#121 Mundell's Trilemma; Sumption's Dilemma 🎧

This newsletter is really a public policy thought-letter. While excellent newsletters on specific themes within public policy already exist, this thought-letter is about frameworks, mental models, and key ideas that will hopefully help you think about any public policy problem in imaginative ways. It seeks to answer just one question: how do I think about a particular public policy problem/solution?

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- RSJ

A couple of short takes for the mid-week edition.

An Obituary

Robert Mundell, the Noble Prize winning Canadian economist, died at his Italian home on Sunday. He was 88.

His obit in the New York Times read: Robert A. Mundell, a Father of the Euro and Reaganomics, Dies at 88.

I had mixed feelings when I read that line. Sure, you could argue Mundell’s works provided the intellectual foundation for the Euro and Reaganomics. But there are many other economists who might be ahead in the queue for claiming credit for those two phenomena. And then these aren’t exactly the greatest of times for either Reaganomics or the Euro.

Mundell’s greatest contribution to me was to set up a branch of economics singlehandedly. He theorised about international monetary policy when the idea itself was inconceivable. It might appear a bit odd today but notions of free cross-border movement of capital and a floating exchange rate weren’t anywhere near mainstream in the early 60s. Mundell almost presaged the future interconnected global economy and the monetary theory that would underpin it.

And to top it all, he summed it all up in a way that has set the bar for brevity for all future economists and policymakers. He proposed a trilemma, an intuitive interpretation of his theory, which made it the touchstone of the neo-Keynesian macroeconomic paradigm. The trilemma, also called the impossible trinity, is a beautiful representation of economic reasoning.

The policy trilemma says a country must choose between free capital mobility, exchange-rate management and monetary autonomy. Only two of the three are possible. A country that wants to fix the value of its currency and have an interest-rate policy that is free from outside influence cannot allow capital to flow freely across its borders. Think India during the 70s.

If a country chooses free capital mobility and monetary autonomy, it has to allow its currency to float. This is India now.

And if the exchange rate is fixed but the country is open to cross-border capital flows, it cannot have an independent monetary policy. Think countries now in the European Union.

Robert Mundell helped policymakers and central bankers think of the fiscal and monetary policies as two separate instruments to achieve varying objectives. His was a beautiful mind.

RIP.

An Interview

I also came across this interview of Jonathan Sumption over the weekend. Lord Sumption is a retired Justice of the Supreme Court of the United Kingdom and earned his reputation with his brilliant 4-volume history of the Hundred Years War.

The preface to the interview sets the stage for his responses thereafter:

“Over the past year, his unabashed criticism of lockdown policies has turned him into something of a renegade. It is a development that mystifies him; as he sees it, his views have always been mainstream liberal, and it is the world around that has changed.

In the course of our conversation, the retired judge doesn’t hold back. He asserts that it is becoming morally acceptable to ignore Covid regulations, and even warns that a campaign of “civil disobedience” has already begun.”

I will reproduce three of his answers below from the Unherd site that deeply resonated with me:

On the ethics of law-breaking:

“I feel sad that we have the kind of laws which public-spirited people may need to break. I have always taken a line on this, which is probably different from that of most of my former colleagues. I do not believe that there is a moral obligation to obey the law… You have to have a high degree of respect, both for the object that the law is trying to achieve, and for the way that it’s been achieved. Some laws invite breach. I think this is one of them.”

On the dangers of public fear:

“John Stuart Mill regarded public sentiment and public fear as the principal threat to a liberal democracy. The tendency would be for it to influence policies in a way that whittles away the island within which we are entitled to control our lives to next to nothing. That’s what he regarded as the big danger. It didn’t happen in his own lifetime; it has happened in many countries in the 20th century, and it’s happening in Britain now.”

On the fragility of democracy:

“Democracy is inherently fragile. We have an idea that it’s a very robust system. But democracies have existed for about 150 years. In this country, I think you could say that they existed from the second half of the of the 19th century — they are not the norm. Democracies were regarded in ancient times as inherently self-destructive ways of government. Because, said Aristotle, democracies naturally turn themselves into tyranny. Because the populace will always be a sucker for a demagogue who will turn himself into an absolute ruler…

Now, it is quite remarkable that Aristotle’s gloomy predictions about the fate of democracies have been falsified by the experience of the West ever since the beginning of democracy. And I think one needs to ask why that is. In my view, the reason is this: Aristotle was basically right about the tendencies, but we have managed to avoid it by a shared political culture of restraint. And this culture of restraint, which because it depends on the collective mentality of our societies, is extremely fragile, quite easy to destroy and extremely difficult to recreate.”

HomeWork

Reading and listening recommendations on public policy matters

* [Podcast] On Persuasion, Yascha Mounk and Dr Leana Wen sit down to discuss the failures of expert opinions, the deadly consequences of inaction, and what the West needs to do to improve public health for the decades to come. 

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