. Union membership in OECD countries grew until the mid-1970s but then started dropping. With the rise of neoliberal governments in the West, organized labor came under attack. Under the free-market ideology, unions disrupt economic activity with strikes and demand higher-than-optimal wages. Thus, their power needed to be kept in check. What is more important, though, is the shifting of ideas in what the goals of the State should be. In the post-War period, an expressed purpose of governments was to keep aggregate demand at full employment levels. The UK government, for example, stated full employment as its purpose after the War in its Economic Policy White Paper in 1944. That goal changed with the rise of neoliberalism.

When the commitment to keep employment levels high and stable was abandoned, and labor markets were deregulated, unemployment spiked in most countries and has never fallen at levels where it can be stated that full employment exists. Even during strong upturns unemployment levels in most countries did not dip below 4%. As a result, labor unions, and workers in general have lost their biggest bargaining chip. When there is full employment, and thus jobs are abundant, workers have more power to demand higher wages and better working conditions. With the neoliberal policies of the Reagan administration, real wages in the US got decoupled from productivity, meaning that workers stopped receiving their fair share of the output produced. The same phenomenon has been observed in many other industrialized countries, such as the UK. The policies introduced in the 1980s were pretty much sustained and expanded up until 2008.

The Financial Crisis: A turn for the worse

The situation became even worse after the financial crisis erupted. For example, in both the US and the UK the growth of wages slowed even more, as shown in the following figure, even as the headline unemployment returned to pre-crisis levels.

Moving towards a low headline unemployment rate, though, does not mean full employment is being achieved. In the US, the U-6 measure of the unemployment rate, which adds the underemployed to the headline rate, shows that the real unemployment rate is at 8.6%. Far from full employment! In the UK, it has been reported by the Office for National Statistics that the number of people employed in zero-hour contracts has risen by 400% since 2000 but most of the rise happened after the financial crisis. Thus, the employment situation is worse than before the crisis which leads to a further decline in wage growth.

Why is high wage growth important for the recovery?

It is essential to point out that one of the main reasons the current economic recovery has been weak is low wage growth. Wage income is the main propeller of consumer spending, which accounts for more than 60% of GDP in industrialized countries. Low wage growth means low consumer spending, thus low GDP growth and employment. Currently, households are borrowing to keep their living standards stable and that is what’s keeping consumer spending going. This process, though, is unsustainable and will not last long. When households cannot afford to borrow anymore another financial crisis will almost certainly occur. That’s why governments need to do everything in their power to restore wage growth.

What can be done?

The power of organized labor has been decimated since the 1980s. If workers cannot actually have a say in what happens in the workplace then they cannot fight for fair wages. This is why unions need to be strengthened and supported by governments. Employers should be forced to negotiate wages through collective bargaining and union coverage should be expanded above the current 50% OECD average. This will level the playing field between powerful employers and the currently weak labor class.

As mentioned before, productivity and real wages have been delinked since the 1980s. That’s where the minimum wage could potentially help. In the US, the real minimum wage fell after 1980 and has stayed relatively flat since then. With the liberalization “mania” sweeping the western world, governments are freezing public sector pay rises and Greece even cut the minimum wage in the name of restoring public finances and growth. That’s the exact opposite of what should be done to restore growth. Wages drive consumption and growth, cutting them can only depress the economy. Hiking the minimum wage will help sustain consumption based on wages, employment growth and, thus, wage growth.

A sure way to speed up wage growth again is fiscal stimulus. Government spending lifts aggregate demand directly and effectively. If enough spending is injected into the economy, it will create enough jobs to bring full employment. The momentum and labor scarcity created by the stimulus will force wages up and give workers and labor unions more bargaining power. A Job Guarantee Program, if ever implemented, would effectively set a wage floor in the economy, since any person working at a lower wage than the Job Guarantee offers will be given work in the public sector.

The “curse” of low wage growth is not something new and it definitely got exacerbated with the financial crisis. Even though unemployment is currently falling in many countries, it is still way above full employment levels. With workers’ rights under attack for some time now, unions do not have the power they once did to promote strong pay growth. If the current recovery is to accelerate, and for ordinary people to participate in it, wage growth has to rise substantially. The only way to do this is for labor unions to be strengthened and governments to once again commit to full employment.

