Robert A. Mundell
He was an architect of supply-side economics and the euro.
By The Editorial Board
The pantheon of great 20th-century economists includes John Maynard Keynes, Friedrich Hayek, Joseph Schumpeter and Milton Friedman, among a few others.
Less well known but as tall as any of those giants was Robert Mundell, who died on the weekend at age 88.
A Canadian by birth who settled at the University of Chicago and later Columbia, Mundell made his economics reputation as the foremost student of the international monetary system.
He won the economics Nobel in 1999 for his work on “optimum currency areas” and the monetary theory of the balance of payments.
His work led him to advocate fixed exchange rates, famously disagreeing with Friedman, who favored a floating-rate system.
The latter has dominated world monetary affairs since the collapse of Bretton Woods in 1971, but not for the better if frequent bouts of economic and financial instability are evidence.
Mundell’s work laid the foundation for the euro, which has become a remarkably resilient reserve currency as he predicted in a paper as early as 1969.
Mundell argued that fixed rates anchored in price stability allow more efficient trade and capital flows, while rapidly fluctuating rates lead to economic dislocations or worse.
He often called the euro-dollar rate the most important price in the world.
The euro is in bad odor these days with economists who say you cannot have a common currency without an underlying fiscal union.
But Mundell himself believed that the euro would lead to closer fiscal collaboration (see his writing nearby), in particular that the euro’s monetary discipline would reduce the ability of politicians to devalue their way out of borrowing and spending to excess.
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.
Mundell is best known to readers of these columns as an architect of supply-side economics.
The left derides this part of Mundell’s legacy as a political sideline unrelated to his Nobel work, but the two are linked.
It’s forgotten now, but the stagflation of the 1970s was a colossal failure of the Keynesian model.
Mundell understood this partly as a failure of international economics, with the collapse of Bretton Woods triggering global inflation.
Mundell’s prescription, working with his Chicago colleague and friend Art Laffer, was to use different policy levers to solve different economic problems.
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.
Global capital markets would finance U.S. budget deficits until faster growth restored tax revenues, which is what happened.
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.
International monetary reform was the one unfinished part of Mundell’s policy mix, and these days we doubt anyone in Washington even understands the issue.
The global economy is an afterthought.
The exception are China’s central bankers, who became students of Mundell and are working to turn the yuan into a reserve currency to challenge the dollar and establish a yuan currency zone.
Bob Mundell’s ideas will live on, even if the country that first put them to work now forgets that they brought two decades of prosperity.
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