Transformational Growth and Full Employment
Edited by Edward J. Nell and Mathew Forstater
Chapter 8: Functional Finance and Fiscal Function
s Richard A. Musgrave While I have no paper to present, I have been asked to contribute some comments, and I am happy to do so. I will first review Abba LernerÕs model of Functional Finance with its focus on budget policy as an instrument of stabilization, and then consider its relation to my three-branch model. FUNCTIONAL FINANCE AND THE ROLE OF BUDGET POLICY AS AN INSTRUMENT OF STABILIZATION The Functional Finance model, when presented six decades ago, proposed to lay bare the logic of fiscal stabilization in stark terms, acting as a shock therapy intended to correct popular misunderstandings, specifically those regarding the role of taxation and the nature of public debt. THE STRUCTURE OF FUNCTIONAL FINANCE The structure of Functional Finance (Lerner, The Economics of Control, 1944, Ch. 24) can be summarized as follows: The function of public expenditures is to render public services at the level required for efficient resource use at full employment. By contrast, the function of taxation does not provide such necessary finance. The state can always print money for that purpose. Taxation, rather, serves to hold down aggregate demand Ð public and private Ð to its full employment level. The same is true for borrowing and debt finance. Both taxing and borrowing (debt issue), while thus serving to depress demand, differ in their impacts. Taxation primarily checks consumption by curtailing disposable income, while debt-issue primarily restrains investment by raising the rate of interest. Stabilization policy may thus assure full employment along with maintaining price...
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