About the Author
Nikos Bourtzis is from Greece and recently graduated with a Bachelor in Economics from Tilburg University in the Netherlands. He will be pursuing a Master in Economics and Economic analysis at Groningen University. Research interests are heterodox macroeconomics, anti-cyclical policies, income inequality, and financial instability.

What is the Minimum Wage that Will Employ Everyone?

It is official, the unemployment rate in the US has dropped to its lowest level in 16 years. Economists all around the country must be tapping themselves in the back and buying each other drinks in congratulations, right? Wrong. Despite the official drop in joblessness, we have a decline in labor participation, an increase in the “skill gap” in the labor force (i.e. unemployed workers’ skills do not match those needed by open jobs) and, arguably most importantly, wages that fail to rise fast enough.

For starters, the latest reports show that the year-over-year wage growth rate has been stagnating; it reached 2.5 percent since last year, which is just marginally above inflation. It is difficult to determine exactly why people drop out of the labor force, but we can speculate that some do so because of the lack of pay increases. Whatever the reason, the dropout is a significant part of the declining unemployment rate—e.g. the May report shows that 429,000 people dropped out of the labor force. A nation with a population that is actively leaving the labor force and that deals with stagnant wages is a nation facing serious socioeconomic problems.

The problem at hand, then, is a question economists have been dealing with for ages: how can we increase earnings and employment at the same time? Common economic understanding would argue that we have to choose between higher wages and more jobs. The main argument against minimum wage hikes is that it would increase unemployment. That claim is factually untrue (just look at Seattle) and there are a number of ways to address the issue. At The Minskys we have tackled this topic several times, and shown that a decent minimum wage does not have to reduce the number of jobs out there. One way to have both is with a Job Guarantee (JG) program.

One of the more interesting consequences of a JG program is that it would create a de-facto minimum wage without the need of actually raising the minimum wage. The JG wage would become the minimum wage for the entire economy. Workers receiving less than the JG wage would be inclined to take a JG job, and employers would have to raise their salary offers in order to keep their workforce. Given the impact of the pay offered by the program, it is important that the JG wage rate be thoroughly discussed.

The JG literature has a large number of works focused on the topic of wages. Some suggest the pay to vary with skill-level. Others advocate for JG wages to be the same as they would be in the market. But having multiple compensation packages would make the logistics and application of a JG program much more complicated.

To find the best wage rate for JG jobs, a few parameters should be considered. First, the JG framework is to create jobs that provide at least a minimum “subsistence” rate, so that workers can live a decent life. As such, it is clear that the JG wage should at least be the current federal minimum wage of $7.25 an hour. Second, the goal of the JG is not, and should never be, to replace the private sector. So, the JG wage should not exceed the average wage paid in the private sector ($25.31 in 2016). This creates an upper limit.

With these lower and upper limits in place we can raise the floor or lower the ceiling, ultimately arriving at the proper wage rate paid by this full employment policy. Recent polls show that Democrats, Republicans and Independents—in their majority—all support raising the minimum wage to $10.10 an hour, which suggests that there may be widespread political support to increasing the minimum wage.We can raise the lower limit further after we consider the per capita income in the US, which would put the fair minimum wage at $12.00 an hour. The lower limit of $12 an hour is appropriate since it is marginally above the poverty rate of $11.53 for a household with two children where only one of the parents is employed.

A good point within that range is the $15.00 hourly wage rate. Legislation regarding this wage rate has recently been approved in cities such as Seattle, Los Angeles, and the state of New York. There is also a movement by workers demanding that it becomes the floor in the fast food and retail industries. It seems appropriate, therefore, to follow these cities and movements by determining the going wage rate for a JG program to be set at $15.00 an hour. After all, a national JG cannot pay less than locally established minimum wages. On the other hand, the guarantee of a job in, for example, Seattle paying $15.00 per hour, while surrounding areas are offering lower pay could saturate one area in detriment of another.

