Reorienting Fiscal Policy and Understanding Currency Sovereignty

From Mariana Mazzucato’s “Rethinking the State” video series:

Pavlina Tcherneva discusses the implications of the Great Financial Crisis of 2007 for employment outcomes and fiscal policy. She argues that the current view of Keynesian fiscal policies is based on a misreading of Keynes. Simply boosting demand — through what should be understood as trickle-down fiscal policy — is not sufficient to promote inclusive growth. Keynes originally called for a more targeted approach, including “on the spot employment,” as the means to achieve full employment and equitable and sustainable growth.

[See also her recent working paper on this theme.]

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L. Randall Wray argues that rethinking the State requires rethinking the relationship between the State and its currency. His analysis starts with the observation that money is based on State power (“currency sovereignty”): it is an “IOU” from the State — a liability — implying that fiscal constraints are in fact artificially created. In this sense, the State cannot run out of money, as it creates and enforces its own IOUs. Governments could — and should — afford to invest more in innovation and technology development to promote the capital development of the economy.

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@michlstephens