Monday, May 17, 2010

Mundell on deficits.

From David P. Goldman's excellent recent Asia Times column:
Paul Samuelson's most gifted doctoral student is the Canadian Robert Mundell, who won the 1999 Nobel Prize in economics. Mundell's theory is not as simple as Keynes, for it is a global model that casts a weather eye on the long run. The trouble, Mundell observed in a 1965 essay in the Journal of Political Economy, is that markets are not very good at seeing into the future. They may do a reasonable job of evaluating corporate debt (although as the former head of bond research for a major Wall Street firm I am skeptical). But they are very bad at gauging the present value of household income streams.

That, Mundell argued, is why government debt actually may represent wealth: if a well-funded public debt (to borrow Alexander Hamilton's term) is supported by future economic growth, which implies more employment and tax revenues, then an increase in debt represents wealth. It also might represent hot air. Mundell cited the case of a tax cut that leads to revenue loss, but also to economic growth. If the increase in tax revenues arising from the higher growth rate more than pays the interests on the bonds that the government must issue to cover the revenue loss, the result is an increase in wealth.

1 comment:

  1. I'm sorry but I really am detecting a small amount of senility showing up in Mundell's words these days. Will it take as long for supply-siders to admit it as it did with RR?

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