Public Policy for Working People

Abstract

Given the ineffectiveness of contemporary monetary and fiscal policy, this chapter begs the question, is there a better alternative? The chapter opens with New Keynesian fallacies and the need for public policy centered on workers. The hope is that this chapter can provide further justification for the Employer of Last Resort (ELR) approach to full employment, by rooting it in the theoretical framework of Classical Keynesian Political Economy. Further, while modeling the ELR within a CKPE production model, this chapter deviates slightly from the existing literature on the ELR by modeling a fully funded, budget-neutral ELR program; but (hopefully) with good reason. Elsewhere, Wray (1998) and others have discussed the macroeconomic outcomes of an ELR program operating under the principles of Modern Money Theory (MMT). Wray, and proponents of MMT, more or less, articulate the outcomes of a fully deficit-financed ELR. Here the opposite extreme is analyzed, and the simulation asks … what are the macroeconomic outcomes of a budget-neutral ELR? These results are important for governments operating non-sovereign currencies to understand. But the result may also be interesting for countries wishing to operate an ELR with a sovereign currency. In practice, even with a sovereign currency, a government would most likely not operate an ELR at either extreme; rather the government would partially fund an ELR (perhaps for political reasons if anything else). Thus by countering the MMT model with a balanced budget model, public policy officials can understand the effects at each extreme and get a better idea of what the macroeconomic outcomes would be if an ELR were operating some place in the middle.

Appendix: Modeling ELR in the US-Fairmodel

The modifications to the US-Fairmodel followed previous modifications done by Fullwiler (2007) and Majewski (2004) and Majewski and Nell (1999). Additional modifications were also required in order to simulate a balanced-budget ELR program.

Generate the following variables:

• GENRJELR=U;

• GENRWELR=.95*WF+.05*WG;

• GENRYELR=WELR*JELR*520;

• GENRCOSTELR=.15*YELR;

• GENRELRSPEND=YELR+COSTELR;

• GENRLELRSPEND=ELRSPEND−ELRSPEND(−1);

• GENRYELRR=YELR/PG;

Modifications to the FairModel’s Identity Equations:

• IDENTWH=100*((WF*JF*(HN+1.5*HO)+WG*JG*HG+WM*JM*HM+WS*JS*HS−SIGG−SISS)+YELR/(JF*(HN+1.5*HO)+JG*HG+JM*HM+JS*HS)+(JELR*520))

• IDENTX=CS+CN+CD+IHH+IKF+EX−IM+COG+COS+COSTELR+IKH+IKB+IKG+IHF+IHB−PIEB−CCB;

• IDENTXX=PCS*CS+PCN*CN+PCD*CD+PIH*IHH+PIK*IKF+PEX*EX−PIM*IM+PG*COG;+PS*COS+COSTELR+PIK*(IKH+IKB+IKG)+PIH*(IHF+IHB)−PX*(PIEB+CCB)−IBTG−IBTS;

• IDENTSH=YT+YELR+CCH−PCS*CS−PCN*CN−PCD*CD−PIH*IHH−PIK*IKH−TRHR−THG−SIHG+TRGH−THS−SIHS+TRSH+UB+INS;

• IDENTSG=THG+IBTG+TFG+TBG+SIHG+SIFG−LELRSPEND−PG*COG−WG*JG*HG−WM*JM*HM−INTG−TRGR−TRGH−TRGS−SUBG−INS−PIK*IKG+SIGG+CCG+TRFG−DG

• IDENTGDP=XX+PIV*(V−V(−1))+IBTG+IBTS+WG*JG*HG+YELR+WM*JM*HM+WS*JS*HS+WLDG+WLDS+PX*(PIEB+CCB)

• IDENTGDPR=Y+PIEB+CCB+PSI13*(JG*HG+JM*HM+JS*HS)+YELR/GDPD+STATP

• IDENTJJ=(JF*HF+JG*HG+(JELR*520)+JM*HM+JS*HS)/POP

• IDENTPUG=PG*COG+LELRSPEND+WG*JG*HG+WM*JM*HM+WLDG

• IDENTYD=WF*JF*(HN+1.5*HO)+WG*JG*HG+WM*JM*HM+WS*JS*HS+RNT+DF+DB+DR+DG+DS+INTF+INTG+INTS+INTZ+TRFH+TRGH+TRSH+UB+YELR−SIHG−SIHS−THG−THS−TRHR−ELRSPEND(−1)