C e n t e r f o r F u l l E m p l o y m e n t a n d P r i c e S t a b i l i t y

Summer, 2000Vol. 1 No. 1

The Center for Full Employment and Price Stability

is Inaugurated at UMKC

DIGESTCFEPS

C o n t e n t s7 C-FEPS Symposium: Launching of Euro8 Vickrey’s Works Issued by C-FEPS14 C-FEPS Community Service Program28 We’re Online!

Robert Heilbroner delivered the keynotelecture at the C-FEPS inauguration.

continued on p. 25

After two years of independent opera-tion, the Center for Full Employment andPrice Stability (C-FEPS) has joined theUniversity of Missouri-Kansas City(UMKC). The center began sponsoringresearch, organizing conferences andpanels at professional meetings, andpromoting public discussion of issuesrelated to macroeconomic and monetarypolicy in the fall of 1997. Discussionswith UMKC began in early 1999 andculminated in an agreement that makes theUniversity C-FEPS’ permanent institu-tional home.

“We are very excited about the innova-tive research that the center is undertak-ing,” said Chancellor Martha Gilliland.“In addition, it will serve as a communityresource by attracting premier scholars toour campus for its lectures and speakerseries.”

The center’s director, Mathew Forstater,joined the Department of Economics as anassistant professor. Forstater came toUMKC from Bard College, where heserved as a visiting scholar at the JeromeLevy Economics Institute and as a fellowof the Bard Center.

Forstater, who remains a research asso-ciate with the Levy Institute, began hisprofessional career at Gettysburg Collegein Gettysburg, Pa. He is also an associateof Columbia University Seminars and anaffiliated faculty member with the Mis-souri Institute of Public Policy.

The center invited Robert Heilbroner,author of The Worldly Philosophers, topresent the keynote lecture at its inaugura-

tion ceremony in October 1999. Forstater,who wrote his Ph.D. dissertation under thewell-known author, introduced Heilbroner,the Norman Thomas Professor of Econom-ics in the Graduate Faculty of Political andSocial Science at the New School forSocial Research. C-FEPS sponsors theProgram on Transformational Growth andFull Employment at the New School.

Heilbroner has been an enthusiasticparticipant in C-FEPS activities, includingthe conference on “Functional Finance andFull Employment,” held at the NewSchool, and the “Commitment to FullEmployment” conference, held at Colum-bia University in memory of Nobel Prize-winning economist William S. Vickrey.Mrs. Cecile Vickrey enthusiastically gavethe Center permission to issue two of her

late husband’s previously unpublishedpapers as the first two papers in its Work-ing Paper Series.

Following the ribbon-cutting ceremony,Heilbroner and Forstater were guests on“The Walt Bodine Show,” a popular talkradio show on KCUR, Kansas City’spublic radio station. The discussionfocused on the deflationary impact of theU.S. federal government budget surplus.Heilbroner is the co-author of The Debtand the Deficit: False Alarms, RealPossibilities , and is a long-time advocateof a sensible approach to budgetary policy.

In the early 1960s, Heilbronerco-authored A Primer on GovernmentSpending, which influenced then President

1 Inauguration of C-FEPS3 Budget Surpluses? - Economists Object4 In Memoriam: Robert Eisner6 Functional Finance & Full Employment

The Center for Full Employment and Price Stabilityis Inaugurated at UMKC

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From the Director

Welcome to the

first edition of

C-FEPS Digest.

Having just com-

pleted our first year

at our new home at

the University of

Missouri-Kansas

City (UMKC), we at

the Center for Full Employment and Price

Stability (C-FEPS) thought it appropriate

to take stock of our activities and accom-

plishments.

Because we are concerned with macro-

economic policy, our activities have

reflected the issues arising from recent

developments in the global economy: the

Asian financial crisis (with the fallout in

Latin America and the transition econo-

mies); the Russian default; ongoing reces-

sion in Japan; weaknesses in the structure

of the new European EMU; continued

volatility on Wall Street; the debates over

Social Security and ‘what to do’ with the

Federal government budget surplus in the

U.S. (with its ever-increasing household

indebtedness); deflationary pressures in

the global economy; the WTO fiasco in

Seattle (followed by more demonstrations

at the IMF meetings in Washington, D.C).

These and other related developments

invite a reconsideration of some of our

most deeply held beliefs concerning

economic theory and public policy. Even

within the hallowed halls of mainstream

economics, voices of dissent can be heard.

Such periods of impending crisis and open

expressions of self-doubt, questioning our

most deeply held beliefs about the way the

world works, create a climate in which

fresh perspectives are welcomed and new

ideas may be seriously considered.

Charles Goodhart of the London

School of Economics, Robert Heilbroner

of the New School for Social Research,

Wynne Godley of the Jerome Levy

Economics Institute of Bard College, the

late Robert Eisner of Northwestern

University, the late William Vickrey of

Columbia University (and recipient of

the Nobel Prize in Economic Science),

James Duesenberry and Richard

Musgrave of Harvard University, and

Jan Kregel of the United Nations Con-

ference on Trade and Development

(UNCTAD) and UMKC are just some

whose voices have been heard at recent

C-FEPS-sponsored events and in C-

FEPS publications who have not only

expressed concern about potential

economic instability, but also offer

positive policy approaches as we enter

the new millennium.

At the Center for Full Employment

and Price Stability, we believe that the

key to understanding many of these

crises is to go back to the basics of

double-entry bookkeeping and the

principles of functional finance, first

outlined by Abba Lerner when he was a

professor at the University of Kansas

City (as UMKC was then known).

C-FEPS is committed to supporting

fresh perspectives based on common

sense, in the hope that effective practical

policies with popular support may result,

promoting full employment and price

stability, with decent jobs and rising

living standards for the average family

struggling to get by.

We invite you to join us in our project

and welcome your thoughts on our ideas

and activities.

Mathew Forstater

C-FEPS DigestA publication ofThe Center for Full Employmentand Price Stability

Staff

Mathew Forstater - Director

Pavlina R. Tcherneva - Associate Directorfor EconomicAnalysis

L. Randall Wray - Senior ResearchAssociate

Kelly D. Pinkham - Assistant Directorfor ProgramDevelopment

Stephanie Bell - Research Associate

PanayotisGiannakouros - Research Assistant

Benton Wolverton - Student Assistant

Address

Center for Full Employmentand Price StabilityUniversity of Missouri-Kansas CityEconomics Department; 211 Haag5100 Rockhill RoadKansas City, MO 64110

Phone: (816) 235-5835Fax: (816) 235-6558Email: cfeps@umkc.edu

Relay Missouri (800) 735-2966 (TT) or(800) 735-2466

UMKC is an equal opportunity institution.

The Center for Full Employment and PriceStability is a non-profit, non-partisan policyinstitute at the University of Missouri-Kansas City dedicated to promotingresearch on and public discussion of issuesrelated to macroeconomic policy.

In an effort to generate policy-relevantresearch, the Center sponsorsinterdisciplinary scholarship, collaborateswith universities, organizes symposia,lectures, and conferences and participatesin community programs.

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We, the undersigned, hereby go on

record stating that:

• the current U.S. policy of allowing a

federal budget surplus is an extremely

high risk strategy that will likely end in

a severe and prolonged recession, and

furthermore that,

• lowering interest rates (the most likely

initial policy response to an economic

slowdown) by itself cannot be relied

upon to restore prosperity (as the

Japanese economy has demonstrated).

Therefore, it is recommended that the

federal government relax its fiscal stance

by increasing spending and/or cutting

taxes at the earliest sign of economic

weakness.

Budget Surpluses – Economists Object

Jan Kregel Discusses the Aftermath of Seattle WTO Meeting

With the Seattle demonstrations stillfresh in the public’s memory and anotherwave of protests against IMF policiessweeping the streets of Washington, D.C.,C-FEPS invited Dr. Jan Kregel to sharehis thoughts on trade and the role of theWorld Trade Organization (WTO) withstudents and faculty at the Universityof Missouri-Kansas City. Dr. Kregel, ahigh-level financial expert at the UnitedNations Conference on Trade and Devel-

opment (UNCTAD) and DistinguishedResearch Professor at UMKC, is a regularparticipant in C-FEPS sponsored events.

The message of Kregel’s presentationwas clear: “One of the most paradoxicalaspects of the current economic environ-ment is that after numerous UN ‘develop-ment decades,’ global summits, andconferences, little advance has been made

Background to Petition Statement:

Budget surpluses occur as tax revenues exceed government spending, reducing non-government nominal wealth by an amount equal to the size of the surplus. (A reductionof nominal wealth due to a budget surplus primarily takes the form of a reduction inoutstanding treasury debt.) Therefore, the Congressional Budget Office’s projection of a$3 trillion surplus over the next 10 years is simultaneously projecting that net privatenominal wealth will be reduced by the same $3 trillion.

Can our economy withstand such bloodletting? Our own history suggests this ishighly improbable. The U.S. has experienced six depressions in its history and every onefollowed close on the heels of federal government surpluses. The last two Treasury buybacks of its debt were in 1928 and 1930. For a recent example, we can again look tothe experience of Japan, whose economic deterioration followed government budgetsurpluses at the end of the 1980s. Furthermore, after more than four years of near zeropercent interest rates, monetary policy has not succeeded in restoring economic growth.

Many point to the long and robust expansion as evidence of the wisdom of deficit-cutting and budget surpluses. However, our expansion is fully explained by unprec-edented private sector deficits (private sector spending in excess of income). Currently,the domestic private sector is deficit spending an amount equal to 5 percent of GDP. Thisis already the largest private sector deficit the U.S. has ever experienced. For continuedeconomic growth in the presence of government surpluses, the non-government sectormust continue to spend beyond its income.

Logic does not permit that this excess consumer spending can increase indefinitely.As federal government surpluses reduce non-government wealth, aggregate demandwill stall and the U.S. will lapse into a full-blown recession. CBO projections will notmaterialize. Instead, tax revenues will slow and transfer payments will increase due tothe increasing number of unemployed, sending the budget into deficit.

According to Jan A.Kregel, free tradeyields benefits onlyon the condition offull employment.

For the Record

continued on p. 21

The Center for Full Employment and Price Stability has drafted the following petition which is being distributed

to a variety of economists. We intend to have the signed document published in the media, as well as read into the

Congressional Record. We feel that the time is short to respond to a potentially severe crisis.

High Level UN Financial Expert Addresses UMKC Students and Staff

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In Memoriam: Robert Eisner

Enthusiastic Participant inC-FEPS Activities

When C-FEPS Director Mathew Forstater invited RobertEisner to participate in the Association for EvolutionaryEconomics’ “Roundtable on Employment Policy” at the AlliedSocial Science Association Annual Meetings in New York inJanuary 2000, he not only accepted on the spot, but also immedi-ately said he would speak about “Employment Policy and theNAIRU.”

For years Eisner, an active and enthusiastic participant inC-FEPS-sponsored activities at the end of his life, insisted thatthe NAIRU (the “non-accelerating inflation rate of unemploy-ment”) is a theoretically flawed and socially harmful conceptjustifying the politically induced unemployment of millions ofworkers in the name of price stability. Eisner saw the recent dropin the official rate of unemployment to well below 5 percentwithout any signs of inflation whatsoever as an opportunity toslay the NAIRU dragon once and for all. Fiscal policy should beused to push the official rate down even further and promote truefull employment.

Following Eisner’s death on November 25, 1998, at age 76,Forstater suggested to the other Roundtable participants—William A. Darity, Jr. of the University of North Carolinaat Chapel Hill and co-author (with Samuel L. Myers, Jr.) ofPersistent Disparities, James K. Galbraith of the University ofTexas at Austin and author of Created Unequal, Philip Harveyof Rutgers Law School at Camden and author of Securing theRight to Employment, and C-FEPS Senior Research AssociateL. Randall Wray of the University of Missouri-Kansas City andauthor of Understanding Modern Money—to dedicate theRoundtable to Robert Eisner’s life and work.

Previously, Eisner had participated in the C-FEPS-sponsoredconference “Functional Finance and Full Employment” at theNew School for Social Research in spring 1998 (see p. 6), theC-FEPS-sponsored Post Keynesian Workshop at the Universityof Tennessee at Knoxville in the Summer of 1998 (“his very lasttrip away,” according to his wife, Edith Eisner; see p. 17), and heaccepted an invitation to deliver the final keynote address at theC-FEPS-sponsored “Commitment to Full Employment” confer-ence in memory of Nobel-prize winning economist WilliamVickrey at Columbia University in the fall of 1998 (see p. 8).He had to cancel his appearance at the Vickrey conference dueto ill health, but he was still planning to attend the roundtableright up until his untimely passing.

The roundtable papers by Darity, Forstater, Harvey, and Wrayappeared, along with an introduction by Forstater entitled “Rob-ert Eisner’s Common Sense Commitment to Full Employmentand Activist Fiscal Policy,” in the June 1999 issue of the Journalof Economic Issues (Vol. XXXIII, No. 2).

In addition, C-FEPS organized another memorial session,“Robert Eisner’s Contributions to Economics and Public Policy,”including David Colander of Middlebury College, Paul Davidsonof the University of Tennessee-Knoxville, Edward J. Nell of theNew School for Social Research, Ingrid Rima of Temple Univer-sity, and Sumner Rosen of Columbia University, and chaired byC-FEPS Director Mathew Forstater, at the Eastern EconomicAssociation Annual Meetings in Boston in the spring of 1999.Eisner’s paper from the New School conference will appear inthe conference volume, Functional Finance and Full Employ-ment: Reviving Real Macroeconomics, edited by Edward J. Nelland C-FEPS Director Mathew Forstater, to be published byEdward Elgar.

While Eisner was a gifted technical economist, no doubtcontributing to his recognition within the mainstream of thediscipline (e.g., he was elected president of the American Eco-nomic Association in 1987), his ideas were rooted in somethingmissing from much of the profession: common sense. Eisnerbelieved that failure to understand the logical fallacy of composi-tion was at the root of many of the theoretical errors and mis-guided policy views that plague us.

For the economy as a whole, contrary to the popular saying,there may be a free lunch, “and failing to take advantage of itmay leave some of us without dinner as well,” wrote Eisner inhis 1994 book, The Misunderstood Economy:

The cost of anything is what has to be sacrificed to getit. What then would be the cost of providing lunchto the needy if we used surplus food that would other-wise be wasted? Would there be a cost to govern-ment’s giving lunch to hungry children? Would thepeople, otherwise unemployed, who might be paid toprepare the lunches perhaps secure the wherewithal topurchase dinner? (Eisner, 1994, pp. xiii-xiv).

