Money and Unemployment

Introduction

The long-standing problem of involuntary unemployment has escalated in recent years to the level of a global systemic crisis. The United States jobless rate currently stands above 8 percent, translating to over 12 million people out of work and almost $10 billion per day in lost output. Youth unemployment is approaching a staggering 75 million worldwide. In Spain, almost 1 in every 4 workers looking for work cannot find any. Even in my native Australia, famed for its quick recovery from the Global Financial Crisis, overall labor underutilization remains above 10 percent due to underemployment.

When faced with such stark figures, conventional wisdom tends to argue (borrowing Thatcher’s famous slogan) “There Is No Alternative,” and that such short-term losses are necessary for long-term sustainability. This essay challenges that view as applied to fiat currency systems, and argues that a monetarily sovereign nation such as the United States has the power, today and forever, to achieve genuinely full employment if it wishes.

Functional versus Transcendental Finance

The term “Functional Finance” was first coined by Abba Lerner during World War II to describe a macroeconomic policy whereby a state would use its complementary privileges of money creation and taxation to control the flow of money into the economy and achieve full employment, price stability, and socially desirable goals. He likened this to the driver of a car using the gas and brake pedals to keep a constant speed while changing direction with the steering wheel. For Lerner, the idea of being unable to secure “financing” (gas) for the government was a non-issue, since it could always spend new dollars as necessary. The real macroeconomic concerns, in his view, were price stability (the speed of the car) and the productivity of jobs and investments created through money creation (the direction). The numerical size of the government’s deficit or surplus was considered a mere accounting afterthought, reflecting rather than dictating the conditions of the real economy.

Lerner’s approach heavily influenced macroeconomic policy in the post-war era before losing popularity in the wake of the oil-driven stagflation of the 1970’s. Since then, mainstream economic discourse has mostly abandoned the lofty goal of true full employment amidst irrational fears of budget deficits and deceptive household budget analogies that ignore the fundamental difference between a currency issuer and a currency user. Gone is any sense of deep outrage at the irredeemable social waste, human suffering and death caused by unemployment. In its place is a fear of “running out of money,” which implies that the defining economic issue of the present era is the risk of running out of electricity to power the computer at the Federal Reserve that purchases treasuries with reserves using keystrokes. In response to our alleged "budget crisis," politicians across the political spectrum have pushed for “shared sacrifice” in order for us to return to “living within our means.” Anyone familiar with the paradox of thrift would and did find this idea laughable even before “Too Big To Fail.” Together, these policies of austerity and banking subsidy are, to borrow Lerner’s analogy, akin to the driver of the car taking their foot off the gas, stepping on the brake, and handing the steering wheel over to those who had caused the car to stall only moments ago.

There are some pockets of resistance advocating for greater government intervention, but even they tend to cast such action as extraordinary, and recommend rolling back stimulus as the economy returns to an allegedly “natural” rate of unemployment. Overall, with a few refreshing exceptions, supporters of capitalism appear resigned to the inevitability of involuntary unemployment.

From “Law and Economics” to “Law of Economics”

But is this view correct? Did the millions of productive workers who stopped getting out of bed in 2007 all transform into socially repugnant, Kafkaesque beetles? Did we collectively exhaust our supply of that precious job-creating element, “employaminium”? Of course not. Unemployment is a legal creation arising from an accounting system that records claims on real value in nominal amounts. Nothing in the natural world prevents individuals from contributing to the betterment of society.

As prospective lawyers, it is our job to learn how to solve legal problems. To that effect, we might do better by spending less time considering the Econodwarf’s orthodox dogma as axiomatic truth and more learning about how creative lawyers devise out-of-the-box solutions to pressing economic problems. One example of such legal creativity is blogger-lawyer Carlos Mucha (a.k.a. Beowulf)’s brilliant proposal to take advantage of a little known but hugely important provision in the Coinage Act that completely eliminates the need for the government to issue treasury debt during the process of deficit spending. 31 U.S.C. 5112(k) authorizes the Secretary of the Treasury to mint platinum coins “with such specifications, designs, varieties, quantities, denominations, and inscriptions as the Secretary, in the Secretary’s discretion, may prescribe.” Under the clear wording of this statute, the Treasury tomorrow could create and deposit at the Federal Reserve a single $60 trillion coin to pay for the national debt, universal Medicare, universal education and a minimum wage job guarantee, while still leaving a very-publicly-visible $40 trillion in its checking account for a rainy day. Of course, such a move would not be a panacea for every social and economic problem. However, it would effectively eliminate the distracting question of government “funding” and allow us to focus on the truly political and messy issues of policy design and implementation.

Conclusion

The global crisis has put into stark relief the overwhelming failure of economic orthodoxy to maintain full employment. As emerging lawyers, we are positioned to play a significant role in shaping a new economic policy built around principles of abundance and democracy rather than scarcity and aristocracy. Doing so requires creativity and courage, but perhaps above all, cooperation. As such, I stand ready to work with anyone interested in this issue to promote meaningful change.

Eben, I would like to continue working on this over Summer. -- RohanGrey - 23 May 2012