Why is functional finance difficult to implement? 1. Financing the deficit often

Question

Why is functional finance difficult to implement?

1. Financing the deficit often has offsetting effects, and the government doesn’t always know how its policies will affect the economy.

2. Potential output is not a known quantity, and enacting spending and taxing policies is time consuming.

3. Government debt can affect private spending, and taxing and spending can negatively affect other government goals. 4.

It is unknown whether the Ricardian equivalence theorem is true.

5. The government cannot function without the popular vote, making policy difficult.

Explanation / Answer

2. Potential output is not a known quantity, and enacting spending and taxing policies is time consuming.

Functional finance is an economic theory proposed by Abba P. Lerner, based on effective demand principles and chartalism. It states that government should finance itself to meet explicit goals, such as taming the business cycle, achieving full employment, ensuring growth, and low inflation.

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