Tags: Free | Lunches | US | Insolvency | Mundell

'Free Lunches' Pushing U.S. to Insolvency, Columbia’s Mundell Says

Tuesday, 20 March 2012 02:26 PM

Political competition for votes and lack of fiscal discipline are pushing the world’s largest economy toward solvency issues, according to the Nobel Prize-winning economist Robert Mundell.

“The public is looking for free lunches, and the political competition for votes makes the politicians offer them free lunches,” Mundell, a professor of economics at Columbia University, said on Bloomberg Radio interview with Tom Keene and Ken Prewitt. “That’s what gets us in to the difficulties of insolvency.”

The U.S. plans to finance a budget deficit forecast to exceed $1 trillion for a fourth year and outstanding U.S. marketable debt expanded to $10 trillion in February.

Even as the jobless rate has fallen from a high of 10 percent in October 2009 to 8.3 percent in February, it remains almost 2 percent above the average of the past decade and the central bank has called unemployment “persistent.”

“You could have fiscal stimulus back in the day of Keynes, when the government was a small proportion of gross domestic product and there was no insolvency problem,” he said, referring to British economist John Maynard Keynes. “You can’t just issue more bonds to pay for deficits and expect it to solve the employment problem.”

The euro area is forecast to have fiscal spending of 3.3 percent of GDP in 2012, compared to 7.1 percent in the U.S. this year.

“The United States is not in as bad a situation as Europe,” he said, “but it’s getting that way.”

‘Political Glue’

As the International Monetary Fund said Greece may require additional funding or a third debt restructuring, the odds of the fiscal union breaking up by the end of 2013 have reached 36.5 percent, based on bets made at Intrade.com. Mundell, often referred to as the father of the common currency, sees a different outcome.

“It’s political glue inside Europe to keep it together -- the euro is the best thing going for it since the creation of the common market,” he said. “The end game is going to be deeper integration in Europe and more centralization of the fiscal authority.”

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Tuesday, 20 March 2012 02:26 PM
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