Introduction

Introduction

William S. Vickrey was best known for his work on microeconomics – auctions,

public utilities, transportation, and the work for which he (along with James Mirrlees)

was awarded the Nobel Memorial Prize in Economic Sciences in 1996, 'the economic

theory of incentives under asymmetric information.' The last years of his life,

however, were dedicated to macroeconomic policy issues, and he even intended to

use the Prize as a bully pulpit to spread his views on macroeconomics, especially

the importance of full employment. Vickrey's single-minded commitment to full

employment is evident in a series of papers written in the last years of his life. We are

pleased that Edward Elgar has agreed to publish these papers in a single volume.

In this work, Vickrey formulated an 'assets-based' approach to macroeconomic

analysis with definite implications for budgetary and employment policy. In Vickrey's

approach, the difference between desired and actual holdings of net nominal savings

(or net financial assets) is the crucial relation in understanding macroeconomic

processes, and the government budget is the key policy instrument in the necessary

recycling of net nominal savings to bring the desired and actual levels into equality at

the full employment level of output and income. Vickrey believed that the major task

for economists and policymakers was to devise the means whereby the necessary

recycling of net nominal savings can take place without unexpected changes in the

rate of either inflation or deflation.

In what follows, we not only summarize Vickrey's solutions to the problems of

unemployment and inflation, but we also offer a specific policy proposal for

eradicating both maladies simultaneously – a proposal that is firmly rooted in and

largely inspired by Vickrey's work from the final years of his life. We believe that this

is in the spirit of Vickrey's macroeconomic vision, and his hope that others would

follow in his path.

Vickrey's commitment to full employment

For Vickrey, 1926 was the last time there was an acceptable level of employment

during peace time in the US (Vickrey, 1994, p. 39). He embraced Beveridge's definition

of full employment as holding when 'there are at least as many unfilled job openings

as there are unemployed individuals seeking work' (Vickrey, 1993a, p. 1). Elsewhere,

he describes full employment – what he called 'chock-full employment' (1992b; 1994)

- as the situation in which individuals 'can find work at a living wage within 48 hours"

(Vickrey, 1994, p. 40).

Vickrey recognized that there are huge social and economic costs to unemployment,

and that the promotion of full employment must be a top priority. Among these costs

are the direct and real costs of loss of potential output and income, as well as the

nominal costs of lower tax revenues because of the smaller tax base and higher rates

of government expenditure in the form of unemployment compensation and various

forms of 'welfare' assistance. But Vickrey also continuously emphasized the social

and economic costs linked to unemployment in the form of poverty, crime, drug

xvii

xviii Full Employment and Price Stability

addiction, homelessness, malnutrition, poor prenatal care, ethnic antagonism, school

dropouts, broken families, and other social problems (Vickrey, 1992a, p. 310; 1992b.

p. 341; 1993a, p. 2; 1993b, p. 16; 1997, pp. 504–5). He also recognized that

unemployment differentially impacts certain sectors of the population, so that an overall

official unemployment rate of 5 percent can mean rates of 10, 20, and 40 percent

among disadvantaged groups' (1994, p. 39). The benefits of full employment thus

include improved security for society's most downtrodden, alleviation of a variety of

social ills, and expanded output and income. In addition, full employment also can

stabilize business expectations and have a positive impact on the wages and status of

unskilled workers (1993a, p. 9; 1997, p. 505).

Given these views, it is not surprising that Vickrey vehemently rejected the notion

of the NAIRU (non-accelerating inflation rate of unemployment), and any kind of

'natural' rate of unemployment, calling the latter 'one of the most vicious euphemisms

ever coined' (1992b, p. 341). At the heart of the NAIRU and the 'natural’ rate of

unemployment are the beliefs that there is a trade-off between unemployment and

inflation, that inflation is the greater evil of the two, and that some unemployment is

necessary to guarantee price stability.

During the last decade of his life, Vickrey also continuously argued for reorienting

national priorities away from

unemployment. The rhetoric, inherited from the Reagan years, terms inflation the

'cruelest tax'ever and deficit spending the result of 'big government madness.’ Vickrey

was on a crusade to dispel conventional misconceptions fueling these twin phobias –

the phobias of inflation and deficit spending.

The inflation phobia owes its existence to the fact that repercussions from

continuously rising prices are felt rather universally. The negative effects of inflation,

however, pale in comparison with those associated with unemployment. Vickrey evokes

Franklin Delano Roosevelt's declaration that the only thing we need to fear is fear

itself. The problem, he argues, is not with inflation per se, but with the measures used

to restrain it. Modern policies tackle the perceived threat of accelerating inflation by

stifling demand. Unemployment is viewed as a 'necessary evil' so long as inflation

pressures are mitigated. Vickrey fervently denounced such a view and rejected any

policies for dealing with inflation that increased unemployment.

