Paul Krugman: What’s Wrong With Functional Finance?: "MMT seems to be pretty much the same thing as Abba Lerner’s 'functional finance'.... So what I want to do in this note is explain why I’m not a full believer in Lerner’s functional finance; I think this critique applies to MMT as well, although if past debates are any indication, I will promptly be told that I don’t understand, am a corrupt tool of the oligarchy, or something...
...OK, Lerner: His argument was that countries that (a) rely on fiat money they control and (b) don’t borrow in someone else’s currency don’t face any debt constraints, because they can always print money to service their debt. What they face, instead, is an inflation constraint: too much fiscal stimulus will cause an overheating economy.... This is a smart take.... And it also looks pretty good in today’s world, where we once again had a long period of depressed demand despite zero interest rates and still look pretty fragile. Indeed, it looks vastly better than the “Eek! We’re turning into Greece!” panic that dominated policy discussion for much of the 2010s.
So what are the problems? First, Lerner really neglected the tradeoff between monetary and fiscal policy. Second, while he did address the potential problem of snowballing debt, his response didn’t fully address the limitations, both technical and political, on tax hikes and/or spending cuts. Introducing these limitations makes debt potentially more of a problem than he acknowledges....
Lerner says that the interest rate should be set at the level that produces “the most desirable level of investment,” and that fiscal policy should then be chosen to achieve full employment given that interest rate.... What actually happens... although, crucially, not when we’re at the zero lower bound... [is] political tradeoffs determine taxes and spending, and monetary policy adjusts the interest rate to achieve full employment without inflation. Under those conditions budget deficits do crowd out private spending, because tax cuts or spending increases will lead to higher interest rates. And this means that there is no uniquely determined correct level of deficit spending; it’s a choice that depends on how you value the tradeoff.
What about debt? A lot depends on whether the interest rate is higher or lower than the economy’s sustainable growth rate.... Now, Lerner basically acknowledges this point. But he assumes that the government always can and will run these surpluses as needed.... And he says nothing at all about the political difficulty of achieving the required surpluses, yet such difficulties seem likely to be central if debt gets to very high levels....
The bottom line is that while functional finance has a lot going for it, it’s not the kind of axiomatically true doctrine that Lerner–and, I think, modern MMTers–imagined it to be.... That said, I don’t think these objections are all that central to the budget issues facing progressives in the near future. You don’t have to be a deficit scold or debt-worrier to believe that really big progressive programs will require major new revenue sources. But I’ll explain that in my next post.
#noted
