by Bill Mitchell
….Keynes’ views in this context were relatively conservative and mistaken.
1. Issuing debt to match fiscal deficits does not reduce the inflation risk of the initial spending, whether that spending be government or non-government.
It just swaps one financial asset – a saving balance (deposit) for a government bond. Moreover, the latter carries an income flow which is likely to be larger than the former.
2. There is no reason to believe that continuous fiscal deficits will be inflationary. Extending Keynes’ own logic, deficits are required when non-government spending is insufficient to generate sales that would justify firms fully employing all available labour.
As long as firms can continue to respond to nominal demand growth through increased output growth, there is no major likelihood of an inflation breakout.
In other words, a deficit could easily be a ‘steady-state’ policy position to support full employment when the other sectoral balances (external and private domestic) were in particular states……..
….Progressives should abandon the notion that they attribute to Keynes that the fiscal balance should be zero on average over the course of the economic cycle.
In this regard, the work of Abba Lerner in the 1940s on Functional Finance is much more seminal to the development of MMT than was Keynes’ offerings, which I believe a antithetical to the foundational blocks of MMT.
Progressive narratives should aim to educate the public as to the need in normal times for continuous fiscal deficits. Then we would start getting somewhere…….