Sri Lanka can become a 1st World Nation
Since independence in 1948, Sri Lanka has been doomed to be a poor nation without a way of getting out of the “poor nation” status due to an archaic, self-destructive underlying economic framework that was imposed on Sri Lanka. The country unfortunately still operates under the same self-destructive economic system and unless we change this system we are doomed to stay poor.
This article has two main purposes. The first purpose is to introduce a new economic framework under which Sri Lanka could break down the chains that have kept them in poverty and become one of the “First World” or “Developed” nations.
The second purpose is to model Sri Lanka after the Scandinavian nations where the very wealthy live in safety, security and peacefully alongside the rest of the population enjoying all minimum basic needs and not like in some developed nations where a sizable population lives in poverty while a few enjoy unspeakable luxury and wealth, living in guarded communities. In Scandinavian nations everyone has free healthcare, free education, a house to live and livable wages and retirement income to live comfortably when they retire. These are some of the benefits we can experience if Sri Lanka became a First World nation following the footsteps of Scandinavian nations. Compare the lives of Scandinavian citizens with the Sri Lankan citizens; currently a huge segment of Sri Lankan women work outside Sri Lanka as domestic servants, often harassed by their employers.
While trying to uplift the nation, Sri Lanka (or any nation) should be very careful in asking for or accepting the assistance of foreign governments or non-independent foreign institutions that are controlled by major powers since most outside forces have their self-interest at heart first, when giving advice and aid. The interests of the Sri Lankan people would therefore be of secondary importance to them. If Sri Lankans wish to turn Sri Lanka into a first world nation the impetus must come from the Sri Lankans themselves.
It is always a puzzle why a nation like Sri Lanka is poor when the people are smart, work hard and quite honest. We tried to come up with a few responses to this question but I could never really understand the real reason until I came across, as I believe, are not only extremely smart but also benevolent, group of economists, other professional and business people that go by the “Modern Money Theory” (MMT) group. Their theory is so perfect for Sri Lanka that when I first came across it, I could not believe it, but as I read books written by the members of the MMT group and began interacting with them I realised that MMT can uplift a nation such as Sri Lanka from a developing nation to a developed nation status. If Sri Lanka is willing to consider the MMT approach to economics the founders and the members of the MMT framework would be ready to help Sri Lanka understand their framework in detail and help Sri Lanka adopt it without having to worry about any ill-consequences of inflation when spending the own currency of a sovereign nation. Therefore, let me introduce the MMT framework and the people behind it to Sri Lankans.
Fiat currency
MMT is a macroeconomic framework that explains the process of spending fiat currency (that is sovereign currency used to help the people at will) by sovereign independent nations. The main premise of MMT is that monetarily sovereign government is the monopoly supplier of its currency and can spend an infinite amount of currency to upkeep their nation and thus have an unlimited capacity to pay for the things it wishes to purchase and to fulfill promised future payments without insolvency and bankruptcy of the nation. Also according to the MMT framework, a fiat currency nation imposes taxes to create sellers of real goods and services in exchange for currency needed to pay the tax. Also taxes can be levied to curb inflation or other bad practices of the non-governmental sector since currency can be spent by the Central Bank to pay for the expenses, at the request of the Treasury (Ministry of Finance) without taking into account the revenue. It is a myth to compare a household budget to a budget of a sovereign nation since a household does not have the unlimited power to issue its own currency as done by a sovereign nation.
Also underlying the MMT theory is a job guarantee programme by the national government so that there is no need to have any unemployment in a sovereign nation. In fact any sovereign nation, if they really wish to, could eliminate poverty using its power to spend its own currency. MMT does not advocate right wing or left wing policies but mainly interested in demonstrating through examples and facts as to how to use MMT to advance any nation and appeal to the common sense and rationality of people to make the lives of all citizens in a nation livable.
When doing accounting of a sovereign nation with fiat currency, expenditure in a fiscal year that exceeds the revenue for that year will be accounted as a budget deficit and this process is called deficit spending which, as stated above, could be done by a sovereign state. As a matter of fact, deficit spending is practiced currently by many developed nations including the US, Japan and the UK. What that means is that those nations use the sovereign money to pay for government expenditure without giving any regard to collection of taxes. However, the problem is deficits (or the fiscal stimulus) are too small and taxing and spending is not directed to the hands of all its people in a fair and equitable manner This is evident especially in the US, where there is no social safety net for the common people, in contrast to the way in which deficit spending is being done in Switzerland and Scandinavian nations to benefit all their citizens in an equitable manner.
When applying the MMT framework to a nation such as Sri Lanka with the power to spend its own currency the budget of the nation should not be considered the same as a household budget. There is no need for Sri Lanka to rely on the IMF or the World Bank or any other foreign sources to provide debts for the upkeep of Sri Lanka. Instead Sri Lanka can utilise its power to spend its own money through a well calculated method without having to worry about inflation and other ill-consequences of money-creation as we will explain.
MMT emerged in early 1940s
The idea of MMT, began with British economist and University of Cambridge Professor John Maynard Keynes (1883 to 1946) who spoke of state money and deficit spending. A major contention, or the main argument, of Keynes was that private sector decisions sometimes lead to inefficient and destructive economic outcomes, especially harming a large segment of the population, and thus it requires governmental interference or responses to fix the economy to benefit all people. These governmental responses, in a sovereign nation could come from the central bank that has the unlimited power to spend its own currency. The MMT position on guaranteed jobs by the government for all who have lost their employment that has brought in an economic recession due to private sector inefficiencies is one of those stimuli that the central bank can provide. Keynes economics was adopted by Franklin D Roosevelt during the great US depression in the 1930s that brought the most prosperous time in US history in the years following the 1930s. Keynesianism also helped many developed nations to come out of its economic depressions.
