NCPA - National Center for Policy Analysis

Reaganomics Architect Wins Nobel Prize

October 19, 1999

Robert A. Mundell of Columbia University, a founding father of supply-side economics, has received the Nobel Memorial Prize in Economics. Supply-side economics was the foundation of Ronald Reagan's economic policy.

In the 1970s, the prevailing view was that inflation was largely a fiscal phenomenon unconnected to monetary policy, that the best way to reduce a trade imbalance was to devalue the currency, and that gold should play no meaningful role in monetary arrangements. Thus we saw Lyndon Johnson impose a 10 percent surtax in 1969 to arrest inflation and in 1971 Richard Nixon ended the last vestiges of the gold standard and devalued the dollar. Lacking any anchor, the money supply exploded, leading to rampant inflation.

Mundell was one of the first to say that instead of loose money, we needed tight money; instead of tax increases, we needed tax cuts; instead of devaluing the dollar, it should once again be anchored to gold.

Mundell laid out this new theory at a May 1974 conference sponsored by the American Enterprise Institute (later published as "The Phenomenon of Worldwide Inflation" in 1975). Mundell said that rapidly rising prices for oil and other commodities was not the result of shortages or the cause of inflation, but rather an inevitable consequence of going off gold. He predicted (rightly) that tight money would stop inflation and lead to a decline in oil prices.

This conference was attended by Jude Wanniski of the Wall Street Journal, whose interview with Mundell caught the attention of Congressman Jack Kemp of Buffalo, New York. Supply-sider Arthur Laffer organized the conference and edited the proceedings.

Eventually, they and some others, including myself, Paul Craig Roberts and Norman Ture, put together the Kemp-Roth tax-cut bill. Ronald Reagan bought the idea and the rest is history.

Source: Bruce Bartlett (senior fellow, NCPA), "Supply Side in the Nobel Wings," Washington Times, October 15, 1999.


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