Economist Bob Mundell has died | Hacker News Reader

Economist Bob Mundell has died

forbes.com

28 pointsRickJWagner67 comments

> Somehow Keynesianism—and monetarism—limped into the 1970s, saying you can manage domestic demand and supply, and therefore growth and employment, by adjusting taxes and spending and the money stock in a country, even though Mundell’s field-defining articles of the previous two decades had shown that capital movements will overwhelm all efforts at domestic authorities to fine-tune their way to a desired result.

On the one hand is an attractively reasoned theoretical argument as to why it can’t ever work. [0]

On the other side is the repeated, concrete experience that it does work.

[0] Although, even per the article, it doesn’t show that in the case of “a solitary global economic hegemon”, which might, even if it was otherwise completely correct, be a pretty important limitation to its applicability to late-20th and early-(as in so far)-21st Century US policy.

>Somehow Keynesianism—and monetarism—limped into the 1970s, saying you can manage domestic demand and supply, and therefore growth and employment, by adjusting taxes and spending and the money stock in a country, even though Mundell’s field-defining articles of the previous two decades had shown that capital movements will overwhelm all efforts at domestic authorities to fine-tune their way to a desired result.

It's weird the way this article determinedly avoids considering the notion that a hypothetical country (let's our hypothetical country "China") could impose capital controls to avoid being overwhelmed by inflows and outflows of capital and manage effective domestic growth by adjusting taxes and spending.

This disproves Keynesianism, apparently.

It's like saying that it is impossible to build anything next to the sea because it will be destroyed by waves.

I'm not sure the latter part ("manage effective domestic growth by adjusting taxes and spending") is correct at all. China manages its economy via SOEs and targeted and massive credit, as well as financial repression (of which capital controls are a component).

China makes heavy use of Keynesian stimulus. It's why they bounced back from the 2008 crisis so quickly.

Capital controls come with huge costs, it's another form of import/export controls. Imagine being told the part you need to manufacture your car is 4x the normal price because of intense focus on capital controls, or worse, that you can't get it.

Yes, imagine being a business in a country under the US sanctions. Without ability to import cheaper foreign parts, what would happen? In a country large enough one would imagine it would lead to the appearance of the home industry that would provide a substitute. More expensive, and of lower quality, sure, but Rome was not built in a single day.

> Without ability to import cheaper foreign parts, what would happen?

We'd lose the economies of scale that come with being a major exporter to Europe and South America, for starters. Which would lead to an R&D disadvantage. Which would further widen the gap. Strategically protecting industries is very different from blanket sanctions / capital controls.

That's why I said "large enough country", that'd would allow to retain the scale somewhat. And if you look at the examples of Iran/EU trade and Russia/EU trade, perhaps the exports won't even go down that much, so perhaps doubling down on R&D to keep being competitive would even be feasible.

Imagine putting nuclear weapons on your lawn and pointing at your neighbour and being surprised that they decide not to trade with you.

Imagine being Thailand in 1997: the stock market plunges 75% in one day, GDP contracts ~10%, a wave of bankruptcies, poverty and inequality skyrocketing while the government has to go begging to the IMF, accepting any and all demands that they make, no matter how unpopular.

You're better off being China.

? That crisis was literally started by misguided attempts at currency controls (!) i.e. Thai pegging their currency to USD and unable to 'hold the wall against the sea' so it eventually came crashing in.

So yes, Thailand 1997 demonstrates very effectively one of the challenges with currency controls.

Currency controls come with a cost, that has to be considered.

Capital controls are controls what kind of capital can enter and exit the country and when - e.g. transaction taxes or exchange controls (limiting how much currency you can buy or sell).

Currency pegs are when the government tries to maintain a particular value against another currency. E.g. maintaining a $ peg by buying or selling US treasuries on the open market.

They are not the same thing at all.

Currency pegs should probably additionally be separated into two groups, as, well - "too high" (UK and Thailand) and "too low" (China).

The crisis could be characterized as an attempt to adhere to the impossible trinity: https://en.wikipedia.org/wiki/Impossible_trinity

When the government is buying and selling currency at some rate commensurate with capital coming in and out of the country -> it's a capital control.

Reacting to capital leaving the country uncontrolled is not a capital control.

It's a reaction to capital leaving the country uncontrolled.

Fixed exchange rate regimen != capital controls.