Vickrey often argued that it is not inflation itself that is the problem; rather we

should be concerned with its unpredictability, which causes changes in business

expectations and firm activity. A moderate but assured rate of inflation will not upset

business plans, and will likely bring very little discomfort. The damage of unexpected

inflation, on the other hand, may produce some random and inequitable transfers

between debtors and creditors, but these distributional effects cause much less harm

than the loss of output and the other social ills associated with unemployment. For

this reason, on numerous occasions, Vickrey compared unanticipated inflation to wide-

spread embezzlement and unemployment to cruel vandalism.

Vickrey recognized that most prices in the economy are administered or 'seller

determined.' Oligopolistic pricing can set off an inflationary cycle that is entirely

independent of the restrictions on the money supply. Hence, monetary policy to curo

inflation is not only largely ineffective but may also have perverse effects. An increase

in interest rates only raises the cost of capital for producers, which in turn justifies

aflation- and deficit-fighting and toward eliminating

Full Employment and Price Stability xix

Gurher price increases. The inflationary process stops only when unemployment grows

ufficiently to reduce output and choke off aggregate demand. Thus, Vickrey perceived

an urgent need to deal with unanticipated inflation by providing a direct countervailing

pressure on prices that does not rely on increased unemployment.

Vickrey proposed an anti-inflationary program which builds on Abba Lerner's idea

of establishing a market in rights to raise prices. In this basic proposal, each firm is

allocated a certain number of warrants to gross mark-ups (based on past performance),

which allow it to raise prices at a certain rate. The initial allotment of these entitlements

ensures a steady and predictable rate of inflation. Adjustments in warrant issue during

subsequent accounting periods are made for changes in investment and/or hiring by

the firm in the previous period. If some firms wish to increase their prices beyond

what their warrant allocation permits, they can do so only by purchasing entitlements

from other firms, who are willing to lower their prices by a corresponding degree.

Thus the overall price level remains stable. If, at the end of the accounting period, a

firm's gross mark-up (the excess of gross sales over the cost of intermediate inputs)

exceeds the warrants at hand, it will be subject to a significant tax penalty. These

penalties are not meant to be a revenue source but an enforcement mechanism.

Since these mark-up warrants will be freely traded, their market price will

automatically adjust to a level that offsets any inflationary or deflationary pressures.

Their price, Vickrey explains, should converge to a value 'that would approximately

balance supply from those willing to leave some of their entitlements unused and

demand from those, who for one reason or another, find it sufficiently desirable to

increase their aggregate mark-ups beyond their initial entitlements' (1986, p. 10).

Vickrey questioned some aspects of this specific proposal, but he firmly believed that

direct anti-inflationary policies can and should be designed that do not rely on forfeiting

output and employment. Vickrey's commitment to common sense policies was

unwavering and he always welcomed proposals that no longer 'tie our hands with

financial shibboleths [via] models that tacitly assume a fixed total resource utilization'

(1993a, p. 10).

For Vickrey, 'unemployment is not needed to control inflation' (1997, p. 507).

Adherence to the view that price stability requires maintaining a reserve army of the

unemployed, which Vickrey believed was 'especially strong in influential financial

circles and among monetary authorities,' means that the fiscal and monetary brakes

have to be slammed every time economic growth causes unemployment to drop below

a certain level (1992b, p. 341). One implication of such an approach is that efforts

such as worker retraining become 'a cruel game of musical chairs' with the 'keepers

of austerity' making sure the total number of chairs stays fixed (1997, p. 504). This is

a high price to pay given that it is based on a view that 'lacks historical or analytical

basis' (1997, p. 504).

While he believed the dangers of inflation are overstated, Vickrey recognized that

unexpected changes in the rate of inflation, either up or down, can have undesirable

effects, and so developing a means to chock-full employment without unstable prices

Is a priority. But this does not mean that inflation is a greater evil than unemployment.

In Vickrey's view, while inflation is a 'redistribution of the given total output ...

unemployment involves a reduction in the total product to be distributed' and therefore

Clearly does greater social harm (1992b, p. 341). In fact, the greatest danger of

Full Employment and Price Stability

XX

inflation for Vickrey turns out to be the measures taken to control it, in other words

enforcing unemployment (1992b, p. 341): political maintenance of 'unemployment

as prophylactic measure against a highly problematic threat of mismanaged inflation

is a cure far worse than the disease' (Vickrey, 1997, p. 505).

