Some (Un)pleasant Nobelmetrics…

Some (Un)pleasant Nobelmetrics…
Ok, I was wrong. I kind of expected that Scott Sumner would not get the Nobel Prize in economics (yeah, yeah I know that its not a real Nobel Prize…) and no I can hardly say that Thomas Sargent and Christopher Sims are not world class economists. Both certainly are, but I must say I am a bit disappointed by the increasing focus among economists on econometrics. But there is no reason to blame Sargent and Sims for that. Sargent and Sims were awarded the Nobel Prize for"for their empirical research on cause and effect in the macroeconomy" It might as well have said that they got the Nobel Prize in for developing the econometrics – particularly Vector AutoRegression (VAR). This is why I am slightly disappointed. Economics is not statistical method. To me, and his might make Bob Murphy happy, economics is mostly a deductive science or what Ludwig von Mises called Praxeology. That does not mean that we should not use math (as the Austrians are suggesting) or not test our theories empirically, but I find it highly problematic that economic reasoning has become less important for our profession than fancy statistically methods. I could of course also say as Nick Rowe usually say that we dislike econometrics because we are so bad at it, but frankly I have seen very few econometric results that have changed my mind on any particular issue. From a Market Monetarist perspective there is reason to be sceptical about econometrics. Econometrics is about history – it basically by method assumes that expectations have no importance (yes, yes I know Sargent and Sims have tried to change that…). To Market Monetarists expectations about future monetary policy is key to how we understand monetary policy. Studying monetary policy in the rearview minor does not teach you anything. (I will later today put out a comment on Market Monetarist methodology as I see it…UPDATE: I JUST DID). So do Sargent and Sims not deserve the Nobel Prize? Yes, let me say it again they certainly do deserve the Nobel Prize. It is well deserved. I am just unhappy that they get it for econometric work rather for economic thinking. In fact Sargent have written a number of papers that I consider to be among the most import papers I have ever read. In 1981 Sargent wrote the paper "Some Unpleasant Monetarist Arithmetic" with Neil Wallace. In my book that paper alone qualifies for a Nobel Prize. The story in their paper is pretty simple (a lot of good economics is). Sargent and Wallace tell us that public expenditure can be financed in three ways in the short-run: Taxes, borrowing (issuing bonds) and by printing money. In the long-run you have to pay back your debts so that will leave only two options – taxes and printing money. In a world with rational expectations – forward looking economic agents - this means that if a government is running large deficit then it will sooner or later lead to either higher taxes/lower expenditures or to higher inflation. And as agents are forward looking an unsustainable large budget deficit this could trigger a sharp rise in inflation already before the money printing starts. This is pretty Sumnerian: Monetary Policy works with long and variable LEADS. (Anybody who thinks the US will default should read this paper and look at US bond yields...). A less well-known paper by Sargent (co-authored with Joseph Zeira in 2008) “Israel 1983: A Bout of Unpleasant Monetarist Arithmetic” is another of my other favourite economics papers. It is wonderfully written and very intriguing. Here is the abstract for you: “From 1970 to 1985, Israel experienced high inflation. It rose in three jumps to new plateaus and eventually exceeded 400% per annum. This paper claims that anticipated monetary and fiscal effects of a massive government bailout of owners of fallen bank shares caused the last big jump in inflation that occurred in October 1983. Bank shares had just collapsed after a scandal in which it was revealed that banks had long manipulated their share prices. The government promised to reimburse innocent owners for the diminished value of their bank shares, but only after four or five years. The public believed that promise and public debt therefore implicitly increased by a large amount. That implied future monetary expansions. Because that was foreseen, inflation immediately rose as predicted by the unpleasant monetarist arithmetic of Sargent and Wallace (1981)” So once again, I think Sargent and Sims deserve to win the Nobel Prize. They are world class economists, but I would so much have hope that they have gotten it for economics and not for statistical method. Congratulation Thomas and Chris! PS I am really just an angry Danish nationalist, if you want to award the Nobel Prize in economics to statisticians for their work on VAR why not give it to the best? My country man Søren Johansen and his wife Katarina Juselius. Maybe next year Søren and Katarina…ah sorry guys next year Scott Sumner will get it…


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