Research Topics

A Comparison of the Evolution of the Positions of Hyman Minsky and Abba Lerner

This paper examines the views of Hyman Minsky and Abba Lerner on the functional finance approach to fiscal policy. It argues that the main principles of functional finance were relatively widely held in the immediate postwar period. However, with the rise of the Phillips curve, the return of the Quantity Theory, the development of the notion of a government budget constraint, and accelerating inflation at the end of the 1960s, functional finance fell out of favor. The paper compares and contrasts the evolution of the views of Minsky and Lerner over the postwar period, arguing that Lerner’s transition went further, as he embraced a version of Monetarism that emphasized the use of monetary policy over fiscal policy. Minsky’s views of functional finance became more nuanced, in line with his Institutionalist approach to the economy. However, Minsky never rejected his early beliefs that countercyclical government budgets must play a significant role in stabilizing the economy. Thus, in spite of some claims that Minsky should not be counted as one of the “forefathers” of Modern Money Theory (MMT), this paper argues that it is Minsky, not Lerner, whose work remains essential for the further development of MMT.

Monetization Fears and Europe’s Narrowing Options

With the creation of the Economic and Monetary Union and the euro, the national government debt of eurozone member-states became credit sensitive. While the potentially destabilizing impact of adverse cyclical conditions on credit-sensitive debt was seriously underestimated, the design was intentional, framed within a Friedman-Fischer-Buchanan view that “no monetization” rules provide a powerful means to discipline government behavior. While most countries follow some kind of “no monetization” rule, the one embraced by the eurozone was special, as it also prevented monetization on the secondary market for debt. This made all eurozone public debt defaultable—at least until the European Central Bank (ECB) announced the Outright Monetary Transactionsprogram, which can be seen as an enhanced rule-based approach that makes governments solvent on the condition that they balance their budgets. This has further narrowed Europe’s options for policy solutions that are conducive to job creation. An approach that would require no immediate changes in the European Union’s (EU) political structure would be for the EU to fund “net government spending in the interest of Europe” through the issue of a eurobond backed by the ECB.