Robert Mundell, one of the more prominent economists of the last fifty years, died recently, setting off a series of congratulatory remembrances of his influence in world affairs.
This item, from Ralph Benko, also has links to other recent writings from the Wall Street Journal, Brian Domitrovic (historian of the “supply-side revolution”), and others.
Anno Mundell: An Elegy for the Father of the Golden Age
I think some of this has been a little excessive, or perhaps, does not quite fully express the situation. So, today I will offer a little bit of a counterpoint, which probably will not be received very nicely since it basically amounts to “damning with faint praise,” but which I think is valuable especially for those who are trying to make sense of this whole thing.
I see Mundell as a sort of transition figure, with one foot in the world of erroneous academic dogma, and one foot outside. He probably thought that he needed to keep one foot in the academic world, to achieve his high regard in that world, and get accolades like his Nobel Prize. But, it also worked as a terrible handicap to his brilliant mind — a handicap that was not just a matter of politics, but which clouded and limited his thinking in general.
As I think is well expressed in the article by Benko, and those it links to, the contribution of Mundell (who won a Nobel Prize in 1999) to the realm of academic economics, and from there, public policy, largely amounts to two things: Stable Money, and Low Taxes. This, you may recognize, is The Magic Formula, which I wrote a whole book about. It is basically an answer to the question: “What should the ‘policy mix’ be between Monetary and Fiscal policy?”
First of all, let’s recognize that this is indeed Important. I think so. But, it is also, perhaps, Obvious. Not so obvious to the academic economists of the last 100 years; but also, conventional wisdom of the better statesmen for the past 300 years. “Stable Money,” for Mundell — at least, his more public writings — mostly focused on stable exchange rates, or the formation of “currency blocs.” He also insisted that these stable exchange rates should be achieved with a proper operating mechanism, something like the automatic function of a currency board, rather than the “currency pegs” where a domestic monetary policy is combined an “external” fixed exchange rate policy, a self-contradictory arrangement that will probably soon blow up. The combination of these two basically eliminates domestic “monetary policy,” or the manipulation of the currency to produce various macroeconomic effects. (I explain all this in the first chapter of Gold: The Final Standard, quoting Mundell at length.) It is a rejection of floating fiat currencies, which 95%+ of the rest of the academics are addicted to — including, and especially, the NGDP Targeting people at places like Cato, Mercatus and the Independent Institute. It is true that the euro is, itself, managed by the ECB as a floating fiat currency, which has macroeconomic consequences, intended or not. But, if Italy uses the euro, then Italy does not have a separate Italian monetary policy to address Italy-specific macroeconomic conditions, which is only achievable with a separate lira currency that floats.
Even in this realm of monetary issues, Mundell never really escaped from the errors and misconceptions of his era. He continued to babble about the “balance of payments,” representing the “adjustments” necessary to maintain a fixed currency value with a currency-board-like automatic adjustment mechanism. This has nothing to do with the real “balance of payments,” which is a description of international trade. Mundell took some steps to remedy this confusion, with the result that he contributed to the “monetary approach to the balance of payments,” which is like saying that the Earth revolves around the sun, except that the sun sort of revolves around the Earth. (This is what I mean by “transition figure.”) Economists need to throw this nonsense out the window altogether. I wrote a book about that: Gold: The Monetary Polaris.
From this arises the question: “Should a country fix its currency to another, probably a major international currency like the euro or dollar, or go it alone? Which currency should it fix to?” The answer to this question is “optimum currency areas,” a somewhat vague series of principles by which we might make a decision about that. This must remain rather vague, for simple reasons. The ideal situation (as Mundell agreed), is one in which the whole world is on one currency basis. There are no floating exchange rates. But, that can only be achieved when the basis is one that is of such high quality that the whole world can agree to share it. Basically, this was the Gold Standard System, the principle going back hundreds and thousands of years, up until 1971, and which produced excellent results during that period. The last two decades of the World Gold Standard, the 1950s and 1960s, I think remain the best two decades of global economic performance since the end of the prior World Gold Standard, in 1914. So, there was no evidence, in 1971, that gold was somehow not serving its role as a superlative basis for a global currency system.
On the other end of the spectrum, we have some currency basis that is of such poor quality, that nobody would want to take part in it. This might be, for example, the hyperinflationary German mark of 1919-1923. As a major international currency, the mark had a few currencies linked to it, such as that of Estonia. Other examples could include the hyperinflationary Russian ruble of 1990-1995, which also took down the currencies of the former Soviet-bloc countries. I think the euro will eventually be so badly mismanaged that countries in Europe will eventually go their own way — which was already happening in 2011-2012, when Germany went so far as to print up a new supply of “Nordic euros” to prepare for a potential split from the “Southern euro.”
