The 2011 Nobel Prize in Economics

by Pejman Yousefzadeh on October 11, 2011

It has gone to Thomas Sargent, and Christopher Sims. “Go Princeton! (And NYU)”, says Paul Krugman, who apparently likes to forget that Sargent spent eight years at the University of Chicago, and will go back next year to spend a three year stint as part of the Becker Friedman Institute.

Sargent’s ties to the University of Chicago–a hated freshwater redoubt for the likes of Krugman–are important, because they place him in the freshwater economics camp. Krugman, a thoroughgoing saltwater economist, doesn’t like that, so he tries to play down the freshwater connections in his post:

Is this a fresh-water macro prize? Sargent is surely identified with that school, and to some extent these techniques have tended to be associated with fresh-water modeling. But they’re much more widely used than that. For example, Barry Eichengreen, who does a lot of quantitative economic history from a relatively Keynesian perspective, routinely uses Sims-type time-series techniques, e.g. in this paper on multipliers in the Great Depression.

While it is nice to see that saltwater economists are using freshwater techniques in their research–never let it be said that the world is without hope for enlightenment–the fact that one or some saltwater economists use techniques developed by Sargent and/or Sims is not enough to allow the saltwater camp to lay claim to this year’s laureates. Take it away, Ira Stoll:

. . . An interview of Professor Sargent by the Minneapolis Fed in August 2010 summed up some of his contributions succinctly: “Policymakers can’t manipulate the economy by systematically ‘tricking’ people with policy surprises. Central banks, for example, can’t permanently lower unemployment by easing monetary policy, as Sargent demonstrated with Neil Wallace, because people will (rationally) anticipate higher future inflation and will (strategically) insist on higher wages for their labor and higher interest rates for their capital.”

That interview is also notable for Professor Sargent’s icy dismissal of another Nobel laureate in Economics, Paul Krugman of Princeton University and The New York Times opinion page.

[Minneapolis Fed interviewer]: What was Paul Krugman’s opinion about those Princeton macro seminar presentations that advocated modern macro?

Sargent: He did not attend the macro seminar at Princeton when I was there.

Interviewer: Oh.

In the same interview, Professor Sargent was also skeptical of President Obama’s stimulus:

Interviewer: A January 2009 article quotes you as saying, “The calculations that I have seen supporting the stimulus package are back-of-the-envelope ones that ignore what we have learned in the last 60 years of macroeconomic research.” What calculations had you seen?

Sargent: I said something like that to a reporter. I had just read an Obama administration’s Council of Economic Advisers document e-mailed to me by my friend John Taylor. I agreed with John that the CEA calculations were surprisingly naive for 2009. They were not informed by what we learned after 1945….In early 2009, President Obama’s economic advisers seem to have understated the substantial professional uncertainty and disagreement about the wisdom of implementing a large fiscal stimulus. In early 2009, I recall President Obama as having said that while there was ample disagreement among economists about the appropriate monetary policy and regulatory responses to the financial crisis, there was widespread agreement in favor of a big fiscal stimulus among the vast majority of informed economists. His advisers surely knew that was not an accurate description of the full range of professional opinion. President Obama should have been told that there are respectable reasons for doubting that fiscal stimulus packages promote prosperity, and that there are serious economic researchers who remain unconvinced.

Now, it just so happens that I think that central banks can do a good job of stimulating the economy via quantitative easing, a position that puts me in the Milton Friedman/Robert Lucas camp. But I am certainly interested in examining what Sargent’s research has come up with in analyzing the efficacy of monetary stimulus. In any event, there is no way that anyone with Sargent’s philosophy and opinions can be claimed by the saltwater camp.

But don’t take my word for it. Here is Tyler Cowen:

[Sargent] now teaches at NYU, and is a fellow at Hoover, though much of his career he spent at the University of Minnesota. Sargent is one of the fathers of “fresh water” macro, though his actual views are far more sophisticated than the critics of his approach might let on. He has done significant work on learning and bounded rationality, for instance. This is very much a “non Keynesian” prize.

And here is Professor Cowen on Sims:

. . . Sims is currently at Princeton but most closely associated with the University of Minnesota. Basically this is a prize in praise of Minnesota macro, fresh water macro of course, and lots of econometrics. Think of Sims as an economist who found the traditional Keynesian methods “just not good enough” and who worked hard to improve them. He brought a lot more rigor into empirical macro and he helped define a school of thought at the University of Minnesota. His influence will endure.

I am sure that it will. And his influence will serve to advance freshwater school thinking, Paul Krugman’s attempt to sweep the true nature of Sargent’s and Sims’s contributions under the rug notwithstanding.

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