The logic of an economy with unemployed resources is verydifferent than that of an economy running at full employment

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and full capacity. It is a grave error to apply the logic of fullemployment—the logic of scarce resources—to the society inwhich we actually live.

Eisner’s common-sense approach led him to repeat oftenthe truism that “for every buyer there is a seller and for everyborrower there is a lender.” If someone or some institution isin deficit, some other person or institution must be in surplus.Reducing the federal budget deficit must reduce the privatesector surplus on the other side of the ledger, and this has eco-nomic implications. If the federal government runs a surplus, theprivate sector is going to have to go into deficit (currently, withconsolidated federal, state, and local governments running asurplus and the foreign sector running a trade deficit, the privatesector has been forced into record high deficit; given that firmsremain profitable in the aggregate, this currently takes the formof household spending in excess of income). For Eisner, ifyou want to reduce the federal budget deficit or pay down thenational debt, you are going to have to face the (dire) economicconsequences.

In response to what he called the “hysteria” surroundinggovernment deficits and the debt, Eisner devoted a lifetime ofeffort and thousands of pages of scholarly articles and books,newspaper editorials and letters to the editor, as well as hours oftestimony before various congressional committees, demonstrat-ing that there is no logical or empirical support for the claimsthat deficits cause high interest rates and inflation or crowd outprivate expenditure. Most often, such claims are derived fromthe assumptions that all resources are fully employed and thatinvestment must be financed out of a fixed “pool” of savings.

Recently, Eisner’s common sense was additionally focused onthe “myths” concerning Social Security, which he considered“perhaps the worst of all the deficit scare stories” because they“frighten millions of elderly” and provide “cover for insidiousefforts to diminish or destroy a system of social insurance thathas served its purpose well for six decades” (Eisner, 1997,p. 43). According to Eisner, the claim that the trust funds are inprospective deficit and projections of insolvency are, in hisword, “nonsense” (Eisner, 1997, p. 43). Likewise, the claim thatthe federal government is “masking” the deficit by spendingworkers’ contributions and replacing them with worthless paperin the form of non-negotiable Treasury securities is:

Also nonsense! The budget deficit … is the excess oftotal outlays by the Treasury over total revenues. All“contributions for social insurance” go directly to theTreasury, and Social Security checks—as retirees canreadily attest—come directly from the Treasury. And ifTreasury securities or promises to pay are worthless,then so is all our money. (Eisner, 1997, p. 43).

There is no justification for cutting benefits, investing benefitsin the stock market, or raising taxes in the name of “saving”Social Security.

Robert Eisner was a giant in his common sense commitment tofull employment and his insistence that, despite the “deficit

scares,” sensible fiscal policy is available for its achievementand maintenance. The Center for Full Employment is honored byEisner’s enthusiastic support for and participation in its activitiesat the end of his life, and pledges to carry forward the banner ofa common sense commitment to full employment and a betterlife for all.

Robert Eisner discusses Social Security at the NewSchool’s “Functional Finance and Full Employment”conference, with James Duesenberry in rear.

For Further Reading

Robert Eisner, 1986, How Real Is the Federal Deficit?,New York: The Free Press.

Robert Eisner, 1994, The Misunderstood Economy,Cambridge, MA: Harvard University Press.

Robert Eisner, 1997, The Great Deficit Scares: The FederalBudget, Trade, and Social Security, New York: CenturyFoundation Press.

Mathew Forstater, 1999, “Roundtable on Employment Policy:Introduction: Robert Eisner’s Common Sense Commitment toFull Employment and Activist Fiscal Policy,” Journal ofEconomic Issues, Vol. XXXIII, No. 2, pp. 471-73, June.

L. Randall Wray, “Abolish the Surplus,” Policy Note 99/01,Center for Full Employment and Price Stability.

L. Randall Wray, 1999, “Subway Tokens and Social Security,”Policy Note 99/02, Center for Full Employment and PriceStability.

L. Randall Wray, 2000, “Implications of a Budget Surplusat Mid-Year 2000,” Policy Note 00/01, Center for FullEmployment and Price Stability.

L. Randall Wray, 2000, “A Primer on Government Surpluses,”Special Report 00/02, Center for Full Employment and PriceStability.

Stephanie Bell and L. Randall Wray, 2000, “Financial Aspectsof the Social Security Problem,” Working Paper No. 06, Centerfor Full Employment and Price Stability.

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In 1941, Professor Abba Lerner of theUniversity of Kansas City (later renamedUMKC) laid out the principles that hebelieved should guide the government’sbudgetary policies. These principles wereoffered as an alternative to the orthodoxprinciples of so-called “sound finance”and were spelled out in his article, “TheEconomic Steering Wheel,” whichappeared in the University of Kansas CityReview. Lerner later moved to the NewSchool for Social Research, wherehe elaborated his ideas in “FunctionalFinance and the Federal Debt,” publishedin the New School’s Graduate Facultyjournal, Social Research, in 1943.

The C-FEPS-sponsored Programon Transformational Growth and FullEmployment, headed by the New School’sEdward J. Nell, Malcolm B. Smith Profes-sor in the Economics Department, held aconference on Functional Finance and FullEmployment, attracting a group of world-class economists from around the globe,who expressed their commitment toLerner’s principles and celebrated theirimportance for contemporary monetaryand budgetary theory and policy.

Among the participants were HarvardUniversity Professors Richard Musgrave,the father of modern public finance, andJames Duesenberry, who is best knownfor formulating the relative incomehypothesis, an alternative to the permanentincome and life cycle theories of con-

sumption. The lateRobert Eisner of North-western University, whohad been a frequentparticipant in C-FEPS-sponsored activities untilhis untimely death inNovember 1998, DavidColander of MiddleburyCollege, and the NewSchool’s own Robert L.

Heilbroner, also presented papers.

In the Social Research paper, Lernerproposed his principles of functionalfinance, which he believed the government

should implement inorder to bring aboutfull employment.In his words:

The central idea isthat governmentfiscal policy, itsspending and taxing,borrowing andrepayment of loans,

its issue of new money and its withdrawalof money, shall all be undertaken with aneye only to the results of these actions onthe economy, and not to any establishedtraditional doctrine about what is soundand what is unsound. This principle ofjudging only by effects has been appliedin many other fields of human activity,where it is known as the method of scienceopposed to scholasticism.

The principle of judging fiscal measuresby the way they work or function in aneconomy we maycall FunctionalFinance… Govern-ment should adjustits rates of expendi-ture and taxationsuch that totalspending in theeconomy is neithermore nor less thanthat which is suffi-cient to purchase the full employment levelof output at current prices. If this meansthere is a deficit, greater borrowing,“printing money,” etc., then these things inthemselves are neither good nor bad, theyare simply the means to the desired ends offull employment and price stability.(Lerner, 1943, p. 354).

The papers from the conference will becollected in a volume, Functional Financeand Full Employment: Reviving RealMacroeconomics, edited by the NewSchool’s Edward J. Nell and C-FEPSDirector Mathew Forstater, to be publishedby Edward Elgar Publishing, 2000.

Renowned Scholars Gather to ExpressSupport for Functional Finance

For Further Reading

Abba Lerner, 1941, “The Economic Steer-ing Wheel,” University of Kansas CityReview, June.

Abba Lerner, 1943, “Functional Financeand the Federal Debt,” Social Research,Vol. 10, pp. 10-51.

L. Randall Wray, 1998, UnderstandingModern Money: The Key to Full Employ-ment and Price Stability, Edward Elgar.

Mathew Forstater, 1998, “Toward a NewInstrumental Macroeconomics: AbbaLerner and Adolph Lowe on EconomicMethod, History, Theory and Policy,”Working Paper No. 254, Jerome LevyEconomics Institute, October.

Mathew Forstater, 1999, “FunctionalFinance and Full Employment: Lessonsfrom Lerner for Today,” Journal of Eco-nomic Issues, Vol. 33, No. 2, pp. 475-82,June.

Mathew Forstater, 1999, “FunctionalFinance and Full Employment: Lessonsfrom Lerner for Today,” Working PaperNo. 272, Jerome Levy Economics Insti-tute, July.

Stephanie Bell, 1998, “Can Taxes andBonds Finance Government Spending?,”Working Paper No. 244, Jerome LevyEconomics Institute, July.

Stephanie Bell, 1999, “FunctionalFinance: What, Why, and How?,” WorkingPaper No. 287, Jerome Levy EconomicsInstitute, November.

James Duesenberry

Robert Heilbroner

Abba Lerner

Edward J. Nell and Richard Musgrave

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Launching of Euro is Subject ofC-FEPS Conferences and Publications

On January 1, 1999 the Euro was launched. Although actualnotes and coins denominated in Euro will not begin circulatinguntil January 1, 2002, the exchange rates between the currenciesof the eleven participating countries (Austria, Belgium, Finland,France, Germany, Ireland, Italy, Luxembourg, the Netherlands,Portugal, and Spain) and the Euro have been irrevocably fixed,so that their currencies for practical purposes stand in a relationmuch like nickels, dimes, and quarters do to the dollar in theU.S. In anticipation of this event, the Center for Full Employ-ment and Price Stability (C-FEPS) organized a number of eventsaddressing the common currency, resulting in a variety of publi-cations.

Eminent monetary economists (representing France, Italy, andthe U.K., as well as Canada) were invited by C-FEPS to partici-pate in a Roundtable on the European Economic and MonetaryUnion (EMU) at the Eastern Economic Association annualmeetings in New York in March, 1998. The papers, along withan Introduction by C-FEPS Director Mathew Forstater and aninvited comment by Princeton University’s Walker Professor ofEconomics and International Finance Peter B. Kenen, werepublished in the Winter 1999 issue of the Eastern EconomicJournal.

Taken as a set, the papers were frankly pessimistic about theEuro. This pessimism is rooted in a rejection of the underlyingtheoretical basis of the plan, which famed theorist of the FrenchCircuitiste School Alain Parguez of the Université de FrancheComté referred to in his paper, “The Expected Failure of theEuropean Economic and Monetary Union: A False MoneyAgainst the Real Economy,” as “Euro-economics.” Euro-eco-nomics is first and foremost pre-Keynesian in its basic outlookand assumptions. Inflation is clearly Public Enemy No. 1 (if notthe only public enemy recognized), and the principles of “soundfinance” rule the day (with strict limits on deficit-GDP and debt-GDP ratios). The papers thus express a natural concern about theability of member countries to respond effectively to deficienciesin aggregate demand and conditions of unacceptably high unem-ployment with its negative effects on human welfare.

But there is a more fundamental, albeit related, issue. Even ifthere were no imposed limits on countries’ deficits and nationaldebts, the structure of the EMU makes it nearly impossible for acountry to enact a counter-cyclical fiscal policy even if therewere the political will. This is because, by giving up their na-tional monetary sovereignty, countries are no longer able tocoordinate their fiscal and monetary policies, essential for acomprehensive and effective remedy for periodic demand crises.Why would countries voluntarily sacrifice the ability to conducta coordinated macroeconomic policy, especially with officialunemployment rates in double digits and clear deflationarypressures? The papers suggest that the answer can be found, again,in Euro-economics (and perhaps more than a bit of Euro-politics).

As Charles A. E. Goodhart, Norman Sosnow Professor ofBanking and Finance at the London School of Economics (LSE),pointed out in his paper “The Two Concepts of Money and theFuture of Europe,” presented at a C-FEPS-sponsored symposiumat the New School for Social Research in April, 1999, most ofthe analytical work on the Euro has been conducted within theOptimal Currency Area Paradigm, itself rooted in a metallist/monetarist view of the origins, nature, and evolution of money.According to Goodhart, whose paper, “Credit Risks and Euro-pean Government Bond Markets: A Panel Data EconometricAnalysis” (co-authored with Jan J. G. Lemmen of the Nether-lands Bureau for Economicand Policy Analysis),appeared in the East-ern Economic Jour-nal symposium, verydifferent conclusionsconcerning the Euro arereached when seen fromthe perspective of analternative, “Cartalist” (orChartalist) view thatmoney is a creature of thestate. The state has thepower not only to tax, butto designate what willsuffice to retire tax (andother) obligations to thestate, that is, what it will accept at its pay offices. By determin-ing public receivability, the state can create a demand for other-wise worthless bits of paper, leading to general acceptability. Thestate can issue this currency, and can use it to purchase goodsand services from the private sector. Thus, a variety of statepowers, such as government’s ability to tax, declare publicreceivability, create and destroy money, buy and sell bonds, andadminister the prices it pays for goods and services purchasedfrom the private sector, constitute a menu of instruments throughwhich macroeconomic policy may be conducted based on theprinciples of functional finance. Under such a system, nationalbudgets may be freely utilized as means to promote full employ-ment, price stability, and other macroeconomic goals.

Goodhart, whose New School paper was discussed by a panelincluding Duncan Foley and Edward J. Nell of the New School,Michael Hudson of New York University, Perry Mehrling ofBarnard College, Robert Guttmann of Hofstra University, andC-FEPS Senior Research Associate L. Randall Wray of theUniversity of Missouri-Kansas City, and moderated by C-FEPSDirector Mathew Forstater, went on to argue that the alternative,

Charles A. E. Goodhart

continued on p. 20

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Columbia University ConferenceCelebrates William Vickrey’s“Commitment to Full Employment”

William Vickrey’s single-minded com-mitment to full employment was evident ina series of papers written in the last yearsof his life. In this work, Vickrey formu-lated an assets-based approach to macro-economic analysis with definiteimplications for budgetary and employ-ment policy. In Vickrey’s approach, thedifference between desired and actualholdings of net financial assets is thecrucial relation in understanding macro-economic processes, and the federal gov-ernment budget is the key policyinstrument in the necessary recycling ofnet nominal savings to bring the desiredand actual levels into equality at the fullemployment level of output and income.

Vickrey believed that the major task foreconomists and policymakers is to devisethe means whereby the necessary recyclingof net nominal savings at full employmentcan take place without unexpected changesin the rate of either inflation or deflation.Vickrey considered government deficit-financed guaranteed public employment asan automatic stabilizing policy instrumentcapable of serving as just such a means.

