Table of Contents

Reinventing Functional Finance

Reinventing Functional Finance

Transformational Growth and Full Employment

Edited by Edward J. Nell and Mathew Forstater

This ambitious book seeks both to revive and revise the idea of ‘functional finance’. Followers of this doctrine believe that government budgets should concentrate solely on their macroeconomic impact on the economy, rather than reflecting a concern for sound finance and budgetary discipline. Reinventing Functional Finance examines the origins of this idea and then considers it in a modern context. The authors explore the concept of NAIRU and argue that modern economies can operate at the level of full employment without provoking unmanageable inflation. They also contend that budget deficits do not have the deleterious effects commonly ascribed to them; the belief that they do rests on a misunderstanding of modern money. In this context, they highlight the relevance of Abba Lerner’s famous dictum, ‘money is a creature of the State’. The authors also debate the merits of various proposals for ‘Employer of Last Resort’ programs, which combine automatic stabilizers with the buffer stock principle.

Chapter 16: The Job Guarantee: Full Employment and Price Stability in a Small Open Economy

William F. Mitchell

Subjects: economics and finance, financial economics and regulation, radical and feminist economics


William F. Mitchell 1. INTRODUCTION High and persistent unemployment has pervaded almost every OECD country since the mid-1970s. The period of rising unemployment began with the rapid inflation of the mid-1970s. The inflation left an indelible impression on policy makers who became captives of the resurgent new labor economics and its macroeconomic counterpart, monetarism. The goal of low inflation led to excessively restrictive fiscal and monetary policy stances by OECD governments driven by a false analogy between the household budgetary constraints and government budgetary constraints (Mitchell, 1996, 1998). This has resulted in rising labor productivity combined with GDP growth in OECD countries that is generally below that necessary to absorb the growth in the labor force.1 Ultimately, mass unemployment arises because the government budget deficit, relative to the desires of the private sector to meet its tax obligations, is too small to save and to hold money for transactions purposes. It is thus a macroeconomic phenomenon and can never be a Ôreal wageÕ problem as Keynes noted many years ago. The solution to this problem is for government to use deficit spending to introduce a Job Guarantee policy that can simultaneously achieve full employment and price stability (Mitchell 1996, 1998).2 The Job Guarantee approach to full employment opposes the current policy directions of governments in the OECD economies that emphasize fiscal consolidation and supply-side reforms like deregulation and privatization. The fallacious analogies that government spending, taxation and debt issue is equivalent to the spending and financing decisions of the...

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