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PAVLINA TCHERNEVA / ECONOMIST

“UBI would eventually replace many other welfare programs”

Madrid , 1/03/2017

<p>Paulina Tcherneva.</p>

Paulina Tcherneva.

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The foundation in Madrid of Red Modern Monetary Theory (MMT), which aims to achieve a 0% rate of unemployment, presented us with the opportunity of a discussion with one of the main representatives of this economic approach. We are talking about Pavlina Tcherneva: this American economist of Bulgaria origin, is an Associate Professor at the Bard College in New York, of the Levy Economics Institute also at Bard College, as well as of the Binzagr Institute of Sustainable Prosperity. Tcherneva has been able to apply her research and findings to the social reality of numerous countries, obtaining surprising results. Unemployment, the job guarantee and, above all, monetary sovereignty are the main topics of a most inspiring conversation.

Did you know that for Spaniards unemployment is the main problem? What is happening in the United States? Are you really moving to full employment?

In general, many jobs have been created… precarious jobs. We lost many jobs after the crisis. Our labor market recovered according to the official figures, but we did not get back the full-time jobs that we lost. We are especially creating a lot of part-time jobs and these are not exactly voluntary. Moreover, many people gave up and have left the active population which has experienced a major downturn. As people abandon the search for work they do not appear in the unemployment statistics. This is not exactly a solution to the problem, is it? We have other additional indicators produced by our statistical services but they are not given much attention.

And what do these other indicators say?

The official unemployment rate is right now 4.7%, about seven and a half million people; however, if you added to that rate all the people who are not looking for work any longer, the part-time workers that really want a full-time job, then the unemployment rate would be at least double. We could find unemployment rates of 17 million, about 11%, which is very uncommon in the USA, especially in a recovery period.

What is happening to all those people?

To understand this you have to stop paying attention to the official figures. There is a large segment of the population that is now out of the active population. Many economists are going to tell you that this is “structural unemployment”, that they are people who do not have the qualification to get a job, whose jobs have been taken away by technology, that the cost of recovering them for the job market is very high —this is the worst excuse of them all, because the costs have come down everywhere with the crisis—. The job market has become ever more precarious. Social benefits have disappeared, salaries have dropped, we barely have any long-term work contracts, and we barely have trade unions… It is at this point of social failure when certain economists, who have not been able or did not want to solve the problem of unemployment, decide to attach a new label: that this is a natural rate of unemployment. They claim that there is nothing to be done, that this is the market structural unemployment, that it is produce by automation, that the robots are coming….

And it is not scientifically correct. Is it ideology then?

Absolutely. If your ideological commitment is to take no action to achieve secure employment and leave that task to the market, then you should not be surprised to encounter high unemployment figures because the private sector, the market, is always going to do all that is possible to bring down the cost of labor or, if they can, replace it with technology. Because it is only pursuing a profit the private sector frequently finds itself trapped in a vicious circle in which many people are fired, so you need a corrective force. However, if your ideology is anti-State, you cannot even start to think about the policies that you can deploy to correct this situation.

You are proposing a “bottom-up” approach to the problem of unemployment which would consist in the direct creation of jobs. Could this apply to Spain where there are so many unemployed?

The problem is not the quantity of the unemployed. The “bottom-up” approach consists in offering a direct solution to the problem: if your problem is the lack of jobs you have to give people a job. It is so simple! If people need work, you give them a job, not education nor tax rebates for companies hoping that they might then decide to hire…

On paper it looks good, but, in reality?

You have the New Deal of the 1930’s. Another less well-known example: for many decades Sweden had a model in which the State was the employer of last resort. The government, the trade unions and the firms would agree to ensure full employment as the main goal: if companies needed to fire people they negotiated the amount with the trade unions and then those laid off were hired by the public sector. There are, indeed, many direct job creation programs but now they are small. We do not think in the large numbers any longer as they did during the American New Deal.

If the political will exists, then I am totally convinced that the Governments can set up these programs and, moreover, very quickly, in four to six months

What are the chances of implementing this? If the political will exists, then I am totally convinced that the Governments can set up these programs —because I have experienced it besides studying it— and, moreover, very quickly, in four to six months. These are not administratively complex procedures. For example the New Deal was activated in six months and we had 30% unemployment. The Plan Jefes de Hogar in Argentina was introduced when unemployment was 25% and it took off in only four months.

You were an advisor of the Argentinian government just at the time when they implemented a direct employment policy: the Jefes de Hogar Program.

Do you know what they did? They asked the unemployed what jobs they wanted or wished to perform: that really empowered them! The local communities, the parties and trade unions, which are very developed, were the organizers of the program on the ground. The government gave money to the communities and people submitted proposals that had to go through an approval process and, often, these had a direct relationship with what the community needed: a shop to sew school uniforms, clothes for the gym, community gardens, kitchens… People know what they want and, if you allow them to decide what the community wants, the result is tremendously empowering.