The Center for Full Employment andPrice Stability joined forces with Colum-bia University Seminars, the Jerome LevyEconomics Institute of Bard College, theCenter for Economic and Policy Analysis(CEPA) of the New School for SocialResearch, and the National Jobs for AllCoalition to present the “Commitment toFull Employment” conference in celebra-tion of the life and work of the NobelPrize-winning economist.

The two-day conference, which tookplace in the fall of 1998, began with akeynote address by Paul Davidson of theUniversity of Tennessee at Knoxville on“Commitment to Full Employment in aGlobal Economy,” in which he discussedalternative arrangements for dealing withinternational financial instability. In his

paper—which was discussed by JohnLangmore, director of the Division forSocial Policy and Development with theUnited Nations, and Thomas Palley, assis-tant director of public policy with theAFL-CIO—Professor Davidson rejectedrecent proposals for more “transparency”as well as transactions taxes, such as theTobin tax, as ineffective in dealing withthe problems brought on by internationalspeculative flows, instead promoting hisideas for reforming the internationalpayments system, in which he advocatesa fixed exchange rate system.

It was pointed out in discussion moder-ated by Dimitri Papadimitriou, presidentof the Levy Institute, that Vickrey was infavor of flexible exchange rates. Vickreyworried that a fixed exchange rate systemsuch as is entailed in the Maastricht agree-ments makes it difficult for a small openeconomy (e.g., Denmark) to pursue aneffective full employment policy on itsown, because fixed exchange rates or ratesconfined to a narrow band can only bemaintained by coordinated fiscal policiesamong the countries involved, or byimposing extreme austerity measures thatinvolve deleteriously high unemploymentrates.

The next morning’s activities beganwith the second of the three keynotespeeches of the conference. C-FEPSDirector Mathew Forstater introduced theNew School’s Norman Thomas Professorof Economics Emeritus Robert L.Heilbroner, who employed one of histrademark methods of interrogating keywords and phrases often taken for grantedor commonly used to evoke certain emo-tions by the press, politicians, and eveneconomists, including “full employment,”“the natural rate of unemployment,” and“the debt” and “the deficit” (often writtenout by Heilbroner as “thedeficit” with no

space between the two words, to indicatejust such a state in which a phrase isrepeated over and over again without everstopping to consider what it really means).

“Full employment,” the author of thebest seller The Worldly Philosopherspointed out, is often used not to indicatethe absence of involuntary unemploy-ment—the state in which every personready, willing, and able to work at thegoing rate has employment—but rather toindicate the level of unemployment atwhich there is no or little inflation. Such asituation is little different than that de-scribed by the novelist George Orwell inhis classic work, 1984. The “natural rateof unemployment,” Heilbroner continued,implies that joblessness is divinely or-dained, or at least either without socialcause or beyond social correction.

Vickrey himself promoted what hecalled “chock-full employment,” which hedescribed as holding when “there are atleast as many unfilled job openings asthere are unemployed individuals seekingwork” or a situation in which individuals“can find work at a living wage within 48hours.” Not surprisingly, Vickrey vehe-mently rejected the notion of the NAIRU(non-accelerating inflation rate of unem-ployment) or any kind of “natural” rate,calling the latter, “one of the most viciouseuphemisms ever coined.” For Vickrey,“unemployment is not needed to controlinflation.”

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Adherence to the view that price stabil-ity requires maintaining a reserve army oflabor, which Vickrey believed was “espe-cially strong in influential financial circlesand among monetary authorities,” meansthat the fiscal and monetary brakes have tobe slammed every time economic growthcauses unemployment to drop below acertain level. One implication of such anapproach, according to Vickrey, is thatefforts such as worker retraining become“a cruel game of musical chairs” with the“keepers of austerity” making sure thetotal number of chairs stays fixed.

Heilbroner demonstrated the problemswith “thedebt” and “thedeficit” withexamples of imagery utilized by politi-cians of dollar bills corresponding to thebudgetary values piled up half-way to themoon, without ever clearly stating whatsuch accounting categories actually mean.

Heilbroner hailed Vickrey for his com-mitment to true full employment and hiscourage to speak the truth about the im-portance of the government budget as apolicy tool promoting prosperity to col-leagues and students over his many yearsas a professor and public figure. ForVickrey, since the private sector isincapable of creating net nominalassets, there is “no adequate solutionwithout long-term and continuedincreases in government debt.” “The‘deficit’ is not an economic sin,”wrote Vickrey, “but an economicnecessity.”

There may be political or ideologi-cal reasons why a capital budget maymake deficits more palatable. Whilemany have promoted the use ofcapital budgeting by the federalgovernment, for Vickrey, from ascientific point of view, this isbeside the point:

The savings-recycling budget ispossibly the most important ofbudgetary concepts from the stand-point of day-to-day policy. Thisbudget would reflect the effect ofgovernment outlays… in recyclingsavings, in excess of those absorbedby private investment, into thestream of demand for output. It isthe crucial element in curbing

the business cycle and bringingemployment of resources up to asatisfactory level. From this point itmatters relatively little whetheroutlays are for current or for capi-tal-account items. (Vickrey, 1992,p. 307).

As far as “the debt” is concerned,Vickrey noted that government investmentthat spurs further private investment(“crowding in”) or otherwise benefits thepublic refutes the argument that the na-tional debt is a burden on future genera-tions, arguing instead that much of theactivity undertaken for the purpose ofrecycling savings “will form part of thereal heritage left to the future.” Becausesavings recycling through governmentdeficits permits chock-full employmenteconomic growth, “this means an in-creased heritage of real capital plant andequipment, to say nothing of the humancapital induced by fuller employment.”

Vickrey rejected many of the othercommon myths and misconceptions con-cerning deficits and the debt held by theeconomics profession and politicians, and

repeated ad nauseam by the press, includ-ing the assertions, backed up by neithercareful analysis nor the historical record,that deficits cause inflation and highinterest rates, or crowd out private invest-ment. Vickrey pointed out that not onlyhave deficits and the national debt notresulted in these effects, but that the

“existence of a large government debtmay be one reason why we have not had arecurrence of a depression of the severityof the 1930s.”

Following Heilbroner’s morning key-note, Columbia University ProfessorEmeritus of Social Work Sumner Rosenchaired a session on “Work and Welfare”that included presentations by GertrudeSchaffner Goldberg of Adelphi Universityand the National Jobs for All Coalition,and Helen Ginsburg of Brooklyn College.

Goldberg, the author of Washington’sNew Poor Law, began by noting thatwhile Welfare “reform” as enacted byCongress (the Personal Responsibility Actof 1996) imposes stricter work require-ments on welfare recipients, it overlooksthe fact that about 17 million people in theU.S. either want jobs and don’t have themor are forced to work part-time becausethey can’t find full-time employment.

Welfare reform requires recipients toenter a labor market in which there aren’tenough jobs to go around and in which thejob shortage is worsened by policies ofthe federal government itself, such as

politically enforcing unemploymentin the name of fighting inflation. Bydriving welfare mothers into a labormarket with a chronic shortage ofjobs, welfare “reform” will actuallycreate more unemployment.

Professor Ginsburg, author of FullEmployment and Public Policy, gavea detailed history of successfulemployment programs of the past,including New Deal programs suchas the Works Progress Administra-tion and the Civilian ConservationCorps and more recent programssuch as CETA. Consideration of thishistory refutes many of the criticismsof government jobs programs, such

as the claim that such employment consti-tutes “make-work.” It would do us well,Ginsburg stated, to remind ourselves ofthe contributions made by WPA workers,such as building or reconstructing 617,000miles of roads, 124,000 bridges andviaducts, and 120,000 public buildings,adding thousands of new parks, play-grounds, and athletic fields to the nation,draining malarial swamps, organizingnursery schools, and teaching illiterate

Mrs. Cecile Vickrey has kindlygiven C-FEPS permission to issue

two previously unpublishedpapers by her late husband—

“The Fifteen Fatal Fallaciesof Fiscal Fundamentalism” and“We Need a Bigger ‘Deficit’”—

as the first two papers inits Working Paper Series.

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Vickrey argued that publicemployment “can indeed”result in net job creation,while bringing a numberof other benefits as well.

adults to read and write. A revitalized public employment pro-gram could today address important public concerns such asenvironmental protection, while increasing the number of posi-tions available for job-seekers.

Vickrey rejected draconian workfare that is not combined withincreases in aggregate demand:

Attempts to move selected individuals or groups into jobsby training, instruction in job search techniques, threats ofbenefit withdrawal or denial, and the like, merely movethe selected individuals to the head of the queue withoutreducing the length of the queue. Merely because anyone traveler can secure a seat on a flight by getting to theairport sufficiently early does not mean that if everyonegets to the airport sufficiently early that 200 passengerscan get on a flight with seats for 150. (Vickrey, 2000,p. 27).

But when financed by deficit spending, he argued, publicemployment “can indeed” result innet job creation, while bringing anumber of other benefits as well.

Such “Direct Job Creation” bythe government was the topic of thenext session, chaired by C-FEPSDirector Mathew Forstater, with apaper by Rutgers University LawProfessor Philip Harvey and com-ments by David Howell of theProgram on Urban Analysis andManagement at the New School’sRobert J. Milano Graduate School. Harvey distinguished thoseapproaches to employment policy that focus on reducing theaggregate level of joblessness in the economy from those thatmerely redistribute employment opportunities among populationgroups. Among the former, he made the further distinctionbetween public job creation programs and fiscal stimulusintended to increase employment opportunities in the privatesector (i.e., traditional Keynesian macroeconomic management).Harvey pointed out that direct job creation has some importantadvantages over Keynesian demand management, for example,in controlling inflation, providing important public goodsand social services, combating labor market discrimination,and providing job training. Harvey also argued that direct jobcreation is the only approach that can secure the right toemployment.

Vickrey emphasized that there are huge social and economiccosts of unemployment. Among these are the direct and realcosts of loss of potential output and income, as well as thenominal costs of lower tax revenues because of the smaller taxbase and higher rates of government expenditure in the form ofunemployment compensation and various forms of “welfare”

assistance. But Vickrey also continuously emphasized the socialand economic costs linked to unemployment in the form ofpoverty, crime, drug addiction, homelessness, malnutrition, poorprenatal care, ethnic antagonism, school dropouts, broken fami-lies, and other social problems. He also recognized that unem-ployment differentially affects certain sectors of the population,so that an overall official unemployment rate of 5 percent canmean rates of “10, 20, and 40 percent among disadvantagedgroups.” The benefits of full employment thus include improvedsecurity for society’s most downtrodden, alleviation of a varietyof social ills, and expanded output and income. In addition, fullemployment also can stabilize business expectations and have apositive impact on the wages and status of unskilled workers.

Vickrey emphasized that savings-recycling public employmentdoes not replace either private sector or other public sectoremployment. Under such a program, all the benefits of fullemployment outlined by Vickrey are obtained, and the social and

economic costs of unemploymentdrastically reduced. To the extentthat savings-recycling publicemployment involves the enhance-ment of worker skills, the benefitsof the program as a means of jobtraining are actualized, as net jobcreation means the program is notsimply a cruel game of musicalchairs, while the retraining effectmay prove “essential in abatingstructural mismatch between job

requirements and individual qualifications.”A lunch-time talk on “Rewarding Work to Widen Self Support

and Add Jobs” was delivered by Edmund Phelps, who wasrecently appointed the McVickar Professor of Economics atColumbia University, the chair formerly held by Vickrey him-self. Phelps, who was introduced by Lowell Harriss, also fromColumbia’s Economics Department, summarized the proposalput forward in his 1997 book, Rewarding Work, for governmentto partially subsidize wages paid by firms to hire additionalworkers. In the discussion period, it was pointed out thatemployers may seek to substitute subsidized workers for thosecurrently employed, resulting in no net employment creation. Ifthe plan is successful in promoting higher levels of private sectoremployment, it could lead to inflation and system rigidities thatwould hinder growth. The consensus of the audience was that thepublic employment approach discussed by Harvey during themorning session had significant advantages over Phelps’ wagesubsidies.

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James K. Galbraith

For Further Reading

Vickrey, William, 1992, “Chock-Full Employment WithoutIncreased Inflation,” American Economic Review, Vol. 82, No.2, May, pp. 341-45.

Vickrey, William, 1993, “Today’s Task for Economists,” Ameri-can Economic Review, Vol. 83, No. 1, March, pp. 1-10.

Vickrey, William, 1993, “The Other Side of the Coin,” Ameri-can Economist, Vol. 37, No. 2, pp. 5-16.

Vickrey, William, 1994, “Why Not Chock-Full Employment?,”Atlantic Economic Journal, Vol. 25, No. 1, pp. 39-45.

Vickrey, William, 1997, “A Trans-Keynesian Manifesto(Thoughts about an Asset-Based Macroeconomics),” Journal ofPost Keynesian Economics, Vol. 19, No. 4, pp. 495-510.

Forstater, Mathew, 2000, “Savings-Recycling Public Employ-ment: An Asset-Based Approach to Full Employment and PriceStability,” Journal of Post Keynesian Economics, Vol. 22,No. 3, pp. 445-59.

“Unlike private investors, public investors are not hampered byuncertainties about future demand, because they themselvesdetermine the purpose that investment and its final output is toserve, for instance, the items that make up the infrastructure.”

— Adolph Lowe, Has Freedom a Future?, 1988

“By its willingness to accept a designatedasset in settlement of taxes and other obliga-tions, the government makes that assetacceptable to any who have such obligations,and in turn to others who have obligations tothem, and so on.” — James Tobin, Money, Credit and Capital, 1998

Quotable continued from p. 28 (Back Cover)

“The permanent programs will provideoutputs—public services, environmentalimprovements, etc. that transfer-paymentgovernment does not yield, as well as thecreation and improvement of humanresources. In our urban centers, where thereare concentrations of unemployed and welfarerecipients, the improvement in public environment shouldbe marked. WPA, CCC and NYA will succeed preciselybecause they are job programs that perform useful tasks andyield benefits.” — Hyman P. Minsky, Stabilizing an Unstable Economy, 1986

The first afternoon session,“Monetary and Fiscal Policies for FullEmployment,” moderated by PerryMehrling of Barnard College, includeda paper on “Vickrey, Macro Policy, andFull Employment” by David Colanderof Middlebury College (and a formerstudent of Vickrey), with commentaryby Edward Nell of the New School.This was followed by a session on“Discrimination,” moderated by Kevin

Parker of the Graduate Center of the City University of NewYork, with a paper on “Unemployment, Wages, and Race”by Heather Boushey of the New York City Public HousingAuthority (and currently of the Economic Policy Institute),with comments by Brendan O’Flaherty of Columbia University’sEconomics Department. The sessions further demonstrated thewide-ranging influence of Vickrey’s work, as Colander and Nelldebated the relative importance of multiple equilibria modelsand Boushey and Flaherty discussed the relationship betweenunemployment and inequality, especially as it affects AfricanAmericans.

