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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 18: Transformational Growth Project Members and Conference Participants in Open Conversation


EDWARD NELL: Most proposals for public sector employment have treated it as a fiscal stabilizer, or as an anti-poverty measure. If it is to act as a fiscal stabilizer, the public sector should expand in a slump and contract in the boom. This is just what is needed to set up a Ôbuffer stockÕ approach to labor Ð to offer a labor supply in a boom and to hire in the slump, in both cases at a fixed wage. This will provide a stabilizing effect on the wage structure. We start by setting a fair, but low, wage at which labor will be absorbed in the slump and be released when private sector employment expands. Keeping the wage reasonable but low makes it easy for people to be bid away from public employment by the private sector. (This wage will become the market-imposed minimum wage.) In other words, the public sector wage will be chosen to make adjustment easy, and to help stabilize the wage bill. Of course, this has a direct impact only on the low end of the wage bill, but because the wage structure doesnÕt change easily, a very large part of the wage/price complex is stabilized. It can be expected that many of the jobs most likely to be created will be training jobs. At the same time we provide for full employment. Warren Mosler likes to call this Ôfull employment with loose labor markets,Õ as it prevents upward pressure on the wage bill while at...

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