Edward Prescott, Nobel economist who saw harm in quick fixes, dies at 81 – The Washington Post

by | Nov 9, 2022 | Financial

Gift ArticleEdward Prescott, a Nobel laureate economist who urged policymakers to take the long view on economic strategies and resist short-range tinkering over issues such as employment and interest rates, arguing that seeking quick booms often can be followed by sobering busts, died Nov. 6 at a health-care center in Paradise Valley, Ariz. He was 81.His son, Edward, said his father had been receiving cancer treatment.Dr. Prescott’s work with Norwegian economist Finn E. Kydland, with whom he shared the 2004 Nobel Prize in economics, was as much about high-level policy as it was consumer psychology — with particular relevance to the current worries over rising food and energy prices and the many voters looking for someone to blame.Dr. Prescott challenged widely held outlooks among Western central banks and economic policy chiefs favoring direct interventions, such as pumping up interest rates to fight inflation or dropping borrowing costs in attempts to jump-start business growth and consumer spending.AdvertisementHe contended that the tweaks may bring temporary relief but end up causing disruptive economic crests and valleys. A calmer path, he asserted, is better for financial markets and job growth, and lessens the chances for mood swings by the public and businesses.The key to any good policy, Dr. Prescott summarized, was to make a commitment and stick to it.“What I am going to describe for you is a revolution in macroeconomics,” Dr. Prescott wrote in the American Economist in 2006.The essay further distilled theories from a seminal 1977 paper by Dr. Prescott and Kydland, titled “Rules Rather Than Discretion: The Inconsistency of Optimal Plans” and written during a time of U.S. “stagflation,” a combination of high inflation and stagnant economic growth.Fluctuations and unpredictability in economic policy, they argued, feed into turbulence, exacerbate boom-and-bust cycles and lead to potentially harmful decisions on the home front.AdvertisementIf a family, for example, expects higher taxes in the future, it may spend more now and save less, Dr. Prescott theorized. If businesses anticipate interest rate hikes in attempts to tame inflation, they may bump up prices in advance and keep the inflationary cycle going.“You should not think in terms of controlling the economy,” Dr. Prescott said in 2004. “That leads to bad outcomes. You should think in terms of committing to good policy rules.”“So much of his work challenged the way we modeled economic policy, forcing us to dig deeper into our theories and tests of our theories against data,” said a statement from Art Rolnick, former director of research at the Federal Reserve Bank of Minneapolis, where Dr. Prescott was an adviser while he held various teaching and research positions, including at Arizona State University since 2003.The Nobel Committee said Dr. Prescott and Kydland, now at the University of California at Santa Barbara, challenged views on the “credibility and political feasibility of economic policy.”AdvertisementFor some detractors, however, Dr. Prescott and Kydland were on intellectual shaky ground.Their theories ran roughshod over one of the architects of economic policies since the Great Depression, John Maynard Keynes. In the Keynesian view, officials should always have their hands on the economic levers. During slumps, raise government spending and lower interest rates, Keynes advised. To combat …

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