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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 7: The History of Abba Lerner’s Supply-side Inflation

Lynn Turgeon


7. The history of Abba LernerÕs supply-side inflation Lynn Turgeon* Abba LernerÕs Ôfunctional financeÕ arose out of the unusual conditions associated with fighting World War II: full employment, effective price and wage controls and interest rates with a lid of approximately 2 per cent. Nevertheless Lerner came up with an important conclusion applicable to the postwar economy: taxes should be collected only to prevent or reduce inflation, never for revenue purposes; and a government can function without imposing any taxes as long as there is no threat of inflation.1 Unfortunately, after the Treasury Accord of March 1951, it was assumed by all and sundry, including the Federal Reserve Board, that there was some threat of inflation, presumably of a demand-pull nature. Thus tax increases were imposed or attempted on several occasions, in particular throughout most of the Korean War. When price controls were eliminated by Eisenhower at the end of that war, the price level, as an indication of false inflationary expectations, actually fell a little. If we can assume (along with Alan Greenspan) an upward bias in our measures of inflation, we might claim that there was insignificant inflation in the 1950s and until the latter part of the decade of the 1960s. It is the purpose of this chapter to examine LernerÕs interpretation of economic policy, in comparison to other Keynesians, looking at the second Eisenhower recession; the ÔNew EconomicsÕ of KennedyÐJohnson; the Nixon ÔNew Economic PolicyÕ; and the two rounds of hefty OPEC...

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