The closing address was delivered by James K. Galbraith ofthe University of Texas at Austin and author of Created Unequal,replacing Robert Eisner, who was originally slated to deliver thefinal keynote, but was unable to attend due to his deterioratinghealth. Galbraith, who was introduced by Duncan Foley of theNew School, began by paying tribute to both Vickrey and Eisner.He then continued with several themes that had been raisedearlier in the day. First, he repeated the belief, put forward byBoushey, that unemployment contributes to inequality. Second,he agreed with Colander and Nell that Walrasian micro-economics and Keynesian macroeconomics are incompatible.Finally, he echoed the sentiments put forward by virtually all the

participants that full employment should never be sacrificed tothe fear of inflation; that Social Security should not be cut—rather, it should be expanded; and that deficit reduction is adangerous policy course with a sharp contractionary bias.

The conference papers have been collected together in Com-mitment to Full Employment: The Macroeconomics and PublicPolicy of William S. Vickrey, edited by Aaron Warner, C-FEPSDirector Mathew Forstater, and Sumner Rosen (M. E. Sharpe,2000). The book includes an “Introduction” by Robert L.Heilbroner, papers by Colander, Davidson, Forstater, Galbraith,Ginsburg, Goldberg, Harvey, Nell, Papadimitriou, and Rosen,and comments by Palley and Langmore.

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True to its name, the Center for FullEmployment and Price Stability is com-mitted to true full employment—meaningzero involuntary unemployment—andsupports Public Service EmploymentAssurance as a viable policy option for itsattainment. In its first annual Interdiscipli-nary Conference held at the University ofMissouri-Kansas City, C-FEPS invitedscholars and policy makers representingthe fields of law, social policy, economics,political science, social work, and publicpolicy to present their work on variousaspects of public employment programs.The conference, “Public Service Employ-ment Assurance—Lessons from the Past,Looking to the Future,” explored thestrengths and weaknesses of governmentjobs programs from the past and consid-ered the prospects for effective direct jobcreation in the future.

Morning Session:Public Service Employmentin Historical Perspective

Following an introductory welcomeby C-FEPS Director Mathew Forstater,the morning session, “Public ServiceEmployment in Historical Perspective,”was called to order by UMKC EconomicsProfessor James Sturgeon, who is alsoDirector of UMKC’s Social ScienceConsortium, an innovative core of theUniversity’s Interdisciplinary Ph.D.Program.

The first paper, “Full Employment: TheMissing Entitlement, 1935-Present,” byGertrude Schaffner Goldberg of AdelphiUniversity and the National Jobs for AllCoalition, reviewed the developments ininter-related employment and welfarepolicies from the passage of the SocialSecurity Act in 1935 to the repeal of TitleIV. Goldberg, who is author of Washing-ton’s Poor Law, argued that job creationefforts during periods of high unemploy-ment, even if large, fell far short of em-ploying the jobless and were not,in any case, sustained; that full legislationwas debated but passed without employ-ment guarantees; that a program of“economic opportunity” largely ignoredemployment opportunity; and that propos-als for welfare “reform” either excludedjob creation altogether or included too fewnew jobs, even if they required recipientsto work.

Next Philip Harvey of Rutgers LawSchool and author of Securing the Right toEmployment, considered “DesigningPolicies to Combat Joblessness.” Harveyconsidered the strengths and weaknessesof a variety of approaches to eliminatingunemployment, concluding that direct jobcreation has a number of distinct advan-tages over other approaches. First, it isattractive as an inflation-minimizingstrategy for reducing joblessness. Second,it attacks poverty and other social prob-lems not only by reducing joblessness, butalso by increasing the provision of publicgoods and services.

Third, direct job creation programsactually increase national wealth. Thepolicy therefore represents a wealth-enhancing response to joblessness, astrategy that would permit the economyto expand output above the level whereinflationary tendencies normally arethought to create a barrier to furthereconomic growth. This additional wealthcould be devoted to the expansion ofpoverty-reducing goods and services, assuggested above, but it could also be

devoted to other public purposes, such asthe improvement and beautification ofpublic spaces. In either case, society ingeneral would benefit. Fourth, a large-scale direct job creation program couldserve as a powerful automatic stabilizer.Unemployment Insurance (UI) functionsin a similar fashion; but its coveragelimitations and limited wage replacementpolicy diminish its counter-cyclical effects.A jobs program that automatically ex-panded as unemployment rates rose couldhave a stronger impact. Finally, direct jobcreation is the most immediate and effec-tive means of securing the right to employ-ment recognized in international humanrights agreements.

Nancy Rose of the University of Cali-fornia-San Bernardino and author of Put toWork: Relief Programs in the Great De-pression and Workfare or Fair Work:Women, Welfare, and Government WorkPrograms, spoke on “Historicizing Gov-ernment Work Programs: A Spectrum fromWorkfare to Fair Work.” Rose pointed outthat while workfare and other “welfare-to-work” programs received a significantboost from the 1996 Personal Responsibil-ity and Work Opportunity ReconciliationAct (PRWORA), the United States has ahistory of another type of governmentwork program as well. Fair work, or jobcreation programs, have been implementedperiodically since at least the early 1800sto provide jobs for people. The best knownof these programs are the Works ProgressAdministration (WPA) in the 1930s andPublic Service Employment (PSE) whichwas part of the Comprehensive Employ-ment and Training Administration (CETA)in the 1970s. Rose explored the differ-ences between workfare and fair work;presented brief histories of both types ofprograms; and outlined how work pro-grams have been implemented since 1996.Her presentation concluded by proposingan agenda for fair work and related pro-

Public Service Employment Assurance —Lessons from the Past, Looking to the Future

Robert Heilbroner, James Duesenberry,and Robert Eisner at the conference on“Functional Finance and Full Employment”

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grams, including responses to time-worncriticisms that inevitably emerge whenpublic sector job creation is raised as apossible policy.

In the final paper of the morning ses-sion, C-FEPS Director Mathew Forstaterexplored the possibilities of a full employ-ment approach to reducing Black povertyand eliminating Black unemployment.Forstater’s paper began with a summaryof the current economic plight of theAfrican American, a sobering example ofpoverty amidst plenty and of boats therising tide of U.S. economic expansionduring the past decade has failed to lift.Forstater then called for a rejection of thebehavioralist approach to the problems ofBlack poverty and unemployment, andoffered in its place an alternative structur-alist analysis for understanding the Blackpolitical economy. The last half of thepaper documented the wide-spread sup-port among African American leaders,social scientists, and community organiza-tions for what the National Urban Leaguehas called a policy that “has a laser-likefocus on jobs for the inner city poor.”Recognizing the inability of affirmativeaction policies by themselves to contributeto net job creation, the adoption of apermanent equivalent of a revived WorksProgress Administration was put forwardas the key to job creation in the AfricanAmerican community, while contributingto the provision of crucial social servicesand programs to address important com-munity needs.

Keynote Address:“If We’re So Smart…Why GoodIdeas are Not Enough”

The Keynote address for the conferencewas delivered by Sumner Rosen, Profes-sor Emeritus of Social Policy of ColumbiaUniversity, and co-editor (with AaronRosen and C-FEPS Director MathewForstater) of Commitment to Full Employ-ment: The Macroeconomics and PublicPolicy of William S. Vickrey. Rosen’saddress, “If We’re So Smart…Why Good

Ideas are Not Enough” reminded theaudience that without taking our policyprograms and proposals from the level oftheory to the level of political realization,we will never actualize the dream of fullemployment. In addition to holding distin-guished appointments at prestigious uni-versities around the globe, includingHarvard University, Cornell University,and Columbia University, Rosen has spenta lifetime as an advisor and consultant forlabor unions, governments, and interna-tional organizations, including the U.S.Departments of Labor and Health, Educa-

tion, and Welfare, the International LabourOrganization (ILO), and the AFL-CIO. Hethus has the knowledge based on real lifeexperience to depart to his younger col-leagues seeking to implement PublicService Employment Assurance programs.

In an interview with Kevin B. O’Neill,Publisher of the Labor Beacon, during abreak at the conference, Rosen and C-FEPS Director Mathew Forstater wereasked why it seems that Federal ReserveChairman Alan Greenspan and thefinancial market generally consider theannouncement of lower official unemploy-ment rates to be bad news? In his column,“The Economy” in the April 1, 2000edition of his newspaper, O’Neill reportedtheir replies. The scholars explained thatGreenspan and the markets have tradition-ally held a notion not unlike Marx’s ideaof unemployed workers constituting areserve army of labor, ready to work

should there be an expansion, but servingas potential replacements for the employed,and thus disciplining workers and holdingdown money wages. In short, unemploy-ment is used as a tool for price stability,which Rosen explained is a clear violationof the Fed’s obligation: “HumphreyHawkins legislation makes it clear that fullemployment should be Greenspan’s num-ber one priority,” he stated.

Afternoon Session:Toward Full Employment:Challenges and Opportunitiesfor the 21st Century

The afternoon session, “Toward FullEmployment: Challenges and Opportuni-ties for the 21st Century” was moderatedby UMKC Economics Professor PeterEaton, who also serves as Director of theCenter for Economic Information. In thefirst presentation, C-FEPS Senior Re-search Associate Dr. L. Randall Wrayproposed a Public Service EmploymentAssurance Program such as that put for-ward in his recent book, UnderstandingModern Money: The Key to Full Employ-ment and Price Stability (see p. 19). Wrayalso took the opportunity to explainC-FEPS’ unique community serviceprogram for UMKC students, which alsoserves as an educational tool for under-standing modern monetary systems(see p. 14).

In “Political Constraints on the Devel-opment of a Universal Public EmploymentProgram,” Joel Blau, Director of thePh.D. Program in the School of SocialWelfare at the State University of NewYork at Stony Brook and author of Illu-sions of Prosperity: America’s WorkingFamilies in an Age of Economic Insecu-rity, outlined the challenges facing anyserious job creation program on the na-tional level. He first pointed to what hecalled “American Exceptionalism,” thenotion that the U.S. system of checks andbalances, the separations of power within

continued on p. 26

Humphrey Hawkinslegislation makes it clear

that full employmentshould be Greenspan’snumber one priority.

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C-FEPS Launches CommunityService Program at UMKC

There is a growing movement on col-lege campuses to increase student involve-ment in their communities, particularlythrough what is known as “service-learn-ing,” in which students participate incommunity service activities organized bylocal community groups. The Center forFull Employment and Price Stability hasinaugurated a community service programat the University of Missouri-Kansas Citythat also aims to demonstrate the workingsof a modern monetary system. This novelapproach to public service not only helpsmeet important local needs, but alsoprovides a unique perspective on modernmoney and the way it operates.

C-FEPS has proposed that UMKCstudents, like students at many collegesand universities across the country, per-form community service as a requirementfor graduation. Each student will perform

also feature a portrait ofrenowned economist ThorsteinVeblen, who once held a position at theUniversity of Missouri!)

Each UMKC student would have a“community service tax” of, for example,25 buckaroos (B25), payable in buckaroonotes. The requirement is met when stu-dents return B25 one-hour “roo notes” tothe UMKC “Treasury.” It is the Universitythat issues the roo notes to students forperforming community service, while theproviders of public service opportunitiesare given special drawing rights (SDR’s)at the University “Treasury” in order topay the students in buckaroos for thehours of service performed. The numberof roo notes issued is linked to the com-munity tax on the students, which in turnis determined by the number of publicservice hours desired by the community.As students perform the 25 communityhours, they are paid in roo notes. Whenstudents pay their tax liability to theUniversity with the obtained roo notes,their graduation requirement is met.

The program immediately sheds lighton capitalist monetary systems as theyoperate analogously to the UMKC Bucka-roo Program. Just as UMKC is the soleissuer of the roo notes so is the Govern-ment (consolidating the Federal Reserveand the Treasury) the sole issuer of thedollar. And just as returning roo notes tothe University can only satisfy the UMKCgraduation requirement, so do U.S. citi-zens retire their tax liability in terms ofdollars payable to the U.S. Treasury.

Several implications follow directlyfrom the UMKC program. First, the Uni-versity cannot collect any buckaroo taxesbefore it has spent some buckaroos. As theonly source of buckaroos, the Treasury hasto emit some buckaroos before they can becollected in taxes. Second, the Treasurycannot collect more buckaroos in taxesthan it has previously spent. The theoreti-

cal minimum for UMKC is torun a “balanced budget,” with tax revenuesequaling buckaroo spending. Actually, it isalmost certain that the Treasury will run adeficit—at least in the first year—as somebuckaroos are hoarded for future use, “lostin the wash,” or saved as souvenirs. Whileit is possible that the Treasury could run asurplus in subsequent years, this would belimited by the previously hoarded bucka-roos that could be used to pay taxes. Third,and most importantly, it should be obviousthat the Treasury faces no “financial con-straints” on its ability to spend buckaroos.While the Treasury might decide to limitthe amount of buckaroos it issues to anindividual service provider, there would beno reason to limit the aggregate quantity ofbuckaroos issued to the entire community.Indeed, the quantity of buckaroos providedwould be determined by the students desireto work to obtain buckaroos and by theproviders who need student labor.