Vickrey scolded the economics profession and policy makers for what he saw as

wasting their time arguing 'over which foot is the better to shoot ourselves in' (2000

[1993], p. 192). Extolling the benefits of full employment, he urged his colleagues

and anyone willing to listen to immediately focus their 'concentrated attention to

working out the practical details and bringing the concept to realization' (1992b, p. 345).

Vickrey himself led by example, racking his brains until the last moment of his life to

lay bare the fundamental causes of unemployment, and devise means for its elimination.

Vickrey recognized that the elimination of unemployment may require significant

government deficits. For this reason he also dedicated his last years to dispelling

another phobia that has permeated economic thinking- the deficit phobia. The modern

alarmist view of deficits is in many ways due to the excessive focus on inflation and

the belief that government deficits cause inflation. The fear of 'big government

madness' has led to an increasing reliance on monetary tools.

Vickrey compares monetary policy to pushing on a string. In conditions of

unemployment, when capacity is already idle and output cannot be sold, lowering

interest rates is largely ineffective in stimulating investment. Increased economic

stimulus, he argued, can only be achieved through the savings-recycling budget.

Vickrey's assets-based approach to macroeconomics, with its implications for the

government deficit-financed recycling of net nominal savings, was the fruit of these

untiring efforts, and it is to this work that we now turn.

Savings and investment: toward an assets-based approach to macroeconomics

Vickrey's assets-based approach to macroeconomics is rooted in the analysis of savings

and investment. In orthodox neoclassical theory, savings determines investment through

variations in the rate of interest. Thus income not consumed is transformed into

investment expenditure in the market for loanable funds. It is this mechanism that,

under perfectly competitive conditions, ensures that all output will be purchased at

the full employment level of output and income. Vickrey rejected such a view, which

he identified as the heart of 'Say's Law,' and targeted for rebuttal the implication that

economic growth is achieved by promoting an increase in savings (1993b, p. 6).

Vickrey casts doubt on the conventional view of the interest-elastic nature of both

savings and investment:

On the one hand, the demand for asset accumulation and the supply of savings have come

relatively insensitive to interest rates and may even have developed an inverse relationship

as lowered interest rates increase the amount of assets required to provide a given level old-

age security. On the other hand, high risk, obsolescence, maintenance, and other user costs

have diminished the long-run responsiveness to interest rates of investment in productive

assets. The implicit assumption of the neoclassical paradigm that the potential for profit-

seeking capital investment would expand without limit as real interest rates fell, so that

there would always be an interest rate that would close the gap, fails in the face of the realy

of uncertainty concerning conditions that will obtain in the remote future. (Vickrey, 1997.

p. 498)

Full Employment and Price Stability xxi

ue both the positively sloped neoclassical saving function and the downward sloping

Thast-elastic demand curve for investment are brought into question in Vickrey's

analysis.

Key to understanding the savings-investment relation is to understand the two-

sided nature of saving and spending:

Most economic transactions have at least two aspects, and much of our present plight is the

esult of looking at only one aspect and failing to follow through on the obverse aspects and

their consequences. Nowhere is this more apparent than in the popular discussions of the

Jevels of saving and capital formation and their impact on the health and growth of our

economy. (Vickrey, 1993b, p. 5)

Savings is income not spent. It is, in Vickrey's phrase, 'non-spending' (2000 [1993],

D. 191; 1993b, p. 5; 1994). Increased savings is therefore an increase in non-spending,

most often in the form of a reduction of consumption, and this causes the income of

others to fall. This in turn leads those experiencing falling incomes to reduce their

own savings. Vickrey liked to demonstrate this principle with his now well-known

story of abstaining from an $8 haircut:

Savings are not like a sack of potatoes which if not sold at the current price will stay on hand

and put a downward pressure on the price until sold. Savings not immediately taken up to

create capital simply vanish in reduced income, without even exerting a downward pressure

on interest rates. If I yield to the allurements of tax concessions to IRAS to the point of not

having my hair cut, this puts $8 more in my bank account, but $8 less in the barber's

there is nothing that makes it any easier for anyone to obtain funds with which to create

capital, nor anything that makes the prospect more attractive ... If the barber reacts by

curtailing his consumption, this further reduces national income and saving. I may succeed

in my attempt to save, but only by reducing the saving of others by even more. Savings are

an extremely perishable entity. Say's law fails as soon as part of the income generated in the

process of producing the supply is shunted off into new savings that fail to get converted

into new capital goods. (Vickrey, 1993a, p. 6)

saccount;

Not only has the increased saving not been translated into investment, but the decline

in aggregate demand that results may further impact investor expectations so that

investment may actually be discouraged (Vickrey, 2000 [1993], p. 191).