Here is a new element: that crude intervention from the State that is always feared does not occur. People are asked…

Of course! For example, in rural areas, the farmers know best. And they let us know that they had irrigation problems and then they developed the project. Even people who lived in the poorest communities in the suburbs of Buenos Aires, who had been neglected for decades, as if they didn’t exist, the poorest people we could find… developed some of the projects on their own: libraries, healthcare centers,… One of the cities I went to was called Ciudad Oculta —Hidden City—, and had been called that way for decades… and one year before the Jefes de Hogar ended they changed the name…

Instead of an invasion from the State, this is about empowering the community. Not everything was perfect: in some areas the program did not work so well… But there was something else and that is that it represented a huge stimulus for the rest of the Argentinian economy: in the first place, more people than expected applied for work, and that is what we call hidden unemployment; the government expected half a million people would participate and two million, 13% of the active population, showed up. In two years the numbers began to drop because people started to leave for the private sector. It was a program in which the government, instead of microcredits that have been so extolled, provided, for example, women with sewing machines and paid them until they could set up their own shops. These women worked a lot of hours even though the government only paid them four, they worked at least eight. They could also end up saving something, investing and creating small enterprises. Things were not the same for people who came out of the middle classes and wanted to return to the private sector… But they also came because they wanted to see their neighbors and feel that they were part of the community. Some people, when they knew about the program Jefes de Hogar, even lent their rooms, garages, … as spaces for the projects, offering their own resources.

In other words it was more than just numbers. We are talking about people… But, how did unemployment evolve?

It came down very quickly from 25% to 7% in about two years. The multiplier effect, 2.5 times, was very high: for each dollar invested in the program two and a half dollars were generated in the Argentinian economy. GDP grew for many reasons besides this program Jefes, at a rate between 8% and 12%... and during this last crisis they haven’t fared that badly…

How was the program funded?

The Government paid in pesos because it had ended the peg with the dollar. When you have a currency board, like they had with the dollar, your capacity to spend is very limited: you cannot increase pesos to spend unless you have obtained the same amount of dollars. If Argentina imports, then it loses pesos and cannot increase public spending which leads to automatic austerity. When they abandoned the currency board and adopted their own currency with their own Central Bank, the peso depreciated but it later stabilized, it was not madness.

Once they achieved monetary sovereignty, the program was funded from the general Budget and final costs did note even reach 1% of GDP. It is not an expensive program at all! The salaries were low, people were only paid for four hours. They should have spent 2% at least.

Then it is not an unbearable cost, as one could have thought.

Unbearable? Look, in Spain the cost of the unemployment insurance is 2.5% of GDP. I reiterate that wages were low. The effects on extreme poverty were very strong because it declined a lot, but not on poverty. This was a negative feature of the program.

 The cost of a job guarantee in Spain would only reach 3% of GDP, or, at best, 4%

Speaking about the job guarantee, there is strong controversy between this concept that you have illustrated and Universal Basic Income (UBI). Is some form of compromise possible? 

I have written extensively about the subject and I have been talking to academics who defend the universal basic income for more than 16 years. We all have the same goals and we are worried about the same problems, but the UBI, in my opinion, solves neither the problem of poverty nor of unemployment. Nor do I think that it empowers people. There are many reasons. In the first place, it has been estimated that the financial cost for Spain would be 20%. However, the cost of a job guarantee in Spain would only reach 3% of GDP, or, at best, 4%. Why? Because it would not apply to everybody, only to those who need it the most.

And only for a period, until the economy recovers… 

Exactly. In the second place, it is true that there are people who should not be forced to work; this is indicative that we could combine both methods. But the unemployed person that wants to work and gets a UBI, even though he surely will not die of hunger, certainly will not get a job. Because the jobs are not there, the market is broken! This is where the problem is, the market does not create jobs because it prefers to automate or do other things.

But there are more reasons. The UBI would end up replacing many other welfare programs, which would be a major problem. How can we defend the minimum wage? They would say: hey, you’ve got your UBI and your basic income, why don’t you go to the market?

From what you are saying the UBI could eventually behave according to the Neoliberal idea: “take your check and spend as you like”.

That is the reason why in the USA the UBI has a strong backing in the Right. Milton Friedman himself supported it. The Left has to know who their ally is: what the Right wants is to eliminate all those social benefits that were won in the past thanks to the struggle of the workers. Besides, if you get a UBI, are you not going to be discriminated in the market?

But the fact is that within the Left there are experts who have been studying the issue of the UBI for years..

