Hyman Minsky – “Stability Is Destabilizing”, Employer Of Last Resort


Hyman Minsky, who was my dissertation
advisor, was famous for [his] Financial Instability Hypothesis. So this is also incorporated within
Modern Money Theory. The most famous line from Minsky is “stability is
destabilising”. So if the economy appears to be
operating in a very stable manner, the problem is that people will change
their behaviour. They will assume that it’s safe to take more risk. As they take
more risk the stability disappears and you get financial crises. In one sentence that’s the theory. And so by using the understanding of sovereign currency
which came from Knapp, Innes, Goodhart, and so on, we were able to — beginning in 1992 — to write about the coming crisis in Europe land. That the way that the euro
was set up by trying to divorce fiscal policy from the sovereign currency, as
each country adopted a foreign currency called the euro, we said that this system
will not be able to deal with its first serious financial crisis. And then
following Minsky we said, “Aha! we have our chairman Greenspan and Bernanke
famous for eliminating risk”. Okay, when Greenspan was the chair of
the Fed we said “Oh, there’s the Greenspan put.” In other words you can go ahead and take all the risk you want because you know that no matter what happens, Greenspan
won’t allow anybody to fail. Bernanke even wrote a paper called “The Great Moderation”. ‘Central Bankers know what they’re doing now. You can trust us therefore there is no risk any more. Financial crises are a thing of
the past; we’re not going to have them any more.’ Okay? So we said, “You know, this is exactly what Minsky was talking about. The stability will create the instability”. So we said,
“We’re going to have a major financial crisis, compounded by the Clinton budget
surpluses that put the private sector so heavily in debt, by the deregulation pushed by Greenspan, Larry Summers, Bob Rubin”. “We’re going to have a massive financial
crisis which the US will be able to deal with because we’re a sovereign currency. Euroland will not be able to deal with it”. “They will face a crisis they cannot get out of”. And so in addition to the creation of the blogosphere, being right about these two things also
increased the credibility of the Modern Money Theory. The last piece in the history of thought that led to the development of Modern Money Theory is the idea of “Employer of Last Resort”. So Abba Lerner says, “if there is any unemployment at all,
it can be eliminated by the government spending more”. Now the problem is that
you can get inflation. Lerner thought you get inflation only when you go
beyond full employment. Now in the sixties he changed his mind on this. The writing in the forties, his prescription was, “Just spend more”! The problem is we get inflation long
before we get to full employment. And so the government has to cut back its spending, raise taxes,
slow down the economy, before we ever get to full employment. So Hyman Minsky who’s known for financial instability in the 1960s worked to develop a proposal of
Employer of Last Resort. So he argued that only the government can afford to
hire all the unemployed. And so it must be the government’s responsibility in
order to maintain full employment. And we do that with what we now call a Job Guarantee, he called it Employer of Last Resort. So what you want to do is
design a New Deal-style jobs programme in which the government takes workers as
they are, pays them a wage which will become the minimum wage throughout the economy, hopefully it’s a living wage, and then finds useful things for people to
do. Just as the New Deal jobs programme did — and I know that you’re all young and
maybe you don’t know too much about this — 13 million people were employed in the
New Deal jobs programme. The biggest was the WPA which employed 8 million people. You can still see the output of these workers all over the country. They built thousands of schools;
they built probably tens of thousands of bridges, hundreds of thousands of miles
of road; they built public buildings all over the United States. They brought a
country that was a developing nation into the 20th century. It is not an
exaggeration to say that they developed America. They made America a developed nation. And in the New Deal jobs
programme. So this is what Minsky had in mind when he talked about it. I won’t go
any more into the, you know, tiny details of how you run the program to make sure
that it is not inflationary but Minsky argued this path to full employment will not
cause inflation whereas just having the government spend more could be inflationary.

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