This article was published originally on Jan. 17, 2012.
Economist Randall Wray pushes a bold jobs plan: Everybody who wants one, gets one – guaranteed – courtesy of Uncle Sam.
Wray pitches more than a repeat of the New Deal to bring down staggering unemployment. He wants a federal job guarantee and says it should be permanent.
Welcome to the outside-of-the-box thinking inside the economics department at the University of Missouri-Kansas City.
Since just after World War II, UMKC’s economics department has embraced unorthodox explanations of the economy that often challenge mainstream economics.
Recently, the department has become a leading voice for what advocates call a “modern” explanation of money. If everyone understood it, they say, it would defuse the nation’s rancorous deficit debate.
“They represent fiercely independent thinking about economic matters that are not in the conventional scheme. And almost nobody knows anything about them,” said Landon Rowland, retired CEO of Kansas City Southern Industries.
UMKC may shed its anonymity as America searches for answers to the financial crisis, answers that more traditional economists haven’t produced. Some outsiders even refer to the modern money theory that UMKC promotes as the “Kansas City school” of economic thought.
The reference plays on the widely accepted notion of the “Chicago school” of economics, which advocates market-oriented theories and distrust of government intrusion. It was championed by Nobel-winning economists at the University of Chicago such as the late Milton Friedman.
Mostly, however, UMKC’s economics department and similarly small unorthodox groups at other universities remain outcasts within economic academia.
Prestigious publications reject or ignore their research papers. At conferences they’re shunted off to smaller venues. They tend to get short shrift from other economists.
“We’re in many ways not considered economists,” said UMKC economics professor Fred Lee.
Mainstream economics is the stuff you learned in school.
Markets function through prices, set by supply and demand, driven by rational behavior by consumers and businesses. Government can influence the economy with taxes and stimulus packages.
Those outside the mainstream tent have come to be known collectively as “heterodox economists.” The name conveys more than an unorthodox approach. It also carries a sense of heresy.
Heterodox economists assert a variety of alternative theories, which are not necessarily in agreement with each other. If there’s a theme, Lee says, heterodox economists hold a “more critical view of contemporary capitalism – we need to make some changes.”
Some of the heterodox approaches sport familiar names like Marxism or vaguely recognizable ones such as Post-Keynesian economics. Others, such as Institutionalism or Chartalism, remain obscure.
UMKC is among a select few universities dominated by heterodox economists. Others include the University of Massachusetts at Amherst, the University of Utah and the New School in New York.
“We’re very lucky to have them. All over the world, economics departments tend to all look alike,” said Marc Lavoie, a heterodox economist at the University of Ottawa in Canada.
In the mid-1990s, Jim Sturgeon, chairman of UMKC’s economics department, and Robert Brazelton, now professor emeritus, saw heterodoxy as a small pond in which UMKC could become a big fish. Retirements allowed them to restock with a focus.
In 1999 they hired Wray, who had spent a year in Italy on a Fulbright scholarship and taught at the University of Denver.
Wray’s doctorate degree came from Washington University in St. Louis. He went there to study under Hyman Minsky, who was known for arguing that financial markets are inherently unstable (a view that has gained adherents after the near-collapse of the banking system in 2008).
Of the 10 tenure-track professors in UMKC’s department, eight are heterodox.
The UMKC professors are spreading the word through speaking engagements, advisory jobs overseas and on an Internet blog called “New Economic Perspectives.”
Heterodoxy reaches deep into UMKC’s past, to 1946 with the arrival of John Hodges, an institutional economist from Texas.
Institutional economists look beyond markets, employment, inflation and the like. They weigh the social institutions that influence our behavior, said Xuan Pham, a visiting professor at Rockhurst University who received her doctorate from UMKC in 2010. Think of “a marriage between sociology and economics,” she said.
UMKC still teaches its students the full range of mainstream economic theories but also gives heterodox theories prominence in the curriculum.
Earning a doctoral degree in economics at UMKC means taking on a second discipline, the equivalent of a minor in education, political science, history, sociology or other fields.
“So you’re not coming at it just as an economist,” Wray said. “You have to have an understanding of how the world works. Economics is not enough.”
