Law in Contemporary Society

Money and Unemployment


The long-standing problem of involuntary unemployment has escalated in recent years to the level of a global systemic crisis. The United States jobless rate currently stands above 8 percent, translating to over 12 million people out of work and almost $10 billion per day in lost output. Youth unemployment is approaching a staggering 75 million worldwide. In Spain, almost 1 in every 4 workers looking for work cannot find any. Even in my native Australia, famed for its quick recovery from the Global Financial Crisis, overall labor underutilization remains above 10 percent due to underemployment.

When faced with such stark figures, conventional wisdom tends to argue (borrowing Thatcher’s famous slogan) “There Is No Alternative,” and that such short-term losses are necessary for long-term sustainability. This essay challenges that view as applied to fiat currency systems, and argues that a monetarily sovereign nation such as the United States has the power, today and forever, to achieve genuinely full employment if it wishes.

Functional versus Transcendental Finance

The term “Functional Finance” was first coined by Abba Lerner during World War II to describe a macroeconomic policy whereby a state would use its complementary privileges of money creation and taxation to control the flow of money into the economy and achieve full employment, price stability, and socially desirable goals. He likened this to the driver of a car using the gas and brake pedals to keep a constant speed while changing direction with the steering wheel. For Lerner, the idea of being unable to secure “financing” (gas) for the government was a non-issue, since it could always spend new dollars as necessary. The real macroeconomic concerns, in his view, were price stability (the speed of the car) and the productivity of jobs and investments created through money creation (the direction). The numerical size of the government’s deficit or surplus was considered a mere accounting afterthought, reflecting rather than dictating the conditions of the real economy.

Lerner’s approach heavily influenced macroeconomic policy in the post-war era before losing popularity in the wake of the oil-driven stagflation of the 1970’s. Since then, mainstream economic discourse has mostly abandoned the lofty goal of true full employment amidst irrational fears of budget deficits and deceptive household budget analogies that ignore the fundamental difference between a currency issuer and a currency user. Gone is any sense of deep outrage at the irredeemable social waste, human suffering and death caused by unemployment. In its place is a fear of “running out of money,” which implies that the defining economic issue of the present era is the risk of running out of electricity to power the computer at the Federal Reserve that purchases treasuries with reserves using keystrokes. In response to our alleged "budget crisis," politicians across the political spectrum have pushed for “shared sacrifice” in order for us to return to “living within our means.” Anyone familiar with the paradox of thrift would and did find this approach laughable even before the rank hypocrisy that was “Too Big To Fail.” Together, these policies of austerity and banking subsidy are, to borrow Lerner’s analogy, akin to the driver of the car taking his or her foot off the gas, stepping on the brake, and handing the steering wheel over to the person who had caused the car to stall only moments ago.

There are some pockets of mainstream resistance advocating for greater government intervention, but even they tend to cast such action as extraordinary, and recommend rolling back stimulus as the economy returns to an allegedly “natural” rate of unemployment. Overall, with a few refreshing exceptions, supporters of capitalism appear resigned to the inevitability of involuntary unemployment.

From “Law and Economics” to “Law of Economics”

But is this view correct? Did the millions of productive workers who stopped getting out of bed in 2007 all transform into socially repugnant, Kafkaesque beetles? Did we collectively exhaust our supply of that precious job-creating element, “employaminium”? Of course not. Unemployment is a legal creation arising from an accounting system that records claims on real value in nominal amounts. Nothing in the natural world prevents individuals from contributing to the betterment of society.

As prospective lawyers, it is our job to learn how to solve legal problems. To that effect, we might do better by spending less time considering the Econodwarf’s orthodox dogma as axiomatic truth and more learning about how creative lawyers devise out-of-the-box solutions to pressing economic problems. One example of such legal creativity is blogger-lawyer Carlos Mucha (a.k.a. Beowulf)’s brilliant proposal to take advantage of a little known but hugely important provision in the Coinage Act that completely eliminates the need for the government to issue interest-bearing treasury debt during the presently convoluted process of deficit spending. 31 U.S.C. 5112(k) authorizes the Secretary of the Treasury to mint platinum coins “with such specifications, designs, varieties, quantities, denominations, and inscriptions as the Secretary, in the Secretary’s discretion, may prescribe.” Under the clear wording of this statute, the Treasury tomorrow could create and deposit at the Federal Reserve a single $60 trillion coin to pay for the national debt, universal Medicare, universal education and a minimum wage job guarantee, while still leaving a very-publicly-visible $40+ trillion in its checking account for a rainy day. Of course, such a move would not be a panacea for every social and economic problem. However, it would effectively eliminate the distracting question of government “funding” and allow us to focus on the truly political and messy issues of policy design and implementation.