Furthermore, it should be obvious thatthe Treasury’s spending is in no waydependent upon its receipt of buckaroosfrom tax payments. To drive the pointhome, we can assume that the Treasuryalways burns every buckaroo received in

a fixed number of hours of communityservice per semester. The novelty in thisprogram is that it operates as a “monetarysystem.” UMKC has issued a paper note,called the “buckaroo” (after the University’smascot, the kangaroo), with the inscription“this note represents one hour of commu-nity service by a UMKC student,” anddenominated as “one roo hour.” (The notes

C-FEPS Director Mathew Forstater withkeynote speaker Robert Heilbroner

Harvard University ProfessorRichard Musgrave, the fatherof modern Public Finance

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payment of taxes. While it is possible thatthe Treasury might find it more cost effec-tive to inventory buckaroos rather than toburn them, buckaroos received by theTreasury are nothing more than pieces ofpaper with a (sunk) printing cost. From theperspective of the Treasury, the buckarooshave already done their part in mobilizingstudent labor resources before they havebeen received in payment of taxes. That is,when students supply labor to communityservice providers in order to earn themeans of paying taxes (buckaroos), theTreasury has already accomplished its goalof inducing students to volunteer theirtime in community service. Actual pay-ment of taxes comes later and is importantonly in maintaining the incentive forstudents to continue to supply labor inorder to earn buckaroos. In other words,the Treasury does not impose taxes inorder to ensure that buckaroos flow into itscoffers, but rather to ensure that studentlabor flows into community service.

More generally, the Treasury’s budgetbalance or imbalance would not provideany useful information to UMKC regard-ing the community service program’ssuccess or failure. Rather, a Treasurydeficit, surplus, or balance would provideuseless accounting data. Program successwould be determined by careful assess-ment of the actual accomplishments of theservice providers, by improvements inUniversity-community relations, and bythe impact that community service had onthe students themselves. In a sense, theseare all “real” effects as opposed to thepurely “monetary” accounting data that isprovided by looking at the Treasury’sbudget balance. It would be senseless tocut the Treasury’s spending of buckaroosmerely because it ended a fiscal year witha budget deficit. It would be equally sillyto increase the tax on students (say, fromB25 to B35) in an attempt to eliminate abudget deficit. It might, however, makesense to reduce the tax (say, from B25 to

in interest-earning savings accounts. Asdiscussed above, we can continue toassume that all buckaroos received “ondeposit” are simply burned. This in noway affects the ability of the Treasury toliquidate accounts if buckaroo saversdecide to withdraw their funds. Similarly,the Treasury can retire buckaroo bonds atany time simply by issuing new bucka-roos.

Another important implication is imme-diately clear from the UMKC program:printing more roo notes does not diminishthe value of that note. As long as theUniversity pays one roo note for one hourof public service performed, the value of

B15) if it were found that students wereproviding too much community service(relative to the demand for student laborcoming from providers) or that studentswere devoting too little time to classwork. Likewise, the tax could be in-creased if it was believed that the univer-sity, the community, or the student bodywould benefit by greater provision ofstudent labor hours to community service.

Again, UMKC does not rely on thecollection of roos in taxes to make sureit can pay for future public service hours.The University can opt to burn all col-lected roo-notes and issue brand new onesfor additional public service hours. TheUMKC Treasury does not impose taxes toensure it can collect Buckaroos for spend-ing, rather it imposes them to guaranteethat students perform community service.Similarly, the government, as the soleissuer of the currency, does not rely on taxcollections for spending. Taxes onlyensure that the private sector transfers(sells) goods and services to the publicsector in an effort to obtain dollars forretiring the imposed tax liability.

Note that the UMKC Treasury does not“need” to borrow its own buckaroos inorder to deficit spend—no matter howhigh the deficit, the Treasury can alwaysissue new buckaroos. Indeed, the UMKCTreasury could only “borrow” buckaroosthat it has already spent, in fact, that it has“deficit spent”. It cannot borrow bucka-roos that it has not yet spent, nor would itsensibly try to “borrow” buckaroos thatstudents need for payment of taxes. Forthis reason, it makes little sense to callthis “borrowing.” Suppose the Treasuryagrees to offer interest-earning savingsaccounts or bonds to students who earnmore buckaroos than their “tax liability.”All it is really doing is offering an inter-est-earning alternative to non-interest-earning hoards of buckaroos. And it doesnot need to hold any buckaroos in reserve

David Colander and Robert Heilbronerat the “Functional Finance and FullEmployment” Conference

the buckaroo will be stable and equal toone hour of community service. Printingmore roo notes does not change this fact!Each student must supply an hour of laborto obtain a buckaroo. As such, the bucka-roo will command an hour of labor. Fromthe perspective of the student, the “cost”of a buckaroo is the hour of labor thatmust be provided; from the perspective ofthe community service provider, a bucka-roo buys an hour of student labor.

Note that we can determine the value ofthe buckaroo without reference to thequantity of buckaroos issued (or received)

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by the Treasury. Whether the Treasuryspends a hundred thousand buckaroos ayear, or a million a year, the value will bedetermined by what students must do toobtain them. If the Treasury leaves thevalue at one buckaroo per hour of laborprovided to a community service provider,it makes no difference whether tax liabili-ties are raised from B25 to B50, or low-ered to B15. Nor does it matter whetherthe Treasury runs a deficit, a balancedbudget, or a surplus in a particular year.So long as students can, and must, workfor an hour to obtain a buckaroo, the valueof the buckaroo will remain equal to an

demonstrated by the fact that they wereunable or unwilling to obtain communityservice jobs. Others might suggest thatspecial training programs are required toraise the skills of the unemployed studentsso that they might find jobs. Hard-nosedMalthusian realists might assert thatpoverty and unemployment will alwaysbe with us, so that it is best to just let theunemployed “die” (fail to meet degreerequirements).

Of course, any objective analysis wouldfind the source of the unemployment inthe Treasury’s policy, and not in the char-acteristics of the unemployed. Unemploy-ment at the aggregate level is caused byinsufficient Treasury spending. Improvingthe skills or motivation of today’s unem-ployed students will merely shift theunemployment to other groups. If thereis any (positive) desired net saving, theTreasury must run a deficit in order toprevent unemployment from occurring.Further, as we have discussed above, thereis no rational reason for the Treasury tolimit its deficits because the cost to theTreasury of running deficits is simply theprinting and other costs of issuing bucka-

at least B250,000 per semester. In practice,students will want to earn, on average,more than 25 buckaroos per semester—toreplace lost buckaroos, to save buckaroosor lend them to roomates, to make dona-tions to campus charity, and to makepurchases of goods and services by spend-ing buckaroos on—and off—campus. Letus presume that all of these alternativeuses lead to an “extra” demand for bucka-roos equal to 50,000 buckaroos per semes-ter. Thus, the Treasury might find that itspends B300,000 per semester and re-ceives B250,000 per semester in taxrevenues, for a deficit of B50,000 persemester. Note that the Treasury’s deficiteach semester is equal to the “extra”demand for buckaroos coming from stu-dents; indeed, it is the “extra” demand thatdetermines the size of the Treasury’sdeficit. We might call this “net saving”of buckaroos, and it is equal—by defini-tion—to the Treasury’s deficit over thesame period.

What if the Treasury decided it did notwant to run such large deficits, and soproposed to limit the total number ofSDRs to 250,000 per semester in an effortto ensure balanced budgets? In this case, itis almost certain that some students wouldbe unable to meet their tax liability. Theirshortfall would be exactly equal to thebuckaroos hoarded by other students.Students who by luck, good connections,or foresight obtained community servicejobs early and who quickly earned B25 tomeet their tax liability might be able tocontinue to work in order to obtain extrabuckaroos to hoard. Unlucky, procrastinat-ing students without connections mightthen find it impossible to find a commu-nity service job to earn required buckaroossimply because all SDRs had already beenused by providers. These students wouldfind themselves “unemployed,” desper-ately trying to work for buckaroos. Find-ing no job openings, they would be forcedto borrow, beg, or steal buckaroos to meettheir tax liabilities. Some in the commu-nity might conclude that these unem-ployed students were deficient incharacter, perhaps lazy and unskilled as

continued on p. 22

roos—certainly not much higher than thecost of providing letterhead stationary toUniversity departments. Thus, the onlyrational policy is for the Treasury toprovide as many buckaroos as commu-nity service providers request.

It is possible that the total number ofhours of student labor desired by com-munity service providers might be lessthan the number of buckaroos desired by

Wallace Peterson, L. Randall Wray,Max Skidmore and UMKCChancellor Emeritus James Olsonat the C-FEPS inauguration

C-FEPS co-founder Warren Moslerand Kansas City Board of TradePresident Michael Braude at theC-FEPS inauguration

hour of student labor. If, however, theTreasury decided to reduce the value ofthe buckaroo by allowing public serviceproviders to pay two buckaroos per hourof labor supplied, then the value of thebuckaroo would fall to a half hour oflabor. On the other hand, the Treasurycould require that service providers payonly half a buckaroo per hour of labor, inwhich case the value of the buckaroowould rise to two hours of labor.

We have proposed that the Treasuryissue as many SDRs as community serviceproviders request (although it might im-pose limits on individual providers). At aminimum, the Treasury will expect tospend as many buckaroos as students willneed to meet the total tax liability. If wepresume that 10,000 students will partici-pate and that each will have a tax liabilityof 25 buckaroos per semester, then weknow that the Treasury will have to issue

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DOMESTIC: C-FEPS Co-SponsorsPost Keynesian Workshops inKnoxville, Tennessee

Paul Davidson, the Holly Chair ofExcellence in Political Economy at theUniversity of Tennessee-Knoxville (UTK)and the editor of the Journal of PostKeynesian Economics (JPKE), has been anactive participant in activities of the Cen-ter for Full Employment and Price Stabil-ity (C-FEPS) since its inception. Davidsonhas served on numerous C-FEPS-orga-nized panels at the Allied Social ScienceAssociation and the Eastern EconomicAssociation annual meetings; he delivereda Keynote address at the “Commitment toFull Employment” conference at Colum-bia University (see p. 8); and was thesecond C-FEPS visiting scholar (afterRobert Heilbroner) to deliver a seminarand lecture at the University of Missouri-Kansas City (UMKC) during the 1999-2000 academic year.

Davidson, who is the author of numer-ous books—including Post KeynesianMacroeconomics—and who is consideredby many to be the world’s leading author-ity on the work of John Maynard Keynes,has organized Post Keynesian Workshopsat UTK that have attracted scholars fromaround the globe and resulted in a numberof important volumes. Beginning with theFifth Post Keynesian Workshop in 1998,C-FEPS has joined forces with Paul andLouise Davidson, the JPKE, and UTK tosponsor the important event. Among the1998 workshop participants were Keynesbiographer Professor Lord RobertSkidelsky of the University of Warwick,Robert Clower of the University of SouthCarolina, and the late Robert Eisner (seep. 4). Selected papers from the Fifth PostKeynesian Workshop are published in Full

Employment and Price Stability in AGlobal Economy, edited by Davidson andJan Kregel of the United Nations Confer-ence on Trade and Development(UNCTAD) and UMKC, co-organizer ofthe Workshops and another frequentparticipant in C-FEPS activities (see p. 3).C-FEPS is again co-sponsor of the SixthPost Keynesian Workshop in June, 2000.Among the Sixth Workshop’s participantsare Luigi Pasinetti of Universitá Cattolica,Milan, and author of Structural EconomicDynamics and Structural Change andEconomic Growth.

to full employment.CofFEE Director William Mitchell’s

Buffer Stock Employment (BSE) model,while developed independently, is similarto C-FEPS Senior Research Associate L.Randall Wray’s Public Service Employ-ment Assurance proposal. Both modelstarget zero involuntary unemploymentwithout inflation, and show that there isno problem “financing” or “funding” fullemployment with modern money. In aninteresting contrast to conventional views,Mitchell not only rejects the opinion thatstable prices require unemployment,he argues that stable prices require fullemployment! Mitchell has previouslyvisited the U.S. twice to present his BufferStock Employment model at C-FEPSevents: the New School’s “FunctionalFinance and Full Employment” confer-ence (see p. 6) and an Association forEvolutionary Economics session at theAllied Social Science Association annualmeetings, both in 1998. Mitchell will visitthe University of Missouri-Kansas Cityfor an extended stay in July-August of2000.

Other participants in CofFEE’s 1998“Path To Full Employment” conferenceincluded renowned Australian economistBob Gregory, University of NewcastleProfessors and CofFEE scholars MartinWatts and John Burgess, NewcastleProfessor Glenda Strachan, University ofNew South Wales Professor Peter Kreisler,C-FEPS Director Mathew Forstater,C-FEPS Senior Research Associate L.Randall Wray, C-FEPS co-founder WarrenMosler, and the New School’s C-FEPS-sponsored Program on TransformationalGrowth and Full Employment DirectorEdward J. Nell. UMKC Assistant Profes-sor and C-FEPS Research AssociateStephanie Bell joined many of the samescholars and policy makers for the second“Path to Full Employment” conferencein 1999, and the third annual conferenceis already planned for December, 2000.Selected papers from the first twoconferences appear in special issuesof Employment and Labour RelationsReview.

Center-Sponsored Research in the U.S. and Abroad

ABROAD: C-FEPS Collaborationwith University of Newcastle,Australia

The activities of the Center for FullEmployment and Price Stability (C-FEPS)are in no way confined to the U.S.C-FEPS has sponsored research andactivities in countries such as Australia,Canada, and England, and C-FEPS schol-ars have additionally traveled to suchnations as Mexico, Germany, Italy, Japan,and Hungary to present their ideas. Inaddition, scholars and policy makers fromthese and other countries visit the U.S. toparticipate in C-FEPS events. One of themost important C-FEPS collaborations iswith Professor William F. Mitchell and hisCentre of Full Employment and Equity(CofFEE) at the University of Newcastlein Australia.

In 1998 and 1999, C-FEPS scholarstraveled to Newcastle to participate inCofFEE’s annual “Path to Full Employ-ment” Conference. The conference bringsscholars from the U.S., Asia, and Europetogether with Australian social scientistsand policymakers to discuss issues related

Paul Davidson Robert Clower Luigi Pasinetti

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From England, Frederic S. Lee,UMKC Bernardin Haskell LectureSeries Visiting Scholar,Co-Sponsored by C-FEPS

C-FEPS, in cooperation with the UMKC Bernardin HaskellLecture Series, co-sponsored Dr. Frederic S. Lee (Department ofEconomics, De Montfort University, Leicester, England) as avisiting scholar March 9-13, 2000. Dr. Lee is widely regarded asthe world’s foremost authority on empirically-grounded pricingmodels. His work can be regarded as an attempt to discover howprices in the real world are administratively set. Dr. Lee haswritten seven books and published over twenty-five articles andsixteen book chapters.

Dr. Lee spoke to graduate students and faculty about “Cartelsin Action: Case Study of Market Governance in the AmericanGunpowder Industry, 1865-1880.” For his Bernardin Haskelllecture, Dr. Lee spoke on “Inflexible Prices and the GreatDepression.”

