Restoring healthy growth

Economist Hyman Minsky (1919-1996)

"An inappropriate financing of investment and capital asset ownership are the major destabilizing influences in a capitalist economy...The emphasis on investment and 'economic growth' rather than on employment as a policy objective is a big mistake" Hyman Minsky 1986. 

Full employment should be the main objective of economic policy, not investment, in order to promote financial stability.

An economy that is based on employment will grow naturally. We need not fear that investment will suffer as entrepreneurs will always seek to meet real market demand, usually in advance as they forecast healthy demand. However, economies based on investment as the leading edge of growth tend toward inequality and speculation, and they may not grow at all. Evidence of this abounds, most recently in the 2008 crisis. 

Why? 

Instability and crises ultimately drag down these economies because there is insufficient income to support the investment debt. Financing investment with debt when there is insufficient income to support it is obviously unsustainable. Eventually it reaches Ponzi levels where new debt is required just to support the interest on the old debt. As Michael Hudson likes to say, "debt that can't be paid won't be". 

The alternative? Wages increasing in step with productivity will 'finance' consumption without transferring the nation's wealth to the financial sector. 

Rather than providing funds to banks to remove bad mortgages from their books, if the government is to intervene during a financial crisis it should do so by "directing funds toward households facing reduced incomes or impaired ability to meet debt obligations". Borrowing the Ludwig von Mises and Austrian School of Economics term, 'malinvestment' shouldn't be rewarded, but the burden of it also shouldn't be placed on the working populace via unemployment. Maintain employment and you will lessen the impact of crises without rewarding bad business and speculation. 

This implies that the prime objective of government budgets should be full employment not 'balance'. This follows Abba Lerner's "Functional Finance" approach to using the nations monetary system for the benefit of the people. Of course, Lerner and Minsky held the "basic belief that both the government and the financial system exist to serve the private citizen, not visa versa." And so do I! I trust you would agree. 

Whether the government budget then is in balance, deficit or surplus doesn't matter. It is a "result" of meeting the economy's needs, not the goal; whatever the result is it is immaterial when you understand how government finance functions. Deficits and so-called "debt" are not problematic when pursuing full employment and productivity goals. 

Ultimately, it is always and only income which can support sales which support productive investment. Such a stable economic base for a nation also means a far more equitable distribution of benefits. 


The above is based on a few select excerpts and summaries from the superb Levy Institute publication: 

Beyond the Minsky Moment: Where We’ve Been, Why We Can’t Go Back, and the Road Ahead for Financial Reform