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Congratulations to the two American economists, Thomas Sargent and Christopher Sims, who won the Nobel Prize in Economics for their independent work (mostly during the 1970s and 1980s) on macroeconomic analysis and tools.
Here’s a fascinating 2010 interview at the Minneapolis Fed with Dr. Sargent in which he, while avoiding being too political, says that the calculations used by the Obama Administration’s Council of Economic Advisers to support the $787 billion (before interest) “stimulus” were “surprisingly naive for 2009. They were not informed by what we learned after 1945.”
Sargent continues with about as damning an analysis as a professor of economics can offer:
But I suspect that the council was asked to do something quickly, and they did what they thought was “good enough for government work,” as some of us said during my days at the Pentagon in 1968 and 1969. Back-of-envelope work can be a useful starting point or benchmark. But it does mischief when it is oversold.
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.
Sargent also talks about the “moral hazard” created by deposit insurance, and how that can lead us to “too big to fail”, as well as discussing some of Europe’s structural problems including how their over-generous welfare system leads to high unemployment (despite the claims of Paul Krugman that it doesn’t).
And in an equally interesting (if you’re an econ geek like me) late 2009 paper discussing government and central bank policy when the central bank is holding interest rates at or very near the “zero lower bound”, Christopher Sims argues that many current assumptions, especially of the New Keynesian school, are overly simplistic and wrong.
Sims also explains why it is dangerous for the central bank to get into implementing policies which look more like fiscal than monetary policy, including the foreseeable issue of politicizing the central bank.
In a statement that should (but hasn’t and won’t) have profound impact on the Obama administration’s thinking (and that of Ben Bernanke as well), Sims stresses that “If the public becomes convinced that current deficits correspond to large and uncertain future tax increases or budget cuts, then deficits may have little or no stimulative effect.”
Sims’ paper concludes with this section:
VI. DOES CURRENT POLICY IN THE US RESEMBLE GOOD POLICY?
The expansion of the balance sheet, together with acquisition of the right to pay interest on reserves, is not in itself expansionary. Reserves attracted by high interest rates create no incentive to spend. The balance sheet expansion was undertaken for good reason, and markets seem to understand that there is no significant unwinding problem, because of the right to pay interest. But then, if expectations of higher future inflation are essential to mitigate the crisis, where are those expectations to come from?
In fact, one might argue that US policy is not bad, in part unintentionally. The Fed is willing to say that it does not like deflation, but not to say that it would allow temporary above-2% inflation in the future. At least to first order, it may then be helpful that the US has a legislature with an effective 2/3 majority rule and a significant faction that believes all tax increases are evil. In the US, things may be working out as well as they are - “appetite for risk” is returning - precisely because the long-term returns from US debt are at least uncertain. On the other hand, real, coherent, coordinated fiscal and monetary policy with forward guidance could no doubt do better. The current situation creates unnecessary, large amounts of uncertainty about policy.
Congratulations to Mssrs. Sargent and Sims for winning the Nobel Prize in economics, and congratulations to the Nobel Committee for not being afraid to select two men whose views at least partially oppose that of the current “I won a Nobel for what?” president of the United States.