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July 16, 2020, 8:26 a.m. EDT

We deserve an economy that provides jobs, public health and a sustainable environment

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Financial-sector and labor-market deregulation, privatization of state-owned enterprises, and fiscal austerity were the prescriptions of a supposedly universal formula that conflates micro- and macroeconomics and is to be applied regardless of a country’s stage of development.

Neoliberal economics adheres to the early-19th-century economist Jean-Baptiste Say’s “ law ” that supply creates its own demand. The implication is that by eliminating undue political influence on economic incentives, the market will ensure optimal value creation. Politics thus becomes a race to diminish the state’s market-shaping role, while largely ignoring the real-world relationship between supply and demand—particularly undersupply and under-demand.

But the neoliberal dispensation also drew selectively from “welfare economics,” which ascribes a role for governments to patch things up when outcomes deviate from the ideal of the perfect market. This analytical benchmark, combined with the fear of inevitable “government failure,” ensured that market repair never rose to the level of market renovation. The market, not the state, always received the benefit of the doubt.

Markets with a Mission

Now that COVID-19 has exposed the damage wrought by the previous paradigm, it is time to start mapping out a new era of public investment to reshape our technological, productive, and social landscape. The new model should embrace the realization that our economies are always evolving in some direction, rather than merely expanding in a vacuum.

Left on their own, market economies tend to favor short-term or value-extracting activities—hence the sweeping trends in financialization and deindustrialization witnessed over the past four decades.

By contrast, in market economies with a mission-oriented government, public spending and policy making will steer activity toward achieving socially desirable goals beyond mere growth for its own sake. Aside from New Deal-era America, a good real-world example of the new model is New Zealand, whose government has adopted a “ well-being budget ” to align public spending decisions with broader objectives.

A mission-oriented approach also allows for a new form of targeted fiscal stimulus. The point is to start with a large-scale challenge such as climate change and break it down into concrete policy goals, such as achieving net-zero emissions in a given region by a specific date.

With targets in place, the full force of government grants, loans, and procurement contracts can be deployed to leverage the combined potential of the public, private, and nongovernmental sectors.

To head off foreseeable objections, this mission-oriented approach does not involve picking winners and losers in terms of sectors, technologies, or firms; rather, the idea is to pick specific problems and allow solutions to emerge through a bottom-up process of experimentation and innovation across sectors. The same process also will create new employment opportunities.

Achieving carbon neutrality within a particular region, for example, would require new forms of collaboration among energy, transportation, materials, digital, technology, infrastructure, and other sectors, as well as new types of jobs to repurpose, re-use, and recycle existing resources and capital.

Job creation, and the demand side more generally, is where the second pillar of the new fiscal constitution kicks in. A smooth economic transition will require a  public-sector job program  that seeks to generate a sustainable tax base by “crowding in” economic activity that the crisis will have otherwise rendered idle.

Indeed, genuine full employment should be thought of as a public good.

After all, a fully employed person augments not just their own income, but also that of the wider community through increased purchases. When people are under- or unemployed, they have less income with which to drive demand in the economy, leaving everyone worse off.

Writing in 1948, the (future) Nobel laureate economist Paul Samuelson  pointed out  that “the modern fiscal system has great inherent automatic stabilizing properties.” When the economy turns down, the budget deficit automatically increases; when the economy recovers, the deficit automatically falls. To preserve this inbuilt stability, he argued that “no attempt should be made to balance the budget in a downturn.”

But, as Samuelson himself noted, “a built-in stabilizer acts to reduce part of any fluctuations in the economy, but does not wipe out 100% of the disturbance. It leaves the rest of the disturbance as a task for fiscal and monetary discretionary action.”

The Ultimate Market Fix

In the case of today’s recovery, such discretionary action should include a public employment program (PEP), along the lines of what the U.S.-based Levy Economics Institute has  outlined . This would constitute a much more powerful countercyclical stabilizer than the system described by Samuelson, but it also would represent a continuation of policies inaugurated by Roosevelt’s New Deal.

