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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 14: Equality and Enterprise: Can Functional Finance Offer a New Historical Compromise?

Per Gunnar Berglund


Per Gunnar Berglund* ÔLook after Employment, and the Budget will look after itself.Õ John Maynard Keynes INTRODUCTION The first draft of this chapter, which I presented at the New School conference on Functional Finance in April 1998, was cast as a tribute to William Vickrey who died in 1996 soon after he had been awarded the Nobel Prize in economics. Sad to say, in the past two years, two more eminent Functional Financiers have passed away: Robert Eisner and Lynn Turgeon, both of whom appeared at the New School conference and died shortly thereafter. I am deeply indebted, intellectually as well as personally, to these great and amiable men. The following pages should be viewed as my humble tribute to this distinguished trio that represents the very finest of American economics. FUNCTIONAL FINANCE AND THE ROLE OF TAXATION This chapter addresses a fundamental question in the theory of Functional Finance, a question put succinctly by Lynn Turgeon: ÔWhy should we tax people when there is Functional Finance?Õ The core message of the doctrine of Functional Finance is that the government budget should be regarded as a means to attain real-economy goals like maximum output and employment. The size of the budget deficit and government debt does not matter per se; the budget should be assessed only in the light of its impact on the real economy (Lerner 1943: 39) * I am indebted to Ray Majewski for comments on an earlier draft. 243 244 Functional finance and full employment Government expenditures...

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