As previously discussed, the JG wage would become the minimum wage to the entire economy. Consequently, workers who currently earn less than the $15.00 an hour rate would receive a raise. In total, accounting also for the ripple effects faced by workers in the $15.00 to $19.00 range, roughly 64.7 million workers would receive a wage increase, which means 43.5 percent of the labor force would see their wage income go up. To avoid inflationary pressures, allow for seamless implementation, and contain possible—albeit historically improbable—negative employment effects from the minimum wage hike, the transition to this wage through the implementation of the JG program will have to be done incrementally.

The Job Guarantee is an effective way to solve the three major problems currently facing the American labor market: the skill gap, the dropout of workers from the labor force, and most importantly the stagnant wages. We have empirically observed that wage increases not only do not increase unemployment, but they also serve as a catalyst for economic growth and towards social equity. The US economy has plenty of needs that can be fulfilled by giving well-paying jobs to its unemployed. The $15/hour wage is not only fair, it is a necessary measure to ensure the prosperity of this nation.

Going Beyond Exchange

Traditional economics reveals the dynamics of exchange. But is that all there is? Late economist Kenneth Boulding recommends that we look further. Once we consider that some transactions only go one way, we can see the economy in a different light.

If you’re a high school student and you’re hungry for lunch, you may go out and buy yourself a sandwich. You give the deli guy five bucks, and he gives you a BLT. That’s exchange! But where did your five dollars come from? If you’re lucky, your parents gave it to you. Just like they gave you breakfast, your clothes, and a home to live in. And what did you give them? Probably your dirty laundry.

Modern-day, Western world parenting is an example of a one-way exchange. Parents provide for their children because the market doesn’t. And they do so without expecting much in return. Upon reaching adulthood, none of us receive an invoice detailing the costs we incurred. If we did, we’d probably be quite disturbed. In some cultures, children “pay back” by supporting their parents when they are older. But in the West, retirement plans, social security, and old-age homes have largely removed that expectation too.

Economist Kenneth Boulding advocated for such one-way exchanges, or “grants”, to be included in our study of the economy. Grants make up a big part of our distribution of resources, he argues, but economists have limited themselves to the study of exchange. To construct a more holistic framework in which both systems are fully represented, Boulding introduces “Grants Economics,” which adds to our understanding of the economy both at the micro-level (grants within the household) as well as at the macro-level (grants from the government*).

Boulding distinguishes grants by their motivating force. In the example of parental care, the motivating force is one of love. Parents provide for their children because they care about them. Charity, scholarships, and much of government transfers fall into the same category. But each economy also contains grants based on threat. If you’re about to buy your deli sandwich, and an armed robber comes in, you may hand over your money because you’re scared of getting hurt. That’s a grant as well.

Every system, he explains, contains elements of exchange, love-based grants, and threat-based grants. But their respective shares in the total economy vary. To visualize this, Boulding presents a triangle, the corners of which represent a pure exchange-system, a pure love-based grant system, and a pure threat-based grant system. All the points inside the triangle represent different proportions in which the three systems can be combined. Where in the triangle we are, and where we are going, is the question.

At times, Boulding adds, the love-based grants economy may grow to compensate for failure in the exchange economy. If, for example, a hurricane strikes, we recognize the exchange system cannot support the situation, and make donations (grants) to fill the gap. But if we feel the efficiency of our grants is inadequate, the grants economy may shrink again. Only if perceive our grant to be able to be more useful in the hands of the grantee than in our own, do we want to provide it.

Since the 1970s, Boulding’s work has largely been forgotten. Perhaps because his definition of a grant, and the distinction between love and fear can be fuzzy at times, or because the scope of the theory is so vast. Nevertheless, the framework deserves credit for its potential to open our eyes to all the different ways in which resources are distributed. It can get us to think about the nature of our transactions.

Today, it may look like our current economy is increasingly based on exchange. Whereas we used to call a friend to help us assemble a new IKEA couch, many people may now use Handy to book an hour of paid-labor from someone they never met. Later that day, they may log in to TaskRabbit to hire someone for an errand. With the help of modern technology, Interactions that we would otherwise do without asking much in return are becoming two-way transfers.

