Jack Kemp & Peter Ferrara would have you believe that John McCain would pay for his proposed tax cuts by big spending cuts, while Barack Obama would increase everyone’s taxes so as to pay for a much larger government. Never mind the fact that their characterization is quite at odds with reality, what offends me is the pretense that Robert Mundell has somehow endorsed the latest nonsense from Jack Kemp:
Nobel Prize-winning economist Robert Mundell has written that if such tax increases are adopted, the U.S. economy will suffer “a deep recession, a nosedive,” and the dollar will decline further.
Really – when and where did Dr. Mundell actually write this? After several pages of babbling, Kemp and Ferrara write:
Frankly, we are going to need a new theory of economics to argue that Obama’s much higher taxes, much higher spending, protectionism, and much higher energy costs are going to revive the economy and promote economic growth.
No – all we need to do is to turn to Mundell’s open economy IS-LM model but first we have to decide whether the two Presidential candidates are proposing fiscal stimulus or fiscal restraint. For the sake of argument, let’s suppose Obama is proposing fiscal restraint which will tend to reduce private aggregate demand. In the Mundell model, this would indeed lead to dollar devaluation as interest rates fell. But then a weaker dollar would increase net exports, which would at least partially offset the decline in aggregate demand.
I can’t decide which is the case – is Jack Kemp just too stupid to know that this is the implication of Mundell’s contribution or is Jack Kemp up to his old tricks of lying to the readers of the National Review assuming they are too stupid to know otherwise.
Update: Kyle Wingfield did interview Mundell a couple of months ago:
“It’s a lethal thing to suddenly raise taxes,” he explains. “This would be devastating to the world economy, to the United States, and it would be, I think, political suicide” in a general election.
OK, a quick dose of fiscal restraint is not a good idea when aggregate demand is weak. But phased-in fiscal restraint, which we tried during the Clinton years, could restore national savings without triggering a Keynesian style recession. Much of the rest of this interview written by a Wall Street Journal’s editorial page writer reads like the usual supply-side gold-bug silliness the National Review is known for.