Mundell on Y2K and the Euro
Jude Wanniski
October 27, 1999


Do you remember when you interviewed me for the story you did two weeks ago, when the Swedish Academy announced that Bob Mundell had won the Nobel Prize in economics? (Of all the stories I saw, by the way, yours was the best.) At one point in the interview, I got sidetracked talking about the effects Y2K might have on the euro and you said that was a separate story, and you might come back to it. Well, I wish you would. Mundell has been speaking about this issue on the radio interviews he's been having, but his comments have yet to be picked up by a major newspaper. I left messages for your Y2K reporter, but have had no answers, so I come back to you. Professor Mundell received the most visibility on this topic on Sunday's Marketwatch program, in an interview with Marshall Loeb, the former editor of Fortune. Here is the snippet.

Loeb: Will your winning of the Nobel Prize help speed the adoption of your ideas and policies?

Mundell: It will happen outside the U.S. A lot of people here don't like my tax cut ideas. They want to keep a highly progressive tax system.

Loeb: Will Y2K upset everything?

Mundell: Y2K may cause us some problems. It's like a meteor hurtling to earth. It might hit us, and it might not; we just don't know. But enough people who have studied it think that it is potentially very serious, very damaging. I'm thinking of controllers at airports and of seaports around the world. Seaports depend almost wholly on computers to coordinate the schedules of ships coming in. If computers give false signals, there could be lot of confusion.

Loeb: So what can we do about it?

Mundell: The President should direct his Secretary of the Treasury, Larry Summers, to convene a meeting of the finance ministers and the central bankers of the U.S., Canada, Britain, Japan and the 11 European countries that use the euro. They should stabilize monetary exchange rates and the price of gold for a period from about a month before to two or three months after January 1.

Loeb: That means that the value of individual currencies and the price of gold would be fixed for that period of time?

Mundell: I recommend that. It is important to remove any unnecessary uncertainty (surrounding Y2K). One element of unnecessary uncertainty is volatility in exchange rates. This (proposal) would be very helpful because any changes in exchange rates would become enormously more difficult to deal with when computers go down. In the absence of computers, we would not be able to very effectively manage a system of 200 currencies floating in value around the world.

Loeb: How are you going to ask for your prize money?

Mundell: I'm going to ask for it in euros.

Loeb: And why do you prefer (euros) to the dollar?

Mundell: Because I think that in the first 9, 8, 6 months of this year, the euro went down and now I think the euro has gone down too far. It undershot ... the direction.... I look forward in the next year or so to an expansion and a rising euro and a falling rate of the dollar against the euro.

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P.S. Diana... Hal Lux of Institutional Investor called yesterday afternoon to talk about Mundell and whether he would never have received the prize except for his development of supply-side economics. I told him that if it were not for supply-side economics, Mundell would have gotten the Nobel Prize 15 years ago, but that the political controversy surrounding Reaganomics caused its opponents to discourage a Nobel Prize for him. If he had simply stopped at optimal-currency areas, though, history would look back upon him as one of hundreds of economists who won the Prize with an advance in the economic literature. His supply-side work will elevate him in history to the level of John Maynard Keynes.