At the same time, exchange continues to fail us, making large numbers of people rely on grants. In 2016, one in seven Americans received food stamps. That’s 43 million people for whom exchange is not bringing enough food on the table. On the other end of the income distribution, it may seem like things are different. But half of young adults (many with families of a high socio-economic status) rely on financial help from their parents. That’s a grant–typically with less of a stigma than food stamps–but a grant nonetheless.

These trends, and our potential path in the triangle raise various questions. How equal is our access to grants? Should we supply more grants (even a basic income?) or should we boost exchange (perhaps with a job guarantee?) Do we think we’re moving more towards a system based on love, in which care for one another dominates? Or are we finding it tough to get grants out of people unless we threaten them into providing them? Is there an ideal point in the triangle? Can we get there? Ponder on it. Boulding did so too, and being the only economist to sprinkle his books with poetry, he put his thoughts as follows:

Four things that give mankind a shove
Are threats, exchange, persuasion, love

But taken in the wrong proportions
These give us cultural abortions

For threats bring manifold abuses
In games where everybody loses

Exchange enriches every nation
But leads to dangerous alienation

Persuaders organize their brothers
But fool themselves as well as others

And love, with longer pull than hate
Is slow indeed to propagate

– Boulding, 1963

*Sometimes, of course, the lines between exchanges and grants are blurry. If we use taxes toward social security, and cash in at old age, that might be better described as a deferred exchange. If we, however, find ourselves on unemployment benefits, food stamps, rent support that we receive without having made an equal contribution, we can speak of a grant.

Brazil Suffers Under a Leader that Believes in Fairies

Brazil’s current economic policy follows the logic of a fairytale. And unless President Temer wakes up to reality, the Brazilian people will continue to suffer the consequences.

In conservative circles, the solution advocated for economic recovery is a reduction in government spending. The argument behind it is that a large government deficit lowers the market’s confidence in its ability to repay. This lower confidence then drives private investment away.

By the same logic, if the government cuts down the deficit, markets are reassured of its commitment to be a good payer. This newly gained confidence drives up private sector investment and the economy grows.

While this may sound like a great way to boost a struggling economy, it’s not. To expect that a reduction in public spending will lead to an increase in private spending in the middle of a recession is like believing in an economic “confidence fairy.” Picture a creature dressed in dollar bills, fluttering eyelashes at private investors while the government takes a step back. With enough fairy dust, investors regain confidence, and the economy turns into a sparkly paradise. It sounds nice, but it’s not real.

The idea of expansionary austerity is a dangerous one. While most of the arguments against government deficit rest upon flawed economic theory, the confidence fairy has its backbone solely on psychological factors that play into private investment decisions. However, what a depressed economy needs is a boost in aggregate demand, many times driven by public investment. Even fairy-enthusiasts, as the IMF, have expressed increasing skepticism towards the ability of austerity to expand an economy.

There are plenty of recent examples that cast doubt on the confidence theory. Take the low growth trap of the world economy, for instance. Several countries struggled with low growth for almost a decade despite their efforts to reduce their budget deficit. As monetary policy played an excessive role, fiscal policy ― and by effect aggregate demand ― was ostracized. New investments do not take place in a depressed economy regardless of the interest rates level or the government debt; in Minsky’s words, investment does not take place as long as the demand price of capital is lower than the supply price of capital.

Nevertheless, Brazil’s Michel Temer continues to be captivated by the fairytale. Amid continuous involvements in the corruption scandals, Temer introduced ambitious austerity measures to cut government spending and reduce the fiscal deficit. Placing his faith in the confidence fairy, he portrays his policies as the only path to recovery and growth ― as if there were a certain magic debt number to achieve.

But thus far, Temer’s policies have failed miserably. Expecting to see the fairy do wonders, 2016’s 3.6% decline in GDP was “unexpected” to Temer’s team. That’s a harsh reality to wake up to, especially since 2015 showed a similar decline in growth. For 2017, the economy is expected to grow 0.5 percent; but growth projections keep getting adjusted downward, and a third year of recession is only half a percentage point away.