For Vickrey, the causality runs in the opposite direction, from investment to savings:

If some genius invents a new product or process and obtains a credit or borrows the funds

needed to finance the capital involved in its production, this added real wealth is ipso facto,

someone's savings. Instead of Say's law, we have 'Capital formation creates its own saving."

(Vickrey, 1993a, p.6)

Thus, investment determines savings, and the mechanism that brings them into equality

Is hot variations in the interest rate but rather changes in the level of income:

willpted saving, with corresponding reduction in spending, does nothing to enhance the

Willingness of banks and other lenders to finance adequately promising investment projects.

With unemployed resources available, saving is neither a prerequisite nor a stimulus to, but

consequence of capital formation, as the income generated by capital formation provides

a source of additional savings. (Vickrey, 2000 [1996], p. 195)

xxii Full Employment and Price Stability

Vickrey's analysis of the investment-saving relation leads him to view private seote

investment as a means whereby savings are recycled back into the income strea

(Of course, the savings would not exist if it was not for some initial investment in ah

first place.) It is a means whereby non-spending is turned into spending. If the entirety

of the full employment level of savings is not recycled into spending by private

investment, some of the full employment level of output fails to be justified by actual

sales, and disappointed businesses cut back production, laying off workers. Incomes

of the unemployed fall, and saving declines until it is brought into equality with the

below full employment level of private investment. In other words, Vickrey's analysis

of the savings-investment relation leads him to focus on the crucial issue of the

recycling of net nominal savings.

Net nominal savings and the savings-recycling government budget

Another way of stating the problem is to focus on the relation between the desired and

actual levels of holdings of net financial assets, or net nominal savings. If, at the full

employment level of output, 'the total asset supply held by individuals falls short of

what they desire to hold, the curtailing of expenditures by individuals in an attempt to

bring their net worth up to a desired level will reduce sales, production, employment,

and GNP until the corresponding demand for assets has been reduced to the available

supply' (Vickrey, 1997, pp. 497–8). Vickrey believed that there are social, institutional,

and technological reasons for a growing gap between the private demand and private

supply of assets, and that private investment cannot be relied upon to recycle the

full employment level of savings. Unemployment is the real, material evidence of a

discrepancy between desired and actual levels of net nominal savings, for if the

desired level was lower, individuals would be spending more, sales would be higher,

and firms would be hiring more workers.

For Vickrey, there is only one solution to closing the gap between desired and

actual levels of net nominal savings: government deficits. If we consider the problem

from an asset-based approach, it is clear why this is in fact the case: there is no other

source of change in the private sector's total holdings of net financial assets (in dollars).

If one individual in the private sector wants to increase their holdings of net financial

assets, this can only occur if another individual is willing to decrease their holdings

by the corresponding amount. The private sector is incapable of creating net nominal

assets. Thus, Vickrey concludes, there is 'no adequate solution without long-term and

continued increases in government debt' (1997, p. 499): The “deficit" is not an

economic sin but an economic necessity' (Vickrey, 2000 [1993], p. 189).

While many have promoted the use of a capital budget by the Federal Government,

for Vickrey, although he acknowledged that there may be political or ideological

reasons why capital-budgeting might make deficits more palatable, this is beside the

point:

The savings recycling budget is possibly the most important of budgetary concepts from the

standpoint of day-to-day policy. This budget would reflect the effect of government outiay

... in recycling savings, in excess of those absorbed by private investment, into the strea

of demand for output. It is the crucial element in curbing the business cycle and bringlng

employment of resources up to a satisfactory level. From this standpoint, it matters relatively

little whether outlays are for current or for capital-account items. (Vickrey, 1992a, p. 307

Full Employment and Price Stability xxi

Tu fact if government investment replaced private investment, the net effect desired

n he offset, while the income recycling function itself would be served just as

mie from projects with no other justification (1993a, p.6). Despite the crucial

enortance of grasping this point, Vickrey did note that government investment that

spurs further private investment or otherwise benefits the public refutes the argument

national debt is a burden on future generations, instead arguing that much of

the activity undertaken for the purpose of recycling savings 'will form part of the real

beritage left to the future' (2000 [1996], p. 194). Because savings recycling through

covernment deficits permits chock-full employment economic growth, '[t]his means

an increased heritage of real capital plant and equipment, to say nothing of the human

capital induced by fuller employment' (1997, p. 509).

