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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.
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Chapter 6: The NAIRU and Fiscal and Monetary Policy for Now and Our Future: Some Comments

Robert Eisner


Robert Eisner This chapter mixes something old and something new. The section dealing with NAIRU, using data up to 1997, simply updates and re-estimates the material on budget deficits and monetary policy from a number of my previous papers. I have long been denouncing NAIRU, the ÔNon-Accelerating Inflation Rate of Unemployment.Õ The NAIRU is a dogma that has for too long undermined meaningful economic theory and paralyzed economic policy. Here I am offering some empirical results supporting the assertions that fiscal policy can work and that correctly measured budget deficits stimulate the economy and, reinforced by monetary policy, can significantly increase employment, saving and investment and economic growth. I have documented the decline and fall of the NAIRU on many occasions.1 For over three years, inflation has been going down while unemployment has been below the commonly supposed magic NAIRU number of 6 per cent. It has been difficult to avoid saying ÔI told you so.Õ The conventional NAIRU relies upon two basic assumptions: that (a) current and past inflation in equilibrium generates equal future expected and actual inflation; and (b) that for any given time, there is a specific NAIRU that generates an equilibrium. Unemployment above that rate brings continuously decreasing inflation, while unemployment below it continues to increase or accelerate inflation. I should make clear just what the NAIRU means. Those who are not its cognoscenti, devotees or attackers may not appreciate its full implications. The NAIRU goes far beyond the old Phillips Curve, which I also never...

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