But they are rejecting the need for people to participate in the productive process. They want to decommoditize work. But you cannot empower people that way! If you ask the poor what they want, what they are looking for is recognition. Besides, this allows us to drive them to do the things that they themselves need. This is the solution: in the literature on UBI there is a concept called “participation income” where you provide somebody with an income but you require that in return, under the principles of reciprocity and social obligation, that person contributes by participating in socially useful activities; for me, this is the best way to combine the job guarantee and UBI. So, I can support an income for children, for disabled…. But I also allow disabled who wish to work to do so. This is the way to unite the Left in this matter, but as long as a certain Left is determined to disconnect income from work I am afraid that it is a Trojan horse.

However, many say that we are facing the end of work; that the robots are already here…

No. The Left cannot buy this argument. This argument comes from Silicon Valley, from the technocrats who want to automate jobs and kick people out, keeping the profits. That is why they want the UBI.

So that UBI acts as a kind of bailout for private companies…

Exactly! A bailout for companies that want to automate jobs, and that is how they phrase it! The UBI places a veil to structural injustice. What we really need to do is fix the market and make sure that people get work opportunities. The idea that people are going to get a UBI and then will get together and things will come out of there… that’s just not going to happen.

Forgive me for being naive: your bottom-up approach is simple, possible and efficient. Why is not put in effect? In other words, who loses with full employment? 

Well, the thing is that the threat of unemployment represents a huge power exerted against wages. Michal Kalecki wrote about this back in 1944: firms would lose with full employment. In reality, in a mixed capitalist economy, we would all win: more demand, more consumption, more sales, better qualified workers, we would stop paying for diseases caused by unemployment… The job guarantee is a safety net that enhances the human capital of the work force. If the threat of unemployment disappears what happens is that the class struggle between labor and business is drastically altered…

Altered in favor of the workers… But let us turn to the Eurozone. You know that it is right now in a turmoil. Can your bottom-up approach be applied here?

I think that despite everything a direct employment program can be launched in Spain under the current circumstances. And you can even design it so that it costs even less than what you are currently paying for unemployment. In any event, how do you fund a UBI within the Eurozone? It is a lot harder! Look, with a job guarantee there would be many people who would cease to receive unemployment benefits when they enter the program. I you get people out of poverty, those incomes provide to the poor also come down!

Also consider all those unemployed youth: this is a social catastrophe! And it has a high cost that you are already paying for: crime, police costs, security…We are already paying for that! It is a lot cheaper to give people something sensible like a job than to continue supporting them financially, which is the morally correct thing to do but does not empower them at all. You could start with small jobs designed for young people, expand them gradually, associate them to the acquisition of skills and qualifications so that companies later can value that qualification and consider hiring them.

But those who are in power in the Eurozone will not allow it. Look at what happened to Greece…

It was Greece. But now it is going to be Spain, then Italy… they cannot go on doing that. The Eurozone has a very faulty design…. And austerity is going to destroy the Eurozone. It is going to happen. You have to be ready: the first thing you need to do is explain to people that there is nothing natural about austerity and, particularly, that the Eurozone has no precedents in the History of mankind. Normally countries have their own currency; only when you are a colony do you adopt the currency of the metropolis, the colonial power, and you will only get independence if you recover your own currency.

So maybe we are a colony…

Well, it would be a very strange model because you have a voluntary consensus here. A voluntary agreement that consists in separating the government from its money. The USA fought a war for this reason! We wanted our own money and the British did not allow us! You cannot have independence until you have your own sovereign currency under a free-float system. This is why the Eurozone represents an absolutely unique arrangement, because until now there had never been a union in which the government was separated from the Central Bank in such a radical way: it is like a divorce. In the USA there is a separation, OK, but the Central Bank will never bounce a check from the Government. The Fed will never say “No” to a program proposed by the Government and voted in Congress. In Spain you do not have a bank to pay what the government decides. 

There is an added problem. In the Mediterranean countries we are ashamed of our political class and we have always seen our salvation in the European idea.

The same thing happens in Bulgaria where I was born…The idea that Europe solves our problems… The European project begun as a pacifist and progressive project, yes, but the design of the monetary system is killing that ideal: nationalisms are appearing, anti-immigration sentiment… You cannot pursue those ideals of integration and peace when you impose such an unnecessary and severe austerity. If there had federalization, with a fiscal government in Brussels, you could have your own Jefes de Hogar program. You have to decide if that reform is possible. If things go on like this the euro will suffer many more crises and cause a lot more damage, much more than any other alternative. 

In the long-term, would exiting the Eurozone be better? There are a lot of people who say that within the euro crises like the one that we have lived since 2008 can be resisted a lot better…

Think in the alternative? Is austerity going to improve your life? Will it get worse if you have monetary sovereignty even under a corrupt government? Continuing with austerity is going to cause salaries to fall further, more privatizations… When the Government spends in the USA it does it with new money that is advanced by the central bank. The central bank backs all the checks that the Government gives to contractors, who later pay taxes to the government. This money paid in taxes cancels the money created initially. Opposite of what is commonly thought, to collect taxes first you need to spend.

