The Michigan Full Employment Plan:
How States Lacking Monetary Sovereignty Can Guarantee Full Employment
Increasing economic growth and productivity is a question of increasing aggregate demand: i.e. increasing the overall money supply and amount of goods and services produced. A guaranteed state jobs program would do both and could be funded without increasing total spending, at the same time eliminating the present, inefficient system of unemployment, at the same time increasing GDP and tax revenue.
Though this plan uses the author’s home state of Michigan as an example, the same plan could be adopted in any of the fifty states, or by any government that is not a monetary sovereign.
Lacking “Monetary Sovereignty,” that is the ability to immediately fund any expenditure without raising taxes or borrowing money (Mosler, 2020), state governments face the problem of how to fund such a potentially costly upfront outlay as a guaranteed jobs program, especially given the political difficulties encountered when attempting to raise taxes or finance deficits in order to fund perceived social welfare programs. As we shall see, however, raising taxes or borrowing to fund such a program would be unnecessary.
THE COSTS OF LESS THAN FULL EMPLOYMENT:
Apart from the human and social costs of unemployment, such as increased risk for depression, social dislocation, and human capital depreciation (Tcherneva, 2020), Okun’s Law predicts that every 1% of unemployment is the quantitative equivalent of an approximately 2% reduction in prospective GDP, i.e. 5% unemployment equals a GDP 10% lower than it would have been given full employment.
Using data from 2019, we find Michigan’s GDP was approximately 541 billion dollars, while unemployment was near an all-time low of 4%, about 200,000 people. That constitutes an approximately 8% underperformance, or approximately 43 billion dollars unrealized (Michigan Department of Treasury, 2019, U.S. Bureau of Economic Analysis, 2019).
As the private sector never obtains full employment, and markets are never perfectly efficient, meaning a worker losing their job will not be immediately received into another, similar job at equal pay elsewhere, and further that any amount of unemployment is unrealized GDP, modern macroeconomics tells us full employment should be maintained as a matter of state policy (Mitchell, Wray, & Watts, 2019).
In Michigan in 2019 the maximum dispersal in unemployment paid per week was $362 for a maximum of 20 weeks (Michigan Department of Labor and Economic Opportunity, 2019). This is a total of over $7,000, an average of about $9/hr. During this period, the unemployed individual reduces their spending by around 7% (Farrell et al., 2020). This combination negatively impacts state GDP on two levels. First, the unemployed individual is not creating goods or providing services, and, second, they are not stimulating their former demand from existing businesses via their purchases.
A guaranteed state job program, paying a living wage of $15 per hour, would stimulate that individual to spending back at their previous level, at the same time the individual provided useful labor for the state and local communities until such time as space in the private sector opened up to accommodate them.
A common objection to this arrangement, borrowed as it is from the broadly publicized Federal Job guarantee, championed by progressives such as Bernie Sanders and Alexandria Ocasio-Cortez, is that such a guaranteed wage rate would put upward pressure on wages paid for existing jobs that fall below the $15/hr level. First, this is true. But, second, as we have seen in the case of Seattle, this has not led to a rise in unemployment, quite the opposite. After passing its $15/hr ordinance in 2014, unemployment fell from over 5% to 3% at the close of 2019, with an on average increase in take home pay (Seattle Minimum Wage study Team, 2016, 2017).
While it can be argued, and reasonably so, that Seattle is not adequately representative of most locales, since the early 1990s there has been a slow reversal in thinking among economists regarding minimum wages, raising them, and their effects on employment, particularly after David Card and Alan Krueger’s study of unemployment in New Jersey and Pennsylvania, followed by their book on the subject in 1995 Myth and Measurement. One measure of the transformative effect of empirical research of this kind was seen in survey data collected by the American Economic Association. Among members polled in 1992 79% thought minimum wages caused unemployment; by 2000 that number had dropped to 46% (Economist, 2020). The trend toward more heterodox thinking on this matter has continued, including questioning the effect raising the minimum wage has on employment, namely that is it is not deleterious (Kelton, 2020).
HOW FULL EMPLOYMENT CAN BE ACHIEVED WITHOUT A FISCAL DEFICIT OR NEW TAXES:
Because Michigan is not a “Monetary Sovereign,” Article I Section X of the U.S. Constitution forbids states from issuing currency, to cover the $6/hour difference between present and prospective unemployment renumeration under the guaranteed state job framework, the treasury would pay employees of the guaranteed job program the difference in the form of a transferable state tax credit, or MITC (Michigan Tax Credit).
For example: 200,000 people unemployed X (6 MITCs/hour X 40 hours X 20 weeks) = 960 million MITCs, or about 2.5 billion MITCs for the year if we assume 200,000 people are unemployed for the duration of a given year. The value of a MITC would be pegged to the dollar at a rate of 1:1.