C-FEPS Brings European Scholars to UMKC Campus

Dr. Frederic S. Lee will join the EconomicsDepartment faculty at UMKC beginning withthe fall semester, 2000. Dr. Lee’s areas of teach-ing specialty are Microeconomics, History of20th Century Economics, U.S. Economic History1870-1940, and Industrial Economics.

The Center for Full Employment and PriceStability welcomes Dr. Lee and looks forwardto his involvement in the Economics Depart-ment, the Interdisciplinary Ph.D. Program,and the Social Science Consortium.

From Germany, Harald Hagemann,Theodore Heuss Professor at theNew School for Social Research, NYC,Analyzes Technological Unemployment

During three C-FEPS-sponsored lectures, Dr. HaraldHagemann provided an extensive analysis covering closelyrelated controversies relating to employment effects of structuraland technological change. His presentations addressed the con-tentious issues involved with several theoretical and real-worlddisputes.

On April 20th, Dr. Hagemann lectured to social science gradu-ate students and faculty about the controversy regarding “techno-logical unemployment.” He examined the debate over the impactof technological development upon (un)employment, whichinvolves arguments about the displacement versus compensationeffects. For undergraduate students, Dr. Hagemann spoke onApril 21st about the economic challenges that have confrontedGermany since the fall of the Iron Curtain. Regarding some ofthe macroeconomic consequences of unification, Hagemanntalked about the dramatic changes that have taken place and theimpact on the relation between unemployment, productivity andreal wages in the former East Germany.

C-FEPS provided a dinner-seminar on the 21st for economicsgraduate students and faculty, where Dr. Hagemann presented“Traverse Analysis of the Employment Consequences of NewTechnologies: A Comparison of the Pioneering Contributionsby John Hicks and Adolph Lowe,” with an emphasis on thestrengths and weaknesses of the horizontal versus verticalrepresentations of economic structure.

Professor Hagemann remarked that he appreciated howC-FEPS, through its involvement with UMKC’s Social ScienceConsortium program, was able to provide him with the opportu-nity to engage faculty and graduate students from multipledisciplines. In this regard, Dr. Hagemann particularly mentionedthat he enjoyed meeting UMKC faculty members Professor PeterSingelmann of Sociology, Dr. Andrew Bergerson of History, andProfessor Reginald Bassa of Political Science.

Harald Hagemann is Professor at Hohenheim University,Stuttgart, Germany. During the 1999-2000 academic year, he isthe holder of the prestigious Theodore Heuss Professorship inthe Graduate Faculty of Political and Social Science at the NewSchool for Social Research in New York.

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Zero involuntary unemployment with stable prices is possibleaccording to L. Randall Wray, Senior Research Associate withthe Center for Full Employment and Price Stability (C-FEPS)and Professor of Economics at the University of Missouri-Kansas City (UMKC). In Understanding Modern Money:The Key to Full Employment and Price Stability (Edward ElgarPublishing, 1998), Wray draws on economic history, the historyof economic thought, and economic theory to support anemployment proposal based on the principles of functionalfinance. Wray proposes a federally funded job-assuranceprogram, referred to as the Employer of Last Resort (ELR) plan,which he argues follows logically from the nature of a modernmonetary system.

Governments have the power to issue money and to declarethat this money be used to settle tax obligations. It is the privatesector, not the public sector, which is in need of governmentmoney, and this need allows the government to exchange itsdebt (government fiat money) for various real resources. Theseresources, including labor power, are supplied by the privatesector in order to acquire the means with which to settle their taxliabilities. Wray refers to this as the “taxes-drives-money” view,which he documents in work of Adam Smith, J. M. Keynes,Abba Lerner, G. F. Knapp, and Hyman Minsky, among others.

Wray recognizes that his employment program might generatesubstantial, on-going deficits, but he argues that this should notto be feared. Like Lerner, Wray argues that the governmentshould use its budget to generate the appropriate amount ofaggregate spending, which he defines as that quantity that issufficient to employ all who are ready, willing and able to workat the announced government wage. “Unemployment,” writesWray, “is by definition evidence that the government’s budget istoo small.”

In the ensuing discussion, Wray addresses a number of com-mon misconceptions about deficit spending, including:

1. The belief that if deficits are financed by “printing” money,or that if the central bank accommodates the sale of governmentdebt, this will prove to be inflationary.

2. An adherence to the notion that government borrowing islikely to “crowd-out” private borrowing, thereby bidding up theprice of loanable funds (i.e., the interest rate).

3. The idea that, owing to some financial constraint, thegovernment will be unable to run persistent deficits.

One of Wray’smajor conclusionsis that, “the ortho-dox view seriously misunder-stands what monetary policy isall about.” The problem, hemaintains, is that monetarypolicy is primarily concernedwith the determination ofinterest rates, while fiscalpolicy determines the valueand quantity of money – exactly theopposite of the orthodox view.

Wray points out that the government is, by law, charged withthe pursuit of high employment, stable prices, and reasonablystrong growth, but that the first two are usually viewed as incon-sistent goals due to some perceived trade-off between unemploy-ment and inflation. Against this commonly held view, Wraysuggests that the realization of full employment and price stabil-ity is not only possible, but that they are complementary goalsunder the ELR proposal.

Praise for Understanding Modern Money

“Pivoting on his fresh rereading of the history and nature ofmoney, Wray generates insight after insight, and will challengeforever the way in which we think about key macroeconomicvariables and relationships.”

— John Adams, Northeastern University

An excellent text containing a challenging new perspective onthe role of money and the role of government.”

— John Groenewegen, Erasmus University, The Netherlands

This is a most important work, one that should be read by allserious economists regardless of their particular theoreticalpersuasions.”

— John Henry, California State University at Sacramento

“Understanding Modern Money breathes a whiff of fresh airover the desert of unimaginative, and only too often irrelevantthough lofty sophisticated technical difficulties, in which macro-economic writing has landed us in the last decades.”

— Y. S. Brenner, Utrecht University, The Netherlands

“An innovative and carefully argued proposal for solving themost pressing economic issue of our times – how to eliminateunemployment without reigniting inflation.”

— Paul Dalziel, Lincoln University, New Zealand

C-FEPS Scholar Wray: “UnderstandingModern Money is the Key to FullEmployment and Price Stability”

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Chartalist system is predicated on a one-to-one correspondence between moneyand the state—“One Nation, OneMoney”—and only with such a strictcorrespondence does government debtbecome truly risk-free, enabling the stateto buy anything for sale—and, indeed,settle any obligation—in terms of themoney of account. There may of course bereal economic constraints (those imposedby resources and technology), and, as isonly too well-known, political constraints,but there are no financial constraints undersuch a system. When nations forfeit theirmonetary sovereignty and the one-to-onecorrespondence is severed, however, as isthe case under the present arrangements ofthe EMU, they do face financial con-straints. Nations become, in effect, likeU.S. states, subject to fiscal discipline andin danger of default. The analogy with aprivate firm or household—a false analogyunder a state money system—becomesappropriate, as governments now have tofinance their spending, and suffer overtheir budgets.

As Bernard Connally, Managing Direc-tor of International Economics with AIG,pointed out at another C-FEPS-sponsoredconference on “The Launching of theEuro” in London in May, 1998, under theEMU arrangements, member nations mustnow compete with other borrowers whenissuing bonds to finance deficits. If inves-tors are at all hesitant about any onemember’s debt, they can buy anothermember’s debt without incurring currencyrisk, since there is no exchange rate vari-ability among the currencies of membercountries. Because member nations arenow dependent on investors for fundingtheir expenditures, failure to attract inves-tors results in an inability to spend. Fur-thermore, should a member’s revenues failto keep pace with expenditures due to aneconomic slowdown, investors will prob-ably demand a budget that is balanced,most likely through spending cuts. Inother words, market forces can demandpro-cyclical fiscal policy during a reces-sion, compounding deflationary influ-ences.

Jan Kregel of the United NationsConference on Trade and Development(UNCTAD) and UMKC (see p. 3), inpapers presented at the Eastern EconomicsAssociation symposium, the “Launchingof the Euro” conference, and at theC-FEPS-sponsored Fifth Post KeynesianWorkshop in Knoxville, Tennessee, Sum-mer, 1998 (see p. 17), points out that onealternative to coordinating fiscal andmonetary policy at the national levelwould be to coordinate policy at the Eurolevel. In other words, if member nationscannot conduct counter-cyclical fiscalpolicy (as U.S. states cannot) because oftheir loss of monetary sovereignty, theECB might be assigned the responsibilityof undertaking necessary fiscal actions (asis the federal government in the U.S.).In “Currency Stabilization Through FullEmployment: Can EMU Combine PriceStability with Employment and IncomeGrowth?” (Eastern Economic Journal)and “Price Stability and Full Employmentas Complements in a New Europe” (inFull Employment and Price Stability inA Global Economy, edited by Kregel andPaul Davidson), Kregel outlines a planthat goes beyond generic aggregate de-mand management to propose a publicworks program that at once guarantees fullemployment while controlling the value ofthe currency. The plan is essentiallyC-FEPS Senior Scholar L. Randall Wray’sPublic Service Employment Assuranceproposal tailored for the European Union.

Kregel’s proposal, along with commen-tary by Goodhart, Sean Shepley of CreditSuisse First Boston, and C-FEPS co-founder Warren Mosler, also appears inThe Launching of the Euro, availablethrough C-FEPS. In addition to Kregel’s“Price Stability and Full Employment asComplements in a New Europe: A Market-Based Stabilization Policy for the NewECB,” Full Employment and Price Stabil-ity in A Global Economy, the volume ofselected papers from the C-FEPS-spon-sored Fifth Post Keynesian Workshop in

Launching of Euro continued from p. 7

1998, includes two other papers on theEuropean Union: “Economic Integration,the EMU, and European RegionalGrowth” by John S. L. McCombie ofDowning College, Cambridge University,and “Prospects for the Single EuropeanCurrency and some Proposals for a NewMaastricht” by Philip Arestis of SouthBank University and Malcolm Sawyer ofLeeds University. “Money and NationalSovereignty in the Global Economy” byJohn Smithin of York University, roundedout the Eastern Economic Journal sympo-sium. Smithin, who also participated in theC-FEPS sponsored conference on “Func-tional Finance and Full Employment” atthe New School(see p. 6) is theauthor ofControversiesin MonetaryEconomics andeditor of Whatis Money?,which includesa chapter on“ModernMoney” byC-FEPS SeniorResearch Asso-ciate L. RandallWray. Wray’schapter containsa good summary of the Chartalistapproach that Goodhart and Kregel claimis fundamental to the analysis of theEuropean EMU:

Governments issue money to buywhat they need; they tax to generatea demand for that money; and thenthey accept the money in paymentof the tax. If a deficit results, thatsimply indicates that the populationwishes to hoard some of the money.The deficit is of no consequence tothe government; it merely allowsthe population to save in the formof government money. If the gov-ernment wants to, it can let the

Princeton University’sWalker Professorof Economics andInternational FinancePeter Kenen

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in increasing the economic well-being ofthe majority of the world’s populationliving in developing countries.” It is thisfailure, which Kregel says can be traced tothe success of the Washington Consensusin dominating economic developmentpolicies in the 1980s, that underlies theprotests in Seattle and Washington. Theprotests were a response to the abandon-ment of development strategies that weresensitive to individual country’s circum-stances in favor of a uniform policy pro-moting the full integration of alldeveloping countries into the global trad-ing system—which meant, above all, thelowering of import tariffs by African andEast Asian countries.

This singular focus on “free trade” isironic, according to Kregel, because forsuch a strategy to be consistent it couldand should have also included policiesaimed at promoting full employment.Standard economic theory posits thatliberalization of trade is desirable becauseit brings benefits from enhanced competi-tion and efficient utilization of resources.

However, those results only hold underconditions of true full employment (i.e.,zero involuntary unemployment). “Thefailure you saw in Seattle was due to thefact that the WTO does not include in itsmandate or agenda some sort of agency toensure high, stable levels of employment”said Kregel.

The initial charter of the WTO recog-nized that free trade invariably affectsemployment levels by reducing them inthe short run and, in fact, aimed to addressthis problem. Throughout the years, freetrade has remained the main objective ofthe WTO, but the employment concernshave been dropped from the agenda. TheWTO had no agency or framework toaddress the impact of trade liberalizationon domestic employment. Since trade notonly affects employment but also theenvironment, pay-rates, and other vari-ables, numerous Non-GovernmentalOrganizations (NGOs) surfaced to repre-sent the interests of those affected—butnot protected—by WTO free trade poli-cies. The goal of these agencies is to

provide essential forms of protectionagainst some of the more deleteriouseffects of free trade.

Dr. Kregel stressed the importance ofC-FEPS’ work and its support of a uniqueand viable policy option for achieving fullemployment. In several recent scientificpapers and speeches, Kregel has proposedthat governments can act as an employerof last resort to ensure full employmentwith stable prices (see, for example,“Currency Stabilization Through FullEmployment,” Eastern Economic Journal,vol. 25, no. 1, Winter 1999). In particular,he has supported such a program for theEuropean Union, but his remarks nowindicate that such a policy approach mightalso prove viable for developing countriesin Africa, Asia, and Latin America. Dr.Kregel, whose paper “Economic Develop-ment in the UN” is available as C-FEPSWorking Paper No. 7, will be teaching atUMKC beginning in the fall.

Kregel continued from p. 3

population trade the money forinterest-earning government bonds,but the government never needs toborrow its own money from thepublic. Taxes and bonds, therefore,have nothing to do with financinga government’s spending.(Wray, 2000, pp. 61-62)

By forfeiting the powers of the StateMoney system, member nations of theEuropean EMU have relegated themselvesto the status of local governments that doneed to finance their spending, severelylimiting their ability to respond withcoordinated fiscal and monetary policiesin the event of an economic downturn.

For Further Reading

Forstater, Mathew (ed.), 1999, “Symposium: The European Economic and MonetaryUnion” (contributions by J. A. Kregel, John Smithin, Alain Parguez, and Charles A. E.Goodhart and Jan J. G. Lemmen), Eastern Economic Journal, Vol. 25, No. 1, Winter.

Goodhart, Charles A. E., 1998, “The Two Concepts of Money: Implications for theAnalysis of Optimal Currency Areas,” European Journal of Political Economy, Vol. 14,pp. 407-32.

