Money, Debt and Taxes – Introduction to the Series Published by Indian Journal of International Economic Law on

Sanyukta is an Assistant Professor of Law at National Law School of India University. Her research interest is the evolving narrative of public finance, taxation, and money; and, its implications for how laws and policy decisions are made. Amit is an independent researcher and consultant in law, economic and political theory, and their interaction with […]

Sanyukta Chowdhury, Amit Chowdhury

July 18, 2025 10 min read
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Sanyukta is an Assistant Professor of Law at National Law School of India University. Her research interest is the evolving narrative of public finance, taxation, and money; and, its implications for how laws and policy decisions are made.

Amit is an independent researcher and consultant in law, economic and political theory, and their interaction with technology, with special focus on designing laws for the future.

(They met at NLS and had no idea what to do with their lives. Out of sheer boredom, they decided to enquire whether money does indeed grow on trees!)


The Overall Context

The 21st century until now has been defined by two cataclysmic economic events – the Great Recession and the Covid Pandemic. The US Federal Reserve, European Central Bank (ECB) and other central banks responded to these events by employing unconventional (and largely untested) measures such as monetary expansion through quantitative easingasset purchase, zero interest and reserve requirements. Simultaneously, governments worldwide deferred tax collection and debt obligations, engaged in fiscal stimulus and financial bailouts. This marked an unprecedented level of coordination between monetary and fiscal institutions, which had previously been viewed as discrete domains. These measures provided immediate stability to the markets and the economy, but are also held responsible for the inflation, underinvestment, unemployment and wealth/ income gap experienced since then.

The measures that were adopted reflect policy and normative preferences towards public spending and money creation at one level, and between investment and consumption at another. The statutory definitions of quantitative easing and other forms of monetary financing which have been adopted by the Federal Reserve, ECB and others are subjective interpretations of the mechanism for injection and withdrawal of money. This in turn depends on their preference for either demand or supply-side economics, and belief (or lack thereof) in Milton Friedman’s fixed monetary rule. For instance, when the Federal Reserve decided that injection of fresh money will be through asset purchase, it endorsed what is pejoratively referred to as ‘trickle-down’ economics. The ECB, meanwhile, decided to modify this slightly by splitting the money creation between direct asset purchase and the fractional reserve system.

The role that these measures play towards economic growth, income, wages, consumer demand and prices is controversial and contested. The Nobel Prize in economics for 2022 – given to Ben Bernanke, Douglas Diamond and Phillip Dybvig – is contextually significant, as Bernanke was the head of the Federal Reserve during the Great Recession and headed the monetary response to the crisis. The Nobel Prize committee has claimed that the actions of Ben Bernanke during the time were informed by insights on the lending role played by banks in the real economy. Diamond and Dybvig had similarly addressed the economic behaviour of bank runs and their timing, and the possible safeguards to prevent them. The work of all three denote specific interpretations of the fractional reserve system; savings, borrowing and investment; and, the role of the central bank as the ‘lender of last resort’. The Nobel Prize would therefore appear to be an endorsement of not only the macroeconomic decisions that were taken by the Federal Reserve during that period, but also the economic ideas underlying those decisions.

However, the measures that were adopted after the Great Recession are not consistent with the legacy view of money, banking and macroeconomics that had guided monetary and fiscal policy and decision-making prior to it. Central banks had historically been wary of the mechanism of money creation, even though it is well understood that contemporary fiat money is merely an accounting entry. In recent years, Modern Monetary Theorists (MMT) have challenged the conventional narrative of debt monetisation, sequence of the tax-spend cycle, and money multiplier through fractional reserve banking; and have  demonstrated that these concepts are inadequate in explaining the true nature of fiat money and public finance. The Great Recession and the Covid Pandemic shocked central banks into accepting some of these implications, albeit in an indirect and arbitrary manner.

What we are left grappling with, as a result, are two non-conciliatory views on how money is created and spent. In the conventional dogma of Monetarism, public spending is constrained by how much revenue (taxes) can be raised in an absolute sense. Contrary to this, the basic rendition of MMT seems to suggest that both money creation and public spending can be unfettered, and that taxes are a legacy relic which has become an economic untruth in the fiat money framework. Both sides are suggesting that the contrary view is misinformed at best, and deranged at worst. If MMT is simply magical thinking, the monetary and spending decisions taken by central banks and governments in recent years are profoundly reckless and will have disastrous consequences going forward.

