For old-style Keynesians, the fact was that labour markets could not be relied upon to clear. For new classicals, it was that people were rational maximizers. I want to suggest a different fact – that recessions are unpredictable.
Prakash Loungani has shown that both private and official forecasters “miss the magnitude of the recession by a wide margin until the year is almost over”. In February 2008 for example – after the recession had begun – the Bank of England attached only a slight probability to GDP falling when in fact it fell more than 6% in the following 12 months*.
Whatever the reason, this Big Fact has a devastating implication. It warns us that there are severe limits upon what demand management can achieve, whether it be through fiscal or monetary means. This is simply because there’s a lag between policy and outcome. Fiscal or monetary policy can boost demand once it has fallen. But it cannot reliably prevent all recessions. This point applies to conventional as well as unconventional policy. By the time the Bank of England knows there is a sufficiently deep recession to require (say) a helicopter drop, the recession will be well under way.
How can we respond to this?
Or policy-makers could reject conventional macroeconomic forecasting and place more weight upon the yield curve (pdf) to tell us the probability of recession. This, though, is inviting us to be smacked in the face by Goodhart’s Law.
The obvious possibility here is more progressive taxation and a higher welfare safety net. Another possibility is for Shiller-style macro markets to enable those most exposed to the risk of recession to buy insurance: this requires state support for such markets. A third possibility is one suggested by Eric: a sovereign wealth fund. Insofar as this holds overseas assets, it would help diversify local UK economic risks, and would rise as sterling falls.
It’s in this context that a Job Guarantee becomes attractive (pdf). It would provide schemes which expand to create jobs in recessions, and contract as private sector jobs are created in the subsequent upturn. It’s another automatic stabilizer.
Now, there are issues with a JG, not least of which are administrative ones: how do we identify what work needs doing? How can we ensure a JG doesn’t deteriorate into demeaning workfare under rightist governments? And so on. Such problems are a case for thinking about a JG now, and for rolling it out in good times, so that difficulties can be addressed before the scheme needs to be scaled up.
We should regard a JG not as a faddish idea of some sect – although that it how it is sometimes presented – but rather as one of a suite of possible policy responses to one of the fundamental facts of the human condition: our inability to reliably foresee the future.