The Levy Economics Institute of Bard College
Public Policy Brief
No. 103, 2009

FINANCIAL AND MONETARY ISSUES
AS THE CRISIS UNFOLDS
James K. Galbraith

Beginning page 9:

Warren Mosler picked up on the theme of human resource
utilization and full employment in a particularly useful way.
Mosler suggested that stabilization of employment and prices is
akin to a buffer stock—something to which surpluses can be
added when demand is low, and drawn down when it is high.
Normally, a buffer stock works on a price signal: the authorities
agree to buy when market prices are below the buffer and to sell
when they are above. In this way, prices stabilize at the buffer
price. The Strategic Petroleum Reserve is potentially a good
example, though political decisions have prevented it from being
used as it should be.

The problem with most commodity buffers is elasticity of
supply: create a buffer stock in wool, and suddenly it pays to raise
sheep. But this problem is cured if the buffer stock is human
labor, which cannot be reproduced quickly. A program that provides
a public job at a fixed wage for all takers functions exactly
like a buffer stock, stabilizing both total employment and the
bottom tier of the wage structure. People can move in and out of
the buffer as private demand for their services varies. Meanwhile,
the work done in the buffer—the fact that people are working
rather than receiving unemployment insurance—helps keep the
buffer “fresh.” Private employers like hiring those who already
work, and will prefer hiring from the federal jobs program rather
than from among those who remain unemployed.

The point is: the problem of unemployment is easily cured,
without threat of inflation. It is merely sufficient to provide jobs,
at a fixed wage, to whoever wants them, and to organize work
that needs to be done. Such work should be socially useful and
environmentally low impact: from child care to teaching and
research, to elder care to conservation to arts and culture. Where
possible, it should contribute to global public and knowledge
goods. It should compete as little as possible with work normally
done in the private sector; for instance, by serving those who
cannot afford private sector provision of teaching and care. The
point is not to socialize the economy but to expand the range of
useful activity, so that what needs doing in society actually gets
done. The barrier to all this is simply a matter of politics and
organization, not of money.

The effect, nevertheless, would be to raise all private sector
wages to the buffer-stock minimum (say, $8/hour in the United
States), while eliminating the reserve of unemployed used to
depress wages in low-skilled private sector industries. There will
be no pressure to raise wages above the buffer threshold, since private
employers providing higher wages can draw on an indefinitely
large workforce willing, for the most part, to move from the
buffer to the private sector in return for those wages. Hence, the
program is not inflationary. There is therefore no excuse for waiting
a year or two years on the assumption that unemployment
will cure itself, and every reason to believe that at the end of such
a policy of “hopeful waiting,” the discovery will be made that the
problem has not been cured.