Brazil’s collapse in domestic demand is visible in the economy’s capacity utilization. Averaging 73.5 percent in 2016, it’s reached the lowest level since the early 1990s, when the country was plagued by hyperinflation. At this rate, Brazil will have to get through a long period of idle capacity until new private investments can foster demand. Furthermore, the efforts to reduce the government deficit seem to have been futile. The budget deficit has actually surged due to the reduction in tax revenues and the increasing burden of interest rate payments.

Despite everything, Temer isn’t giving up on the confidence fairy yet. Earlier last month, he announced a cut of $42.1 billion reais (approx. US $13.5) in the government budget, nearly a fourth of which on the Growth Acceleration Program for social, urban, and energy infrastructure investment. Other significant cuts were made to the ministries of defense ($5.7 billion reais), transportation ($5.1 billion reais), and education ($4.3 billion reais).

As you may expect, none of this helps to create jobs. On April 28, it became known that the unemployment rate reached a record-high 13.7% for this year’s first quarter. Since the last quarter of 2016, 2 million more people lost their jobs. The number of unemployed now adds to 14.2 million, and that’s more than double the record-low rate of 6.2% in 2013.

Unlike the President, the people of Brazil know they can’t count on fairy dust. Last week, workers went on a general strike, during which millions of Brazilians protested against the austerity agenda. As much as 72 percent of the population opposes the reforms that are being discussed today, and government approval rates are as low as 10%.

But Temer ignores all cries of concern and keeps going steady. Two of his the structural reforms have already been initiated. Real government spending is frozen for the next 20 years, and labor market is under flexibilization. A third, more complex one is the pension reform, whose main proposal is to increase the minimum retirement age and time of contribution. Although the subject is too extensive to be covered in here, it’s worth mentioning that the pension reform disregards some of the social inequalities in the country (e.g. conditions of rural and poor workers) and it solely focus on curbing the long-term system’s expenditure instead of dealing with the falling revenues that collapsed in recent years due to tax breaks and the crisis.

Together, these reforms dismantle any efforts at building a social welfare system in Brazil. Crucial areas for public investment such as education and health will suffer.

Right now, it’s more clear than ever that Brazil’s story is not a fairytale, but a living nightmare. And there’s no confidence fairy that can fix it. As Skidelsky puts it, “confidence cannot cause a bad policy to have good results, and a lack of it cannot cause a good policy to have bad results, any more than jumping out of a window in the mistaken belief that humans can fly can offset the effect of gravity.”

Denouncing the Flaws of the EU is not Extremist, it’s Necessary

The main takeaway from the French presidential election is that criticism of the European Union (EU), including the eurozone, is not well received regardless of its validity. While Europe might currently be breathing a sigh of relief, the strategy of silencing and ridiculing those who express dissatisfaction with EU policies is dangerous for its future.

Presidential campaigns in France

During the campaign for the first round of the French presidential election, two candidates touted the possibility of leaving the euro: Jean-Luc Mélenchon, representing the leftist France Insoumise party, and Marine Le Pen from the extreme right-wing Front National. Most outlets considered their attacks on the euro to be a political liability with the mainstream electorate. The media slotted both candidates as “anti-European” extremists that should be feared. However, a closer look at the platforms of these two reveals that their critiques of the EU and their desired outcomes bear very few similarities.

Marine Le Pen promised a “France-first” approach and pledged to pull France out of the eurozone and close the country’s borders. Her platform plays on racism and xenophobia, and blames France’s woes on immigrants. It is important to note that she did propose strengthening the welfare state and extending benefits, but only for French people and not foreigners.

Mélenchon’s take on the EU was very different. His platform’s “Plan A” was to push for EU-wide reforms that aimed at bringing growth and strengthening mutual support amongst member states. He criticized the EU for becoming a place ruled by banks and finance, and his goal was to leverage France’s influence within the bloc to end austerity policies in all member states. If these negotiations with other EU members failed, then there was a “Plan B” that called for France to leave the euro and the EU in order to pursue a stimulus plan, which is not permitted under the deficit limits imposed by current EU regulation.

A large part of the media coverage received by Mélenchon centered on personal attacks, rather than on providing an accurate overview of his policies. He was accused of being a communist, both an admirer of Fidel Castro and Hugo Chavez, and a Russia sympathizer. With a significant social media following and energizing campaign, Mélenchon was able to surge in the polls late in the race. However, he did not manage to garner sufficient support to qualify for the second round of the election.

