Columbia's newest Nobel Prize winner, economist Robert Mundell, laid the intellectual groundwork more than 30 years ago for the creation of the European Union and its common currency, the euro, and became a hero of political conservatives as the champion of "supply side" tax cuts and higher interest rates adopted during the Reagan administration.
Returning to New York from an economic conference in Sweden a week after the Nobel Prize in Economic Science was announced, Mundell met on Oct. 20 with the international press in Columbia's Low Memorial Library. The 67-year-old professor was asked for his views on a range of economic topics, from how high the Dow Jones industrial average might climb ("certainly to the 15,000 to 20,000 range over the next three years") to whether Alan Greenspan, the Federal Reserve chairman, should raise interest rates ("No - the policy should remain steady as she goes") to his assessment of Rudy Guiliani's political future ("He's been an excellent mayor who has really brought New York back. Now he should concentrate on cutting the New York City sales tax.)"
Mundell, who has been a faculty member at Columbia since 1974 and holds the C. Lowell Harriss Professorship of Economics, became the 60th person who has taught or studied at Columbia to have won the Nobel Prize. He is the second Columbia economist to win a Nobel, following the late William S. Vickrey, who was awarded the prize in 1996. Mundell learned that he had won the Nobel Prize on October 13 in London on a stopover en route to Stockholm. "I was completely delighted and elated," said Mundell, whose pioneering research on common currencies, and the implications of the flow of capital across national borders and flexible foreign-exchange rates were recognized by the Royal Swedish Academy of Sciences, which awards the prize. His discoveries have placed him among the perennial favorites for a Nobel for decades.
"His writings have not just been a topic of discussion for professors but have really laid the groundwork for changes in economic relations between governments," said Professor Richard Clarida, chair of the Columbia Economics Department, which has recently undergone rejuvenation with the hiring of 10 new faculty members, some of them senior scholars recruited from Harvard and Princeton.
Mundell said he will set aside most of the $975,000 prize to complete renovations to his second home, Santa Colomba, a 500-year-old villa in Tuscany near Sienna, which he purchased from the Catholic Church in 1969 as a hedge against inflation and has been slowly restoring. Mundell also plans a gift of a pony to his 22-month-old son, Nicholas, who is often seen on the Columbia campus being pushed in a stroller by his father.
In describing the flourishing American economy in interviews at Columbia with journalists, Mundell repeatedly praised bipartisanship in Congress during the 1980's for the passage of revisions to the U.S. tax codes that reduced the top tax bracket to 28 percent. "This is what created the marvelous boom of the last 15 years," he said.
During the 1970's most economists were stumped by stagflation -- a combination of inflation, a troubled dollar, persistent unemployment and a worsening balance of payments. Mundell suggested an unorthodox solution: raise interest rates to protect the dollar and cut taxes to spur the economy. His views attracted the attention of political conservatives, giving intellectual gravitas to the supply-side tax cuts movement, adopted by candidate Ronald Reagan in the 1980 presidential campaign.
"There's been no downside to the tax cuts," pronounced Mundell, who predicted that when the booming U.S. economy takes a pause "as history tells us it will" tax cuts would be needed again to stimulate growth. "We have created 36 million jobs, more jobs than the entire German labor force and one-fourth of world output. We are the third largest economy in the world."
"I believe we are gradually moving to a point where we can manage our economy in a way that we've never dreamed of," he said.
In the early 1960's when almost all countries had fixed currency exchange rates, Mundell was the first theorist to study the impact of constantly adjusting, or "floating" exchange rates. He demonstrated that monetary policy -- how a central bank controls a country's money supply -- has a limited impact on economies with fixed exchange rates but is the best way to stimulate economies with floating exchange rates that allow the free flow of capital across their borders.
He made the case for the "europa," as he called it, as long ago as 1969. His theories have become conventional wisdom today as capital moves freely around much of the world, seeking its highest return with the click of a computer mouse. Mundell theorized that exchange rates are determined in capital markets by how willing people are to hold a nation's currency, based on their views of country's inflation levels, monetary policies and prospects for growth.
The Swedish Academy cited the "far-reaching and lasting impact" of Mundell's research.
"Above all, Mundell chose his problems with uncommon -- almost prophetic -- accuracy in terms of predicting the future development of international monetary arrangements and capital markets," said the Academy.