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 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.
Mr. Mundell, a Canadian who taught at the University of Chicago and Columbia University, 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-1950s through 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 international monetary arrangements and capital markets,” the Nobel committee wrote.
Mr. 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 International Monetary Fund in the early 1960s, 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 Mr. 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 European 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 and policy-makers in the United States, Britain and elsewhere while drawing the scorn of more progressive economists, who disputed the notion that tax cuts spurred economic growth.
“Supply-side economics made the argument that steeply progressive tax rates reduced the size of the pie to be distributed,” Mr. Mundell said in a 2006 interview with the American Economic Association. “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 maximum tax rate under 25 per cent. “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 fervour in the 1970s particularly by two economists: Arthur Laffer, who became known for the “Laffer curve,” postulating that lower tax rates would generate higher government revenues, and Jude Wanniski, an editorial writer for The Wall Street Journal, whose opinion pages took up Mr. Mundell’s cause after a series of lunches and dinners at the midtown Manhattan restaurant Michael’s, which were later described by Robert Bartley, The Journal’s opinion editor, in his book The Seven Fat Years (1992).
Mr. 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 1970s. Mr. Mundell argued, in contrast to the conventional wisdom, that low tax rates and 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 1980s by U.S. President Ronald Reagan, who, in policy moves that came to be known as Reaganomics, cut tax rates sharply and backed Federal Reserve Chairman Paul A. Volcker as he raised interest rates to bring inflation under control.
Throughout his career, Mr. Mundell frequently battled with the giants of the profession, including Milton Friedman of the University of Chicago and Martin Feldstein of Harvard University. But he also craved recognition and welcomed the prestige – and the US$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 and 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, Mr. Mundell, dressed in white tie and tails and accompanied by Ms. Natsios-Mundell and 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, Ont., 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, Robert Mundell once recalled.
When his father retired from teaching at the Royal Military College after the end of the Second World War, 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 centres of the nation and the world, Western Canadians were not immune to the economic turmoil of the postwar era. While the United States, 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 United States. In 1949, Britain, hoping to make its own exports more competitive, devalued the pound by 30 per cent against the dollar, leading other European countries to follow suit.
Canada, caught in the middle between its role in the British Commonwealth and its trading dependence on its large neighbour to the south, also devalued, but by a lesser amount. A year later, indirectly admitting that it had made a mistake, the government 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, and 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.”
Mr. Mundell first studied economics and Slavonic studies at the University of British Columbia before winning a scholarship to the University of Washington. Wanting to continue his study with some of the best economists in the world, he headed to the Massachusetts Institute of Technology to earn his Ph.D., taking only three classes and completing the work on his thesis while studying at the London School of Economics.
He returned to the United States in 1956, becoming a postdoctoral fellow at the University of Chicago, where Milton Friedman reigned over a free market-oriented department that stood in contrast to the Keynesian tradition at MIT. At the time, though, both universities were guided by domestic-economy models – no surprise, given the scale of the U.S. economy and its relative isolation from external forces.
Mr. Mundell, by contrast, was preoccupied with the problems of an open economy – such as Canada’s – reliant on trade, vulnerable to changes in the international 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 Mr. Mundell at Columbia. “The closed economy model was the baseline for American economists. That was never the case with Bob.”
Mr. Mundell established his stellar reputation within the profession with a series of seminal papers published from the late 1950s through the late 60s while he held various academic posts and worked on the staff of the IMF. 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 the University of California, Berkeley, who was also a colleague of Mr. 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, Mr. 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 labour – like the United States 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 1960s as the United States 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 international monetary system from cracking up,” he later recalled.
That put him in opposition to Milton Friedman at the University of Chicago, where Mr. Mundell had returned in 1966 in join the economics faculty. Mr. Friedman advocated allowing currencies to float in response to market forces.
Mr. Friedman prevailed in that argument; President Richard Nixon went off the gold standard in 1971 and eventually allowed the dollar to trade freely against other currencies.
But before that happened, Mr. Mundell, convinced that the breakdown of the international 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 University of Waterloo. “At last,” one of the Chicago economists remarked, “Waterloo has met its Napoleon.”
Mr. Mundell returned to the United States in 1974, joining the faculty at Columbia University, but he remained largely off the radar of his colleagues in economics for much of the 1970s and 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 New York Times columnist, once gently mocked Mr. Mundell for living in a “crumbling half-habitable villa” where he organized eccentric conferences “outside the regular round of academic meetings.”
In the years just before and after he won the Nobel Prize, Mr. Mundell had settled down in his personal and 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 such as the IMF, and as Europe moved to adopt a single currency as he had long advocated, Mr. 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, and a daughter, Robyn, from his first marriage; and eight grandchildren. Another son from his first marriage, Paul, was killed in a car accident in 2018.
Mr. 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.”
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