Robert Mundell on Stimulus

I just stumbled on this, and don’t think I’ve seen it anywhere else, so I offer for your consideration economics Nobel Laureate Robert Mundell on the stimulus in a January 9th Turkish TV interview :

Ipek Cem: There is talk of a stimulus package in the US. We also know that the average US citizen is highly leveraged as a consumer. And when we talk about stimulus we are also talking about consumer pending. How to make the two of them, you know work hand in hand?

Robert Mundell: Well there’s a lot of questions about “What a stimulus package really is?” And I don’t think the major has been taken called a stimulus package are going to be much of a stimulus. To a certain extent, monetary policy, an easy monetary policy, is stimulating for us. But that’s not the pack what we mean by a “stimulus package” because “Federal Reserve” can always do that. What they mean by that is government spending. But government spending doesn’t have that bigger effect. If you have a big increasing government spending, without monetary expansion, they have to finance that deficit by bringing bonds. So while the spending adds to demand, the selling of the bonds, takes away the demand. So if there’s a multiplier in one process, there is a negative multiplier with the other process. And the other fact is that the exchange rate is flexible. So if you sell more bonds with a stimulus pending interest rates rise a little bit. And the capital comes in, the current account deficit increases. The trade deficit increases. So a good part of that stimulus package goes to the rest of the world.

Ipek Cem: So what kind of policy measures would you be advocating at a time like this?

Robert Mundell: Well I think that the difficulty of all the banks, they need to recapitalize the bank, which everybody says it’s necessary. And is also true with corporation you need to recapitalize the corporations like “General Motors”, “Ford” and “Chrysler”. The glories, what used to be glories of American capitalism in the 20th century. American manufacturing. They need to be recapitalized, too. And instead of the government taking its stimulus package, the bailout package, recapitalizing, buying stocking these banks, it is much more important to look at what’s happenning right now, what the goverment is doing today to economy. What the government does to the corporation today is take thirty five percent of the profits of the corporation. And without putting anything in. So with the 35 percent of corporate tax, they take all that, draining the corporation from that, without putting anything in. And so what the best thing to do for stimulus is to reduce or eliminate the corporation tax. It is a double taxation anyway, because the capital pays the tax to the corporation and the profits are taxed at the corporate level after 35 % is taken out. And then there are also tax in the individual level. So eliminate it. By the way the revenue isn’t going to be very much because the corporate tax used to earn 5 % of GDP in revenue. It’s gone down about 1,5 % of GDP. So it doesn’t add too much. And in a recession period there won’t be any profits and tax, so the revenue will be very little. So you don’t loose too much, but you would, if you stimulate economy all the other taxes will increase. And the revenue then from the tax cuts of corporations will increase the tax of every other corporation. Just recently, Germany has cut it it corporation tax from 25 % to 15 %. That’s a very good move and that’s what the United States should do. I think, I was going to say from 35 % to 20 %, but it would be even better if they do it to 15 %.

Recap: Bond-financed spending doesn’t much help. Recapitalize banks and eliminate radically reduce the corporate income tax.

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