On the cost of a decent public sector

Julio Huato
9 min readMar 31, 2019


My friend and colleague, Josh W. Mason, posted recently a great piece, “Fiscal Rules for the 21st Century: How to Pay for the Public Sector,” on the Roosevelt Institute’s blog. Josh’s articles are a pleasure to read, because they are always sharply argued and crystal clear in their presentation. (By the way, if you want to get to the essence of the Modern Monetary Theory [MMT], then read this.)

The following note is critical of Josh’s piece, but composed in a spirit of heartfelt camaraderie. My remarks apply not only to his arguments in the article, or those presented by others in the Keynesian tradition (e.g. Paul Krugman), but perhaps more suitably the views of the MMT proponents. In any case, again, this is a friendly intervention, intended to contrast the views of those of us who come at the issue from a Marxist standpoint, and to help us all sharpen our arguments against those of the ideologues of the 1%.

One of Josh’s chief points in the piece is that the public sector’s hard or effective constraint in implementing needed public programs is the stock of actual productive resources available. The financing choice is, in fact, much softer. The federal government can wing it, because its Treasuries sell well in the market, they are denominated in the dollars that our own central bank emits, and these dollars happen to be the global reserve currency of choice.

Now, regarding the hard or “real” resource constraint, the availability of labor power and means of production (as we Marxists may put it), Josh offers a number of reasons why, in spite of recently published unemployment statistics, the U.S. economy may be still significantly away from its “full employment” mark. If, as he argues, there’s significant “slack” in the economy, then even large public initiatives over the upcoming decades may not lead to quickly “crowding out” the costs and profitability of private economic activity. So, there’s some “slack” out there!

I have much to say about the mystifying nature of this “full employment” category that we economists use all the time, but take it at face value for now. The argument goes: If we were really near “full employment,” then we’d already be seeing significant increases in nominal wages, prices, and interest rates. One of the things Josh does to highlight this is to compare existing conditions, say in the labor market or in industrial capacity utilization, with what happened in the past. The conclusion — or is it the reassuring ring in it? — troubles me greatly.

Here’s why.

There is a strong tendency among those who come at this issue from the Keynesian tradition to emphasize these output or employment “gaps” with respect to some theoretical “full employment” (or “natural rate of unemployment” or NAIRU) mark. Now, these concepts are not “wrong” per se. They are abstract placeholders, which means that we need to carefully expose their concrete content before they helps us to truly advance in our knowledge of society. Even the most ideologically mystifying concept can be taken apart and then its concrete content restored orderly so one’s knowledge increases.

But back to the idea, Keynesians proceed as if, once the “gaps” are identified and estimated, all is left is to write cogent “essays in persuasion” to convince the public and the political class that the “slack” exists, etc. so that proper action can be taken. It seems to be about (1) persuading people about an obvious or empirically verifiable technical fact and (2) the will to organize to elect a particular crop of politicians who once in office will implement the policies we advocate. The “slack” argument makes it seem as if the actual “economic” and overall social cost of moving the economy to its “full employment” cannot be so considerable.

If the intended audience of this reassuring mode of argument is the 99%, then thanks but no thanks! We do not need self deception. We need to confront reality as it is. If we are, instead, trying to lull the 1%, their politicians, and ideologues, then I am not so sure they will fall for it anyway. Individual exceptions aside, as a crowd, they do not appear to be persuadable on the basis of facts and formal argument. For them to change their ways, much has to change. They have to face new political, legal, and economic realities in the ground. So, what is this “slack” argument for?

Again, there is one side of me that accepts the “slack” or “gap” story as a valid analytical first approximation to the issue. I teach microeconomics, and when — say — I run some “welfare analysis” with my students, I highlight for them potential Pareto (slam-dunk) improvements to a given allocation. But the other part of me screams! — because this can only be a first (analytical) approximation, which must then be qualified further by carefully lifting the scaffolding of abstractions that we economists lovingly erect.

Think of it this way:

If you stop exercising and eat a lot of junk food during a sufficiently prolonged period of time, then … do you believe that it will be easy for me to persuade you that — no worries — there’s a lot of “slack” in your body for exercise and diet? After all, here is your current body-mass index and fitness test results and this is your ideal weight, etc. I mean, all your body needs is to learn how great diet and exercise are, contemplate the “gap,” and it will then jump off the sofa and start moving. Does this sound right to you?

I don’t think so! You know that there’s a very high cost involved in using up one’s “slack.” If your body is like mine, then you’ll go to extreme pains to pull it out of its ditch. It will be much easier to stay there and dig deeper! A society is a lot like a body or organism with adaptive features. Once it gets into a regime or state, temporary habits become regular physiological patterns and physiology turns into rigid anatomy — inertia or hysteresis (as electro-physicists call it) takes over. If getting off the couch is so painful at a personal scale, think about what is entailed in changing the ways of hundreds of millions or billions of people! Pulling our society out of its current state is going to be heavy (organized) political lifting. We are going to have to fight this through against formidable opposition, hostility, sabotage, and who knows what kitchen sink they may throw at us.

Since I don’t want my economist friends to dismiss my argument as a badly constructed analogy, let me be a bit more “economically” specific. Consider Josh’s point that “Despite the fact that the official unemployment rate is low, there is considerable evidence that the economy is still operating below potential.” Which evidence? Well, for example, the still low (by historical standards) labor force participation rates. As a nasty sequel of the Great Recession, lots of able but unemployed people stopped “actively” looking for a job and thus stopped being counted as in the labor force.

