Hard Times for the Elusive “Father of the Euro”

Someday there’s going to be a biography of Robert Mundell, of Columbia University – in all likelihood, there will be more than one, because Mundell has been so elusive over the years. Surely he is the only Nobel laureate who lacks a detailed curriculum vitae  (his first twenty years were only a little less of a pinball carom than those of Thorstein Veblen.) At 80, the so-called “father of the euro” (and chief architect of “supply-side economics”) remains the same indistinct figure that he has been for sixty years, clearly in the picture but somehow just beyond the focal plane.

A recent case in point:  “The MIT Family Tree,” a Bloomberg BusinessWeek charticle that was authoritative enough to be posted on the bulletin board of the economics department at the Massachusetts Institute of Technology. In its center are the mainstays of the department in the 1970s and ’80s, Stanley Fischer (today governor of the Bank of Israel) and the late Rudiger Dornbusch.

Garlanded all around are the students they taught (or taught with), now occupying positions of high responsibility: Federal Reserve Chairman Ben Bernanke; Bank of England Governor Mervyn King; European Central Bank President Mario Draghi; International Monetary Fund chief economist Olivier Blanchard; former Obama advisers Lawrence Summers and Christina Romer; New York Times columnist (and Nobel laureate) Paul Krugman; and Lucas Papademos, who was prime minister of Greece for a time, until the general election earlier this month precipitated the current crisis. In the background are Nobel laureates Paul Samuelson, Robert Solow and Franco Modigliani.

But missing altogether is Mundell, MIT PhD, 1956, the thinker who in a very real sense first plowed and planted the field known today as international macroeconomics. To be sure, he was there only for a year, and took only three courses; he spent another year at the London School of Economics.  He never taught at MIT and, as a professor at the University of Chicago in the ’60s, helped devise the consensus that shattered the hold on the profession by the older generation at MIT.

But it was Mundell who plucked  Dornbusch from obscurity in Geneva and brought him to Chicago to study, along with Jacob Frenkel and the late Michael Mussa.  Dornbusch then taught the new views of a thoroughly international economy that had developed in Chicago to the next generation of students AT MIT: Jeffrey Frankel and Kenneth Rogoff (both now of Harvard); Maurice Obstfeld, of the University of California at Berkeley; and Krugman (now of Princeton). Carmen Reinhart, of Harvard’s Kennedy School of Government, imbibed macro at Columbia from Mundell himself. Dornbusch, a widely beloved figure, died of cancer, at 60, in 2002.

What new views?  At the IMF between 1961-63, Mundell added a crucial model to existing views of closed, or self-contained, national economies.The effects of economic policies depend crucially on the exchange-rate regime, he demonstrated: floating rates made monetary policy powerful and denatured fiscal policy, whereas with fixed exchange rates the reverse is true.  Encapsulated by a pair of equations, described by a couple of intersecting curves, the Mundell-Fleming model (Marcus Fleming, his IMF boss, died in 1976), brought Samuelsonian clarity to the analysis of international finance.

Then, in “A Theory of Optimum Currency Areas,” Mundell asked under what circumstances it would make sense for a nation to give up its own currency and join a larger union. By 1966 Mundell had been hired by the University of Chicago and then the fireworks really started.  The Bretton Woods system of fixed exchange rates predominated in the early 1960s.  Milton Friedman made the case for floating rates.

Friedman won the battle; the US dollar was allowed to trade freely against other currencies – to “float” – after the US left the Bretton Woods system, in 1972.  Mundell stalked off in 1971 to the University of Waterloo, in Ontario, famous today for its computer science, but otherwise nearly as off the beaten path as it was then. He moved on to Columbia University in 1974, where he has remained since.  His ideas about optimum currency areas slowly morphed into the argument for the euro.

For Mundell, the 1970s began a period of relative professional eclipse.  He all but ceased publishing in professional journals. To other economists it didn’t matter much, since his fellow Canadian Harry Johnson, who remained a professor at the University of Chicago, codified “the balance of payments approach” to monetary policy, Dornbusch had taken up his duties. The full story is far from told. (Russell Boyer, of the University of Western Ontario, is hard at work on a version of it.)

What we know about Mundell’s new theory of the policy mix – monetary policy for price stability, fiscal policy to stimulate supply-side growth – stems mainly from a series of luncheon seminars he gave to editorial writers for The Wall Street Journal, described by Robert Barley in The Seven Fat Years. The strong dollar, under the Reagan tax cuts and Volcker monetary stringency, made a case of its own for the utility of the Mundell-Fleming model. Almost completely ignored in those years was Mundell’s eminently readable little 1968 primer, Man and Economics: The Science of Choice.