Assuming all MITCs are spent at least once on an item to which sales tax is applicable would generate almost 150 million dollars in revenue annually. To guarantee their continued circulation during a given fiscal year, thereby increasing the amount of taxable transactions they produce, MITCs could be made time-depreciating. Say, if they sat in one person’s bank account for a month, they would depreciate 5%. Holding on to a single MITC for a year would thereby translate into a 60% depreciation, meaning it would be redeemable only for $0.40 of a dollar for taxes owed. Such a mechanism should serve to ensure continual circulation of the MITCs.
To foster their acceptance, in lieu of an unconstitutional legal tender law, every business, corporation, or individual who accepted and circulated the MITCs up to a certain amount would receive a quarter of a percent reduction in their Michigan taxes for that year.
Based on 2019 data, the value added to GDP by reaching full employment for a given year would total just under 43 billion dollars. Assuming most all of that additional 43 billion dollars were taxed at a mere 4% (the flat rate minus the quarter percent; the business rate is higher, 4.95%, making this a very conservative estimate) that would generate additional state tax revenue of just under 1.7 billion dollars, leaving a difference of approximately 800 million dollars to be accounted for in additional sales tax revenue. As outlined above, the use of each MITC in a single taxable transaction during the course of a given year would produce almost 150 million in revenue. Were they to steadily circulate as desired this would result in a great deal more in sales tax revenue, whereas if they failed to steadily circulate their depreciation would result in their loss of value, so that by the time they were used to pay taxes they would require the supplementation of additional dollars to account for any outstanding difference, thereby justifying the claim that pursuit of this policy could be paid for without increasing the deficit or raising new taxes. For example, were every MITC to change hands only once in a given year that would lead to a total depreciation of just under 1 billion dollars, all of which would have to be repaid to the state in dollars.
A last objection will be noted in closing, that of inflation. For those of Monetarist persuasion, it is accepted that any expansion of the money supply (for that is in essence what MITCs function as, money) will cause a reciprocal and proportional rise in inflation. While the issuance of MITCs would have the effect of increasing the money supply, such orthodox thinking has by now been convincingly refuted (Kelton, 2020). Inflation occurs when increased money supply is chasing the same amount of goods and services. In the present case the state jobs program would be providing goods and services, as well as stimulating demand from the private sector, leading to increased production, as outlined above. Furthermore, as the case of Seattle again shows, raising the minimum wage has no inflationary impact on the price of basic consumer goods such as food (Spoden, Buszkiewicz, Drewnowski, Long, & Otten, 2018).
As to what type of work those employed under the guaranteed state jobs plan would be engaged in, as well as how the new system would be structured and implemented, these questions are sufficiently important to merit their own paper. Suffice it for now to say that examination of the existing institutions and networks in the public and private sectors offers reasonable expectation that the program could be implemented without the creation of any new bureaucracy specific to the task.
Farrell, D., Ganong, P., Greig, F., Liebeskind, M., Noel, P., & Vavra, J. (2020, July). Consumption Effects of Unemployment Insurance during the Covid-19 Pandemic. Retrieved September 10, 2020, from https://institute.jpmorganchase.com/institute/research/labor-markets/unemployment-insurance-covid19-pandemic
Kelton, S. (2020). The Deficit Myth Modern Monetary Theory and the Birth of the People's Economy. New York: PublicAffairs.
Mitchell, W., Wray, L. R., & Watts, M. J. (2019). Macroeconomics. London: Macmillan Education.
Mosler, W. (2020). White Paper: Modern Monetary Theory (MMT). Retrieved September 09, 2020, from http://moslereconomics.com/mmt-white-paper/
Michigan Department of Labor and Economic Opportunity. (2019). How much will I be paid if I qualify for unemployment benefits? (n.d.). Retrieved September 10, 2020, from https://www.michigan.gov/leo/0,5863,7-336-94422_97241_98585_98650-522548--,00.html
Michigan Department of Treasury, Office of Revenue and Tax Analysis. (2019). Michigan Economic Update. Retrieved September 09, 2020, from https://www.michigan.gov/documents/treasury/Michigan_Economic_Update_-_March_2019_655102_7.pdf
Spoden, A. L., Buszkiewicz, J. H., Drewnowski, A., Long, M. C., & Otten, J. J. (2018). Seattle’s Minimum Wage Ordinance did not Affect Supermarket Food Prices by Food Processing Category. Public Health Nutrition, 21(9), 1762-1770.
Tcherneva, P. R. (2020). The Case for a Job Guarantee. Cambridge, UK: Polity Press.
The Seattle Minimum Wage Study Team. (October 2017). The Seattle Minimum Wage Ordinance October 2017 Update: Report on Employer Adjustments, Worker Experiences, and Price Changes. Seattle. University of Washington, Daniel J. Evans School of Public Policy.
The Seattle Minimum Wage Study Team. (2016). Report on the Impact of Seattle’s Minimum Wage Ordinance on Wages, Workers, Jobs, and Establishments Through 2015. Seattle. University of Washington, Daniel J. Evans School of Public Policy.
U.S. Bureau of Economic Analysis. (2020). Total Gross Domestic Product for Michigan. Retrieved September 10, 2020, from https://fred.stlouisfed.org/series/MINGSP.
What Harm do Minimum Wages do? (2020, August 15). The Economist, 61-62.