Hiring at the bottom
Wray’s understanding of the world and economics brings him to the conclusion that government can employ the unemployed.
It would be a massive undertaking. Even with the unemployment rate’s recent decline to 8.5 percent, a federal guarantee would bring 13 million people now out of work to Uncle Sam’s door.
It also likely would attract the more than 10 million who have part-time jobs but want full-time work or have become so discouraged that they’ve stopped looking for work.
Mainstream economists would say even trying to push joblessness so low would trigger a painful surge of inflation.
In many mainstream economic explanations, there’s a trade-off between employment and inflation. Government policies might encourage more hiring, more consumption and more investment. But as skilled labor, materials and capital begin to run short, their prices rise. An inflationary spiral might take off.
Every effort the Federal Reserve has taken to pump up the economy and create jobs has been tempered by concerns that it might set off damaging inflation, with too much money chasing too few goods.
“We are against inflation just like everyone else,” Wray said. But “we believe you can have full employment without inflation.”
As Wray sees it, traditional efforts to lower unemployment have an inflation problem because they work at the wrong end of the job market.
For example, awarding federal contracts to build bridges, research clean energy and develop defense equipment may increase jobs, but they also funnel government dollars into a bidding war that drives up costs for skilled labor, materials and capital that other businesses need. You get too much money chasing too few goods.
“What you have to do instead is hire off the bottom,” Wray said.
Wray’s program would specifically target jobs for those least likely to find work at any time – the unemployed with less education, little experience and few skills. Government would essentially bid on workers the market place didn’t bid on. It wouldn’t be bidding up costs, Wray argues, because the market doesn’t want their labor.
In short, he sees the federal government as the employer of last resort. During more normal economic times, Wray said, a government job guarantee would become a tool for improving the lot of workers.
As the demand for labor grew, private employers eventually would need those workers on the federal payroll and could attract them only by beating the government’s standing job offer.
Inflation isn’t the first question Wray’s idea usually stirs. It’s the price tag.
America already is burning through its credit card, some say. It couldn’t possibly afford to offer work to every idle hand.
UMKC’s answer is called Modern Monetary Theory, the one that some identify as the Kansas City school of economic thought.
Texan Craig Austin is one of its fans.
A 39-year-old industrial engineer, Austin created a blog and Twitter feed last summer called Dollar Monopoly and built it around Modern Monetary Theory. But Austin didn’t like that name, so the description on his Twitter page is this: Marketing the Kansas City School of Economics.
Economist and Wall Street trader Mike Norman said he had to be converted to Modern Monetary Theory. His first encounter was a presentation by another strong proponent, investment manager Warren Mosler.
“Some of it almost angered me, like this guy is so misinformed it angered me,” Norman said.
Now Norman promotes sites that explain the theory.
The basic idea is straightforward: The U.S. government isn’t bound by the same budget limits that a household or even a state government faces.
People and states, for example, can’t spend money without first getting the money to spend, from a job or from taxes. Modern Monetary Theory says that is not true for the federal government.
“They don’t need to get it from us in order to spend. They create money when they spend,” said Stephanie Kelton, the economics professor behind UMKC’s blog.
Kelton, who joined UMKC’s economics department in 2002, said it had been this way since 1973. That’s when the United States dropped out of a global currency system called Bretton Woods that sought to keep the value of global currencies stable. Before Bretton Woods, the gold standard similarly limited the creation of dollars.
Now, according to Modern Monetary Theory, the federal government is free to create dollars to achieve any economic benefit it targets.
Critics would argue that flooding the economy with too many created dollars would undermine the value of the U.S. dollar globally.
The theory’s answer is that it wouldn’t, as long as the money soaked up idle resources. Kelton said recent experience proved their point.
“You’ve just seen the Fed pump trillions of dollars into the banking system without the consequences mainstream capitalism would predict,” Kelton said.
In the heterodox world, the federal government has the power, even the moral obligation, to do more than offer jobs to everyone. It can improve health care, build better roads and put more money in schools.
“We could make things better. We don’t have to have poor. We don’t have to have slums,” Lee said.
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