THREAD
We should talk about Functional Finance. Abba Lerner put forward the approach in the 1940s. He explicitly offered it as an alternative to the more timid pump-priming approach expounded by people like Alvin Hansen. Here’s the seminal paper. https://t.co/ycbYTFIWfk pic.twitter.com/1C4ao1QzaS— Stephanie Kelton (@StephanieKelton) August 23, 2019
I see people like Larry Summers warming up to FF but continuing to express reservations about MMT on the grounds that (among other things), MMT advocates “printing money.” So let’s look at what Lerner’s Functional Finance was all about.
— Stephanie Kelton (@StephanieKelton) August 23, 2019
Against this backdrop, Lerner tells us how he believes gov’t should run fiscal policy. He rejected the principle of “sound finance,” the idea that the budget outcome itself should ever be the target of policy. He wanted everything judged based on real, not budgetary, effects. pic.twitter.com/wnatujTrVB
— Stephanie Kelton (@StephanieKelton) August 23, 2019
He couldn’t care less whether this req’d a fiscal deficit, a balanced budget, or a fiscal surplus. Any of them was justified, provided that was the budget outcome that delivered a balanced economy—i.e. full emp and price stability. So the budget pictured below is doing its job! pic.twitter.com/RZRR6qPExy
— Stephanie Kelton (@StephanieKelton) August 23, 2019
Here’s a place where MMT is exactly in synch with Functional Finance. Taxes are for subtraction, not for “raising revenue” or “paying the bills.” Lerner would have approached the federal budgeting process *very* differently. PAYGO would have been a NOGO. pic.twitter.com/ypgNZqAUBm
— Stephanie Kelton (@StephanieKelton) August 23, 2019
ASIDE: MMT recognizes that taxes are important for other reasons. Inequality foremost among them. We have cited former NY Fed president Beardsley Ruml on this for decades. https://t.co/5SESyuG3Ml
— Stephanie Kelton (@StephanieKelton) August 23, 2019
Overt Monetary Financing, meaning that he wanted the government to simply (deficit) spend and leave any resulting reserve balances in the system, rather than draining them via bond sales. Like MMT, Lerner saw bond sales as a tool for interest-rate maintenance not “financing.”
— Stephanie Kelton (@StephanieKelton) August 23, 2019
Larry (and others) have WRONGLY argued that MMT = “printing money” and warned of hyperinflation. https://t.co/I4TcVzstVr pic.twitter.com/e5zjFDqv6o
— Stephanie Kelton (@StephanieKelton) August 23, 2019
This is something @stf18 and I wrote about https://t.co/Bu1rzj5MdH
— Stephanie Kelton (@StephanieKelton) August 23, 2019
Note: @StephanieKelton and @STF18 recommend this more complete version. Readers might also appreciate What Is Helicopter Money, Anyway?
So how is MMT (un)like Functional Finance? First, we don’t think it is good enough to rely on real-time adjustments in G&T to maintain full employment. You will never get to zero involuntary unemployment that way. Enter the Job Guarantee.
— Stephanie Kelton (@StephanieKelton) August 23, 2019
Note: links to explainers, proposals, research and commentary re MMT’s Job Guarantee here.
The fiscal response—bigger deficits in the downturn and smaller deficits in the upturn—happen automatically.
— Stephanie Kelton (@StephanieKelton) August 23, 2019
On debt sustainability, MMT goes further than Blanchard, Summers, etc. @stf18 has published a dozen or so articles on this. Here are just a couple of them:https://t.co/Hd30zPPmFDhttps://t.co/ikeePTqzRl
— Stephanie Kelton (@StephanieKelton) August 23, 2019
Jamie Galbraith comes down on the MMT side as well. Here’s the bottom line. https://t.co/KsPMwyrQFd
At the end of the day, this is where MMT and mainstream part ways on sustainability. They see interest as something markets determine. We see it as a matter of political economy. pic.twitter.com/tsGZG1skCV— Stephanie Kelton (@StephanieKelton) August 23, 2019
/End pic.twitter.com/oqHagDWBrP
— Stephanie Kelton (@StephanieKelton) August 23, 2019