Mundell, meanwhile, was an occasional guest at White House dinners in those years, an advisor to the Central Bank of Uruguay.  He ran a series of summer conferences in Italy on international financial reform. He trained a series of students at Columbia. Eventually he co-founded the Zagreb Journal of Economics. But Mundell’s presence was otherwise thin on the ground in the United States in those years.  In the ’90s, he staged a considerable comeback, and when he accepted the Nobel Prize in 1999 he sang a couple of stanzas of the Frank Sinatra standard “My Way” to the assembled throng.

It is the cover he provided for the Europe Monetary Union that is of the greatest interest. Mundell was not a force for union  compared to, say, German Chancellor Helmut Kohl.  But he was a puissant force nurturing European politicians’ confidence.  Most economists, led by Milton Friedman and Martin Feldstein, of Harvard University, opposed the measure.  Eduardo Porter put it this way the other day in The New York Times, “Virtually every economist on this side of the Atlantic – and most of those on the other – figured out that the euro would be fatally flawed.  What took economists some time to understand was that Europe’s leaders didn’t much care what they thought.”  They were determined to go ahead anyway. Mundell himself was sanguine and resolute.

Compared to the vast drama now unfolding, Mundell’s career is something of a sideshow. Times have gotten tougher for him in recent years, as he has shifted his attention to Asia.  He was caught up in the Olympus Camera scandal, having been in 2005 the first foreigner recruited to the Japanese camera maker’s board of directors. Recent speeches supporting the Chinese position on exchange rates have won him few friends in Washington.   But he remain among the liveliest and most mercurial figures in all of economics.

Still, that biography is a long way off.

.                  xxxxx

Economist John Quigley, mainstay of the Goldman School of Public Policy at the University of California at Berkeley for more than thirty years, died earlier this month after a long and entirely private battle with lung cancer.  Few knew he had been ill.  Three weeks ago he finished a paper with Matthew Kahn, of the University of California at Los Angeles, “I’m in shock,” said Kahn.

Quigley hadn’t wanted anyone to know. Henry Brady, Quigley’s dean, said, “He kept coming into the office until the last ten days of his life, and although he was visibly sick, he resolutely refused to tell us that anything was wrong,”

He was a special case.  He graduated from the Air Force Academy in 1964, spent four years doing econometrics at the Pentagon, then resigned in 1968, at the height of the Vietnam War, and followed urban economist John Kain, his Air Force Academy professor, to Harvard University, as part of a turnaround in urban economics engineered by Harvard professor John R. Meyer. Quigley obtained his PhD there in 1971.

A profound social consciousness, disciplined by determination to get the economic story right, was the hallmark of his work.  He demonstrated how ghettos diminished black families’ opportunities by denying them the growth of savings through home ownership. He studied the economic advantages of “green” structures, residential and commercial. And he tied homelessness, not to moral failure, but to collapsing low-end housing markets and rising government standards

This obituary provides a glimpse of the man.  So does this appreciation by Edward Glaeser, of Harvard University.  A memorial service is scheduled for June 9 in Berkeley.

3 responses to “Hard Times for the Elusive “Father of the Euro””

  1. How timely this column – and informative its content. You may have lost your voice last week, but certainly found it this one.

    Another advocate of currency unions worth noting: Paul Volcker – in the form of fixed exchange rates – which is to say a global currency union – which requires, of course, far more than the Euro, that elusive goal, an international monetary system that takes into account a multi-polar political world.

    Yet another advocate the French economist: Jacques Rueff – contemporary of Keynes and Hayek, architect of de Gaulle’s initiative to reset the one prescribed by Harry Dexter White at Bretton Woods, in contradiction to one proposed by Keynes, as documented by Robert Skidelsky, Keynes’s biographer: “A golden opportunity for monetary reform” – and further documented in a more recent FT column: “Keynesians are complacent about the dollar.” Appreciating the economic fault lines that resulted from the competitive currency devaluations that followed WW I, that contributed then in no small way to WW II, Rueff articulated the benefits of a system rooted in a global market-driven mechanism, instead of a monetary authority.

    Mirroring the fault lines which so motivated Rueff in his work, those identified in Raghuram Rajan’s recent book: Fault Lines, its title coining that metaphor – featured in one of these columns: “The Economist as Political Philosopher,” and subsequently the subject of a comment to another: “Now the Real Work Begins.” While they have taken almost 70 years since Bretton Woods to manifest themselves, the fault lines in today’s international economy differ little in substance from those that emerged in the 20 short years following WW I.

    Hat’s off to Mundell, in other words, for anticipating the fault lines Rajan has identified, before they became obvious; for supporting and schooling the many colleagues and students cited in this column; and for continuing to this day to articulate the case for a market-driven international monetary system that takes into account the reality of a multi-polar political world. In testimony to that vision, the Union he helped sire might just succeed, thus making the case for other forms of currency union.





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