In the context of the role that debts and deficits play in overall economic policy, in this paper I focus on the philosophy known as “sound finance,” which includes adherents who believe that governments should seek to balance their budgets. I, however, take a different view, and believe that the role of government when dealing with budget deficits should be one of “functional finance,” which ensures that the policies implemented help to reach the overarching goals of macroeconomic policy (generally held to be full employment and price stability). This paper attempts to show why the proponents of sound finance are mistaken by defining and unpacking a series of “myths” that are foundational to, or at least helpful to, convincing us that sound finance requires that governments run a balanced budget. Though not a complete list, following are the “myths” presented:
Myth 1: Governments are like households
Myth 2: Printing money to finance budget deficits is inflationary
Myth 3: Budget deficits/high debt lead to high interest rates
Myth 4: Budget deficits are unsustainable
Myth 5: Debt is a burden on future generations
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