Plagued by scandals and voters’ discontent with the current administration, the candidates backed by the two traditionally mainstream parties in France, the Republicans and Socialists, did not make it past the first round. The run-off election will take place on May 7th between Le Pen and Emmanuel Macron.

Dubbed the establishment’s anti-establishment candidate, Macron describes himself as a staunchly pro-EU, pro-immigration, and pro-globalization centrist. Macron is backed by the party he created in 2016, “En Marche!,” and is successfully managing to brand himself as an outsider candidate. However, it should not be forgotten that as an economy minister in Francois Hollande’s government, who did not seek re-election due to extremely low approval rates, Macron was the architect of labor market reforms that weakened protections for workers and favored businesses. A close look at his program reveals his policies are strikingly similar to those of Hollande, just with different branding and rhetoric.

Macron’s platform consists of neoliberal platitudes that espouse values such as tolerance and acceptance of immigrants, while advocating for austerity and dismantling of social protections under the guise of increasing efficiency and “modernizing” the French economy. Macron pledged to reduce France’s deficit below 3 percent, as mandated by the EU, while also cutting taxes. To achieve both goals, Macron would undoubtedly have to slash government spending, which would most likely have a negative impact on the economy overall.

Macron’s uncritical embrace of the EU has gained him the praise and endorsement of other European leaders. Global financial markets that are reassured by his pro-EU stance are also celebrating the prospect of his victory. While his commitment to structural reforms and budget cuts is likely to please Germany and the European Commission, the question is if he can also satisfy the people of France.

Polls suggest that Macron will now win the run-off against Le Pen. However, concerns are mounting that if his government fails to deliver, the far right will be strengthened by the following election. Given how similar Macron and Hollande’s programs are (despite the different packaging) they are unlikely to deliver a different result.

The failed economic policies of the EU

The French economy struggles with high unemployment rates, particularly for young people, and is facing a decade of economic stagnation. Under increased pressure from the EU for France to abide by its deficit rules and reduce spending, previous governments have implemented harsh pension and labor reforms. These measures have failed to jumpstart the economy, and it seems intuitive that France should pursue different policies that could actually provide the much needed stimulus to its economy.

It’s not just France that is stagnating. Since the 2008 crisis, the entire Eurozone has seen a slow and uneven recovery. Particularly, the worst hit countries such as Greece, Italy, and Spain, are still dealing with the consequences of shrinking incomes and high unemployment. Nobel laureate Joseph Stiglitz showed how the structure and design of the euro were a key factors in holding back the recovery of the EU.

The structure of the euro was established by the Maastricht Treaty which laid down the groundwork for how the EU and the euro area ought to be set-up institutionally. The treaty arbitrarily established yearly deficit limits for countries at 3 percent of GDP. After the crisis, the Treaty on Stability, Coordination and Governance in the Economic and Monetary Union expanded the influence of the European Commission, an unelected body, to impose policies on member states. EU institutions have used the deficit limit as justification to dictate a neoliberal agenda, characterized by imposing austerity measures and pro-business structural reforms on member states, with very little consideration on the worsening of unemployment, poverty, and other social indicators.

Considering the shortcomings of neoliberal policies imposed by the EU, perhaps Melélnchon’s “Plan A,” to push for EU-wide reform is not that “extremist” after all. Rather than crucifying him, he should have been given the chance to advocate for reform. The current direction taken by the EU is one that through austerity measures is slowly dismantling the European Social Model, which has traditionally been characterized by a strong safety net.

What the future holds

As long as the EU imposes and encourages a platform that hurts people, far right politicians like Marine Le Pen will continue to tap into those anxieties and gain popularity. The success of the Brexit campaign should serve as impetus for the EU to reevaluate its policies.

Politicians like Macron, who chose to ignore the flaws of the eurozone and advocate for more of the same unsuccessful policies may win popularity now, but set themselves up for failure in the long run. Macron’s unconditional praise of the EU’s virtues is somewhat similar to Hillary Clinton, who under a backdrop of suffering and social crisis, responded to Trump’s slogan “Make America Great Again,” by stating “America is already great!” This strategy failed and Clinton lost, with areas where jobs were under the most severe threats swinging towards Trump.

