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Pearls before swine?


Canadian Robert Mundell's Nobel prize-winning supply-side economic ideas fall on deaf ears at home.

Originally published in the Halifax Herald.


David Gratzer

 Author Notes

Student at the Faculty of Medicine, University of Manitoba, where he served on the university's Board of Governors for four years. Author of a weekly column for the Halifax Herald and contributor to over a dozen newspapers and magazines including the National Post, the Calgary Herald, the Ottawa Citizen, and the Toronto Star. Author of Code Blue (1999), winner of the Donnor Prize for outstanding books on public policy.

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Code Blue: Reviving Canada's Health Care System
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 Essay - 10/13/1999

WINNING a Nobel Prize should be a ticket to fame. Instead, professor Robert Mundell is a man without honour in his own country.

After being awarded the most prestigious prize in economics, the Toronto Star declared Mundell a "nutbar." His win, the Star maintained, was as random and meaningless as winning the lottery.

Though only a few other Canadians have ever received this recognition, no reception is scheduled with the Governor General.

No praise from the Star. No tea with Clarkson. Mundell will simply have to console himself in that he has changed the face of modern economics.

The 1999 Nobel Laureate in Economics has a long string of accomplishments including laying the intellectual foundation for the euro, the common currency of the European Union. Every tourist to visit Europe who can't convert pounds to francs to marks in his or her head - which is to say, every tourist to visit Europe - should be grateful.

Business people, too, should be appreciative. Monetary union allows effortless movement of capital.

Mundell's most interesting work, however, is his role as the father of supply-side economics.

Supply-siders are a controversial lot. Essentially, they believe that tax cuts can stimulate the economy. If businesses and individuals pay less money to the government, they have more money available to spend and invest, fostering economic expansion. "Voodoo economics" was the famous 1980 characterization of then-Republican candidate George Bush.

Supply-side economics is widely believed to be an American concept, in part because its principal political champion was Ronald Reagan. The president, who staked his 1980 election on an across-the-board tax cut, was converted to the cause by Congressman Jack Kemp, a Hall of Fame football player with a love of economics. Kemp was won over by Jude Wanniski, a journalist with the Wall Street Journal, and Arthur Laffer, a prominent economist.

Every one of these gentlemen is American. But the man who inspired Wanniski and Laffer is an economist by the name of Mundell.

Thus, the boldest campaign pledge of modern American politics originated with a Canadian. The Reagan tax cut is still controversial. It has been blamed for the ballooning of the deficit, a growing gap between rich and poor, and lower than anticipated economic growth.

None of these charges is true.

As economist William A. Niskanen notes, after the 1981 tax cut, the U.S. economy grew by 3.2 per cent a year - besting the Ford and Carter terms as well as the Bush and early Clinton years. Unemployment was halved. Every income group, from the poor to the richest, enjoyed a substantive increase in income.

What is true is that the deficit did significantly rise during the Reagan years. But the problem wasn't the cost of the tax cuts - after 1981, tax revenue grew by roughly seven per cent a year. The problem was the politicians' inability to contain spending.

As author David Frum observes in Dead Right, had the Reagan administration managed to keep government growth in line with the rate of inflation, buoyant tax revenues would have been enough to pay for the tax cut, the defence buildup and another big tax cut (say elimination of the corporate tax). Mundell's economics didn't fail the Reagan administration - a lack of fiscal restraint did.

The United States is not the only country to enjoy the benefits of lower taxes. When the Dallas-based National Center for Policy Analysis compared economic growth before and after tax reduction internationally, 14 of the 17 countries boasted better GDP expansion (internal instability hindered the other three). In some cases, the results were striking. Peru's economy shrank in the 1980s. But from 1990-96, after the tax reduction, the economy grew at a rate of six per cent a year.

There is more to economic performance that tax cuts alone. (A tight monetary policy, another cause Mundell has championed, is also important.)

But the success of tax cuts to create opportunity cannot be doubted. Except, ironically enough, in Mundell's home country.

The week he won the Nobel Prize, the Liberals opened Parliament with a throne speech that allocated just 102 words to tax cuts. The speech ran 24 pages.

And tax cuts remain largely unmentionable in economically depressed regions. Responding to the suggestion of a Financial Post contributor that Saskatchewan significantly reduce taxes, Finance Minister Eric Cline explained: "Those who argue that dramatic tax cuts a la Alberta and Ontario would produce a Prairie Nirvana neglect to point out that we do not have Alberta's vast oil reserves and, unlike Ontario, we are not prepared to run deficits to finance those tax cuts."

It doesn't take a Mundell-scale intellect to realize that tax cuts don't mean deficits. And if Saskatchewan doesn't have the oil reserves of Alberta, it is all the more important for them - as well as other have-not provinces - to cut taxes.

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