Nobel laureate economist had U.S. policy influence
CHALLENGED WIDELY HELD VIEWS AMONG WESTERN CENTRAL BANKS
YOU SHOULD NOT THINK IN TERMS OF CONTROLLING THE ECONOMY.
THAT LEADS TO BAD OUTCOMES. YOU SHOULD THINK IN TERMS OF
COMMITTING TO GOOD POLICY RULES. — EDWARD PRESCOTT,
2004 WINNER OF THE NOBEL PRIZE IN ECONOMICS
Edward Prescott, a Nobel laureate economist who urged policy-makers to take the long view on economic strategies and resist shortrange tinkering over issues such as employment and interest rates, arguing that seeking quick booms often can be followed by sobering busts, died Nov. 6 at a healthcare centre in Paradise Valley, Ariz. He was 81.
His son, Edward, said his father had been receiving cancer treatment.
Prescott’s work with Norwegian economist Finn E. Kydland, with whom he shared the 2004 Nobel Prize in economics, was as much about high-level policy as it was consumer psychology — with particular relevance to the current worries over rising food and energy prices and the many voters looking for someone to blame.
Prescott challenged widely held outlooks among Western central banks and economic policy chiefs favouring direct interventions, such as pumping up interest rates to fight inflation or dropping borrowing costs in attempts to jumpstart business growth and consumer spending.
He contended that the tweaks may bring temporary relief but end up causing disruptive economic crests and valleys. A calmer path, he asserted, is better for financial markets and job growth, and lessens the chances for mood swings by the public and businesses.
The key to any good policy, Prescott summarized, was to make a commitment and stick to it.
“What I am going to describe for you is a revolution in macroeconomics,” Prescott wrote in the American Economist in 2006.
The essay further distilled theories from a seminal 1977 paper by Prescott and Kydland, titled “Rules Rather Than Discretion: The Inconsistency of Optimal Plans” and written during a time of U.S. “stagflation,” a combination of high inflation and stagnant economic growth.
Fluctuations and unpredictability in economic policy, they argued, feed into turbulence, exacerbate boom-and-bust cycles and lead to potentially harmful decisions on the home front.
If a family, for example, expects higher taxes in the future, it may spend more now and save less, Prescott theorized. If businesses anticipate interest rate hikes in attempts to tame inflation, they may bump up prices in advance and keep the inflationary cycle going.
“You should not think in terms of controlling the economy,” Prescott said in 2004. “That leads to bad outcomes. You should think in terms of committing to good policy rules.”
“So much of his work challenged the way we modelled economic policy, forcing us to dig deeper into our theories and tests of our theories against data,” said a statement from Art Rolnick, former director of research at the Federal Reserve Bank of Minneapolis, where Prescott was an adviser while he held various teaching and research positions, including at Arizona State University since 2003.
The Nobel Committee said Prescott and Kydland, now at the University of California at Santa Barbara, challenged views on the “credibility and political feasibility of economic policy.”
For some detractors, however, Prescott and Kydland were on intellectual shaky ground.
Their theories ran roughshod over one of the architects of economic policies since the Great Depression, John Maynard Keynes. In the Keynesian view, officials should always have their hands on the economic levers. During slumps, raise government spending and lower interest rates, Keynes advised. To combat inflation, raise rates and allow higher unemployment.
Prescott countered that the Keynesian template is incomplete. He said economic cycles are more influenced by disruptions — new technologies or major events such as wars or the COVID pandemic — than by monetary policies.
Peter Lindert, an economics professor emeritus at the University of California at Davis, wrote in 2003 that Prescott’s work was “heavily laden with assumptions” and “educated, intelligent, plausible fiction.” In 2004, former treasury secretary Lawrence Summers told the Wall Street Journal that Prescott’s theories on business cycles were “implausible.”
Dr. Prescott acknowledged an unavoidable fact: His theories often collided with the realities of democracies, where economic downturns bring pressure for fast action and politicians use tax policy changes as campaign promises.
“Nothing is easy in politics,” Prescott said in a 2005 speech.
Edward Christian Prescott was born Dec. 26, 1940, in Glens Falls, N.Y., where his mother was a librarian and his father was an industrial engineer at the Imperial Wallpaper and Pigment Co.
Prescott said he worked summer jobs in local paper mills as a teenager. “I got to know, like and respect my fellow workers who didn’t have the opportunities I had,” he wrote later.
He graduated from Swarthmore College in 1962 with a degree in mathematics and received a master’s degree in operations research in 1963 from Case Institute of Technology (now Case Western Reserve University) in Cleveland. He completed a doctorate in economics at Carnegie Institute of Technology (now Carnegie Mellon University) in 1967.
Before taking a professorship at Arizona State, Prescott taught economics at the University of Pennsylvania, Carnegie Mellon, the University of Minnesota and the University of Chicago. At Carnegie Mellon in the early 1970s, Prescott met Kydland, then a graduate student, and became his dissertation adviser.
A decision to spend 1974-1975 at the Norwegian School of Business and Economics in Bergen, Norway, resumed Prescott’s collaboration with Kydland, who was on the faculty.
Prescott often said one of his great pleasures was teaching and working as a doctoral adviser to “help students in that very difficult transition from student to researcher,” he wrote in his biographical sketch for the Nobel Committee.
A University of Minnesota tribute to Prescott said he liked to pop into colleagues’ offices and ask with a smile: “What major advances are you making in economic science today?”
Survivors include his wife of 57 years, the former Janet Dale Simpson; sons Edward and Andrew; daughter Wynne; and six grandchildren.
Despite Prescott’s rejection of monetary policy interventions, he was outspoken in his belief in some conservative ideologies: that lower taxes stimulate economic growth and that Medicare and Social Security benefits should be trimmed back. He regularly took aim at the higher tax rates in Europe that fund programs such as health care but that he claimed also hold back economic dynamism.
In 2009, Prescott joined more than 200 economists and others in an open letter by the libertarian Cato Institute opposing President Barack Obama’s American Recovery and Reinvestment Act after the major fiscal upheavals of the global economic downturn.
“Lower tax rates and a reduction in the burden of government are the best ways of using fiscal policy to boost growth,” said the letter, which ran in the New York Times and other publications.
Prescott also took a public stand against estate taxes, so-called death taxes, on a person’s assets that are bequeathed to survivors.
“Economists like simplicity. It’s one of our most endearing traits,” he wrote in a 2006 op-ed in the Wall Street Journal. “As soon as you complicate things by getting between a man and his intentions you create all sorts of distortions that are often suboptimal (and are the devil to model). Taxes excel at these shenanigans. And those distortions don’t end when the grim reaper comes calling. Ashes to ashes, dust to trust.”