March 29, 2024

2 American Professors Awarded Nobel in Economic Science

Back in the 1970s, Dr. Sargent and Dr. Sims were interested in figuring out how a new policy, like a tax cut or an interest rate increase, might affect the economy. But economists cannot run controlled experiments in real life to see what happens when a policy is executed and compare the results to when it is not. Instead, they have to study whatever history is available to them, with all the complicated conditions that happened to coincide with the policy change.

Dr. Sargent and Dr. Sims developed statistical methods to organize historical data and disentangle the many variables.

Their new methodologies are used to figure out whether a policy change that happened in the past affected the economy or whether it was made in anticipation of events that policy makers thought would happen later. The methods also help decipher how regular people’s expectations for government policies can affect their behavior.

“For both Sims and Sargent, their research is fundamental,” said Mark W. Watson, an economics professor at Princeton. “They figured out what it is you need to know to answer this cause and effect question, and then they developed methods for actually measuring the effects of causes.”

Dr. Sims said that his research was relevant for helping countries decide how to respond to the economic stagnation and decimated budgets left by the financial crisis.

“The methods that I’ve used and that Tom has developed are central for finding our way out of this mess,” he said. But asked for specific policy conclusions of his research, he responded, “If I had a simple answer, I would have been spreading it around the world.”

Dr. Sims, who is president-elect of the American Economic Association, has primarily looked at temporary policy changes, like a surprise in government finances or a change in interest rates. For example, his methods have been used to determine whether a central bank’s decision to raise rates affected inflation, or whether bank officials raised the interest rate precisely because they expected inflation to change later.

His research that was honored on Monday led to a systematic method for distinguishing between unexpected shocks to the economy, like a change in oil prices or government finances, and expected changes, the prize committee of the Royal Swedish Academy of Sciences said in a statement.

His methodology, developed in the 1970s, has been influential in subsequent decades among economists in many fields and of different political leanings. Research using his methodology, for example, has helped lend credence to New Keynesianism, the theory that says that an economy can go into recession because there is not enough demand.

“The idea that there could be an aggregate demand failure is a very old idea, but it had been completely banished in the ’70s, ’80s and ’90s,” said Lawrence J. Christiano, a professor at Northwestern University. “Really the center of gravity of macro was very much in places like Chicago and Minneapolis. That was bumped away in part by results of applying this new methodology, and Sims is the one who originated that.”

Dr. Sims’s work has also been the basis of important papers by Ben S. Bernanke, the Federal Reserve chairman, and Olivier Blanchard, the chief economist at the International Monetary Fund.

Dr. Sargent, on the other hand, focused on longer-run structural changes in the economy, like setting a new inflation target. He has analyzed historical data to understand better how these types of policy changes affect the economy over time. He has also conducted experiments in a sort of laboratory setting to examine how new policies might alter the economy.

Dr. Sargent’s body of work is somewhat eclectic. For example, he spent the early part of his career building up the “rational expectations theory” — the idea that people make choices based on what they rationally expect to happen, and so expectations can affect outcomes — and then spent subsequent decades criticizing it.

“He’s an amazing character in that sense,” said Dr. Christiano, who wrote his dissertation under Dr. Sargent. “He contributed a revolution, and then tried to develop a revolution against that one.”

While the prize committee chiefly cited Dr. Sargent’s contributions to modeling and methodology, he has also done a number of influential empirical studies. He has studied historical episodes of hyperinflation, for example, and helped show how expectations for monetary policy can affect price changes.

“He looked at countries that were having inflation of hundreds of percent for months, like the European countries after world wars,” said Robert Lucas, a Nobel laureate and economics professor at the University of Chicago. “He wanted to know how you get out of inflation like that without causing a big recession. It’s a mix of economics and historical analysis.”

A more controversial line of Dr. Sargent’s research has examined how the generous welfare state in many European countries might be causing higher unemployment rates.

The two economists were awarded for work that they did independently of each other but that the prize committee said was complementary. They did collaborate once, in 1977, when they were colleagues at the University of Minnesota.

Their academic pedigrees have other similarities: Both received their Ph.D.’s from Harvard University in 1968, and both spent time studying at the University of California, Berkeley, before receiving their doctorates. Dr. Sargent received his bachelor’s from Berkeley, and Dr. Sims did postgraduate work at Berkeley after receiving a bachelor’s from Harvard College.

Coincidentally, the two winners, both 68, are jointly teaching a graduate course in macroeconomics at Princeton this semester.

The Bank of Sweden Prize in Economic Sciences in Memory of Alfred Nobel is not one of the original Nobel prizes. It was created in 1968 and is awarded annually “according to the same principles as for the Nobel Prizes,” first begun in 1901.

