This does not mean that the deficit cannot be too big, that is, inflationary; it can also be too small, that is deflationary. At the end of the twentieth century, most of the developed capitalist countries have deficits that are
so small that there is real danger of a massive, world-wide deflationary spiral. There are tens of millions of people who need jobs–by some accounts, there are more idle workers now than there were at the depths of the Great Depression.
In a monetary economy, unemployment is de facto evidence that the deficit is too small. Any modern economy can hire all those unemployed at some announced fixed wage, letting the deficit float as high as necessary, without worrying about inflation since by setting the wage, the government sets the price. In a very real sense, those employed in such a program become a labor "buffer stock" which will serve as a price-stabilizing "reserve army" of the employed. I have called this the employer of last resort program, and it is very similar to what Wendell Gordon, Bill Mitchell, Hyman Minsky, and Philip Harvey have all (independently) advocated in recent years.
Sweden used to have something like this, and interestingly,
justified its full employment program on the argument that Sweden was too small and too poor to afford unemployment, thus, it needed to have everyone working in order to compete. This, it seems to me, has got the thing the right way around. No economy that operates on the basis of a chartal money needs to accept unemployment either because it cannot "afford" to give jobs to the unemployed, or because full employment would be "too inflationary".
Full employment can always be afforded (indeed,
any rational analysis would argue that unemployment cannot be afforded), and if it is achieved through something like an employer of last resort program, it will actually be less inflationary than the current system--which relies on unemployment and waste of resources to reduce inflation pressures. Again, any rational analysis would conclude that a system that wastes resources must be more inflationary than a system which puts resources to work. As Keynes argued three-quarters of a century ago, on the precipice of the Great Depression,
The Conservative belief that there is some law of nature which prevents men from being employed, that it is 'rash' to employ men, and that it is financially 'sound' to maintain a tenth of the population in idleness for an indefinite period, is crazily improbable--the sort of thing which no man could believe who had not had his head fuddled with nonsense for years and years.... Our main task, therefore, will be to confirm the reader's instinct that what seems sensible is sensible, and what seems nonsense is nonsense. We shall try to show him that the conclusion, that if new forms of employment are offered more men will be employed, is as obvious as it sounds and contains no hidden snags; that to set unemployed men to work on useful tasks does what it appears to do, namely, increases the national wealth; and that the notion, that we shall, for intricate reasons, ruin ourselves financially if we use this means to increase our well-being, is what it looks like--a bogy. (Keynes 1972, pp. 90-92)
One can only hope that before the next great depression, the policy implications of modern money are understood.
