A smart idea but not completely right
Abbe Lerner’s 1943 “functional finance” doctrine is part of the Modern Monetary Theory. In a nutshell, it says that countries that rely on fiat money they control and don’t borrow in someone else’s currency don’t face any debt constraints, because they can always print money to service their debt. They do face though an inflation constraint since too much stimulus can cause an economy to overheat.
Krugman argues that what actually happens 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’s Wrong With Functional Finance?
By: Paul Krugman – City University of New York
The point is NOT that the state can do whatever it wants, even though it has a lot of space, but that at the end of the day monetary policy is central for the ability to pursue fiscal policy, and the monetary authority can keep (unless it’s forced by law not to do it; and that would bring up the discussion about the rise of the neoliberal idea of independent central banks) interest rates low enough to allow for fiscal expansion without debt growing at a very fast pace.
MMT and its Discontents: Again (Wonkish and Longish)
By: Matias Vernengo – Bucknell University