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Hawaii’s World

By A.A. Smyser

Thursday, November 4, 1999


Honors for
supply-side
economist

WHEN Morgan Stanley Dean Witter celebrated the 75th anniversary of the founding of Dean Witter in Hawaii, the parent firm's chief investment adviser sent 400 clients away from lunch smiling. Little wonder.

Joseph McAlinden used an airplane analogy to say stocks as measured by the Dow Jones average will nearly double in value to 20,000 by the year 2010 and may do it by 2007.

The airplane allusion was to the white-knuckles part of the trip, when the pilot announces: "Fasten your seat belts. There is rough air ahead." The stock averages will fly through some rough air, McAlinden said, perhaps soon because of Y2K adjustments, but will keep climbing despite them.

Which brings me to the real subject of this column -- Robert A. Mundell, the Canadian-born Columbia University professor, who has just won the Nobel Prize for economics.

If you believe the editorial pages of the Wall Street Journal, Mundell had everything to do with why the Morgan Stanley Dean Witter adviser can be so bullish.

Back in 1980 Mundell preached (though not alone, I am told) that we could have both tax reductions and a sound dollar. It was called supply-side economics.

Many believed we could have one or the other but not both. Mundell argued that personal income tax cuts away from confiscatory levels would enhance economic activity. People would buy more. Businesses would invest more. Meantime, interest rates as high as needed would keep inflation from coming back. And tax revenues would actually rise, supply siders contended, because of the stimulated economy.

It seemed to work except that, contrary to supply-sider predictions, the national debt zoomed way up. It's at $5 trillion. But we seem to have even that under control today. The federal budget has been out of the red for the last two years.

McAlinden refers to this in Goldilocks terms. Our porridge is not too hot, not too cold, but just right. He thinks the porridge can stay that way. Recovery in Asia and rising living standards worldwide will stimulate still more activity.

My guru on things economic is Professor David McClain. He occupies an endowed chair at the College of Business Administration at the University of Hawaii-Manoa and has been nominated as dean.

McClain thinks the Wall Street Journal went way overboard in saying Mundell had it right while economist John Maynard Keynes had it wrong.

KEYNES died half a century ago and had it right about advising the U.S. government to spend its way out of the great depression. Japan is following Keynes today, McClain reminded me. If there are Keynesian errors, McClain says, they came from his disciples going too far in trying to fine-tune the U.S. economy.

Mundell won the Nobel primarily for providing the intellectual base for 11 countries in Europe to band together last Jan. 1 to create a common currency, the euro.

I asked: "Why not an ASEAN common currency or even a world common currency?"

McClain said: "Whoa!" Conditions have to be just right before that can be done, he said. Common-currency countries have to be similar and accept that their common currency will force them into similar national budget policies as well. McClain doubts if even the euro's founders are totally ready for this.

One of Mundell's aphorisms is that the only closed economy is the world economy. This should be a reminder to the remaining ostriches in Hawaii that we must contend with worldwide influences as we dig out of the economic hole we are in.



A.A. Smyser is the contributing editor
and former editor of the the Star-Bulletin
His column runs Tuesday and Thursday.




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