Between these two poles, we have a variety of situations in between. So, the answer to the question is: “It depends.” And, it depends on things that change, so you might have to change your mind at some point. It is easy to say that “everybody knows that you shouldn’t have linked to the hyperinflationary German mark in 1919-1923,” but the mark had been one of the world’s best currencies prior to 1914. In 1918, after Armistice, the German mark was not obviously any worse off than the British pound or French franc, which also floated, and which had lost about the same amount of value (compared to gold) during the war as the mark. Thus, the idea that “currency areas” are something that can be “optimized” is a false promise. Basically, it is just a provisional arrangement until something goes wrong and you have to make some hard decisions.
From this, you might think that Robert Mundell would be a fan of the gold standard, which was the primary monetary principle of the whole world in the 1960s, when Mundell was among the top economists of the International Monetary Fund — an organization established in 1944 for the express purpose of protecting and maintaining the World Gold Standard, to avoid breakdowns like those that happened in the 1930s. In the 1970s and early 1980s he was, in fact, a supporter of the gold standard, like Alan Greenspan and Ronald Reagan. But, this has been politically a little too much of a hot topic since that time, so you would find little support in his more recent writings or comments. I think that he internalized this somewhat, becoming accustomed to his chains. Since 1985 or so, when the monetary situation calmed down even without a Bretton-Woods-like formal return to a World Gold Standard, Mundell’s support for the idea became rather faint.
Today, more than 50% of all countries explicitly link their currencies to some external standard of value, such as the euro or dollar. Another 25% of all countries explicitly have such a link, but allow some modification, or a “crawling peg.” These countries have done this for good reasons, and have enjoyed mostly good results — Stable Money. As I mentioned, you will find little support for this in academia, which has raised Mundell’s importance. In the land of the blind, he has been the One-Eyed Man.
For this, he has been called the “father of the euro.” But, Europe has always shared a currency standard. This was, of course, gold. When the governments of the world got together at Bretton Woods in 1944, when Mundell was twelve years old, they met to create global fixed-rate regime. By 1950, Japan, Germany, Communist China and the Soviet Union had effectively joined the system. Even when the Bretton Woods system broke apart in 1971, Europe immediately moved to stabilize exchange rates in the region, known as the “snake.” This didn’t really have anything to do with Robert Mundell. It was just the continuation of standard policy in Europe over the past 500 years — because, Europe’s statesmen could see that, if every country had its own currency, you would end up in a situation similar to if every State in the United States had its own floating currency. A big mess. But, in this situation, Mundell was among the few academics whose work supported this policy, so he was raised to prominence.
I am told that Mundell’s support of Low Taxes, in the 1960s and 1970s, was strong, and that he indeed served as a generating influence of the global move toward lower taxes known as the “Supply Side revolution.” But, it seems that this was expressed primarily in direct personal communication with a few intellectual allies — for example, at the dinners at Michael’s restaurant in Lower Manhattan, also attended by Laffer and Wall Street Journal editorial page head Robert Bartley, who recalled them in The Seven Fat Years. Mundell didn’t write much about it. Among academics, who are familiar with his best-known papers, there is a certain puzzlement that Mundell gets so much credit for the “low tax” idea. Arthur Laffer has been a far more prominent leader, with numerous excellent books. I would read, especially, The End of Prosperity (2008) and The Return to Prosperity (2010), both coauthored by the always-excellent Stephen Moore. Laffer has said that his Low Tax theme was inspired by Mundell. But, if you count anything that you can point a finger at, Laffer, and also Stephen Moore or many other writers including Larry Lindsey or Charles Adams, achieved about 100x more than Mundell, who never wrote a good book about anything.
Mundell was at the IMF when John F. Kennedy put together his breakthrough tax cut program, passed after his death in 1964. I don’t recall that Brian Domitrovic, in his excellent history of Kennedy’s tax cut program coauthored by Larry Kudlow — both fully cognizant of Mundell’s contributions during the 1970s — made any mention that Mundell influenced the formation of the Kennedy tax cut. Instead, one of the main intellectual motors was the extraordinary Stanley Surrey, who was also part of the group led by Carl Shoup who headed to U.S.-occupied Japan in 1949-1950 to radically reform its tax code, with much lower tax rates. Surrey wrote twenty books about tax policy, compared to Mundell’s zero. Jack Kemp’s tax cut plan of 1977, which became the basis of Reagan’s 1981 tax cut, was an explicit carbon copy of Kennedy’s tax cut — that is, Stanley Surrey’s tax cut — which was done because they thought that would help it pass the Democract-controlled Congress. The other great inspiration for Kennedy was Economics Minister Ludwig Erhard of Germany, who spoke to Kennedy about Germany’s breakthrough tax reduction program (it’s in The Magic Formula) when Kennedy visited Germany in 1963. The point is that, without diminishing Mundell’s contribution to that time, it is not as if these things did not exist before he invented them.