> Capital controls come with huge costs, it's another form of import/export controls. Imagine being told the part you need to manufacture your car is 4x the normal price because of intense focus on capital controls, or worse, that you can't get it.

Lack of capital controls can come with a bigger costs, for instance if your country is weakened through the loss of strategic industries (or failure to gain them) while your businesses followed market incentives. The difference is that many of those costs are billed irregularly, so it's easy to pretend they don't exist by focusing on regularly billed things (e.g. price of widget now).

I don't know why you got downvoted, but capital controls are very much the other side of the same coin.

My take is that we should aim for balanced international trade (not quotas, but balance), and that would require either capital controls or import/export controls at least to establish, and probably (but more flexibly) to maintain that order.

Paul Krugman tweeted this article that he wrote in 1999:

> Later Mundell would broaden this initial insight by proposing the concept of the “impossible trinity”; free capital movement, a fixed exchange rate, and an effective monetary policy. The point is that you can’t have it all: A country must pick two out of three. It can fix its exchange rate without emasculating its central bank, but only by maintaining controls on capital flows (like China today); it can leave capital movement free but retain monetary autonomy, but only by letting the exchange rate fluctuate (like Britain–or Canada); or it can choose to leave capital free and stabilize the currency, but only by abandoning any ability to adjust interest rates to fight inflation or recession (like Argentina today, or for that matter most of Europe).

* https://slate.com/business/1999/10/o-canada.html

* Via: https://slate.com/business/1999/10/o-canada.html

The Zeus of economics? I'd say the last 50 years of wage stagnation for the working class and the massive increases in wealth inequality might call some of his theories into question...

I think it was meant to convey the impact he had on economics, not as a vote of confidence for those contributions.

The trick with economics is to realize that 99% of all discussion is about a particular flavor of economics. It's almost always about theory and implementation, not principles and abstractions. Inevitably, there is also a significant political aspect that is often (but not always!) overlooked.

Even if there is a "raw" theory of economics that describes the "what" in a universally agreeable way it'll never tell us the "why" and "how" of it, let alone how politics should (or should not) be intertwined with the issues.

He also created some wild oil paintings.

https://media.gettyimages.com/photos/economist-robert-mundel...

Hopefully supply-side economics is the next to die. It didn’t work in the Reagan 80s, and it didn’t work in the 2010s in Kansas [0] Laffer and this guy that died are a total joke. Their theories exist to give political cover to politicians who aim to line the pockets of the rich.

[0]https://en.m.wikipedia.org/wiki/Kansas_experiment

> Laffer and this guy that died are a total joke

Laffer curves are empirically corroborated [1][2]. For most taxes, there is a point past which raising the tax rate starts decreasing revenue.

The problem was politicians defining a made-up number as that point and voters going along with it.

[1] https://citeseerx.ist.psu.edu/viewdoc/download?doi=10.1.1.47...

[2] https://www.sciencedirect.com/science/article/abs/pii/S03043...

Agreed. Its not controversial that at a 100% tax rate, work would not be done, and at a 0% tax rate no tax will be collected.

The issue has always been using these points to extrapolate any policy you want because where you land on the curve or even the shape of said curve IS up for debate.

> [...] this guy that died are a total joke.

An article Krugman wrote in 1999:

* https://slate.com/business/1999/10/o-canada.html

His theoretical work allowed the Euro to be developed (which may or may not have been a good idea).

>His theoretical work allowed the Euro to be developed (which may or may not have been a good idea).

It's pretty much one of the most dysfunctional currencies out there.

Krugman in 1998:

> Here's how the story has been told: a year or two or three after the introduction of the euro, a recession develops in part - but only part - of Europe. This creates a conflict of interest between countries with weak economies and populist governments - read Italy, or Spain, or anyway someone from Europe's slovenly south - and those with strong economies and a steely-eyed commitment to disciplined economic policy - read Germany. The weak economies want low interest rates, and wouldn't mind a bit of inflation; but Germany is dead set on maintaining price stability at all cost. Nor can Europe deal with "asymmetric shocks" the way the United States does, by transferring workers from depressed areas to prosperous ones: Europeans are reluctant to move even within their countries, let alone across the many language barriers. The result is a ferocious political argument, and perhaps a financial crisis, as markets start to discount the bonds of weaker European governments.