Neither is the savings-recycling deficit something that can be 'balanced over the

cycle' (1997, p. 499): *the supply of government securities will need to grow pari

passu with the gross domestic product, to correspond to the gap between the demand

of the population for assets and the provision of assets by the private sector' (2000

[1993], p. 190). It must be emphasized that this is not a 'closed economy' argument,

the foreign sector – including foreign governments, firms, and individuals – is included

in the private demand for assets. As Vickrey recognized, exporting unemployment

through 'export surpluses ... is essentially a beggar-my-neighbor policy not available

as a general policy’ (1997, p. 499). While Americans could indeed net save dollar

assets with a trade surplus, this would only be temporary, as the resulting world-wide

dollar squeeze would cause the government deficit to rise.

In promoting the need for savings-recycling government deficits and a growing

national debt, Vickrey rejected many of the common myths and misconceptions

concerning deficits and the debt held by the economics profession and politicians,

and repeated ad nauseam by the press (1994; 2000 [1996]). These include the

assertions, not backed up by either careful analysis or the historical record, that

deficits cause inflation, high interest rates, or crowd out private investment. National

debt according to Vickrey is more appropriately viewed, not as a burden on the future

but as an investment in the future, whereby 'the real advantage left to the future in

terms of tangible assets is enhanced' (1992a, p. 309). He pointed out that not only

have deficits and the national debt not resulted in these harmful effects, but that the

'existence of large government debt may be one reason we have not had a recurrence

of a depression of the severity of the 1930s' (1997, pp. 508–9):

To ensure against such a disaster and start on the road to real prosperity it is necessary to

relinquish our unreasoned ideological obsession with reducing government deficits, recognize

that it is the economy and not the government budget that needs balancing in terms of the

demand for and the supply of assets, and proceed to recycle attempted savings into the

income stream at an adequate rate, so that they will not simply vanish in reduced income,

sales, output and employment. There is too a free lunch out there, indeed a very substantial

one. But it will require getting free from the dogmas of the apostles of austerity, most of

whom would not share in the sacrifices they recommend for others. Failing this we will all

be skating on very thin ice. (Vickrey, 2000 [1996], p. 217)

Vickrey's assets-based approach to macroeconomic analysis elucidates the

Tundamental relation between desired and actual net nominal savings as the key to

understanding the problems of persistent unemployment. Furthermore, it leads

xxiv Full Employment and Price Stability

straightaway to the conclusion that the savings-recycling deficit is the only wor

close the gap and bring the desired and actual levels of net holdings of financial to

into equality at the full employment level of output and income. An economy with

10 percent inflation and 2 percent unemployment would be far healthier in buih

terms than one with 1 percent inflation and 8 percent unemployment,' but, fortunately

such a trade-off is not necessary, as unemployment is not needed to keep prices stable

(1997, p. 505). Vickrey did feel, however, that a 'new tool is needed' to complement

fiscal and monetary measures if we are to accomplish the three macroeconomic goals

of promoting full employment, stable prices, and economic growth (1993a, p. 7). A

number of proposals have been made for government to promote full employment

through direct job creation (Minsky, 1986; Lowe, 1988; Harvey, 1989; Collins, et al.

1994; Gordon, 1997). Recently, several proposals have explicitly highlighted the ways

in which such guaranteed public employment can serve as an effective automatic

stabilizer by recycling savings through government budget deficits in just the manner

proposed by Vickrey (Mosler, 1997–1998; Wray, 1998).

Savings-recycling public employment

We have seen that Vickrey's chock-full employment means at least as many vacancies

as individuals seeking work, and a situation in which workers can find a decent job at

a living wage within 48 hours. We have also seen that Vickrey considered a means to

full employment without inflation as a top priority. In addition, Vickrey felt that

pursuing three macroeconomic goals with only two policy instruments is like 'trying

to fly an airplane without ailerons, which were the third dimension of control that was

the key to the success of the Wright brothers,' so that a new tool is needed (1993a,

p. 7). We must devise a means of promoting chock-full employment without unexpected

changes in the rate of inflation or deflation and “fill the gap between the asset aspirations

of individuals at this level of income and the ability of the private sector to provide

assets' through savings-recycling deficits (2000 [1993], p. 190). °There is no reason

inherent in the real resources available to us why we cannot move rapidły ... to a state

of genuinely full employment and then continue indefinitely at that level' (1993a,

р. 10).

Vickrey rejected draconian 'workfare' that is not combined with increases in

aggregate demand:

[A]ttempts to move selected unemployed individuals or groups into jobs by training,

instruction in job search techniques, threats of benefit withdrawal or denial, and the like,

merely move the selected individuals to the head of the queue without reducing the length

of the queue. Merely because any one traveler can secure a seat on a flight by getting to the

airport sufficiently early does not mean that if everyone get to the airport sufficiently early

that 200 passengers can get on a flight with seats for 150. (Vickrey, 2000 [1996], pp. 213–

14)

But when financed by deficit spending, public employment 'can indeed' result in net

job creation (2000 [1996], p. 214). The key, then, is to combine guaranteed public

sector employment with the savings-recycling government budget in what we here

call 'savings-recycling public employment,' but which has elsewhere been termed

the 'job guarantee' or government as 'employer of last resort.'