Now, if I am a company and the government pays one hundred dollars and charges twenty in taxes, those 80 will remain in my bank account; they are dollars created by the bank that I have. But in the Eurozone you do not have your own Government that can deficit spend and this is very important. If the Spanish Government needs money if has to borrow it from a bank; this bank never advances money to the Government. That is why, in Spain, to spend you either collect taxes or you borrow money. There is a dissociation between the issuer of the currency and the user.

Let’s do an exercise: if the government spends 100 and taxes 20, the private sector keeps 80. Those are their savings and also the government deficit. People are so afraid of the deficit…. But the Government deficit is the private sector surplus; is their savings! Therefore there has to be some agent who, so to say, dissaves.

So the pitfall is to think that deficits are bad per se. It’s a fetishism.

Exactly! Deficit phobia is, possibly, the greatest obstacle to do what we want to do. People believe that you have to comply with austerity… and what happens in reality is that if one agent saves another has to borrow. The idea of austerity is completely unnatural. For, what happens if the government has a surplus? What happens if the government spends 100, gives 100 to the private sector and taxes it with 150? What happens to the private sector?

That it runs into debt.

In runs into debt. So what do we want, that the government borrows so that the government balances the Budget? It’s total madness!

That is what you call functional finance: nothing happens without consequences. The public deficit is the private savings. It’s a system. Once you see it that way, everything else becomes easier. But we the Spaniards, the Greeks are accused of working too little, working on the side, collecting subsidies. There is a certain cultural racism that makes everything worse and undermines our credibility even if we present good alternatives like the one you explain….

In the United States the same things are said about African Americans. Think about this: you cannot know who is lazy and who isn’t unless you reach a full employment situation. Only if the Economy provides a sufficient number of jobs for those looking for one, then, only then, can you know who works the most and who the least. But if your economy hast two people and generates only one hob, you can do whatever you like with the second person: train them, coach them, give them a PhD, computer skills… but she will never have a job. It’s like the musical chairs: if there are only nine chairs then tenth individual, no matter how much computer knowledge she has, will not get one. So the market is not creating enough jobs and we can always say that that person is lazy, that she is happy with subsidies… but in reality it’s the other way around. Each time people think about those people you are making an assumption that never happens, that the Economy produces enough jobs.

If we leave the euro, investors, lenders will lose confidence, inflation will come and all the ghosts haunting us…

Those are myths. If the Peseta [the former currency of Spain] returns you do not depend on lenders to lend you Pesetas because the Pesetas will come from your central bank. You do not have to borrow it because you are the monopolist of the peseta.

But can there not be an inflationary spiral? You know, print, print, print….

Yes, it can happen. How can it happen? It the Government spends, it does so because it needs something. If the Economy produces that something there will be no inflation. If you keep spending but you do not get what you need then it will generate it. In Japan they had the largest public debt in History, but the creditors did not punish them because they had a Central Bank. However, even with the largest debt in World History, they’ve had twenty years of deflation. And they do not create jobs because they are not doing it directly.

With MMT, is there a return to the classic, regulator, and Interventionist State? 

Modern Monetary Theory has no particular political orientation, it only explains how the monetary system works and that, if you have monetary sovereignty, you don’t tax to spend, it’s the other way around, first you spend, and then you tax. That is the first point. Once people understand this, if you see that you have unemployment, you can bring taxes down, because there is nothing bad with the deficit. What matters is where we spend. Besides, the job guarantee proposal empowers people, it frees them, in fact. Social participation increases, the State just finances. This has progressive implications because we end the myth of the budgetary constraint and we see that many impossible things become possible. And then we can see what people want. And then you can get to the conclusion that the financial sector is too large and you go ahead and regulate it… but that’s a different story…

To finish I would like to ask you about Donald Trump’s economic plans. Sometimes he appears to be like Roosevelt, sometimes like a total libertarian. What would have happened if Bernie Sanders had become president?

Sanders is phenomenal. He would have won the elections if the Democratic Party had chosen him, they made a total blunder. There would have been real change. About Trump, I do not think there is a contradiction: in his first days he is behaving like what he is, a Neoliberal. He is terminating publicly funded programs, freezing spending… he’s privatizing the public sector. Although he may use a populist language, he is providing incentives to the private sector in many ways so that they build infrastructure. His policies are reactionary. There could be a good effect in the long-term if he increases deficit spending. But he could be our worst Trojan horse…

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Traducción de Stuart Medina Miltimore/Red MMT Spain

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