The new issue of Review Of Keynesian Economics (ROKE) is out. Thomas Palley has another critique of Neochartalism or “Modern Modern Theory”, tilted What’s Wrong With Modern Money Theory: Macro And Political Economic Restraints On Deficit-Financed Fiscal Policy. 

I don’t agree with many things but it’s worth a read, as has his other critiques been. From a political economy perspective, the problem of the world is the the liberal international economic order which exists and is totalising. This imperialism needs to be overthrown and new order needs to be established. This is completely missed by the neochartalists because they tend to think that as long as a country’s currency is truly floating, fiscal policy can do the trick. Dismissing the constraints brought from international trade, this way.

Globalists need to be defeated.

Neochartalists also do all sorts of verbal gymnastics in throttling any debate about increase in tax rates. In fact Warren Mosler argues for removal of most taxes. Oh wow! How did us mortals miss such a simple solution to the problem of the world!

Basically neochartalists blur the distinction between two separate issues:

1. Tax rates needn’t rise to increase domestic demand and output.
2. Tax rates ought to rise for a fair distribution of the national income.

One can believe both (1) and (2) consistently as typically economies run at less than full employment. Neochartalists however use (1) to throttle the debate on (2).

But if you discuss these issues with them, they concede this but yet the next time seem to argue like before. Another way to see this is that they have no proposals to raise taxes even though they have all sorts of proposals everywhere.

Thomas Palley warns us against this hilarity. He says:

More generally, it is pure semantics whether taxes raise money to finance government spending, or taxes destroy money in order to create the space for reissue of money to finance spending. Taxation and spending occur simultaneously, and taxes are an intrinsic part of the system and cannot be done away with. Even when the economy is far from the full employment/inflation target, taxes are needed to finance the vast bulk of spending. Money-financed budget deficits provide some space at the margin for temporary additional spending, which eventually either has to be cut or be financed by some combination of taxes and borrowing when the economy’s constraints bite.²⁶

…

26. If the economy is away from steady state, and the inflation rate and the money–GDP ratio are both rising, then there will be additional temporary financial space along the traverse to the steady state.

Fiscal policy is hugely important and mainstream economists underplay the role of fiscal policy even after so much fiscal policy came to the rescue in this new lockdown crisis. But the problems are much deeper. Imperialism has to be defeated. A new international economic order with planned trade instead of free trade, together with coordination of policies (including fiscal policy) needs to be established. Without the imperial power of either the United States or other international institutions. But something democratic at the international level. Nor is neochartalists’ claims about the importance of fiscal policy original as there’s a tradition of Post-Keynesian economics stressing the importance.