In short, what he calls their Keynesian platform says “Interest rates are at historic lows, our current infrastructure is aging rapidly, and our economy is stuck in neutral. Now is the time to invest.”
This is as he points out this reasonable reaction to the current state of economic activity has ''suffered a striking failure of nerve'' most strikingly in the UK but ''Even President Obama temporarily began echoing Republican rhetoric about the need to tighten the government’s belt.'' He continues, ''And having bought into deficit panic, center-left parties found themselves in an extremely weak position. Austerity rhetoric comes naturally to right-wing politicians, who are always arguing that we can’t afford to help the poor and unlucky (although somehow we’re able to afford tax cuts for the rich.) Center-left politicians who endorse austerity, however, find themselves reduced to arguing that they won’t inflict quite as much pain. It’s a losing proposition, politically as well as economically.''
The question is whether the standard Keynesian narrative is able to unseat the status quo/ 'sound finance' view. Having been defined as decisively left of center- how will this message resonate more broadly for the long term? Especially with powerful vested interests better organised and positioned then ever. The standard Keynesian narrative falls short of the explicit detailing of the modern money system required for lasting impact. If Mr Trudeau, and others, are going to be successful explicitly communicating and practicing the principles of Functional Finance, to finally dispel the deficit narrative and ensure a prosperous economy, is vital.
Lerner outlined 3 rules for public policy to govern the economy:
- The government shall maintain a reasonable level of demand at all times. If there is too little spending and, thus, excessive unemployment, the government shall reduce taxes or increase its own spending. If there is too much spending, the government shall prevent inflation by reducing its own expenditures or by increasing taxes.
- By borrowing money when it wishes to raise the rate of interest and by lending money or repaying debt when it wishes to lower the rate of interest, the government shall maintain that rate of interest that induces the optimum amount of investment.
- If either of the first two rules conflicts with principles of 'sound finance' or of balancing the budget, or of limiting the national debt, so much the worse for these principles. The government press shall print any money that may be needed to carry out rules 1 and 2.
Having the benefit of evolving along with civil society itself for centuries, a few simple realities underpin the principle foundations for these rules . It is also important to stress the significant historical role the manipulation from the principles and rules once established has proven to be. In America, as Benjamin Franklin points out "The refusal of King George to operate an honest colonial money system which freed the ordinary man from the clutches of the manipulators was probably the prime cause of the Revolution."
Abraham Lincoln utilising the Greenback successfully fought the American Civil War maintained ''The Government should create, issue, and circulate all the currency and credits needed to satisfy the spending power of the Government and the buying power of consumers. By the adoption of these principles, the taxpayers will be saved immense sums of interest. Money will cease to be master and become the servant of humanity.''
Over the years, as private interest and false narratives equating household and government budgets became the orthodox view, the battle between the state and private banking interests to control money proved decisive. Whether or not we are ideologically predisposed to accept it, the economy is not self regulating and government intervention is required. Since Hobbes Leviathan, the successful development of independent states hinges on the institutions provided by the state. (Read Why Nations Fail for supporting material).
As it relates to the money and the banking system, the recurring boom and bust cycle is fundamental to a system based on the search for ever increasing returns which is important to the capitalist system and private investment. What is significant is that, just as banks are never with or without money to create a loan, neither is the state as issuer of currency. The primary role of taxes in the system then is to give value to the state issued money and manage the quantity in circulation to guarantee stable prices.
With modern fiat money a creature of the state, the central bank system and the state are equal in their ability to facilitate and coordinate policy to sustain the system. Public institutions like Social Security and Works Progress Administration developed in the aftermath of the Great Depression continue to support a base of activity lessening the impact of fluctuations in the financial system.
Similarly central bank policies such as Quantitative Easing and Zero Interest Rates have lifted the veil of government funding of policies designed to directly impact the economy. Extending these activities to support infrastructure or energy investment banks represents the next logical step toward this end. Fundamentally this means fiscal policy directed and measured with a focus on its impact on the economy. With the federal budget managed to support full employment and price stability not some supposed principle of 'sound finance'.
Mr Trudeau is right to focus on investment that supports the public good and invests in the future capacity of the nation. The practice of which will only succeed if the narrative surrounding household and government budgets is thrown to the dust heap once and for all. Just as central banks look to employment and inflation as the only significant economic indicators so to our elected representatives.