"Mr. Lerner, how many times do I have to remind you that you cannot run a government on transparent humbug?" — Keynes to Lerner according to Paul Baran.
Times have changed, I may add, the newest innovations in politics seem to have overcome that difficulty.
Lerner will probably be remembered best for his clarification and
extension of Keynesian theory and policy. Keynes himself was not always
ready to keep up with him. In 1943 Lerner published an article,
"Functional Finance and the Federal Debt," that announced a new approach
to fiscal policy. (The subject was further developed in his Economics of Control and the Economics of Employment.) He noted that conventional fiscal wisdom was based on the principles and morals of good household management: don't spend what you don't
have— a tacit reminder that the words "economy" and "economics" are
etymologically derived from oikos, the Greek word for household.
Lerner, however, picking up on the summary
Keynesian prescription of deficit spending, argued that governments
should not be concerned with conventional morality but rather should
consider only the results of their actions. The aim of government
spending and taxing, he said, should be to hold the economy's total
spending at a level compatible with and conducive to full employment at
current prices— in other words, no unemployment and no inflation.
In
doing this the government should not be concerned with deficits or debt.
Second, the government should borrow or repay only insofar as it wants
to change the proportions in which the public holds securities or money.
Changing this proportion will raise or lower interest rates and hence
discourage or promote investment and credit purchasing. If the only
question, then, was how to finance a deficit, Lerner advocated printing
money. Third, the government should put money into circulation or
withdraw (and destroy) it as needed to effect the results called for by
the first two principles.
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