Article source: http://feeds.nytimes.com/click.phdo?i=1f397e4b24da397f80e44e7586c21873

News Analysis: Time to Say It: Double Dip May Be Happening

It has been three decades since the United States suffered a recession that followed on the heels of the previous one. But it could be happening again. The unrelenting negative economic news of the past two weeks has painted a picture of a United States economy that fell further and recovered less than we had thought.

When what may eventually be known as Great Recession I hit the country, there was general political agreement that it was incumbent on the government to fight back by stimulating the economy. It did, and the recession ended.

But Great Recession II, if that is what we are entering, has provoked a completely different response. Now the politicians are squabbling over how much to cut spending. After months of wrangling, they passed a bill aimed at forcing more reductions in spending over the next decade.

If this is the beginning of a new double dip, it will have two significant things in common with the dual recessions of 1980 and 1981-82.

In each case the first recession was caused in large part by a sudden withdrawal of credit from the economy. The recovery came when credit conditions recovered.

And in each case the second recession began at a time when the usual government policies to fight economic weakness were deemed unavailable. Then, the need to fight inflation ruled out an easier monetary policy. Now, the perceived need to reduce government spending rules out a more accommodating fiscal policy.

The American economy fell into what was at first a fairly mild recession at the end of 2007. But the downturn turned into a worldwide plunge after the failure of Lehman Brothers in September 2008 led to the vanishing of credit for nearly all borrowers not deemed super-safe. Banks in the United States and other countries needed bailouts to survive.

The unavailability of credit caused a decline in world trade volumes of a magnitude not seen since the Great Depression, and nearly every economy went into recession.

But it turned out that businesses overreacted. While sales to customers fell, they did not decline as much as production did.

That fact set the stage for an economic rebound that began in mid-2009, with the National Bureau of Economic Research, the arbiter of such things, determining that the recession ended in June of that year. Manufacturers around the world reported rapidly rising orders.

Until recently, most observers believed the American economy was in a slow recovery, albeit one with very disappointing job growth. The official figures on gross domestic product showed the United States economy grew to a record size in the final three months of 2010, having erased the loss of 4.1 percent in G.D.P. from top to bottom.

Then last week the government announced its annual revision to the numbers for the last several years. New government surveys indicated Americans had spent less than previously estimated in 2009 and 2010 on a wide range of things, including food, clothing and computers. Tax returns showed Americans even cut back on gambling. The recession now appears to have been deeper — a top-to-bottom fall of 5.1 percent — and the recovery even less impressive. The economy is still smaller than it was in 2007.

In June, more American manufacturers said new orders fell than rose, according to a survey by the Institute for Supply Management. The margin was small, but the survey had shown rising orders for 24 consecutive months. Manufacturers in most European countries, including Germany and Britain, also reported weaker new orders.

Back in 1980, a recession was started when the government — despairing of its failure to bring down surging inflation rates — invoked controls aimed at limiting the expansion of credit and making it more costly for banks to make loans. Those controls proved to be far more effective than anyone expected, and the economy promptly tanked. In July the credit controls were ended, and the economic research bureau later determined that the recession ended that month.

By the first quarter of 1981 the economy was larger than it had been at the previous peak.

But little had been done about inflation, and the Federal Reserve was determined to slay that dragon. With interest rates high, home sales plunged in late 1981 to the lowest level since the government began collecting the data in 1963. Now they are even lower.

There is, of course, no assurance that a new recession has begun or will do so soon, and a positive jobs report on Friday morning could revive some optimism. But concerns have grown that the essential problems that led to the 2007-09 recession were not solved, just as inflation remained high throughout the 1980 downturn. Housing prices have not recovered, and millions of Americans owe more in mortgage debt than their homes are worth. Extremely low interest rates helped to push up corporate profits, but companies have hired relatively few people.

In any other cycle, the recent spate of poor economic news would have resulted in politicians vying with one another to propose programs to revive growth. President Obama has called for more spending on infrastructure, but there appears to be little chance Congress will take any action. The focus in Washington is now on deciding where to reduce spending, not increase it.

There have been some hints that the Federal Reserve might be willing to resume purchasing government bonds, which it stopped doing in June, despite opposition from conservative members of Congress. But the revised economic data may indicate that the previous program — known as QE2, for quantitative easing — had even less impact than had been thought. With short-term interest rates near zero, the Fed’s monetary policy options are limited.

Government stimulus programs historically have often appeared to be accomplishing little until the cumulative effect suddenly helps to power a self-sustaining recovery. This time, the best hope may be that the stimulus we have already had will prove to have been enough.

Article source: http://feeds.nytimes.com/click.phdo?i=9770323a0f363c158636a488b16b8728