Robert A. Mundell, a Father of the Euro and Reaganomics, Dies at 88

[Dave P.]

Robert A. Mundell, a Father of the Euro and Reaganomics, Dies at 88
By Tom Redburn, 4/5/21, New York Times

Robert A. Mundell, a Nobel Prize-winning economist whose
theorizing opened the door to understanding the workings
of global finance and the modern-day international economy,
while his more iconoclastic views on economic policy fostered
the creation of the euro and the adoption of the tax-cutting
approach known as supply-side economics, died on Sunday at
his home, a Renaissance-era palazzo that he and his wife
restored, near Siena, Italy. He was 88.

The cause was cholangiocarcinoma, cancer of the bile duct,
said his wife, Valerie Natsios-Mundell.

Mundell, a Canadian who taught at the U of Chicago and
Columbia Univ, among other places, was awarded the Nobel
Memorial Prize in Economic Sciences in 1999 “for his analysis
of monetary and fiscal policy under different exchange rate
regimes and his analysis of optimum currency areas.”

His remarkably clear-minded work, mostly conducted from the
mid-50s thru the early 60s — a time when exchange rates were
stable and global capital movements were modest — was far
ahead of its time.

“Mundell chose his problems with uncommon — almost prophetic
— accuracy in terms of predicting the future development of
int'l monetary arrangements and capital markets,” the Nobel
committee wrote.

Mundell is credited as the co-developer of the Mundell-Fleming
model, which added a crucial dimension to the field by creating
an elegant way to move beyond the study of self-contained
national economies. (Marcus Fleming, a colleague at the IMF
in the early 60s, came up with similar ideas at roughly the
same time.)

“You have created modern open-economy macroeconomics,” Jacob
Frenkel, a former governor of the Bank of Israel, wrote in
the inscription of a book on Mundell’s theories. “My generation
of economists owe you all that we know.”

But Mundell’s reputation outside the academic world rests
more on two other ideas. He is known as the “father of the
euro,” for his work that encouraged many Euro nations to give
up their currencies to join a larger monetary union. And he
provided intellectual grounding for lowering the top tax rates
on the rich, whose advocates rallied under the banner of supply-
side economics and won over many right-leaning politicians &
policymakers in the US, Britain and elsewhere while drawing
the scorn of more progressive economists, who disputed the
notion that cutting taxes for the wealthy was the best way
to spur economic growth.

“Supply-side economics made the argument that steeply
progressive tax rates reduced the size of the pie to be
distributed,” Mundell said in a 2006 interview with the
American Economic Assn. “The poor might be better off with a
smaller share of a larger pie than with a larger share of a
small pie.”

To encourage a growing economy, he argued for keeping the
max tax rate under 25%. “The stimulus and rewards of the
entrepreneurial group must be fed and nourished,” he said
in a 1986 interview.

His ideas were promoted with evangelical fervor in the 70s
particularly by Arthur Laffer, an economist who became known
for the “Laffer curve,” postulating that lower tax rates
would generate higher govt revenues, and Jude Wanniski, an
editorial writer for The Wall St. Journal, whose opinion
pages took up Mundell’s cause after a series of lunches and
dinners at a Lower Manhattan restaurant, Michaels 1, which
were later described by Robert Bartley, The Journal’s
opinion editor, in his book “The Seven Fat Years” (1992).

Mundell’s argument gained ground in part because mainstream
Keynesian economists were on the defensive, having a hard
time accounting for the unexpected combination of slower
growth and rising inflation during much of the 70s. Mundell
argued, in contrast to the conventional wisdom, that low tax
rates & easy fiscal policies should be used to spur economic
expansion, and that higher interest rates and tight monetary
policy were the proper tools to curb inflation.

That approach, with results that are still being debated
today, was embraced in the 80s by Reagan, who, in policy
moves that came to be known as Reaganomics, cut tax rates
sharply and backed the Federal Reserve Chairman Paul Volcker
as he raised interest rates to bring inflation under control.

Stepping on ‘Intellectual Toes’

Throughout his career, Mundell frequently battled with the
giants of the profession, including Milton Friedman of the
U of Chicago and Martin Feldstein of Harvard. But he also
craved recognition and welcomed the prestige — and the
$1 million award — that the Nobel Prize conferred.

In his 2006 interview, he said that winning the Nobel “was
particularly pleasing to me as my work has been quite
controversial & no doubt stepped on a lot of intellectual toes.”

He added: “Even more than that, when I say something,
people listen. Maybe they shouldn’t, but they do.”

At the Nobel banquet, Mundell, dressed in white tie & tails
& accompanied by Ms. Natsios-Mundell & their 2-year-old son,
Nicholas, ended his speech by serenading the surprised but
delighted guests with a verse from Frank Sinatra’s signature
song. “I did it,” he declaimed, “my way.”

Robert Alexander Mundell was born on Oct. 24, 1932, in
Kingston, Ontario, and spent his first 13 years living on a
farm and attending a one-room schoolhouse with about a dozen
other pupils. His father, William Campbell Mundell, was a
military officer; his mother, Lila Teresa (Hamilton) Mundell,
was a vivacious heiress who had to give up the family’s castle
because she could not afford the back taxes, Professor Mundell
once recalled.

When his father retired from teaching at the Royal Military
College after the end of WWII, the Mundells moved to British
Columbia, where Robert (known as Bob throughout the economics
world) found what he called a “cult of rugged individuality”
that helped nurture his laissez-faire economic views.