The global crisis has put into stark relief the overwhelming failure of economic orthodoxy to maintain full employment. As emerging lawyers, we are positioned to play a significant role in shaping a new economic policy built around principles of abundance and democracy rather than scarcity and aristocracy. Doing so requires creativity and courage, but perhaps above all, cooperation. As such, I stand ready to work with anyone interested in this issue to promote meaningful change.

Eben, I would like to continue working on this over Summer.

-- RohanGrey - 23 May 2012

Rohan, I agree with you that that the emphasis in monetary policy needs to shift to ensuring full employment. It's particularly disturbing given that in the past couple of years, a number of politicians have made proposals ranging from ending the Federal Reserve altogether to eliminating its dual mandate in favor of a single mandate for price stability. But I don't really think the platinum coin plan is a good solution to these problems. The economic problems with it aside (the original proposal was just focused on paying short term debt, using it to pay all the debt and for all social programs would be highly inflationary [though that might not be such a bad thing]), the real problem to me is that its just a gimmick in the law. It could have been used to deal with an imminent default, but it would eventually be unsustainable, whether because of the Supreme Court, which would have a pretty easy time finding that using a law about creating coins to control the entirety of monetary policy is unconstitutional, or outside political pressure, since there is really no support for the idea of the President having full control of monetary and fiscal policy.

Really, I think the problem isn't with the tools to create full employment, its a question of building support for the idea that its not just desirable, but a necessity. There are all sorts of ways to try to create full employment without resorting to an overt attempt to ignore the other branches of the government. I think if we view the law as a weak social force, there needs to be support outside the law for what the law is trying to accomplish, but as you pointed out support for this idea has dwindled. The narrative you referred to about viewing the government's budget as like a family budget, however wrong it may be, has been highly effective, maybe because the notion that short term sacrifice is a virtue has been so engrained in our culture. Or maybe its just due to corruption, though the rich would seem to benefit as well from full employment. It's strange to me that the obvious counter-narrative to the household budget, that a family takes care of their own even in hard times, has not really been used, though maybe that says something about how the culture both within the United States and the West in general has changed. I'd be curious as to your thoughts about why austerity has been so compelling to officials and the public both here and abroad.

-- DanielKetani - 11 Jun 2012

Daniel, thanks for the thoughts.

I'm not sure that the best counter narrative to “families need to tighten their belts” is that families take care of their own. Rather, I think the Fisherian “paradox of thrift” counter-narrative is more accurate: a collective shift from consuming (private credit-expansion) to saving (private debt-reduction) lowers the amount of economic activity, causing incomes to drop, and saving to increase further in a vicious deflationary circle unless countered by some offsetting stimulative force (public spending).

In my opinion, the prevalence of the mistaken government-as-household view is probably the result of a range of factors, including:

- the protestant saving/suffering ethic you mention,

-the difficulty of accepting that the logic of “fiscal discipline” that applies to individual currency users does not apply to the issuer themselves (i.e. why is it fair that I have to break my back to balance the budget when the government has a blank check?),

-the failure of conventional wisdom to fully appreciate the significance of historical developments in the evolution of our monetary system, in particular Nixon's suspension of gold convertibility in 1971,

-the economic ignorance of the mainstream media (who often just parrot the same ideas amongst themselves) and most federal politicians (many of whom rose through the ranks of revenue-constrained state governments), and

-the misleading and flat-out deceptive models and theories advocated by mainstream/orthodox economics, that tend to treat money as neutral and entirely ignore the unique role played by the banking system in expanding and shrinking the supply of money-like credit.

However, we could also get cynical about it, and view many of these factors as the result of deliberate attempts to whitewash progressive monetary reform efforts from history (Greenbacks, anyone?) as well as purge the economics profession from any voices that challenge the dominant ideology.

On the platinum coin – I question the economic logic behind your claim that “using it to pay for all debt and for social programs would be highly inflationary” on two grounds (though I agree that inflation might not be such a bad thing, particularly if there were some protection measures for middle-class savings, although general wage stickiness concerns are still an issue).

