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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 10: Functional Finance and US Government Budget Surpluses in the New Millennium

L. Randall Wray


L. Randall Wray This chapter explores the nature of Ôgovernment finance.Õ The approach presented here is properly called a Ôfunctional financeÕ approach to government finance Ð an antidote to conventional principles of Ôsound finance.Õ Readers will recognize the debt owed to Abba Lerner; indeed some functional finance principles were incorporated into Keynesian economics Ð bastard and otherwise Ð but I believe the full import of LernerÕs principles of functional finance has not been recognized even by followers of Keynes. An understanding of the nature of government finance not only sheds light on Ôfiscal policy,Õ but also on the true nature of what is normally called Ômonetary policy.Õ We will then move on to an analysis of US government budget surpluses at the beginning of the new millennium and the projections that these will continue into the twentyfirst century as the government retires its outstanding debt stock. BRIEF OVERVIEW OF CONVENTIONAL VIEWS ON GOVERNMENT FINANCE According to the conventional view, tax revenue provides the income needed by the government to finance its spending. A government might be able to spend in excess of its revenue, at least temporarily, if it is able to issue debt that the public will hold. That is the government might be able to borrow from the public to finance deficit spending. One method that is almost universally scorned is for the government to issue non-interest-bearing debt Ð currency Ð to finance deficits, whether directly, by the Treasury, or indirectly through the central bank. Because government deficits financed in this manner...

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