The Great Chinese Experiment

China’s economy, trade and global significance have increased rapidly ever since its accession to the WTO framework. Due to its impact on global trade and investment, the Great Recession was a watershed moment for China as well. The Chinese government opted for a response that was different from the supply-side/ trickle down interventions made in the US, Europe, and elsewhere. There was a massive increase in public spending and lending to both public and private sector enterprises. This was aimed at increasing capital formation investment in basic/ capital intensive industries (steel; cement; housing; shipbuilding) and infrastructure (high speed rail; expressways; ports and airports; telecom; energy). Apart from these, there was an increase in the outlay for higher education, research and healthcare as well.

The different approach to stimulus spending in China (especially the industrial and infrastructure investment) was initially criticised by foreign observers as economic misallocation. It added to the already significant non-performing assets (NPAs) of Chinese banks, and initially resulted in overcapacity in various sectors of the economy. China was simultaneously dealing with significant asset pricing bubbles in real estate and the stock market. There were concerns that the NPAs, overcapacity and asset bubbles would lead to economic failure; and that a major deflationary episode was inevitable. Apart from a severe downturn in real estate and the stock markets, the Chinese government had to address the fallout from the Covid Pandemic as well.

While there was some misallocation of the spending incurred during this period, much of the initial assessment about the Chinese economy has proven to be unfounded, and some scholars are now arguing that Western economic thinking about China is inhibited by certain Cold War and free-market assumptions. The predictions about China’s doom are based on the erroneous view that it is a non-market, centrally planned economy like the Soviet Union. The inability of contemporary neoclassical/ neoliberal thinking in grasping the merits and resilience of the Chinese planned economic model has far-reaching economic and geo-strategic implications for the entire world.

The Indian Experience

Meanwhile, India had to not only grapple with these global events and their aftermath, but is additionally facing a legal and political challenge arising from partisan or ideologically-driven governance; meant to cater to select special interest groups. Funding for education, healthcare, employment guarantee, sustainability and research has either remained stagnant, or has been reduced. The implementation of the Goods and Services Tax left the financial capacity of the states in disarray. The ability of individual states in meeting their spending needs has been severely compromised as a result. There have also been numerous disputes between the Union and state governments on issues of taxation, revenue-sharing and spending obligations. These disputes have arisen due to the absence of clarity as to what purposes public spending should be employed towards, the accountability mechanism needed to monitor this spending  and the means (taxes or otherwise) by which it is to be funded.

This lack of clarity on public finance (including taxes) has many debilitating implications. For the sake of brevity, we need to look at three of the most significant ones. First, public discourse seems to suggest that economic governance is a completely objective and technical exercise which is beyond the comprehension of the citizenry, and that we should therefore not concern ourselves with it. What we should focus on, instead, are the latest statistics on economic performance (gross domestic product, growth rate, income, employment, inflation, housing prices, stock market and foreign direct investment) provided by the very institutions whose performance should be evaluated and held accountable in the first place. Second, by treating taxes as merely the means towards public spending, we effectively negate the role that taxation actually plays in our economic life (influencing economic behaviour and allocative outcomes). Finally, the seriousness with which social security proposals such as direct cash transfers and universal basic income (UBI) must be treated has not materialised. The reasoning given for direct cash transfers is that it is the most ‘efficient’ method by which leakages through graft and mismanagement can be plugged. Similarly, the only questions that seem to be asked about UBI is whether we can afford it fiscally and its effect on the individual’s incentive to work. These concerns may be well-intentioned, but they are not the most significant questions that need to be addressed. When the nature of money, taxes and public spending are opaque to us, it is not possible to form sincere and informed views on these issues.

About This Series

The functional reasoning that underlies the issues mentioned above is in a state of flux at present. This series seeks to introduce readers to the shifting perspectives on public finance and its significance for us. The series will begin with an overview of the distributive aspects of taxation. Certain fundamental ideas – public goods; progressivity; market failure; non-fungibility; moral hazard; and state capture – will be discussed. This will help in bridging the gap between the legacy and contemporary understanding about taxation and its economic and political implications.

The subsequent parts of the series will explain how the conventional and heterodox narratives of public finance have evolved through the crises of the 21st century. The prudential reasons for maintaining a separation between the monetary and fiscal mechanism, and the pragmatic reasons for their increasing coordination, will be discussed. The series will also touch upon the moral hazards and limitations of public finance – as well as the institutional and real constraints to unlimited spending by governments. More specifically, the economic and political risks of unconventional money and how it has exacerbated inequality and instability will be looked at. The emergency public finance response of various countries to the Great Recession and the Covid Pandemic will be evaluated for their economic and political implications.

The series will end by outlining the way forward for public finance. The recent shocks have made it clear that we face serious challenges of inequity, risk and unsustainability within our political and economic systems. The potential for leveraging taxes and public money towards addressing these challenges will be discussed. Finally, the series will attempt to articulate the salient legal and institutional design features that can mitigate the moral hazards and limitations of public finance.

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