Between 1935 and 1943, the Works Progress Administration (WPA) employed 8.5 million Americans, and  provided  almost every type of work imaginable, from infrastructure construction and pest extermination to manufacturing Braille books and performing in the world’s greatest symphonies.

Similarly, the Civilian Conservation Corps (CCC) was designed to  provide  around 1 million young unemployed men with work on projects that included “the prevention of forest fires, floods, and soil erosion, plant pest and disease control, the construction, maintenance, or repair of paths, trails and fire-lanes in the national parks and national forests, and such other work…as the President may determine to be desirable.”

In our own sketch for a PEP, the U.K. government would guarantee a job at a fixed hourly rate (not lower than the national minimum wage rate) to any job seeker or working-age adult who cannot find employment in the private sector. It would focus on creating jobs in areas that are critical to steering the economy toward a green transition, and it would provide training programs so that PEP workers could build or maintain their skill sets, thus preparing them for private-sector employment.

Moreover, a robust PEP would offer four important advantages over the  status quo .

First, it would create a labor-market buffer stock that expands and contracts automatically with the business cycle, limiting discretionary variations in expenditure. It therefore would support aggregate demand while safeguarding against the possibility of mistimed public spending (owing to bad forecasts or undue political interference).

Second, a PEP would maintain workers’ employability better than an unemployment benefit would, and could readily be coupled with on-the-job training—an important factor in economic recovery and long-term growth.

Third, those PEP employees would be paid at a fixed rate, thus setting a floor for private-sector wages. If the PEP wage was set at the national minimum wage, there would be no need for minimum-wage legislation and all the attendant compliance costs.

And, as  Pavlina R. Tcherneva  of the Levy Economics Institute  argues , if the PEP wage were to be set above the minimum wage, it would even have a beneficial distributional effect.

Finally, a PEP can be used to influence the structure of employment overall, tilting talent and resources toward the objectives envisioned in the Green New Deal.

The PEP Paradigm

In our outline for the U.K., the program would be funded nationally, but would be administered locally by a variety of agencies: local governments, NGOs, and social enterprises. Each would be tasked with creating “on the spot” employment opportunities where they are most needed (environmental, civic, and human care), matching unfilled community needs with un- or underemployed people.

There will be snags, of course; and such as all new ideas, this one will have to break through the barrier of entrenched thinking. The notion that economies naturally tend toward full employment is one bit of orthodoxy that events should have fully discredited by now. Yet it remains ingrained in the increasingly stringent conditions required for the receipt of unemployment benefits, the underlying assumption being that the problem is always unemployed people’s reluctance to work rather than job scarcity.

In any case, a PEP would overcome these moral debates by providing work or training to all who are willing and able, thereby alleviating the need for unemployment benefits in the first place.

A PEP is, finally, an inherently  green idea , because it addresses two critical forms of economic neglect and devastation in the economy: that of natural and human capital. Hence, it should not be seen as only a countercyclical consumption program, but also as an essential ingredient in what the technology scholar Carlota Perez calls “ smart green growth .”

The economy will lack up-to-date productive capacity so long as a large share of its workforce remains underemployed and under-waged. But with inclusive wage policies and stronger aggregate demand, companies will have to reinvest in smarter equipment. Squeezing precarious workers will no longer be a viable option for sustaining corporate profits.

The information-technology revolution and major advances in renewable energy in recent years have shown that innovation spawns new products, services, materials, and ways of living—all of which generates jobs. Neoliberal orthodoxy ignored the need to transform old capital into new, and we are now economically and socially poorer for it.

It is time to restart the virtuous cycles of strong demand and high investment, with a focus on green growth and a proper alignment of the economy’s supply and demand sides. A new fiscal constitution, secured through a PEP, provides the basis for such an economy. We must not squander this chance to reform capitalism for the sake of people and the planet.

Mariana Mazzucato, professor of economics of innovation and public value and director of the UCL Institute for Innovation and Public Purpose, is the author of The Value of Everything: Making and Taking in the Global Economy. Follow her on Twitter: @MazzucatoM. Robert Skidelsky, a member of the British House of Lords, is professor emeritus of political economy at Warwick University.

This article was published with permission of Project SyndicateToward a New Fiscal Constitution .

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