Nobel in economics goes to 2 Americans
PRINCETON, N.J. - Christopher Sims and Thomas Sargent have no simple solutions to the global economic crisis. But the work that earned them the Nobel Prize in economics yesterday is guiding central bankers and policy makers in their search for answers.
The two Americans, both 68, were honored for their research in the 1970s and ’80s on the cause-and-effect relationship between the economy and government policy.
Sims is a professor at Princeton University. Sargent teaches at New York University and is a visiting professor at Princeton.
Among their achievements, the two Nobel laureates - working separately for the most part over the years - devised tools to analyze how changes in interest rates and taxes affect growth and inflation.
Their work doesn’t provide prescriptions for policy makers to solve today’s crises. Rather, their achievement has been to create mathematical models that central bankers and other leaders can use to devise policy proposals.
“We’re just bookish types that look at numbers and try to figure out what’s going on,’’ Sargent said in an interview on the Nobel website.
Sims said he had no surefire advice to offer policy makers in the United States and Europe: “If I had a simple answer, I would have been spreading it around the world.’’
Still, Sims said, “I think the methods that I have used and Tom has developed are central to finding our way out of this mess. . . . I think they point a way to try to unravel why our serious problems develop, and new research using these methods may help us lead us out of it.’’
Sargent and Sims have been friends since the 1960s, when both were Harvard graduate students. They later taught at the same time at the University of Minnesota. This semester, they are teaching a graduate-level macroeconomics course together at Princeton. Their awards extend Americans’ dominance in the Nobel economics category. Thirteen of the 15 most recent winners of the prize in economics have been Americans.
Robert Lucas, a University of Chicago economist who won the Nobel in 1995, said the work of Sargent and Sims is timely now that policy makers are debating whether to do something to stimulate the US economy.
“We want to know what happens if we do it, what happens if we don’t, what are the long-term consequences,’’ he said. Sargent and Sims “got their hands dirty, using data, trying to forecast, trying to see what works, what doesn’t.’’
In its citation, the Royal Swedish Academy of Sciences said Sargent showed how statistical models could help analyze how households and companies adjust their expectations as conditions and policies shift.
Using such models, for example, Sargent argued in 1981 that public expectations were crucial to combating high inflation. At the time, many economists assumed it would take many months, even years, of high interest rates to reduce inflation.
But Sargent argued that inflation could be tamed much faster if central banks acted decisively to dispel public expectations that prices would continue to rise rapidly. That’s basically what happened shortly afterward: Paul Volcker, then the Federal Reserve chairman, shattered inflation expectations by raising rates sharply and quickly. Expectations of inflation, it turned out, were even more important than inflation in shaping economic behavior.
Economists are at a disadvantage compared with researchers in many other fields. They can’t experiment on economies the way scientists experiment with laboratory rats or chemicals.
“We’ve got to glean it from the information that’s out there,’’ said Art Rolnick, former director of research at the Federal Reserve Bank of Minneapolis.
Before Sims and Sargent, many economists had underestimated the complexity with which businesses and people respond to economic events and government actions. The two showed how hard it is to predict public responses to policy changes.