A Nobel for Thomas Sargent

What the latest Nobel winner has to say about economics, Paul Krugman, and Obama's stimulus

No matter how skeptical one is of the authority of "experts," it's hard to avoid paying at least some attention to the people who award the Nobel prize—especially when they give one to someone who tends to support some things one tended to believe already.

So it is in the case of Thomas Sargent, the New York University professor who was announced Monday as a winner of the Nobel in economics. An interview of Professor Sargent by the Minneapolis Fed in August 2010 summed up some of his contributions succinctly: "Policymakers can't manipulate the economy by systematically 'tricking' people with policy surprises. Central banks, for example, can't permanently lower unemployment by easing monetary policy, as Sargent demonstrated with Neil Wallace, because people will (rationally) anticipate higher future inflation and will (strategically) insist on higher wages for their labor and higher interest rates for their capital."

That interview is also notable for Professor Sargent's icy dismissal of another Nobel laureate in Economics, Paul Krugman of Princeton University and The New York Times opinion page.

[Minneapolis Fed interviewer]: What was Paul Krugman's opinion about those Princeton macro seminar presentations that advocated modern macro?

Sargent: He did not attend the macro seminar at Princeton when I was there.

Interviewer: Oh.

In the same interview, Professor Sargent was also skeptical of President Obama's stimulus:

Interviewer: A January 2009 article quotes you as saying, "The calculations that I have seen supporting the stimulus package are back-of-the-envelope ones that ignore what we have learned in the last 60 years of macroeconomic research." What calculations had you seen?

Sargent: I said something like that to a reporter. I had just read an Obama administration's Council of Economic Advisers document e-mailed to me by my friend John Taylor. I agreed with John that the CEA calculations were surprisingly naive for 2009. They were not informed by what we learned after 1945….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.

In the same interview, Professor Sargent says, "Europe's generous unemployment compensation system has made an important contribution to sustained high European unemployment….Our models imply that people in Europe, especially older workers, are suffering from long-term unemployment because of the adverse incentives brought about by a generous social safety net when it interacts with these human capital dynamics….if, in the United States, we create a system where unemployment and disability benefits are permanently extended in their generosity and their duration, we will inadvertently put ourselves into the situation that much of Europe has suffered for three decades."

And in the same interview, Professor Sargent speaks of how a gold standard for monetary policy imposed fiscal discipline: "what induced one major Western country after another to run a more-or-less balanced budget in the 19th century and early 20th century before World War I was their decision to adhere to the gold standard."

In a 2007 graduation speech to economics undergraduates at the University of California, Berkeley, Professor Sargent offered "a short list of valuable lessons that our beautiful subject teaches," among them, "Many things that are desirable are not feasible," and, "Everyone responds to incentives, including people you want to help. That is why social safety nets don't always end up working as intended."

In both the Minneapolis Fed interview and his February 2010 Phillips Lecture at the London School of Economics, Professor Sargent gave a respectful summary of a criticism of federal bank deposit insurance: "The deposit insurance allows shareholders to gamble on favorable terms with other peoples' money (the tax payers'), and shareholders want to do this as much as possible. The bank is bound to fail sooner or later, and then the government will have to pay the depositors."

Toward the end of the Phillips Lecture, Professor Sargent also cites Walter Bagehot, who "said that what he called a 'natural' competitive banking system without a 'central' bank would be better…. 'nothing can be more surely established by a larger experience than that a Government which interferes with any trade injures that trade. The best thing undeniably that a Government can do with the Money Market is to let it take care of itself.'"

The best thing undeniably that a government can do with many things is to let them take care of themselves. Now there's a phrase that it'd be nice to see etched into some granite above the entryways of some buildings in Washington.

And if the chance of that actually happening is some elections away, the Nobel committee's decision to give a prize to Professor Sargent may help bring the moment closer.

Ira Stoll is editor of FutureOfCapitalism.com and author of Samuel Adams: A Life.