Strategies: Thomas Sargent, Nobel Winner, Rejects Philosophical Slogans

I took that risk in a recent column about the two new Nobel laureates in economics, Christopher A. Sims of Princeton and Thomas J. Sargent of New York University. They received their awards for a lifetime of theoretical and statistical work on the cause-and-effect relationship between government policies and the economy. These are immensely complicated matters, and neither man is accustomed to boiling down his opinions into bite-sized morsels.

Professor Sims told me that some conservative commentators had gotten his views quite wrong. The Wall Street Journal editorial page, for example, implied that both professors opposed the interventionist economic policies of central banks and governments over the last few years.

Professor Sims said he actually approved of many of them — with qualifications, of course. An op-ed article, also in The Journal that day, called the pair “non-Keynesian,” a reference to the late British economist John Maynard Keynes. Professor Sims said he was not “non-Keynesian” at all.

When I talked to Professor Sims earlier this month, he wouldn’t speak for his colleague Professor Sargent (and I couldn’t reach him). Based on his voluminous published work, I wrote that Professor Sargent didn’t seem to belong in the noninterventionist camp to which he had been consigned. But I was going out on a limb.

It turns out that in some respects, I didn’t go far enough.

In telephone conversations last week, Professor Sargent said he felt insulted by people who call him “non-Keynesian” or “right wing,” terms that, he said, are based on a misunderstanding of his thinking. And he rejected attempts to categorize his views in simple slogans.

He doesn’t wear his political opinions on his sleeve. “They really don’t matter in my research,” he said. But because others have applied labels to him, he decided it was worth setting the record straight. He’s a Democrat, he said, “a fiscally conservative, socially liberal Democrat,” adding, “I think that budget constraints are really central.”

It’s important to consider the “incentive effects” of government policies, he continued. “There are trade-offs in efficiency and equality, and they lead to choices that aren’t easy,” he said.

For example, he has studied the effects of incentives on the behavior of the unemployed. With a colleague, Lars Ljungqvist of the Stockholm School of Economics and of New York University, he’s found that in some circumstances, increasing unemployment benefits may have the unintended consequence of prolonging unemployment. He’s definitely not opposed to unemployment benefits, he said, but believes that they should be designed to help people get back into suitable jobs so that they feel like full participants in the economy.

“The problem is, it’s not just whether you have unemployment insurance,” he said. “It’s what the duration is. And when it’s very long and very generous, it creates traps that are very hard to get out of.” This makes government policy tricky, but it doesn’t imply that the government should avoid intervening wisely on behalf of those without jobs, he said.

Professor Sargent described himself as a scientist, a “numbers guy” who is “just seeking the truth” as any good researcher does.

“If you go to seminars with guys who are actually doing the work and are trying to figure things out, it’s not ideological,” he said. “Half the people in the room may be Democrats and half may be Republicans. It just doesn’t matter.”

The “non-Keynesian” label irks him particularly. “That’s just off base,” he said. “Keynes was a very good economist. He was brilliant. He had wonderful insights. His work has inspired me many times.”

Professor Sargent’s own writings are sprinkled with pithy quotations from Keynes. In January 1986, the professor wrote a Wall Street Journal article, “An Open Letter to the Brazilian Finance Minister,” analyzing that nation’s fiscal crisis. In form and substance, it was explicitly modeled on a very similar letter written by Keynes to the French finance minister 60 years earlier. One point of this exercise, he said, “was to get people to actually read Keynes.”

Still, early in Professor Sargent’s career, he was known as one of the founders of the “rational expectations” school, which has sometimes been thought to be un-Keynesian. He says it actually “tied down an important loose end in the kinds of theories Keynes was building.” Keynes, he said, believed that expectations were all-important in determining economic activity, but didn’t have the mathematical tools needed to nail down all his concepts.

Today, Professor Sargent says that in some ways he actually is a Keynesian, but he qualified that claim, too. “I’m happy to say I am a Harrison-Kreps-Keynesian,” he said, citing work by two scholars at Stanford, J. Michael Harrison and David M. Kreps. They developed a theory of speculative investor behavior and stock-bubble formation that subtly modifies rational expectations “in a beautiful way” and “captures Keynes’s argument, makes it rigorous, and pushes it further,” he said.

Fundamentally, he said, “What I really don’t like is oversimplification.” He tries to think things through, he said, and avoid having “one slogan fighting another.”

Article source: http://feeds.nytimes.com/click.phdo?i=dd2c6598b8b075b605b7f5d456740df6