BEE Partner, South Africa Economy Watch

Proponents of functional finance are committed to the principle that government’s power to tax, spend, borrow and manage its debt can and should be used as an instrument for achieving the goals sanctioned by a democratic voting process for the macroeconomy. The premise of functional finance is quite explicitly that a dynamic capitalistic economy is inherently unstable, so that unemployment and price instabilities periodically impose economic pain on the economy as a whole, which impacts most severely on labor markets. Wages and salaries comprise two-thirds of earned income; both J.M. Keynes, and subsequently Laurence Klein and Richard Kosabud, have shown the ratio of the wage relative to the profit share to be historically constant in national income (Keynes, 1939; Klein and Kosabud, 1961). The implication, as Kenneth Galbraith (1974) put it, is that institutional influences have tended to generate `countervailing’ forces when the historical balance shows tendencies toward disruption. The rationale for functional finance is found, quite simply, in its capacity to rein in the potential for a price-directed economy to ‘overshoot’ or `undershoot’ rather than steer the economy directly toward its objective of ‘full‘ employment, while avoiding significant upward pressure on prices.

Both objectives were clearly articulated in the US in the Full Employment Act of 1946. This landmark legislation in American economic history required the federal government to assume responsibility for creating and maintaining useful employment opportunities for all who are able and willing to work. It was amended in 1978 by the Full Employment and Balanced Growth Act, which specified a numerical unemployment rate goal not to exceed 3 per cent among individuals aged 20 and over, and 4 per cent among individuals 15 to 20, to be achieved within a period of five years. The 1978 Act also recognized that employment policy is unavoidably intertwined with anti-inflationary policy.

The ongoing legal requirement that policies maintain low rates of unemployment, while restraining inflation and avoiding deflation, speaks to the issue of the means by which these policies may be made operational should the malaise of serious unemployment recur. It is unrealistic to expect that the very low unemployment rate of approximately 4.5 per cent of the 1997-2000 years — the lowest rate to be achieved by a peacetime economy — can be extended indefinitely into the future. When the economy falters, as it has in the US since March 2001, and is less responsive to repeated cuts in interest rates than was generally expected, the central question becomes: What other measures might be put into place? Tax cuts as a fiscal measure came to the fore for the first time in spring 2001 since the famous Kennedy tax cuts of the 1960s. Inexplicably, however, the tax reductions were not presented as part and parcel of a comprehensive program of public finance comprised of tax expenditure and debt management components. Thus it contrasts with functional finance as a multi- pronged policy designed to become operative automatically as needed in order to steer the economy in the event of an identifiable lapse to ‘full‘ employment, however defined, by ‘the prevention of depression and the maintenance of the value of money’ (Lerner, 1947: 314). It is precisely because ‘money is a creature of the state’ (Lerner, 1947) that government is able to tax, borrow, manage its debt and make expenditures, including those that encourage the private sector to create jobs and, failing that, to become the employer of last resort (ELR). Simultaneously, government must maintain money’s purchasing power by restraining whatever deflationary tendencies might accompany unemployment that triggers automatic countermeasures.

A public service sector was created under Titles H and VI of CETA, the Comprehensive Employment and Training Act of 1973. In excess of 300,000 Public Service Employment slots were funded under all CETA titles between 1975 and 1977 (Rima, 1996: Chapter 18).² Public funds were used to provide employment to individuals disadvantaged in terms of skills and therefore especially vulnerable to unemployment. The provision of income via Public Service Employment (or ELR) thus helps to maintain the viability of the anthropogenic (or A) sub-system by supporting consumption expenditures and school attendance. The former helps support the production (or P) subsystem, while also limiting premature school leaving that crowds the labor market with young, inexperienced job seekers. In principle, a Public Service Employment program should thus be phased out in a counter-cyclical fashion. This means that the jobs created be those that require only very short and non-specific training.

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