Is this argument going to assuage the fears of capitalists about the labor market getting tighter as a result of major public works initiatives, such as the Green New Deal or Medicare for All? After all, one would reason, the discrete difference between being in the labor force or not is an artifact of the way these statistics are defined and compiled. In fact, whatever the existing employment and nominal-wage levels, the conditions in the labor market already reflect the pressure that those not counted in the labor force exert or not. In fact, it reflects the conditions in the labor markets of China, Mexico, etc.!

There are no insulated containers keeping these different categories of workers apart, so the public sector can take those from one container without significantly affecting the conditions in the other containers. There are, of course, frictions imposed by migration costs (legal and not), adjustment time frames, retraining costs, etc., but if we are thinking in terms of decades (as Josh correctly suggests we do), then what we have instead is a sort of complex system of communicating vessels across the (global) working class.

In brief: The relative tightness or lack thereof of the labor market already incorporates the pressure or lack thereof exerted by the latent sectors of the reserve army of labor. So, the fears of the capitalists that public employment will place the workers in a significantly better bargaining position in the labor market, that their profitability and overall social status will then be in jeopardy — the more so the larger the public work initiatives to undertake — is spot on! Josh actually says more than once that one of the points of expanding the public sector is precisely to help the workers regain some lost power. It sucks for capital to face workers with more power!

Something very similar can be said about industrial capacity utilization. The existing structure of “interest rates” and market prices incorporates already, with greater or lesser fluidity, the totality of those conditions.

I have said that in, normal times, when the class struggle is pushed back to the back political burner, and competition among individual lumps of capital gets all the focus, the profit rate on these capitals is the variable of interest. The capitalists can afford to have infighting as their main concern. However, when the class struggle moves to the front burner, the variable of interest is then Marx’s “rate of exploitation” — or profit share or pecking order in society. In fact, I would argue that, unlike what many Marxists seem to believe, the key variable in the whole of Marx’s “economics” is the rate of exploitation. In plain words, the size of the pie — while never irrelevant — loses importance rapidly, while the angle of the slice takes prominence. In times of sharper social conflict, the first order of business is to put and keep the plebs in their place. When push comes to shove, the capitalists’ concern is not so much the quantity but the existential quality of their social power.

To my Marxist friends with no training in economics, this is how I translate this “macroeconomic” notion of “full employment” for them:

We are used to, by abstraction, conceiving separately the “material” and the “social” aspects of today’s capitalism. On the material side, one contemplates the formidable productive force of society’s labor, the productivity or power of the workers vis-à-vis the rest of nature. On the social side, one looks at its economic, legal, political, and other social structures. “Economic” means effective (private) ownership of wealth. On this aspect, one is contemplating the distribution of wealth ownership, which — viewed from a slightly different angle — captures the overall balance of forces between conflicting classes and groups of society.

One of Marx’s chief theses is that, the structures of modern capitalist society— in particular, its economic structures, a.k.a. its “social relations of production,” social “institutions” such as general private ownership, money, and capital— have become “fetters” that obstruct the free development of the productive forces. Humans have expanded our productive (and destructive!) potential, as incorporated in our own bodies and in the artifacts of our physical wealth, but our own mutually inflicted social “institutions” prevent us from fully tapping such potential for our own good. Precisely, because of the rigidity of these social structures, because of the entrenchment of vested interests, we need social revolutions!

Marx was even more specific. In his economic study of capitalist society, he noted that for capital to grow as it is compelled to do by the class conflict and competition that private ownership unleashes, it needs handy mechanisms to recurrently generate the division and powerlessness of the direct producers, so they remain the exploitable mass that makes capital possible. In particular, Marx referred to the “reserve army of labor”: the mass of people unemployed inclusive of those seemingly not readily fit to be mobilized by capital. The convulsive nature of capitalist accumulation is such that we observe this reserve army expanding and contracting in turn. In a sentence: a hefty (though shifting) degree of unemployment is a fundamental condition for the existence and functionality of the labor market and capitalism overall.

If Marx’s argument has any plausibility — and some of us would argue so — then the shrinkage of the reserve army of labor tends to choke off capital accumulation and even threaten its existence. This happens, as Hegel would have it, not by virtue of some linear and smoothly gradual mechanism. No, rather, there will be a gradual accumulation of tiny changes that won’t call much attention and then sudden snaps ushering new capital-accumulation regimes and critical phases. Critical in which sense? In the sense of intervening massive political crises and revolutions.

In sum, socialists and progressives need to emphasize the gravity of the global emergency we face, which is eminently social. It is not enough that we contemplate the gap between our human potential and the obvious ways in which the social order is currently squandering it. That is a start. But, advancing in our goals will require a practical disposition to pay a large human price, one way or another, partly due to our own limitations, but mostly because the vested interests resisting social change will do everything they can to abort our struggle.

The allusions to the devastation caused by the Great Depression and the challenge of World War II are suggestive of the nature and true dimension of our problem, though only suggestive. I don’t want to sound apocalyptic, but I’m afraid, things are much bigger, faster, and more interconnected today than they were back in the 1930s and 1940s. So we are up for a very bumpy ride. We need to feel in the marrow of our bones that we are in the midst of a serious global emergency, and consciously accept the human costs to pay, because these costs will be substantial.



Julio Huato

The views I express here are mine alone, and not necessarily those of the U.S. government, my employers, my students, my friends, my children, or my cat.