Davidson, P. and J. A. Kregel (eds.), 1998, Full Employment and Price Stability inA Global Economy, Cheltenham, U.K.: Edward Elgar Publishing.

The Launching of the Euro: A Conference on the European Economic and MonetaryUnion (with J. A. Kregel, C. A. E. Goodhart, et al.), Annandale-on-Hudson, N.Y.:The Bard Center.

Smithin, John (ed.), 2000, What is Money?, London: Routledge.

Wray, L. Randall, 1998, Understanding Modern Money: The Key to Full Employmentand Price Stability, Cheltenham, U.K.: Edward Elgar Publishing, ch. 4.

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students. In this case, unemploymentmight result even though the Treasury iswilling to increase its deficit. If the Uni-versity cannot find a sufficient number ofjobs for students in order to increase itsdeficit to the level of desired net saving bystudents, then the recommended policywould be to reduce the tax liability (say,from B25 to B15).

Finally, there may well be some levelof unemployment even in the presence ofjob openings at community service provid-ers. This could be attributed to the sorts of“micro” factors that are often cited ascauses of unemployment: inadequate

benefit, of, say, 10 buckaroos per year.This would allow alumni/retirees to pur-chase student labor to mow lawns, runerrands, or even to conduct library re-search. How can the Treasury ensure that,when the time comes, it will be able toprovide 10 buckaroos per year to retirees?One option would be to run the UMKCretirement plan much like the U.S. SocialSecurity system: place a “payroll tax” oncurrent student workers (say, 10 percenton each hour of labor such that studentswould have to work an hour and six min-utes to obtain a buckaroo) and pay retire-ment benefits out of payroll tax receipts.The Treasury would keep separateaccounts for the retirement system,showing expenditures, revenue, balance,and accumulation of buckaroos in a trustfund. As the number of retirees will grow(tremendously!) relative to student work-ers, the UMKC retirement system wouldpresumably begin to run deficits. Thus,like the U.S. Social Security system, itwould need to build up a huge trust fundby running surpluses today in order tomeet expected deficits in the future. Oneoption would be to issue interest-earningTreasury bonds to be held by the retire-ment system trust fund. All of this wouldbe consistent with the current operation ofthe U.S. Social Security system. No doubt,within a year or two the Treasury’s ac-countants would recognize that the retire-ment system would be “bankrupt” a fewyears down the road, leading to muchhand-wringing and plans to slash retire-ment benefits, increase taxes, or investbuckaroos in riskier assets to increase therate of return on the trust fund.

However, it should be obvious thatrunning a retirement system surplus today,accumulating a buckaroo trust fund, orearning more interest on the buckaroo trustfund will in no way help to provide forfuture retirees. First, there is no reason toaccumulate hoards in the retirement sys-tem trust fund—the Treasury can alwayspay retirement benefits by issuing bucka-roos when payments come due. There isthus no reason to keep separate books forthe retirement system. Buckaroos will besupplied as community service providers

draw down SDRs and as retirees receiveannual buckaroo benefit payments(together, these represent total treasuryspending). The total demand for studentlabor will depend on the demand comingfrom community service providers, plusretirees, plus other holders of excessbuckaroos. It is possible that as the retire-ment community grows, the demand forstudent labor coming from retirees, alone,might become sufficient to meet studentneeds for buckaroos to pay taxes. Thus, theUniversity may have to make a decisionconcerning the appropriate allocation ofstudent labor—is it better to allocate morelabor to community service providers or toretirees? Note, however, that this is a“real” decision and not a monetary deci-sion—it cannot be resolved simply byrunning larger buckaroo surpluses or byearning more interest on trust fund assets.The university could, for example, (tempo-rarily) resolve the problem by raising taxeson students—not to “balance” the retire-ment system’s budget, but to increase thesupply of student labor. Or, it could cutretiree benefits—not to balance the budgetbut to reduce retiree demand for studentlabor. Indeed, the retirement system’sannual budget provides no useful informa-tion regarding the operation of the retireesystem. Rather, the Treasury must set taxrates and retirement benefits at the levelthat will ensure that a sufficient supply ofstudent labor is directed to providingservices both to retirees and to the UMKCcommunity.

Some of the analysis above appliesdirectly to our economic system as itactually operates, while some of it wouldapply to the operation of our system if itwere to adopt an employer of last resort(or buffer stock employment) program.

1. Government budget: In our currentnational system, the dollar is issued by thegovernment whenever it spends, just as thebuckaroo is issued by the UMKC Treasurywhen it spends (that is, when providersdraw SDRs to pay student labor). Dollarsare then drained through tax payments, justas UMKC taxes drain buckaroos. Govern-

Community Service Program continued from p. 16

motivation or skills mismatch betweenunemployed students and desires ofemployers. In this case, counseling andtraining may indeed be necessary. How-ever, unless the number of job vacanciesexceeds the number of job seekers, coun-seling and training alone cannot resolveunemployment problems but would onlyshift unemployment from one group toanother.

Graduation from UMKC is equivalentto retirement from the University, or, moreaccurately, from the community servicehours program, because graduates will nolonger need to work in order to pay taxes.The University may wish to provide an“alumni package” of benefits that wouldinclude an annual buckaroo retirement

Edward J. Nell, Director of the Programon Transformational Growth and FullEmployment at the New School

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ment surpluses allow U.S. households(and firms and financial institutions) tohoard dollars, just as UMKC Treasurydeficits allow students and others to hoardbuckaroos. As government surpluseswould drain dollars, they are made pos-sible only by previous budget surpluses; abalanced budget is the “best” that is sus-tainable. In a system (such as the Ameri-can) in which the central bank is allowedto issue dollars as it “lends” or buys assets(such as foreign currencies), central bankprovision of dollars must be added totreasury spending to obtain total govern-ment spending. Admittedly, this is notnormally done, and thus a country canappear to run continuous surpluses (on itstreasury budget) because its central bankcontinually supplies currency not countedas government spending.

2. Bond sales: It is normally believedthat a government budget deficit requiresbond sales because the government mustborrow to finance its spending in excessof tax revenue. The UMKC communityservice hours program demonstrates thatthis is not correct. The UMKC Treasurynever needs tax revenue in order to spendbuckaroos; indeed, it cannot collect bucka-roos until it has spent/issued them. This isalso true of any national government thatissues the national currency (technically,the base or high powered money) acceptedin payment of taxes. As the only supplierof “that which is necessary to pay taxes”(high powered money), the government(again, consolidating the treasury andcentral bank) must spend before it can tax.Bond sales thus come after the govern-ment has already spent and must servesome purpose other than “financing”government spending. In the UMKCsystem, bond sales are undertaken toprovide students with an interest-earningalternative to non-interest-earning bucka-roo hoards. In national economies, govern-ment bond sales serve the same purpose.They are really nothing more than aninterest-earning alternative to non-interest-earning hoards of high powered money.

3. Interest rates: In our UMKC system,the Treasury decides what interest rate itwill pay on buckaroo bonds; this thenestablishes the base interest rate on bucka-roo lending. In national economies, thebase interest rate is established by thecentral bank (in the US, this is the fedfunds rate) while relatively simple arbi-trage determines the rate on governmentbonds. In both the UMKC system and innational economies like that in the US,the “natural base rate” on high poweredmoney hoards that result from governmentdeficit spending is zero. In other words,government deficits do not place upwardpressure on government bond interestrates, no matter how high the deficit maygo. The base interest rate is always set“unnaturally” above zero as a result ofmonetary policy.

4. Social Security: As discussed, inany modern national economy in whichgovernment issues high powered money,it makes no sense to maintain separateaccounts for Social Security. Furthermore,accumulating a trust fund cannot help toprovide for future retirees, and thus itmakes no sense to run a surplus today inorder to deal with a “baby-boomer” bulgeof retirees in the future. Tomorrow’sstudent workers will have to provide allthe labor demanded by tomorrow’s UMKCretirees plus all other demands for studentlabor. Similarly, in national economies,tomorrow’s workers will have to providethe real goods and services required bytomorrow’s Social Security recipients—and no amount of financial fixes today canchange that. In the year 2030, total gov-ernment spending (including benefitpayments to retirees) will be covered byissuing treasury checks (plus, as discussedabove, creation of high powered money bythe central bank as it purchases assets).Existence of a trust fund does not changethis in any way. In the year 2030, taxrevenue will drain high powered moneycreated by government spending. Thebudget stance that will result (balanced,deficit or surplus) cannot be changed inany way by anything we do today regard-ing today’s “financing” of Social Security.

5. Unemployment: In the buckaroosystem, involuntary unemployment ofstudent labor results only if the Treasurylimits the supply of buckaroos. In oursystem the Treasury lets the supply ofbuckaroos expand as necessary to allowall community service providers to drawdown as many SDRs as desired; if provid-ers do not require all the offered labor, theuniversity employs the remaining studentsseeking jobs. Alternatively, the Treasurycould cut buckaroo taxes to reduce thesupply of labor going to providers in orderto match demand for labor. In the nationaleconomy, involuntary unemployment

results when government spending is toolow, such that the supply of high poweredmoney cannot keep pace with demand forhigh powered money. The solution is tocut taxes or raise spending.

6. Employer of Last Resort (ELR)policy: UMKC stands ready to employall the student labor not required bycommunity service providers. An ELRprogram could perform a similar functionin national economies with governmentsthat issue high powered money. (We will

Angela Bennett, UMKCWomen’s Council Presidentand UMKC Alumni AssociationPast President, at the C-FEPSribbon-cutting ceremony

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not address the relatively few cases ofcountries in which governments do notissue high powered money—for example,countries that operate with a currencyboard arrangement. These operate quitedifferently from the UMKC system.) Insuch economies, the government wouldstand by, ready to employ all ready, will-ing, and able labor at a fixed wage. Anylabor not needed by the private and (non-ELR) public sectors would be able to findwork in the ELR program. It is not neces-sary for the federal government to actuallyprovide all the ELR jobs; indeed, werecommend that the ELR program followthe UMKC example in decentralizingemployment as much as possible. Thus,just as in the UMKC system, the UStreasury would supply dollars to alleligible community service providers(charities, not-for-profit organizations,state and local government) to hire asmany ELR workers as they desire atthe fixed ELR wage. If any involuntaryunemployment still remained, the federalgovernment would create jobs directly forthe remaining job seekers. Note that underthis arrangement, the ELR wage wouldbecome the base wage rate, with all otheremployers offering a wage that is a mark-up over the base wage. Furthermore,employment in ELR would fluctuatecounter-cyclically: as aggregate demandrises, non-ELR employers hire workersout of the ELR pool; in recessions, work-ers shed by the private sector flow into theELR pool. This means that governmentspending on the ELR program would alsofluctuate countercyclically, movingstrongly to deficits as the economy slowedwhile deficits would fall (perhaps even tothe point that the budget swings to sur-plus) during booms. This would ensurethat the supply of high powered moneywould fluctuate with demand, and thatdeficits would always be at just the rightlevel to eliminate all involuntary unem-ployment. Note that none of this precludesdiscretionary “Keynesian” policy: if theELR pool shrinks too much in a boom, thegovernment could cut non-ELR spendingor raise taxes to slow the economy andincrease the size of the pool. On the otherhand, if the ELR pool grows too much, thegovernment can cut taxes or increase non-ELR spending.

7. Wage Inflation: In most countriestoday, situations of high employment arefeared because it is believed this will leadto wage inflation and thus to overall priceinflation. Thus, most economists recom-mend keeping government spending at alevel sufficiently low to maintain a sub-stantial portion of the labor force involun-tarily unemployed. We will not commenton the wisdom of such an approach. How-ever, in the UMKC system, we attempt tooperate at continuously full employmentwith zero involuntary unemployment.Note, also, that this has no effect on bucka-roo wages—which are fixed and holdsteady at B1 per hour. With an ELR systemin place, full employment and zero invol-untary unemployment can be similarlymaintained with no pressure on the basewage because it is set by governmentpolicy. Other wages are then set as amarkup over that wage. When aggregatedemand is high such that employers beginto draw workers out of the ELR pool, theywill need to offer a markup over the ELRwage to obtain workers. So long as theELR pool remains sufficiently large toserve as a buffer stock of employablelabor, it will always help to dampen wagedemand just as any buffer stock helps todampen inflationary pressures on prices ofthe buffer stock commodity.

8. Exchange Rates: It has commonlybeen feared that government deficits raiseinterest rates which then cause currencyappreciation and result in trade deficits.There is surprisingly little evidence of this.In any case, however, our analysis abovehas shown that interest rates are primarilydetermined by monetary policy, and farfrom placing upward pressure on interestrates, the “natural base rate” is zero in thepresence of government deficits. As wehave shown, the buckaroo/dollar exchangerate is primarily determined by buckarooand dollar wage rates—although expecta-tions of interest rate policy as well as tradeimbalances can affect the exchange rate.However, because arbitragers can alwayschoose to hire labor in either buckaroos ordollars, there is pressure to return theexchange rate back toward “wage par-ity”—the ratio of wages in terms of bucka-roos to wages in dollars. Similarly, with an

ELR program in place, foreigners alwayshave the option of using dollars to hireworkers out of the ELR pool. If the dollardepreciates too much relative to, say,sterling, there is an incentive to buydollars in order to hire ELR workers indollars rather than UK workers in poundssterling—stopping the dollar depreciation.Thus, the labor buffer stock also helps tostabilize the external value of the currency.

In future issues of the digest, we willexplore some of the further implications ofthe Buckaroo program. The program is atonce a novel community service programand an educational tool for understandingthe working of modern monetary systemsand exploring monetary and fiscal policyoptions. Interest in the Buckaroo programis in no way limited to economic concerns.Within the context of UMKC’s Interdisci-plinary Ph.D. Program, students in sociol-ogy, psychology, anthropology, philoso-phy, and political science may all find awealth of research possibilities as theprogram develops. Ethical questions mayarise: should students be permitted toexchange dollars for buckaroos? Will anyrules evolve concerning various aspects ofthe program? Will students decide to formpolitical committees to oversee aspects ofthe program, or even pass “laws”? Theprogram is rife with possibilities forexamining the nature of institutions andtheir evolution.

For Further Reading

Harry C. Boyte and Nancy N. Kari, 1996,Building America: The DemocraticPromise of Public Work, Philadelphia, PA:Temple University Press.

Robert Coles, 1993, The Call of Service,New York: Houghton Mifflin Company.