But far as they were from the power centers of the nation &
the world, western Canadians were not immune to the economic
turmoil of the postwar era. While the US, after a brief
recession, was thriving, Europe and Japan were dependent
largely on American investment and materials to rebuild,
amassing large trade deficits with the US. In 1949, Great
Britain, hoping to make its own exports more competitive,
devalued the pound by 30% against the dollar, leading other
European countries to follow suit.

Canada, caught in the middle between its role in the British
Commonwealth & its trading dependence on its large neighbor
to the south, also devalued, but by a lesser amount. A year
later, indirectly admitting that it had made a mistake, the
govt in Ottawa allowed the Canadian dollar to float. That put
the country in a situation unlike any other major economy at
the time; the postwar Bretton Woods system had kept most
currencies fixed against the dollar. Bob Mundell, a high
school senior already gifted in math, was puzzled by it all.

“I asked my high school teacher what the devaluation meant,
& he gave me such a contorted and hopeless explanation that
it piqued my curiosity,” he recalled in 1998. “The newspapers
carried such a jumbled discussion.”

Mundell first studied economics and Slavonic studies at the
U of British Columbia before winning a scholarship to the
U of Washington. Wanting to continue his study with some of
the best economists in the world, he headed to the M.I.T. to
earn his Ph.D., taking only 3 classes & completing the work
on his thesis while studying at the London School of Economics.

He returned to the US in 1956, becoming a postdoctoral fellow
at the U of Chicago, where Milton Friedman reigned over a free
market-oriented dept that stood in contrast to the Keynesian
tradition at M.I.T. At the time, though, both universities
were guided by domestic-economy models — no surprise, given
the scale of the American economy and its relative isolation
from external forces.

Mundell, by contrast, was preoccupied with the problems of
an open economy — like Canada’s — reliant on trade, vulnerable
to changes in the int'l monetary system and torn by economic
disparities and political clashes between regions.

“It’s fair to say that being a Canadian played a significant
role in Bob’s thinking,” said Carmen Reinhart, an economist
who earned her Ph.D. under Mundell at Columbia. “The closed
economy model was the baseline for American economists. That
was never the case with Bob.”

Insights on Exchange Rates

Mundell established his stellar reputation within the
profession with a series of seminal papers published from the
late 50s thru the late 60s while he held various academic
posts and worked on the staff of the I.M.F. Developing models
that helped integrate global financial markets with trade in
goods and services, he demonstrated that under a floating
currency rate and perfect mobility of investment capital
across borders, monetary policy influences economic output
while fiscal policy is essentially powerless. Under a fixed
exchange rate, he found, the opposite is true.

That insight, said Maurice Obstfeld, an economist at UC
Berkeley, who was also a colleague of Mundell’s at Columbia,
“set the framework for the idea that you can creatively use
these two instruments — monetary policy and fiscal policy —
to accomplish different goals.”

Shortly after, Mundell developed the idea of an “optimum
currency area,” arguing that fixed exchange rates covering
a wide region that enjoyed relative mobility of capital and
labor — like the US but also, under the right circumstances,
Europe — are preferable to floating exchange rates between
countries and regions.

Indeed, he believed that the Bretton Woods fixed exchange
rate system — which began to totter in the late 60s as the
US started running up big balance of payments deficits that
drained its gold reserves backing the dollar — deserved to
be preserved by adjusting the value of the dollar to gold.

“The big problem was how to prevent the int'l monetary
system from cracking up,” he later recalled.

That put him in opposition to Milton Friedman at the U of
Chicago, where Mundell had returned in 1966 in join the
economics faculty. Friedman advocated allowing currencies to
float in response to market forces.

Friedman prevailed in that argument; Nixon went off the
gold standard in 1971 and eventually allowed the dollar to
trade freely against other currencies.

But before that happened, Mundell, convinced that the
breakdown of the int'l monetary system was imminent, decided
in 1969 to buy a vast but crumbling Italian palazzo for
$20,000 as a hedge against the global inflation he foresaw.

He left Chicago in 1971, heading back to Canada, where he
remained a citizen throughout his life, to take a post at
the then-obscure Univ of Waterloo. “At last,” one of the
Chicago economists remarked, “Waterloo has met its Napoleon.”

Mundell returned to the US in 1974, joining the faculty at
Columbia University, but he remained largely off the radar
of his colleagues in economics for much of the 70s & 80s.
For a while he grew his white hair down to his shoulders,
developed a reputation as a ladies man, and spent much of
his time at his palazzo.

Paul Krugman, the Nobel laureate in economics and NY Times
columnist, once gently mocked Mundell for living in a
“crumbling half-habitable villa” where he organized eccentric
conferences “outside the regular round of academic meetings.”

But in the years just before & after he won the Nobel Prize,
Mundell had settled down in his personal & professional life.
After his first marriage, in 1957, to Barbara Sheff ended in
divorce in 1972, he married Valerie Natsios — whom he had
started living with in 1984 — shortly after their son was
born in 1997.

As a number of his students assumed high-profile positions at
important global institutions like the I.M.F., & as Europe
moved to adopt a single currency as he had long advocated,
Mundell regained his standing among his peers. He spent much
of his Nobel Prize money on restoring his palazzo.

In addition to his wife, he is survived by their son,
Nicholas; a son, Bill, & a daughter, Robyn, from his first
marriage; & 8 grandkids. Another son from his first marriage,
Paul, was killed in a car accident in 2018.

Mundell remained proudly pugnacious to the end of his career.
He was one of “the liveliest and most mercurial figures in all
of economics,” said David Warsh, a former Boston Globe
journalist who writes an independent column on economics and
politics. “He was a rogue — a brilliant rogue.”

https://www.nytimes.com/2021/04/05/business/economy/robert-mundell-dead.html