Full Employment and Price Stability xxV

Government pledges to hire anyone ready and willing to work at a basic public

sector (living) wage, and the wage bill is paid for by deficit expenditure. Since

unemployment is the material evidence of desired greater than actual levels of net

holdings of financial assets, the deficit spending fills the gap by employing the

unemployed. There is no problem of estimating the level of government deficit

spending needed, as it will be reflected in the number of unemployed showing up for

government guaranteed jobs. As long as the desired holdings of net financial assets is

greater than the actual holdings, there will be unemployed; as the unemployed show

for public employment, the deficit will expand to pay the public employment wage

ll recycling the excess of savings over private asset supply, and closing the gap

batween the desired and actual levels of net nominal savings at chock-full employment.

An employer of last resort scheme that is deficit financed thus serves as a powerful

automatic stabilizer simultaneously guaranteeing an infinitely elastic demand for labor

and the recycling of excess savings.

As Vickrey emphasized, savings-recycling public employment must not replace

either private sector or other public sector employment. Under such a program, all

the benefits of full employment outlined by Vickrey are obtained, and the social and

economic costs of unemployment substantially eliminated. To the extent that savings-

recycling public employment involves the enhancement of worker skills, the benefits

of the program as a means of job training are actualized, as net job creation means the

program is not simply a cruel game of musical chairs, while the retraining effect may

prove 'essential in abating structural mismatch between job requirements and individual

qualifications' (1993b, p. 9). Considering these factors, Vickrey also predicted an

increase in 'the wages and status levels' of the lowest skilled and least well-paid

(1993b, p. 9).

Savings-recycling public employment will not generate deficits that will be

inflationary, since the deficit will only be permitted to expand up to the point where

the gap between desired and actual holdings of net financial assets is filled at zero

involuntary unemployment, which corresponds to the degree to which aggregate

demand falls short of the level corresponding to chock-full employment. While

Increasing deficits beyond that point might be inflationary, there will at that point be

Ho more unemployed workers showing up for savings-recycling jobs, and so the scheme

Includes a built-in feature preventing the deficit from becoming too large. At the

same time, although Vickrey recognized that, depending on the value of the initial

iigs-recycling public employment wage-benefits package set, 'a small one-time

increase in the overall price level' might be expected at the start of the program, this

is in no way the same thing as *an inflationary spiral’ (1997, p. 505). Other features of

the program additionally guarantee against unexpected changes in the rate of inflation

- which Vickrey repeatedly emphasized is what we specifically should be concerned

with, as opposed to a fear of some vague notion of inflation. But before we turn to

these features, let us provide a preliminary indication of why such a program will not

be inflationary by comparing it to Vickrey's main anti-inflationary policy proposal.

Just as modern proponents of public service employment schemes, Vickrey too

treated the problems of inflation as quite separate from those of unemployment. Hence

the ensuing proposed remedies do not imply a policy choice between low inflation or

high employment as in conventional policy measures. Vickrey offered two separate

xxvi Full Employment and Price Stability

solutions: inflation should be countered via direct market anti-inflationary policies

and employment is achieved through savings-recycling government deficits.

Proponents of job guarantee programs similarly reject the alleged tradeoff between

inflation and unemployment. Moreover, by advancing a saving-recycling public

employment program, we can design a single policy proposal that addresses both

maladies simultaneously.

Vickrey's tradable mark-up warrants can be viewed as a buffer stock program.

which operates on a fixed quantitylfloating price rule. The buffer stock commodity in

this case is the mark-up warrant and the total number of warrants issued in a given

accounting period is fixed. Its price on the other hand is allowed to fluctuate depending

on the demand for warrants. In the presence of inflationary pressures, the price of the

buffer stock is bid up, making it more costly to purchase the right to increase prices.

In this sense the price of the buffer stock provides the countervailing anti-inflationary

pressure on product prices. When there are deflationary forces in the economy, the

price of the buffer stock falls, as firms either wish to sell their warrants or simply stop

trading them and leave them unused.

A similar buffer stock anti-inflationary mechanism exists in the saving-recycling

public employment. The program holds the promise of moving the economy

immediately to the level of its full output potential while simultaneously providing a

powerful countervailing pressure on prices. By contrast to Vickrey's market anti-

inflationary policies, it operates on a fixed pricelfloating quantity rule but is nonetheless

consistent with his views on government deficit spending and commitment to full

employment.