L. Randall Wray, 2000, A Proposal toImplement a Community Service Programat UMKC, Special Report 00/03, Center forFull Employment and Price Stability, April.

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John F. Kennedy’s budgetary policy. Morerecently, Heilbroner was chosen to receivethe first-ever Scholar of the Year award bythe New York Council for Humanities. Hehas also received a Guggenheim Fellow-ship, the Veblen-Commons Award fromthe Association for Evolutionary Econom-ics, and seven honorary degrees.

Also in attendance were C-FEPS co-founder Warren Mosler, C-FEPS SeniorResearch Associate L. Randall Wray,Economics Department Chair Jack Ward,and Professor James Sturgeon, director ofGraduate Studies and the Social ScienceConsortium, each of whom was integralin bringing C-FEPS to UMKC. Wray,who was also appointed professor in theEconomics Department, is the author ofUnderstanding Modern Money: The Keyto Full Employment and Price Stability,which serves as a good summary of the

theoretical basis for much of C-FEPS’policy orientation (see page 19). Wrayformerly taught at the University ofDenver and Bard College, and he remainsa Senior Scholar with Bard’s Levy Insti-tute. The audience also included WallacePeterson, author of The Social SecurityPrimer and Silent Depression, and UMKCProfessor of Political Science MaxSkidmore, author of Social Security andits Enemies.

While UMKC will be the focus ofC-FEPS operations, the center also fundsresearch at other institutions, includingHarvard University, Columbia University,the London School of Economics, and theUniversity of Newcastle, Australia. In aneffort to produce policy-relevant research,

C-FEPS Inaugurated continued from p. 1

Mosler, Sturgeon, Heilbroner, Wray,Forstater, and Ward at the ribbon-cutting ceremony.

C-FEPS sponsors interdisciplinary,non-partisan scholarship, collaborateswith universities, organizes symposia,conferences, and lectures and participatesin community programs.

In the News

Senior Research AssociateL. Randall Wray

—(with Wynne Godley), “Determiningbalance between receipts and outlays,”Financial Times, Tuesday, 26 January1999.

—Interview on Public Service Employ-ment on Mexican Television, September1999.

—“Should the US Pay Off the NationalDebt,” by Richard Cowan, carried byBridge News, 18 October 1999.

—(with Mathew Forstater), “The Heart-land Labor Forum,” (on unemploymentand public service employment policies),KKFI Radio, 30 December 1999.

—National Public Radio’s “All ThingsConsidered,” report by Jim Zaroli onFederal Reserve policy and technologystocks, 10 March 2000.

—“Kansas City This Week,” KMBC(Kansas City NBC Television affiliate),21 May 2000.

—“The Heartland Labor Forum,” (onincarceration), KKFI Radio, June 2000.

—Congressional Testimony (publishedin Congressional Record): “Did theClinton Rising Tide Raise all Boats?: TheExpansion’s Employment Effects,” Testi-mony Submitted to the Subcommittee onImmigration and Claims, House JudiciaryCommittee, 11 March 1999.

Director Mathew Forstater

—(with Robert Heilbroner), “The WaltBodine Show,” (on deflationary impactof the budget surplus), KCUR Radio,12 October 1999.

—“Public Sector Job Growth,” KansasCity Business Journal, 10 December 1999.

—(with Sumner Rosen), “TheEconomy,” (on Federal Reserve policy ofusing unemployment to control the pricelevel), by Kevin B. O’Neill, 1 April 2000.

—“Gore’s Fiscal Austerity Plan WouldLead to Recession,” Financial Times,16 June 2000.

UMKC Distinguished ResearchProfessor Jan A. Kregel

—“Economic Development at the UNand the Seattle WTO Meetings,” “Heart-land Labor Forum,” KKFI Radio, 6 March2000.

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the federal government, and a two-partysystem rather than proportional representa-tion, all combine to make it extremelydifficult to successfully launch large-scalesocial programs. Such factors, he stated,also contribute to a tradition of suspicionof government, a perception of govern-ment as incompetent, and a fear of poten-tial conflict of government with the privatesector. All this leads to a lack of institu-tional capacity and administrative mecha-nisms necessary for a large-scale publicemployment program. Blau then citedobstacles in the current political environ-ment, such as the “low” official unemploy-ment rate, that additionally presentchallenges. He concluded with somepositive signs, such as a relative softeningof the anti-government attitude on the partof the public since its low point in 1994,and proposed that any successful programin the current political climate must beuniversal rather than targeting specificgroups and must be designed to build theinstitutional capacity of the agency withinthe federal government that runs it.

Many of Blau’s points were underlinedby Bill Grady in his presentation on“Challenges and Opportunities for Legis-lating Job Creation programs in Washing-ton.” Grady, Chief of Staff toRepresentative Brad Sherman (D-CA)and formerly Chief of Staff to the lateRepresentative George Brown (D-CA),cited among the challenges facing anyattempt to enact a public employmentprogram in the current climate: the percep-tion that the economy is doing well, so itshould be left alone; the perception thatwelfare reform is working; a preferencefor job training programs over direct jobcreation; and a preference for tax incen-tives for private business rather thangovernment hiring. Among the opportuni-ties at present, Grady, whose key legisla-tive projects include “Job CreationProgram” advocacy in Congress, togetherwith inclusion of language in the FiscalYear 1998 Labor-HHS Appropriations Act

to fund job vacancy surveys, included: thepreference for jobs programs in generalover transfers; Republican affiliation witha number of recent work programs; theexistence of numerous small employmentprograms that could be expanded, which isalways easier than new legislation; theview that under what is perceived as “thebest of economic times” no one ought tobe left behind; and a real concern with anumber of social problems—especiallythose affecting youth—that could beaddressed by increased employmentopportunities.

In the final paper of the conference, Dr.Harold Oaklander, Founder and Directorof the Alliance for the Prevention ofUnemployment and formerly the AssociateDean of the Graduate School of Businessat Pace University, outlined a number ofcreative ideas for addressing “Barriers tothe Prevention of Unemployment.” Argu-ing that unemployment should be thoughtof as a “social disease,” Oaklander pro-posed that a Center for UnemploymentControl be instituted that would be pat-terned after the Center for Disease Con-trol. Oaklander then asked the audienceto think of unemployment as a kind of“social pollution,” and proposed that anEmployment Protection Agency be inau-gurated that would be modeled after theEnvironmental Protection Agency.

Community Leaders Participatein C-FEPS Conference

Among those in attendance at the con-ference and participating in the discussionfollowing each session were MissouriState Representative Sharon SandersBrooks (D-District 37, and a frequentparticipant in C-FEPS events); HermanWallace, Regional Director of the Em-ployment and Training Administration ofthe Kansas City, Missouri Office of theDepartment of Labor; and Richard A.Morris, Board of Commissioners of theLocal Investment Commission (LINC—a citizen-driven community group selected

by the State of Missouri to administer theCaring Communities Fund and involved inassisting the unemployed find jobs).

The conference papers are currentlybeing assembled by Sumner Rosen andC-FEPS Director Mathew Forstater for aconference volume. The papers byGoldberg, Rose, Harvey, Forstater, andWray are currently available in theC-FEPS Working Paper Series.

For Further Reading

Forstater, Mathew, 1998, “Flexible FullEmployment: Structural Implications ofDiscretionary Public Sector Employment,”Journal of Economic Issues, Vol. 32,pp. 557-63.

Harvey, Philip, 1999, “Liberal Strategiesfor Combating Joblessness in the Twenti-eth Century,” Journal of Economic Issues,Vol. 33, pp. 497-504.

Harvey, Philip, 1989, Securing the Rightto Employment, Princeton: PrincetonUniversity Press.

Mitchell, William F., 1998, “The BufferStock Employment Model and theNAIRU: The Path to Full Employment,”Journal of Economic Issues, Vol. 32,pp. 547-55.

Rose, Nancy, 1994, Put to Work: ReliefPrograms in the Great Depression, NewYork: Monthly Review Press.

Rose, Nancy, 1995, Workfare or FairWork: Women, Welfare, and GovernmentWork Programs, New Brunswick, N.J.:Rutgers University Press.

Wray, L. Randall, 1998, “Zero Unemploy-ment and Stable Prices,” Journal ofEconomic Issues, Vol. 32, pp. 539-45.

Public Service Employment Assurance continued from p. 13

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Working Papers

Fifteen Fatal Fallacies of Financial Fundamentalism-A Disquisition on Demand Side EconomicsWilliam VickreyWorking Paper No. 1, January, 2000

We Need a Bigger “Deficit”William VickreyWorking Paper No. 2, January, 2000

The NAIRU and Fiscal and MonetaryPolicy for Now and Our FutureRobert EisnerWorking Paper No. 3, January, 2000

Public Service Employment: Full EmploymentWithout InflationL. Randall WrayWorking Paper No. 4, January, 2000

Can Penal Keynesianism Replace Military KeynesianismL. Randall WrayWorking Paper No. 5, January, 2000

Financial Aspects of the Social Security “Problem”L. Randall Wray and Stephanie BellWorking Paper No. 6, January, 2000

Economic Development in the UNJan KregelWorking Paper No. 7, February, 2000

The Full Employment Approach to Reducing Black Povertyand Unemployment in the United StatesMathew ForstaterWorking Paper No. 8, March, 2000

Historicizing Government Work Programs: A Spectrumfrom Workfare to Fair WorkNancy RoseWorking Paper No. 9, March, 2000

Designing Policies to Combat JoblessnessPhilip HarveyWorking Paper No. 10, March, 2000

The Missing Entitlement and the Lost Entitlement:Work and Welfare, 1935 – PresentGertrude Schaffner GoldbergWorking Paper No. 11, March, 2000

Policy Notes

Abolish the SurplusL. Randall WrayPolicy Note 99/01

Subway Tokens and Social SecurityL. Randall WrayPolicy Note 99/02

Implications of a Budget Surplus at Mid-Year 2000L. Randall WrayPolicy Note 00/01

Special Reports

FOR THE RECORD: Petition 2000Center for Full Employment and Price StabilitySpecial Report 00/01

A Primer on Government SurplusesL. Randall WraySpecial Report 00/02

A Proposal to Implement a Community ServiceProgram at UMKCL. Randall WraySpecial Report 00/03

These publications can be accessed online at www.cfeps.org orrequested by mail:

UMKC-CFEPSEconomics Department; 211 HaagUniversity of Missouri-Kansas City5100 Rockhill RoadKansas City, MO 64110

C-FEPS Publication Series

Edith Eisner has kindly given herpermission for C-FEPS to issue apreviously unpublished paper

by her late husband,“The NAIRU and Fiscal and

Monetary Policy forNow and Our Future,”

in its Working Paper Series.

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“A Prince, who should enact that a certainproportion of his taxes should be paid in a papermoney of a certain kind, might thereby give acertain value to this paper money.”

— Adam Smith, An Inquiry into the Nature andCauses of the Wealth of Nations, 1776

“Make no mistake, inner city folk want to work. We’ve got tospread the job action around if inner city folk are to work—andif cities are to work. There is no macroeconomic policy, noeconomic growth scenario, no model cities approach, no blackcapitalism strategy and no enterprise zone experiment imagin-able that can match the Depression-era Works Progress Adminis-tration in jumpstarting hope by driving unemployment down in ahurry. [There is] nothing un-American about spending publicmoney to fill gaping holes in the labor market.”

— The National Urban League, The State of Black America 1996

“At the cost of not conforming entirely with current usage, Ipropose to include as State-Money not only money which is

itself compulsory legal-tender but also moneywhich the State or Central Bank undertakes toaccept in payments to itself or to exchange forcompulsory legal-tender money… Knapp acceptsas “Money”—rightly I think—anything which theState undertakes to accept at its pay-offices,whether or not it is declared legal-tender betweencitizens.”

— John Maynard Keynes, A Treatise on Money, 1931

“We must develop socially useful forms of work, whichenhance the creativity and involvement of workers… The mostrewarding jobs are those which give opportunities for creativity,provide a living wage and have a beneficial effect. People liketo do, and like to be seen to be doing, good works. Our citiesprovide numerous opportunities for congenial employment, frombeautifying our cities with gardens to mending footpaths andbuilding playgrounds… Real job-creation schemes involve theworkers in the goals and strategies of the employment. Let usallow people the dignity of being involved in identifying, as wellas doing, useful employment.”

— John Short, The Humane City, 1989

“The modern state can make anything it chooses generallyacceptable as money and thus establish its value quite apart fromany connection, even of the most formal kind,with gold or backing of any kind. It is true that asimple declaration that such and such is moneywill not do, even if backed by the most convinc-ing constitutional evidence of the state’s absoluteauthority. But if the state is willing to accept themoney in payment of taxes and other obligationsto itself the trick is done. Everyone who hasobligations to the state will be willing to acceptthe pieces of paper because they know that taxpayers, etc., willaccept them in turn. On the other hand if the state should declineto accept some kind of money in the payment of obligations toitself, it is difficult to believe that it would retain much of itsacceptability… What this means is that whatever may have beenthe history of gold, at the present time, in a normally well-working economy, money is a creature of the state. Its generalacceptability, which is its all-important attribute, stands or fallsby its acceptability by the state.”

— Abba Lerner, “Money as a Creature of the State” (AmericanEconomic Review, 1947, p. 313)

“There is a serious danger that the bidding up of asset pricescould create a bubble of unsustainable values that is likely to

collapse disastrously, as occurred in 1929after the budget surpluses of the precedingyears. Sooner or later a reduction in produc-tion and national income will set in until thereduction in income reduces the demand forassets to conform to the supply.”

— William S. Vickrey, “Fifteen FatalFallacies of Financial Fundamentalism”(C-FEPS Working Paper No. 1, 2000)

“The policy problem is to develop a strategy for fullemployment that does not lead to instability, inflation, andunemployment. The main instrument of such a policy is thecreation of an infinitely elastic demand for labor at a floor orminimum wage that does not depend upon long- and short-run profit expectations of business. Since only governmentcan divorce the offering of employment from the profitabilityof hiring workers, the infinitely elastic demand for labor mustbe created by government.”

— Hyman P. Minsky, Stabilizing an Unstable Economy, 1986

Quotable

continued on p. 11

www.cfeps.orgWe are Online!Come visit us online. We always welcomeyour comments and suggestions. www.cfeps.org(Center for Full Employment and Price Stability)