Robert Mundell, Nobel prize-winning economist just passed away this last weekend.
His name is not always mentioned when people talk about the top economists of the last fifty years or so, but I consider him one of the individuals that people, interested in how the economy is progressing, should contemplate.
Furthermore, it is particularly interesting to me, that Mr. Mundell’s name should be reaching the press just at this specific time when analysts are starting to see that the economic problems we are dealing with right now have an explicit connection with the supply-side of the economy.
Robert Mundell is well known as one of the architects of supply-side economics. Supply side economics is something all of us should pay a little more attention to because the tendency is to discuss demand side economic policies and to just assume that the supply side will follow along and respond to whatever the demand side of the economy wants.
But, it is important to see right now that the latest recession a supply-side phenomenon.
The Latest Recession
The beginning of the last recession has been dated by the National Bureau of Economic Research (NBER) to have begun in February 2020. Right now, we are breathlessly waiting to hear when the recession ended, if it has.
The advent of the recession is tightly tied to the spread of the Covid-19 pandemic. It was a supply-side generated recession. The contraction occurred because suppliers “closed up” and businesses “closed down.”
We did not have a liquidity crisis or a debt dilemma or a bankruptcy shock or anything of the sort. The drop off in economic activity came immediately and it came because of a withdrawal of supply.
But, that has been changing and it is supply-side changes that are making the difference.
The Editorial Board of the Wall Street Journal have suggested that
The bottom of the recession may have been as early as last April, and the economy has been growing for at least nine months.”
The Board’s reasoning hangs on current statistical releases. For example, the Institute for Supply Management just released the results of its March survey and the index reported an all-time high of 63.7. This, the Board argues “signifies rapid growth and optimism.
The problem seems to be that businesses can’t find workers… or supplies… to meet the demand they are observing.
Furthermore, last Friday, a “blowout” employment report for March was released. New jobs are increasing, wage gains are coming in larger than originally thought and there were people returning to the labor force.
One final positive note pointing to a recovery: the vaccination process is moving along and this has very positive implications for future economic growth. But, this, too, will be a supply-side effect.
Could the economy have begun its recovery last April? Well, we’ll have to see the numbers as they come in. The Wall Street Journal seems to be very confident that the economy has actually been growing for nine months.
Does The Economy Need A Tax Increase?
Even before Joe Biden was elected president and began proposing his demand-side spending programs, the future debt burden of the United States was humongous. Projections going far off into the future tried to present a picture of what the United States was facing in terms of paying for its debt load… even with very low interest rates.
Now, Mr. Biden has achieved a $1.9 trillion budget stimulus plan that will add more debt to the projected amounts already discussed. In addition we are facing one or two more budget programs that will require a lot more debt to be accounted for.
And, then there are the tax plans that Mr. Biden and his associates are thinking about and these raise other questions about how they will support… or hinder… the economic recovery itself as the taxes can impede supply-side actions on the parts of businesses and corporations.
Again, the editorial board of the Wall Street Journal have taken a look at the “Anatomy of a Biden Tax Hike.” As can be expected, the editorial board is not very happy.
The conclusion that the board draws is that the Biden tax hike will not contribute to either the competitiveness of U.S. corporations or it will not provide the support for job growth that the creators of the tax hike plans think they will .
The Biden Administration and its progressive political masters have decided they don’t care about the global competitiveness of American companies.”
Who is to look out for the global competitiveness of American companies?
The Board suggests
Members of Congress need to decide if they do.”
Mr. Mundell Again
Mr. Mundell, looking at the supply-side of the economy, would likely not look to add a lot of fiscal stimulus to where the U.S. is right now. Furthermore, Mr. Mundell would not like what the Federal Reserve is doing at all. Together, the efforts of these two bodies are seeing to it that not only will aggregate demand be pushed to extremes, the monetary support for these efforts is also as a historical high.
But, the thing that would probably be of most concern to Mr. Mundell is what these efforts are going to do to the place of the U.S. dollar in the world.
The Editorial Board of the Wall Street Journal contends that Mr. Mundell would see the U.S. policy as one of destroying the strength of the U.S dollar and opening the door for the Chinese to walk in and turn the Yuan into a reserve currency and even go the next step and produce the first major digital currency to be generally used. In this way, Mr. Mundell would see the United States treating the global economy “as an afterthought” in which it would allow the monetary leadership of the world to “slip away.”
It would be good for investors to read the newly published articles on Robert Mundell to get a sense of what he stood for, and, in addition, to read some of his published works. Mr. Mundell’s work, I think, will be a very important read to understand what we now are going through.