For the European project to succeed and continue bringing peace and unity to Europe, economic policy reform is necessary and austerity needs to end. Ignoring the economic struggles of the bloc and refusing to recognize the role of EU policy in exacerbating them will continue to fuel the rise of extremist right wing politicians. Calling those who advocate for socially inclusive reforms “extremists” is a strategy bound to backfire.

In the Spotlight: William “Sandy” Darity

William “Sandy” Darity’s work is the proof you need that the American dream is just that, a dream. The promise that anyone who takes initiative and works hard has an equal chance at success is not true. A close look at data on income and wealth reveals an inherently unequal society. Our recent post on racial inequality points out how for example, race affects the payoffs of a college education. For a much more comprehensive view of this issue, we can dive into Darity’s work.

Darity currently serves as the director of the Samuel DuBois Cook Center on Social Equity at Duke University, where he teaches Public Policy, African and African American Studies, and Economics. The focus of his work is inequality, examined through the lenses of race, class, and ethnicity. He also has analyzed policies that would help fix the legacy of racial injustice in America.

Darity rejects the neoclassical view that “markets” will arbitrage away discrimination over time, and champions a different approach called stratification economics. This strategy uncovers the stories of inequalities by looking at economic variables by different strata. Your chance at success in this society differs based on your race and gender. Examining economic variables by different groups offers a much clearer picture than the abstract “representative agent” models would depict.

As a young economist at Brown and MIT, Darity thought that studying economics would teach him why these inequalities are created and persist. Yet he found, like so many of us now, that studying economics is often more focused on math than society. Thankfully, once degrees are conferred PhD economists can pursue different lines of thought. His work today is a bright light for not only understanding how these inequalities are created and persist, but for understanding how we can fix them.

For example, the piece Umbrellas Don’t Make It Rain: Why Studying and Working Hard Isn’t Enough For Black Americans shows the broken logic behind the idea that more years of education results in higher earnings. Think about a rainy day, he argues. A lot of people might be holding umbrellas, but that doesn’t mean that the umbrellas caused the rain. Similarly, people with higher educational attainments have higher levels of wealth. Yet, it does not mean they accumulated the wealth because of the education.

Often times, working hard at an education or job is just not enough. Darity shows that white families with an unemployed family head have double the wealth of black families with a family head working full time. That’s a difference of $21,892 to $11,649. It’s not because of their educations, either. Black household heads with a college degree have two-thirds of the net worth of white household heads who never finished high school. Data like this suggests that education is not enough to correct these inequalities. This is just a taste of an enormous list of Darity’s publications that help us understand discrimination, prejudice, and inequality.

Darity hasn’t just looked at the problem, he has proposed bold solutions. Two policies which he advocates for are Baby Bonds and the Job Guarantee. The Baby Bonds idea would endow every newborn American with a trust that grows and they can access when they turn 18 years old. Everyone would receive this trust but to reduce wealth inequality those with lower levels of wealth would be given larger endowments, While this idea strengthens future generations, the Job Guarantee proposal fights inequality immediately. Guaranteeing every American access to employment at a living wage with benefits, the Job Guarantee could create a more equitable system.

Economic justice will be a necessary component for achieving racial justice in this country, and Darity’s work helps not only understand the problem but also the solutions that we, as citizens, can help promote. If you’re itching for more, check out this piece on INET, his articles at HuffPo & NYT and be sure to follow him on Twitter @SandyDarity. I’m sure we’ll hear from him there when his forthcoming book on reparations comes out. I can’t wait to read it!

The Job Guarantee: The Coolest Economic Policy You’ve Never Heard Of

When you think of economic issues what are the first things that come to mind? Poverty, inequality, unemployment, inflation, and crisis are all common answers to the question. Wouldn’t it be great if there was a policy that could address all of those issues (and more) in a cost-effective manner? In this piece I will give a very brief introduction to Job Guarantee (JG) schemes, the proverbial economic silver bullet.

