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Well, it looks as if policy debates over the next couple of years will be at least somewhat affected by the doctrine of Modern Monetary Theory, which some progressives appear to believe means that they don’t need to worry about how to pay for their initiatives. That’s actually wrong even if you set aside concerns about MMT analysis, which is something I’ll write about in a companion piece. But first it seems to me that I need to set out what’s right and what’s wrong about MMT.

Unfortunately, that’s a very hard argument to have – modern MMTers are messianic in their claims to have proved even conventional Keynesianism wrong, tend to be unclear about what exactly their differences with conventional views are, and also have a strong habit of dismissing out of hand any attempt to make sense of what they’re saying. The good news is that MMT seems to be pretty much the same thing as Abba Lerner’s “functional finance” doctrine from 1943. And Lerner was admirably clear, making it easy to see both the important virtues of and the problems with his argument.

So what I want to do in this note is explain why I’m not a full believer in Lerner’s functional finance; I think this critique applies to MMT as well, although if past debates are any indication, I will promptly be told that I don’t understand, am a corrupt tool of the oligarchy, or something.

OK, Lerner: His argument was that countries that (a) rely on fiat money they control and (b) don’t borrow in someone else’s currency don’t face any debt constraints, because they can always print money to service their debt. What they face, instead, is an inflation constraint: too much fiscal stimulus will cause an overheating economy. So their budget policies should be entirely focused on getting the level of aggregate demand right: the budget deficit should be big enough to produce full employment, but no so big as to produce inflationary overheating.