* https://web.mit.edu/krugman/www/euronote.html

Which is basically what happened in ~2010:

* https://www.nytimes.com/2011/01/16/magazine/16Europe-t.html

Germany being 'fiscally obstinate' is a continuing issue:

* https://www.irishtimes.com/opinion/paul-krugman-the-world-ha...

Europe is basically like the US was pre-Civil War, where people would say "these United States": not quite culturally whole, and pulling in all sorts of directions. Given the pull of (economic) gravity Germany has, everyone is kind of forced to follow their lead, even when it doesn't make much sense.

It's a conflict of interest but also in a different way than he says: deficit countries want to devalue their currencies to boost exports (and make imports more expensive), but they have no central bank to print money. Guess who benefits from that: surplus countries like Germany, which are perfectly content with having Greeks buy their exports in €.

> Guess who benefits from that: surplus countries like Germany, which are perfectly content with having Greeks buy their exports in €.

Supposedly lots of German banks were investing in Greece and Spain because returns there were good compared to the abysmal rates in Germany. So the ECB/IMF 'bail out' ended up being a bit of a rescue of the German banks:

> According to a study by the European School of Management and Technology only €9.7bn or less than 5% of the first two bailout programs went to the Greek fiscal budget, while most of the money went to French and German banks.[84] (In June 2010, France's and Germany's foreign claims vis-a-vis Greece were $57bn and $31bn respectively. German banks owned $60bn of Greek, Portuguese, Irish and Spanish government debt and $151bn of banks' debt of these countries.)[85] According to a leaked document, dated May 2010, the IMF was fully aware of the fact that the Greek bailout program was aimed at rescuing the private European banks – mainly from France and Germany. A number of IMF Executive Board members from India, Brazil, Argentina, Russia, and Switzerland criticized this in an internal memorandum, pointing out that Greek debt would be unsustainable. However their French, German and Dutch colleagues refused to reduce the Greek debt or to make (their) private banks pay.[86][87]

* https://en.wikipedia.org/wiki/European_debt_crisis

> His theoretical work allowed the Euro to be developed

I rest my case.

If only people had actually listened to what Mundell actually said / wrote:

> The four often cited criteria for a successful currency union are:[6]

> * Labor mobility across the region. […]

> * Openness with capital mobility and price and wage flexibility across the region. […]

> * A risk sharing system such as an automatic fiscal transfer mechanism to redistribute money to areas/sectors which have been adversely affected by the first two characteristics. […]

> * Participant countries have similar business cycles. When one country experiences a boom or recession, other countries in the union are likely to follow. This allows the shared central bank to promote growth in downturns and to contain inflation in booms. […]

* https://en.wikipedia.org/wiki/Optimum_currency_area

* https://www.jstor.org/stable/1812792?seq=1

In 2012 Krugman laid out three things that needed to be done to make the Euro work better:

* https://www.journals.uchicago.edu/doi/full/10.1086/669188#_i...

I don't have comment on the legacy of supply-side economics and and how successful e.g. Reagan's economic policy was, but it looks to me like we have more of a supply-side issue right now than demand-side.

We have shortages of semiconductors, congested ports, all of the supply issues with early COVID PPE, absurdly low housing supply in the most desirable places to live, and so on.

That’s not quite what “supply-side economics” means. From Wikipedia[1]

> Supply-side economics is a macroeconomic theory that postulates economic growth can be most effectively fostered by lowering taxes, decreasing regulation, and allowing free trade. According to supply-side economics, consumers will benefit from greater supplies of goods and services at lower prices, and employment will increase.

Cf. Demand-side economics[2]:

> Demand-side economics is a term used to describe the position that economic growth and full employment are most effectively created by high demand for products and services. According to demand-side economics, output is determined by effective demand. High consumer spending leads to business expansion, resulting in greater employment opportunities. Higher levels of employment create a multiplier effect that further stimulates aggregate demand, leading to greater economic growth.

> Proponents of demand-side economics argue that tax breaks for the wealthy produce little, if any, economic benefit because most of the additional money is not spent on goods or services but is reinvested in an economy with low demand (which makes speculative bubbles likely). Instead, they argue increased governmental spending will help to grow the economy by spurring additional employment opportunities. They cite the lessons of the Great Depression of the 1930s as evidence that increased governmental spending spurs growth.

