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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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David Colander, James Duesenberry, Robert Eisner, Mathew Forstater, Robert L. Heilbroner, Richard Musgrave and Edward Nell


FORSTATER: This afternoon IÕm pleased to moderate a panel of distinguished visitors and local scholars. Since they all are familiar to you, IÕm not going to run through their many publications and accomplishments. Please join me in welcoming our panel. First, from Middlebury College, we have David Colander. Next is the graduate facultyÕs Robert Heilbroner. Then James Duesenberry from Harvard University, Robert Eisner from Northwestern University, Edward Nell, also from the graduate faculty of the New School, and finally, Richard Musgrave from Harvard University. Proposing, as we do, to revive the Functional Finance approach to macroeconomic policy and develop it for todayÕs world, we are brought face to face with a number of problems. How can we respond to the current (1998) enthusiasm in the US, for balanced budgets, even for running surpluses to pay down the national debt? In Europe, where it is proposed that national powers to run independent fiscal policy be forfeited to a common currency managed by an independent central bank, will there be any room for Functional Finance? On the other hand, recent crises seem to indicate that the international financial system is pretty fragile. LetÕs consider each of these situations in turn. PART I Presently, in the United States and in other countries, there is strong support across the political spectrum for balanced budgets and even for running a surplus in order to begin to pay down national debts. What are the possible economic impacts of this trend and...

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