But, the Low Tax idea, like Stable Money, has been politically dangerous for academics for a long time. Arthur Laffer’s last regular job in academic economics was in 1976, when he was on the faculty of the University of Chicago. From 1976-1984, Laffer had a position at the University of Southern California School of Business (possibly funded by private means), which is, among the academic macroeconomists, similar to going from an A-List Hollywood actor to having a channel on YouTube. But, already by the late 1970s, Laffer’s main way of making a living was through advising Wall Street investors, which he was highly successful at. So, Laffer’s departure from academia coincides almost exactly with his prominence as a Low Tax advocate in public affairs. In university Departments of Economics across the country, Democrats outnumber Republicans 5:1. They would rather read Thomas Piketty. So, I think you can see why Mundell kept his mouth shut about that. (Stan Surrey was also not part of the academic macroeconomic high priesthood, but was a professor at the Harvard Law School.)
Like Stable Money, the idea that low taxes can be good for economies has been around about as long as taxes themselves. Already by the fifth century B.C., Chinese philosophers wrote about the importance of low taxes. Mencius was one of the world’s first “Flat Taxers,” touring China in the fourth century B.C. to tell one prince after another that the best tax system was a simple one-ninth (11%) tax on agricultural production, and a 10% rate for merchants and artisans. Nevertheless, this simple idea was neglected throughout the 20th century, as economists focused on what I’ve called the “Price, Interest, Money Box.” This has been true of the Keynesians, Austrians and Monetarists. Mundell reintroduced the idea that tax policy (and other policy, including various sorts of regulations) is a big deal. But, he did this while statesmen across the world were lowering taxes without the influence of Mundell, whether it was Andrew Mellon in the U.S. in the 1920s, or the Japanese bureaucrats at the Ministry of Finance in the 1950s, or Lee Kuan Yew in Singapore in the 1970s. The main significance of Mundell is that he reintroduced these ideas (to the extent that he did, which was not very much) into academia and the intellectual sphere, then as now enshrouded in darkness and ignorance.
Yet, even here, Mundell’s writings seem handicapped by the chains of academic politics. Although he was never really a Great Depression expert, and we can make some allowances for what was a side interest, his writings on the topic were notably substandard. (Although he mentioned his views in his Nobel Prize acceptance speech, they were more fully expressed in a paper from 1989). You would think that a Low Tax advocate like Mundell would have something to say about Herbert Hoover’s giant tax hike in 1932, which raised the top income tax rate in the U.S. from 24% to 63% — or the many similar policies that were enacted worldwide, in Britain, Germany and elsewhere. You would think that, with a big fat pitch like that, Mundell could hit home runs all day long. He even had Alan Reynolds, for example this nice paper from 1979, to show him the way. But, he ignored this, preferring instead a silly daydream about the monetary consequences of World War I — a daydream that I have found no supporting evidence for, for example in this record of international bullion flows. (Mundell didn’t provide any evidence either, and I don’t think it was because he wanted to keep it a secret.)
But, the consequence of all this obesiance to the dogma of academia was that Mundell was able to rise to a high standing in that field, even to the point of gaining a Nobel Prize — a prize, it is worth noting, given to academics by non-academics. If you had left it up to the U.S. academics alone, they probably would have wished that Mundell disappear quietly, like Friedrich Hayek who — after being rejected for a position in the Economics Department at the University of Chicago despite the enthusiastic support of the University’s president Robert Hutchins — was also awarded a Nobel Prize in 1974, or Ludwig von Mises, whose 24-year stint as an unsalaried Visiting Professor at New York University was funded by a private businessman. Nevertheless, Mundell’s prominence in academia has indeed been useful; since, otherwise, Stable Money and Low Taxes might be even more ignored among the academics than it is already. Much of the recent celebration of Mundell’s legacy, mostly by non-academics, amounts to a wish and hope that some younger academics will continue in this fashion, and that at least a few academics will finally get a clue to what non-academics have been well aware of since the Reagan era. At least a little bit, Mundell broke the ice of the incredible ignorance of that field, and gave statesmen something to point to when they wanted to do something that had been a regular part of statesmens’ toolkit for hundreds of years.
Mundell held many gatherings at his villa in Italy, where economists, government people and business leaders would stay for several days and have long talks. This is a great idea, and I wish that more people would follow Mundell’s example here and do something similar. Just as his influence in the 1970s was almost entirely through personal communication, so too he apparently continued in this mode through the end of his life. If more people got the Stable Money, Low Taxes idea through this means, all the better.
Nevertheless, going forward, I think we should not put Mundell on too high of a pedestal. It is not very hard, I think, to be a much better economist than Robert Mundell. I invite any reader to compare any book or paper by Mundell, to any one of the four that I have written. Just read them and compare. I think you will see what I mean. Galileo observed that the Earth revolved around the sun. This was known in Greece and the Muslim world since the third century B.C., and was preceded in Europe by the insights of Copernicus, Tycho Brahe and Giordano Bruno. But, it conflicted with the Catholic dogma of Europe at the time. Galileo never accomplished much — after his initial discoveries, which rediscovered what others had known for centuries previous, he had to recant or be burnt at the stake. After his recantation, the Church mercifully allowed him to live under house arrest until the end of his life. But, he helped open the door for the many others that followed.
Today, a modern astronomer can look at an intellectual tradition that stretches back to Galileo. But, I certainly hope that a modern astronomer considers himself a better astronomer than Galileo.
Be a two-eyed economist.