[1]https://en.m.wikipedia.org/wiki/Supply-side_economics

[2]https://en.m.wikipedia.org/wiki/Demand-side_economics

Supply side economics works if everyone is poor and there isn't enough stuff for everyone, the assumption is that the supply side can never be saturated and there is always excess demand (think of a hedonic treadmill). It works fine in developing countries with a young population.

As soon as you have a developed nation with an aging population where everyone is scrambling to save for their own retirement, you get the exact opposite problem. People are deferring spending, which means deferring incomes, which means deferring jobs which means unemployment.

There is lots of money available to invest into businesses, in fact, people are investing too much, interest rates fall through the floor. Low interest rates allow unproductive companies to stay alive and when the long term debt cycle ends they all die at once. That's not good for your retirement.

When you expect to retire in 10 years, you want your savings to actually be able to buy things, by making sure there are people in the future willing to work for your money. That's why you invest your savings, to make sure companies exist that sell stuff to you in the future, but how are those companies supposed to survive the 10 years until you retire, if you never buy anything?

One has to love these fake dichotomies where both "sides" suck. Where's the school of thought advocating for demand commensurate with what people can actually use, and that aims to require only as much labor as required to fulfill that? Probably not getting any phone calls from the economic schemers in Washington.

In fact the problems of supply that you mention are a demonstration of the failure of supply side economics. The whole theory is based on the idea that if you give fiscal incentives to the supply side, you will have more supply. But what we see in reality is that more fiscal benefits were provided and the industries are not responding, according to the examples you gave.

Another example is the healthcare and Pharma industry: more incentives should result in more competition and lowered costs, but exactly the opposite is happening: consolidation and higher costs.

The "supply side" of "supply side economics" is a red herring. The theory has less to do with what actually affects the supply of goods at any given time and more with the theory that lowering taxes and decreasing regulation always necessarily results in more supply and lower prices even when it clearly doesn't.

The theory ignores everything else that affects supply and only focuses on complaining about taxes and regulation.

While this might be a tangent to your larger point, I personally struggle when arguing about housing in California, in particular. Yes, supply might be low and more aggressive construction could do wonders for more affordable pricing, I have no disagreement with that. (And as a low-income retail worker in SoCal, I would certainly welcome that relief!)

But at the same time, I see basic limits in our water supply, and less absolute constraints in the crowding around a handful of urban hubs, and wonder if more housing is truly a good idea, or if we might already be near the practical limits on capacity for the geography/hydrology and geometry we're working with.

we're not anywhere close to the natural limits, as we have plenty of technology and policy we could implement yet around resources like clean water, air, energy, and even space. the primary reason we don't is cost, both for externalities and for the remedies themselves.

the 50-year plan for LA (the city) from about 50 years ago was projecting something like 7-8 million residents being housed here by now with basically the same current infrastructure. instead, we've only grown from 3 to 4 million in that time, largely because of various restrictions on development (zoning, prop 13, etc.). note that LA city is ~470 sq mi, in contrast to NYC which is twice the population and ~300 sq mi.

Hmm, and not a mention of the US reaching peak conventional oil production around 1970, which pushed trade balance in the red, and was the main reason behind the stagflation and the end of the gold standard...

More a Typhon than a Zeus.

What a strange metaphor. Why Zeus?

Zeus is known for using violence to get whatever he wanted, and screwing anything that moved (despite being married)

A man whose 1960s ideas were ideal for the seventies and helped destroy our economic system in the 1990s while enabling the billionaire winner take all society of today.

Substantive critique is welcome, but please don't post rhetorical ideological drive-bys to HN. It leads to shallower, more repetitive, and nastier internet discussion—all of which is uninteresting.

https://news.ycombinator.com/newsguidelines.html

Honoring a man who never got anything right. A man whose predictions were never bore any material fruit, but justified everything billionaires were going to do anyway.

After the stimulus bills of 2020 one would think everyone is a Keynesian (maybe excluding Rand Paul, he probably voted against it).

The 2020 COVID relief wasn’t as much argued on Keynesian stimulus terms as, say, the 2009 ARRA stimulus, but more as disaster relief.

They just don't want to use the K word.

It goes both ways. The government closed businesses, but also gave them resources to stay in business. You can argue it was Keynesian, but you can also argue it wasn't.

However, pretty much everything Biden did, was Keynesian.

To clear some inevitable confusion, Zeus in this context is intended as a compliment. Bob Mundell is not a libertine with jealousy and anger issues.

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