However, Keynesianism ran out of favour in the 1970s due to stagflation (both inflation and unemployment). According to MMT, blaming Keynesianism for stagflation and embracing a new economic theory entitled “monetarism,” especially of Milton Friedman (1912 to 2006) from University of Chicago, was a deadly mistake. The monetarists believe the Federal government should always keep the budget in balance and use what they called “monetary policy” to regulate the economy. Initially that meant keeping the “money supply” growing slowly and steadily to control inflation, and letting the economy do what it may. However they never could come up with a measure of money supply that did the trick, nor could the Federal Reserve ever find a way to actually control the measures of money they experimented in the 1970s and 1980s applying monetarism.
As we can see through evidence, monetarism is one reason that has brought the historical levels of income inequality in most developed nations subjecting a huge population in those developed nations to live in poverty. To briefly contrast the views of Keynes and Friedman, Keynes wanted fiscal policies (economic policies that are applied by the government such as government expenditure to build the nation or provide employment to people) to be active to resolve economic imbalances while Friedman and the monetarists wanted monetary policy (money supply of the central bank) to play the key role in correcting the imbalance in a nation’s economy. The MMT position is that government should interfere in the economy through fiscal policies delegating the central bank to allocate the national currencies to pay for the expenses that the government makes for its deficit spending.
Influences from all over
MMT was also influenced by Abba Lerner, a Russian-born British economist (1903 to 1982) from the London School of Economics. Lerner immigrated to the US in 1937 and befriended Friedman who was considered an intellectual opponent of Lerner who advocated use of fiscal policy and monetary policy as the twin tools of Keynesian economics. Lerner considered misallocation of resources as a waste but unemployment to be even a far great waste. Lerner’s development of functional finance argues that government policy should be designed to obtain full employment output and price stability regardless of whether it increased or decreased public debt. He was an effective debunker of the idea of the “burden of the debt” and crowding out (when government borrows money it increases the rate of interest so the private sector cannot borrow at an acceptable rate) commonly used against government deficits. MMT goes further and makes this argument redundant as they show the lack of need for a sovereign nation with power to spend its own currency to borrow funds from where private sector has to borrow.
Another economist that has influenced MMT when creating its framework was Hyman Minsky (1919 to 1996) at the Levy Economics Institute of Bard College, in the US. Minsky’s research provided an understanding and explanation of the characteristics of financial crisis which he attributed to swings in private sector financial system (Minsky and a generation of economists who were using Keynesianism as the base in advocating their theories are often called post-Keynesian economists).
Minsky advocated Keynesian tradition of government intervention in financial markets and opposed some of the financial regulation policies. He stressed the importance of the Federal Reserve as the lender of last resort and argued against the over-accumulation of private debit in the financial markets. Minsky stated that booms and busts are inevitable in a so-called free market economy unless government steps in to control them through regulation and central bank actions. His theories as we can see are self-evident.
Economist and hedge fund manager Warren Mosler (1949 to current) who had written extensively on MMT is considered one of the architects of the current MMT framework. He is an influential proponent of post-Keynesian economics. Mosler is a co-founder of the Center for Full Employment and Price Stability at University of Missouri Kansas City. In 2010, Mosler published a book “Seven Deadly Innocent Frauds of Economic Policy” outlining errors of public policy. According to Mosler (that is also called “Mosler’s law”), no financial crisis is so deep that a fiscal stimulus cannot deal with it. He opposes high taxes since it discourages consumption. He points out to the failures of the efforts both by the US government and the Japanese government to create inflation through monetary policies for the last few decades as an excellent example as to the increase in money supply by the central banks to not be the cause for inflation. Inflation according to Mosler is not caused by the increase in money supply but due to the reduction in production and importation of goods and services.
Economist and writer of best-selling books such as “The Affluent Society” and “The Great Crash, 1929,” John Kenneth Galbraith introduced the term “innocent fraud” with his publishing of “The Economics of Innocent Fraud,” at age 94 in 2004. In that book, Galbraith describes a variety of innocent, naïve assumptions believed by the mainstream economists, the media, and most of all, politicians. Galbraith was largely a Keynesian who believed that fiscal policy can restore spending power and spending is what is generally called aggregate demand.
Another pioneer of MMT is Randall Wray, Professor of Economics at the University of Missouri–Kansas City in Kansas City, Missouri. Through his book “Modern Money Theory,” Wray gives a deep insight into how an economy with modern money works and, how it can be used to lift any segment of a nation out of poverty and provide full employment.
Australian economists William Francis “Bill” Mitchell and Steve Hail are also strong proponents of MMT. Mitchell is the professor of economics at the University of Newcastle, New South Wales, Australia. He is Director of the Centre of Full Employment and Equity (CofFEE), a non-profit, research organisation whose stated focus is on the policies that can restore full employment and achieve an economy that “delivers equitable outcomes for all”. His latest book, published in May 2015 and titled “Eurozone Dystopia: Groupthink and Denial on a Grand Scale,” provides a critical history as to what went wrong with the Euro zone from the perspective of MMT. Hail is a Lecturer in the School of Economics at the University of Adelaide and Research Scholar at the American Binzagr Institute for Sustainable Prosperity, with a Ph.D. from Flinders University, and a M.Sc from the London School of Economics.
(The writer is a Certified Public Accountant based in the US and currently managing his Hedge Fund. He is the also the author of “Uncommon Commonsense Steps to Super Wealth” where he has illustrated how a few who began with very little and became the richest people on earth following four strategies.
This article has been written with the collaboration of members of the Modern Money Theory Group)