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monetary union). The major disadvantage, he noted, is the difficulty of maintaining full employment when one country suffers from some event that other members of the currency area do not suffer from. What if, for example, Canada and the United States are in a currency area, but the demand for softwood lumber suddenly declines? This would hurt Canada proportionally much more than the United States and, with a floating exchange rate, Canada could let the value of the Canadian dollar fall and save somewhat on the need for Canadian lumber workers’ wages to fall. But with Canada and the United States in the same currency area—the ultimate in fixed exchange rates—the Canadian dollar cannot fall relative to the U.S. dollar because they are the same dollar. One immediate implication, noted Mundell, is that high labor mobility (i.e., allowing workers to move from one country in the currency area to another country in the area) is key so that workers can have an easier time finding jobs. Of course, the euro is now the world’s largest currency area, and, in line with Mundell’s thinking, many EU supporters are advocating that workers be free to move from one EU country to another. Opposition to such worker mobility, though, was strong among French voters who voted down the EU constitution in 2005.
The issue of mobility of labor also dovetails with another issue to which Mundell contributed. He showed that if labor and capital are mobile across national borders, then even if there are trade barriers, labor and capital can shift to equalize prices of tradable goods. This means that trade barriers lead to more movement of labor and capital.
Mundell was and is an ally of various supply siders who not only want to use fiscal policy to keep the economy growing—which is consistent with his original 1960s insight—but also want a particular fiscal policy: namely, keeping marginal tax rates low or cutting them to a low level. In his Nobel address,2 Mundell highlighted the fact that inflation during the late 1960s and the 1970s had pushed people into higher and higher tax brackets, even when their real income had not increased. In the early 1970s, Mundell advocated that Canada’s tax brackets be indexed to inflation so that inflation alone would not increase people’s marginal tax rates, and the Canadian government adopted this policy. In 1981, President Ronald Reagan and Congress also adopted indexing, effective in 1985.
Mundell earned his Ph.D. from MIT in 1956. His early positions were at Stanford University, the Johns Hopkins Bologna Center of Advanced International Studies, and the International Monetary Fund. From 1966 to 1971, he was a professor of economics at the University of Chicago. He has been on the faculty of Columbia University since 1974.