L. Randall Wray and Functional Finance

L. Randall Wray is a prominent economist associated with Modern Monetary Theory (MMT), and a leading proponent of Functional Finance. While the ideas of Functional Finance predate Wray, he has significantly contributed to its contemporary understanding and application. Functional Finance is a macroeconomic philosophy that advocates for government policy to be judged solely by its effectiveness in achieving specific real-world outcomes, like full employment and price stability, rather than adherence to arbitrary fiscal rules.

The core tenets of Functional Finance, as championed by Wray, revolve around the idea that a sovereign government, which issues its own currency, is not financially constrained in the same way as a household or business. Such a government can create currency to finance its spending, making “affordability” a false constraint. The *real* constraints are inflation and resource availability.

Wray emphasizes that government’s role is to ensure full employment. He argues that unemployment is a societal failure, indicating that the economy is operating below its potential. Functional Finance proposes the Job Guarantee (JG) as a key policy tool to address this. The JG involves the government directly employing anyone willing and able to work at a set wage and benefits. This serves as a buffer stock, expanding during recessions and shrinking during booms, providing a stable floor for the labor market.

A central argument is that inflation is best managed through real resource management and targeted policies, rather than blunt instruments like interest rate hikes. If the economy is overheating (i.e., experiencing demand-pull inflation), the government can raise taxes to reduce aggregate demand. The goal is to balance aggregate spending with the economy’s productive capacity. Wray rejects the notion that government deficits are inherently bad. Instead, he argues that deficits should be evaluated based on their impact on the real economy. A deficit that funds productive investments or alleviates unemployment can be beneficial, while a deficit that fuels unsustainable asset bubbles can be detrimental.

Wray advocates for a pragmatic approach to fiscal policy. He believes that policymakers should focus on achieving desired outcomes, like full employment and price stability, and then design policies that are most effective at achieving those goals, regardless of whether they fit neatly into traditional fiscal frameworks. He challenges conventional economic thinking by highlighting the unique capabilities of sovereign currency issuers and emphasizing the importance of prioritizing real economic outcomes over abstract budgetary targets. Ultimately, Wray’s work on Functional Finance encourages a re-evaluation of how we understand government finance and its role in shaping a more prosperous and equitable society.