A note on the sustainability of full employment in the presence of budget deficits

T. Palley, E. Tymoigne and L. R. Wray recently discussed, under the hypothesis of stationary state, the possibility for the economy to experience stable full-employment equilibria with persistent public budget deficits, which necessarily imply a continuous growth of a stock-variable: high-powered money and/or government bonds in the hands of the private sector. The question is whether such a situation can be regarded as sustainable over time. This paper argues that a satisfactory solution to the problem can be found only by abandoning the hypothesis of stationary state and by considering also the effects that different compositions of the public expenditure have on the rate of growth. To have a stable full-employment equilibrium associated with budget deficits, the economy must grow. Since the economy is assumed to be in full employment, the growth of aggregate output must be entirely due to the growth of productivity, which can be realized by changing the composition of public spending in favor of productive expenditures.