Thinking Citizen Blog — Robert Mundell (1932–2021) Maverick — Father of the Euro and Supply Side Hero
Thinking Citizen Blog — Tuesday is Economics, Finance, and Business Day
Today’s Topic: Robert Mundell (1932–2021) Maverick — Father of the Euro + Supply Side Hero
Robert Mundell won the Nobel Prize in Economics in 1999 for his work on exchange rates. He was a fierce advocate of fixed exchange rates and is considered the “father of the Euro.” He was also a fervent champion of tax cuts to stimulate growth and as such is considered one of the fathers of Reaganomics. His “supply side economics” was popularized by the likes of Arthur Laffer and Jude Wannitsky. Mundell died last week so I thought I’d do a little research and report back. Experts — please chime in. Correct, elaborate, elucidate.
THE CASE FOR FIXED EXCHANGE RATES AND THE DEFENSE OF THE EURO
1. Fixed exchange rates make for more efficient trade and capital flows.
2. Floating exchange rates result in economic dislocation.
3. “The euro’s monetary discipline would reduce the ability of politicians to devalue their way out of borrowing and spending to excess.”
NB: “The eurozone’s problems today aren’t due to the euro but to the failure of politicians to implement the supply-side reforms necessary to prosper in a system of monetary restraint.”
THE REAGAN REVOLUTION — tax cuts and tight monetary policy slay the stagflation dragon
1. “Tax cuts would stimulate growth, while tighter money would slay inflation. In that sense Paul Volcker, the great 1980s Federal Reserve Chairman, was a Mundellian.”
2. “Global capital markets would finance U.S. budget deficits until faster growth restored tax revenues, which is what happened.”
NB: “The Keynesians predicted none of this. Mundell’s ideas ushered in the economic boom of the 1980s that, with the exception of the brief recession of 1990 caused by the savings and loan crisis and an ill-advised tax increase, continued to the end of the century.”
FRIEDMAN VERSUS MUNDELL: so who was right?
1. Milton Friedman, widely regarded as the greatest economist of the 20th century, was an advocate of floating exchange rates. Mundell, much less well known and much less quotable, was the opposing voice.
2. When Nixon took the US off the gold standard, Mundell bought a 65 room Italian palazzo for $20,000 as a hedge against the coming global inflation.
3. Not a bad move.
NB: So, a half a century later, has history spoken? Or is the truth in the eye of the beholder?
1. Mundell was Canadian — born in Kingston, Ontario. As an undergraduate he studied at the University of British Columbia and the University of Washington and received his PhD from MIT in 1956.
2. Taught at Stanford and Johns Hopkins before joining the International Monetary Fund (IMF) in 1961. In 1966 became a professor of economics at the University of Chicago, moving to Columbia University in 1974, where he remained until his death.
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