First, despite conventional wisdom to the contrary, the difference between a treasury bill or bond (i.e. government “debt”) and other forms of risk-free government liabilities (federal reserve notes and reserves) is very little – essentially, a small degree of liquidity (you can't use a bond at the local grocery store) and the rate of interest. Indeed, since the Federal Reserve began paying interest on excess reserves in 2008, even that difference has largely evaporated. To that extent, if the Treasury were to create a large platinum coin, deposit it at the Federal Reserve, and use the funds credited to its reserve account to purchase all outstanding government debt (or alternatively, to fund future spending in lieu of issuing new debt), the effect from an accounting perspective on bondholders would be very little, akin to an individual moving deposits from an interest-earning savings account to a checking account at a regular bank. As Warren Mosler explains here, it is quite possible, not withstanding the effect of such a policy on the long-term interest rate (which is already quite low!), that such a move would actually exert a net deflationary impact due to the removal of government interest income from the private sector. Of course, it is possible that there would be (irrational) expectational inflationary effects from announcing the printing of a $60T coin, but from a purely accounting perspective there is no reason for that to occur. My real goal with that suggestion was to throw a bucket of water over this ridiculous notion that governments with their own currency can “go broke,” or perhaps even more worryingly, that they need to “borrow” money they have already created in order to deficit spend.

Second, I'm not sure why you think that funding all social programs through printed money will cause very high inflation or even render it a likely outcome given the U.S.'s institutional arrangements, productive capacity and the huge demand slump we are currently living through. It is possible that we would experience a temporary increase in inflation at the point of introducing universal public education, medicare and a minimum wage job guarantee. However, given the effect such policies would have on constraining rising healthcare and college education costs, not to mention the increase in productivity that would result from a fully employed workforce working on things like infrastructure, environmental renewal and community-redevelopment (or as some have called it, a “Green New Deal”), it is unlikely that such inflation would persist beyond the initial adjustment shock. Of course, if it were to occur and become a significant problem, one could temper demand through a range of measures, including targed tax increases (which would be explicitly serving an aggregate demand-managing function rather than a revenue-raising function), increased interest rates, or higher capital requirements/reduced leverage ratios on bank lending. In short, there are plenty of ways to deal with the issue of high inflation should it occur without dismissing the unique policy freedom afforded to monetarily sovereign nations by seignorage power.

Notwithstanding all of that, the suggestion of a $60T coin has always been partially tongue in cheek, and I don't think anyone, even Constitutional Law Professor Jack Balkin – who seems to think the idea would work – is suggesting it should form the basis of long-term economic policy. But I don't think the problem with it is that it is unconstitutional (what is your basis for this claim?), or that there is any inherent problem with giving the President power over monetary and fiscal policy (given that they are inextricably linked to the point of being “two sides of the same coin” as it were). Rather, the biggest problem with it, in my opinion, is that even the act of depositing a coin at the Federal Reserve is unnecessarily complicated compared to a true system of functional finance, with money injected through deficit spending, removed through taxation, and interest rates set through paying interest on publicly available accounts at some form of public bank (perhaps linked to social security numbers and/or corporate tax numbers).

Of course the political issues with truly democratizing money are, as you mentioned, a crucial consideration - probably the crucial consideration, if we are to listen to Kalecki or take seriously Eben's suggestion that those things left unspoken are usually the most important. But outside of those who, like yourself, have formally studied economics, how many average people do you think are aware now that banks do not “lend deposits” as the traditional model suggests, but rather “create deposits through loans” through the process described by heterodox economists as “endogenous money”? Do you think the average person would be happy with the fact that the credit-expanding power, with all of its inflationary potential, is today wielded largely by the private banking industry under licensing regimes, rather than utilized directly for the public purpose? Personally, that revelation was shocking to me and continues to represent one of the largest cancers on our economic system, as it relies upon interest-earning debt to expand economic growth, resulting over time in an exponential transfer of wealth from debtors to creditors.

Finally, in regards to “ignoring the other branches of government” - I am not sure exactly what you mean by this. Congress still has to appropriate money before it is spent, regardless of whether it is created through a coin or through debt issuance, so i'm not sure how oversight in that sense would be undermined. Can you explain further your concern here?

P.S. Ron Paul wasn't the only one proposing getting rid of the Federal Reserve as we know it.

-- RohanGrey - 11 Jun 2012


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r14 - 22 Jan 2013 - 20:10:10 - IanSullivan
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