Hyperboles aside, Job Guarantee proposals (which may come in many different names such as Employer of Last Resort, or Public Service Employment) are a remarkably good way to address many of the social economic problems current faced by populations all over the world. Ideas about JG programs date back to as early as the 1600s, they have been implemented in many nations during a variety of different stages of the business cycle – and usually to a great deal of success.

Simply put, JG is a direct public employment policy where all of those people who are willing and able to work are guaranteed a job given that these individuals meet some basic employability requirements. Most proponents of JG establish that these jobs should pay a basic, fixed, uniform wage plus full medical coverage and free child care (the latter can be provided by JG workers themselves). The goal of the program should be to ensure that all full-time JG workers are able to obtain a living standard that is above a reasonable poverty threshold. Thus, this sort of program go a long way in addressing poverty. Furthermore, it would also target another major economic problem, the stagnation of real wages and the currently low minimum wage granted to US workers. The JG wage would instantly become the minimum wage for the entire economy: workers in other sectors that are receiving less than the JG wage would be very compelled to take one of those guaranteed jobs, and employers would have to raise their salary offers in order to keep their workforce. Finally, the wages would also act as price anchor, which improves upon the stability of the economy.

The first question I usually get when telling someone about the Job Guarantee is “yeah but, how can we afford it?!” Questions about the deficit and national debt have been put to rest previously on this blog (see here), hence I shall focus on other questions regarding its affordability. For starters, it has been shown elsewhere that JG is remarkably cheaper and more effective than other proposals, such as Basic Income and Negative Income Tax, in achieving lower poverty and unemployment rates (see here, and in many pieces by Rutger’s Phillip Harvey). Secondly, the newly employed JG workers would bring in savings in many different ways: they would get out of unemployment insurance, food-stamps, and other such programs; they will pay income tax, medicare and social security tax, as well as more consumption related taxes; and the government would spend less on issues that are related to poverty, such as higher crime rates. In addition, employment multipliers would make it so the JG program would not have to employ the entire unemployed population. The extra consumption and production related to the JG will create indirect and induced jobs which will represent a significant portion of the job creation from the program. Finally, yours truly is among a number of economists who have modeled the implementation of a a JG for the US and found that eliminating unemployment at a living wage would cost just around 1% of the American GDP.

At this point many say something like “but employing everyone while raising the minimum wage has to be inflationary!” the answer to which is a simple “nope”. First, we have to bear in mind that in the current system the economy’s most precious resource – workers – is being wasted in unemployment, while under a JG program it will be put to use. Orthodox economic thought claims that millions of people need to be unemployed in order to contain inflation, that it is financially “sound” to a tenth of the population in idleness for an unknown period of time. It comes from the idea that the economy is always operating at full capacity, which then brings the inflation problem to being a matter of equilibrating the demand and supply forces of the economy. Both of these assertions are, to quote Keynes, “crazily improbable – the sort of thing that which no man could believe had not his head fuddled with nonsense for years and years.” Government expenditure is as inflationary as any other sector expenditure. Unemployed workers are spending in consumption either way, being sustained by welfare or, dangerously, by credit – and there’s nothing financially “sound” about that.

A JG program would in fact control for inflation by proving a minimum wage anchor for prices and by increasing the productive capacity of the economy through its projects. It would take off the pressure put on demand from the unemployed by increasing supply of goods and services by incorporating those idle workers in the productive structure. Furthermore, even if we assume it to be inflationary it would be a “one-time” increase in inflation, and not an accelerating type one, meaning that demand (and inflation) wouldn’t rise above the full employment level.

In that sense, the costs associated with a JG program (increasing budget deficit and inflation) are not more than ideological myths that obscure the true social costs of unemployment and poverty and curtails any innovative attempts to deal with them. Indeed, generating aggregate demand, employment and inflation is all what the US economy has tried to do since the 2008 financial crisis, but through the wrong ways. A JG program would be extremely more efficient and less costly than QE or negative interest rates. As the world crumbles in economic and political instability, guaranteeing jobs would surely deal with most of its problems. It is up to governments to load and shoot that silver bullet. I don’t think there’s a more appropriate time than now.

Written by Carlos Maciel & Vitor Mello
Illustrations by Heske van Doornen