As we have indicated above, under this proposal the public sector offers a job to

anyone willing and able to work: full employment by definition is achieved. The

wage offered to public sector employees is fixed and does not compete with those in

the private sector. This ensures that when demand for labor in the private sector rises,

wages are bid up and workers are hired away from public sector jobs. Conversely,

when the private sector lays off workers, they find employment in the public sector.

Thus a savings-recycling public employment scheme too is designed to work as a

'buffer stock program' where the buffer stock commodity is labor hired in the public

sector. When there is an upward pressure on the buffer stock's price, the commodity

is sold, and when there are deflationary pressures, it is bought. In other words, the

program provides the countervailing pressure on prices by ensuring wage stability in

the public sector and a powerful counter-cyclical mechanism. The program operates

on a fixed pricelfloating quantity rule, because the price of the buffer stock (the public

sector wage) is fixed, and the quantity of the commodity (public sector employment)

is allowed to float.

We can now turn to the other reasons why such a buffer stock program will not be

inflationary. First, savings-recycling public employment may be directed towards

public works such as infrastructure revitalization that may promote private sector

productivity growth. Second, productivity will also be enhanced by virtue of the fact

that while unemployment is associated with the depreciation of human capital, savingss

recycling public employees may well experience an appreciation of skills and

knowledge. Third, in addition to the decrease in the social and economic costs of

unemployment, the savings-recycling public employees may be engaged in activities

Full Employment and Price Stability xxvii

that help reduce other social costs, such as environmental protection and clean-up.

Fourth, the increase in expenditure on savings-recycling public employment will at

least partially be offset by decreases in other forms of expenditure on the unemployed.

Thus, expenditures on unemployment insurance and other forms of general assistance

should be expected to decline. Fifth, public works tend to be less inflationary than

*the dole' because the former increases both supply and demand, while the latter

increases only demand. Sixth, inflationary bottlenecks and structural rigidities

associated with high levels of employment can be avoided with the savings-recycling

approach. Workers employed in savings-recycling public employment are still available

to the private sector should the demand for labor rise, maintaining numerical flexibility

without the social and economic costs of unemployment. In addition, flexibility in

terms of capital goods and natural resources are maintained as government can

strategically choose to utilize methods of production and type of resources that will

avoid bottlenecks and even enhance system flexibility (Forstater, 1998; 1999). Seventh,

firms may still be expected to maintain planned reserve capacity to meet both peak

and unexpected increases in demand, so that full employment of labor will be consistent

with a normal level of capacity utilization. Eighth, since government is willing to hire

as few or as many people who want to work at the savings-recycling public employment

wage, it is free to set that wage exogenously rather than paying a market-determined

wage. Being fixed, the program's wage is perfectly stable and sets a benchmark price

for labor. It is obviously unlikely that unexpected changes in the rate of inflation will

be due to wage-related factors under such a system. In fact, the exogenous pricing

component of the savings-recycling public employment approach may be seen as a

means of defining the national currency in terms of fairly homogeneous, low or semi-

skilled labor. The program wage thus serves as an anchor to which the currency is

tied. Because labor is a basic commodity, employed directly and indirectly into the

production of every other commodity, the savings-recycling public employment

program offers a mechanism for regulating the value of the currency, and thus

controlling the price level. In this sense, the savings-recycling public employment

approach resembles a commodity buffer stock scheme, only here it is labor that is

being used as the buffer stock to stabilize the currency.

Savings-recycling public employment is an automatic stabilizing policy instrument

that can ensure chock-full employment, generating the savings-recycling deficit

necessary to equate the desired and actual levels of net holdings of financial assets

as proscribed by Vickrey's assets-based approach to macroeconomic analysis without

the danger of unexpected changes in the rate of inflation. Guaranteed public

employment establishes the infinitely elastic demand for labor required to meet the

Vickrey-Beveridge definition of chock-full employment, and financing such

employment through deficit spending guarantees the recycling of excess savings

necessary to bring the desired and actual levels of holdings of net financial assets into

equality at the zero involuntary unemployment level of economic activity. A number

of features of the approach establish it as not only a viable means to true full

employment, but a tool for price stability as wellI.

Vickrey's macroeconomic vision

In retrospect, these articles by Vickrey seem incredibly prescient, as relevant to recent

Xxviii Full Employment and Price Stability

developments as they were when they were written. For example, we have soon

one of the major emphases of this work is that countries are increasingly unabl

rely on conventional monetary policy to counter recessions and depressions, du

no small part to the insensitivity of investment to lower interest rates. One need on

cite the experience of Japan during the 1990s, where interest rates near zero did nothine

to budge the economy out of its deep downturn. The Japanese experience also appears

to support Vickrey's observation, cited above, that lower interest rates can sometimes

be associated with higher rates of saving.

