Monday, June 23, 2008

Robert Mundell's Nobel-Quality Economic Insights

Economic Nobel Laureate Robert Mundell's interview with Kyle Wingfield of the Wall Street Journal appeared in the weekend edition of that publication.

What ought to concentrate the mind of any business person wonderfully is Mundell's clear, explicit assertion that the failure to make the Bush tax cuts permanent will push the US "into a big recession, a nosedive."

Mundell continued,

"This would be devastating to the world economy, to the United States, and it would be, I think, political suicide."

The economist opined that his own view of the best corporate tax rate is that it be set at 25%.

On the seemingly-endlessly debated topic of whether we are currently at risk of a new round of serious stagflation, Wingfield relates,

"With prices again rising as growth slows, some economists are worried that stagflation could be making a comeback. Not Mr. Mundell- not yet.

He draws a comparison with the situation in 1979-1980. Start with the dollar price of oil, which he calls "one of the two most important prices in the world" (the other being the dollar-euro exchange rate).

"If you look at the price level since 1980," he begins, "oil prices would naturally double by the year 2000. So from $34 a barrel in 1980 to $68 a barrel. And then...because the inflation rate's about 3.5%, it would double again by 2020. So the natural price...would be something like $136 in2020.

"Now, we already got to $130-something, but...I really think the price is going to settle down, probably below $100, if not below $90. What I'm saying is we're not so far off track."

"The price of gold in 1980 was $850 an ounce. And the price of gold today is about the same. It's astonishing," he says. "It's true, gold did go up" to more than $1,000 an ounce earlier this year, "but the public doesn't believe that there is inflation. If there was big inflation coming, then you'd see the price of gold going up to $1,500 an ounce very quickly, and that hasn't happened."

I found Mundell's opinions to be both reassuring and troubling. Reassuring that gold prices indicate we are not necessarily in for a serious, long-term bout of inflation.

Troubling about the absolute necessity of making Bush's tax cuts permanent. McCain wants to do so, but doesn't really prostyletize that convincingly. We know Obama wants to run the other way and raise taxes everywhere possible.

At least I can take comfort in the likelihood, per Brian Wesbury's observations about political gaffes being punished in internet time now, in this post, that if Obama is elected, and he conspires with Congress to raise taxes, that mistake should be rectified at the ballot box in, first, two years, then four.

It took a Carter to bring us Reagan. We may have to suffer through Obama to revitalize our economy, in terms of lower tax rates and government spending, with another fiscally conservative President, regardless of his party.

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