Comments on Louis-Phillipe Rochon’s Presentation on ‘Stagflation’ to the Canadian Centre for Policy Alternatives, Ottawa, March 24, 2022– by John Smithin

Hi Louis-Phillipe,

Thank you for sending me the link to this webinar! I was very interested to hear your views on stagflation and you did not disappoint. I have been trying to work out in my mind where I differ from you, and it is not very much. However, there are some subtle points.

Somebody once called me a ‘radical Keynesian’. (I think it was you actually).I happily accept that label, but what I now realize is that a radical Keynesian is somewhat different than a Progressive, and I think it is interesting to see in what respects.

Similarly, the late Geoff Harcourt always tried to link my work to that of Marx – perhaps because of my emphasis on income distribution? I could see where he was coming from, because I do use some economic concepts that originated with Marx. But, I always resisted that label because my theory of income distribution is actually not the same as Marx. Again, it is more strictly Keynesian (as it includes rentiers, and so on).

So what would a ‘radical Keynesian’ say?

(a) Stagflation dramatically illustrates the weak point of modern monetary theory (MMT). I certainly think that MMT ‘works’, in principle, in a country like Canada with a sovereign currency and floating exchange rate. But, as I have been arguing for some years, the Achilles heel for MMT is the ‘zero interest rate policy’ (ZIRP), which we also effectively have in Canada. What is required is a ‘zero real policy rate’ (ZRPR). This deals mainly with the question of stability.

(b) But how to actually cure stagflation?This is what puts the radical in ‘radical Keynesian’! What is needed is both greater government spending and lower average tax rate (that is, a lower ratio of total tax collection to GDP). Do not worry at all about balancing the budget, or the national debt.

The higher spending cures the ‘stag’ part, and the lower taxes cure the ‘flation’ part. This is because under endogenous money a higher average tax rate leads to inflation, and a lower average tax rate to deflation. This is probably where the potential split with Progressives comes in. (I gather that most people here identify as Progressives, so I do apologize). In general, I believe that Progressives tend to favour higher taxation? As I understand it (and you can correct me on this) the idea seems to be that taxes mainly have to do with income distribution - ‘tax the rich’ and so on. However,  that is not really the case when you actually work out the macro theory under endogenous money. Of course, a lower average tax rate at the macroeconomic level would by no means rule out a progressive tax schedule (lower-case ‘p’) within the overall lower average tax take.