Vickrey was skeptical of the conditions of the European Economic and Monetary

Union, and utilized that case to express a more general concern about the desirability

of fixed versus flexible exchange rate policies:

Freely floating exchange rates are the means whereby adaptations are made to disparate

price level trends in different countries and trade imbalances are brought into line with

capital flows appropriate to increasing the overall productivity of capital. Fixed exchange

rates or rates confined to a narrow band can be maintained only by coordinated fiscal policies

among the countries involved, by imposing efficiency-impairing tariffs of other restraints

on trade, or by imposing costly disciplines involving needlessly high rates of unemployment

as is implied by the Maastricht agreements. (Vickrey, 2000 [1996], p. 204)

As Vickrey recognized, a successful domestic full-employment policy requires flexible

exchange rates: 'Restraints on exchange rates, such as are involved in the Maastricht

agreements, would make it virtually impossible for a small open economy, such as

Denmark, to pursue an effective full-employment policy on its own' (Vickrey, 2000

[1996], p. 204).

Vickrey's articles were written in the context of government budget deficits, private

sector surpluses, and trade deficits in the US, and it has been noted that Vickrey

believed institutional, historical, and social factors supported the view that private

sector surpluses were likely to continue and even grow. He thus warned against the

growing calls for budget balancing, decreasing the deficit, and even running budget

surpluses to pay down the national debt. The late 1990s saw the tightening fiscal

stance come to pass, and, coupled with deterioration in the foreign trade stance, the

result was that the private sector actually went into deficit.

The private sector consists of firms and households, and since firms were able to

maintain a surplus in this period, it was households that went into deficit, with

household spending exceeding incomes at record rates (Godley and Wray, 1998).

This was due to credit-financed spending by households, supported by sharp rises in

stock market prices. Vickrey noted the possibility of such a scenario and warned

against this means of closing the gap between desired and actual levels of net holdings

of financial assets: 'Meeting the demand for assets by a speculative boom in stock

market and other assets prices is a temporary bubble solution that is bound to burst

(Vickrey, 1997, p. 499). Vickrey further warned that this is particularly dangerous

when combined with budget balancing, a situation reminiscent of the events leading

up to the Great Depression, but that also describes the late 1990s:

There is a serious danger that the bidding up of asset prices could create a bubble

unsustainable values that is likely to collapse ... Sooner or later a reduction in production

Full Employment and Price Stability xxix

nd national income will set in until the reduction in income reduces the demand for assets

10 conform to the supply. (Vickrey, 2000 [1993], pp. 190–91)

Vickrey cautioned of the hazards to the economy that tight monetary policy and a

icht fiscal stance may bring. As we entered the twenty-first century, his warning

became even more prophetic. Almost every state without exception faced a severe

budget crisis. In 2003, personal bankruptcies hit an all-time high for any 12-month

period. Corporate profits and private fixed non-residential investment took a dive in

the late 1990s and continued sliding in the first two years of the new millennium

before recouping some of the lost ground. While inflation lay dormant, unemployment

rose sharply and hovered high as the economy teetered along a path of a jobless

recovery.

As Vickrey's analysis makes clear, conventional fiscal and monetary policy is not

sufficient to deal with a significant reduction in output and income and rising

unemployment. Fortunately, Vickrey's analysis demonstrates that a Savings-Recycling

Public Employment Plan could provide the automatic stabilizer that the system requires

to deal with the macroeconomic challenges of modern society. We can have chock-

full employment with price stability, if our economic experts and political leaders can

exhibit clear-headed, common sense thinking and the courage of their convictions.

They have to look no further than Bill Vickrey for an outstanding example in both

these regards.

Vickrey's writings decry conventional monetary and fiscal policies and call for a

pressing need to reorder the nation's priorities. In the last decade of his life, Vickrey

continued to dispel the myths of alarmist perceptions of the threats of inflation and

deficit spending. He was firmly committed to the objective of urgently raising the

economy to the level of production of which it is capable.

Whether it is saving-recycling budgeting coupled with market anti-inflationary

policies of the kind Vickrey suggested, or job guarantee schemes as the herein advanced

saving-recycling program, economists have no dearth of common sense proposals

that hold the promise of resolving the problems of unemployment and inflation. As

Vickrey concluded his presidential address at the 34th International Atlantic Economic

Society Meetings: 'We have the tools. Let's use them' (1993c, p. 7).

Mathew Forstater and Pavlina R. Tcherneva

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