Two U.S. economists — Thomas Sargent and Christopher Simms — recently shared the annual Nobel Prize in economics. Why did they receive this coveted award? N.C. State University economist Mike Walden responds.
“This is very timely because these two economists worked on the area of macroeconomy and economic policy, for example, designed to shortcut or end recession. So, very, very timely. And really what they did … is they questioned a lot of the ideas and theories that had been developed over maybe 50 years.
“And, and their main point was that people learn. That is to say, for example, one of the things that we’ve seen the Federal Reserve do to try to end the recession is print more money. But we know that if that continues eventually that can lead to higher inflation. So, one thing that Sargent/Simms said was, ‘Look, when people see the Federal Reserve printing more money, they’re going to assume perhaps that we’re going to have higher inflation.’ And one thing higher inflation does is it pushes up interest rates, which would actually counter what the Federal Reserve was doing.
“Another area that they questioned was the idea of stimulus — that is to say, the federal government borrowing and spending money to bring us out of a recession.
“Again what Simms and Sargent said was, ‘Maybe people learn’ — that is to say, they look at the federal government spending more money, borrowing to get that money, and that’s going to eventually mean higher taxes. Well, if people work that into their psyche and say, ‘Well, we’re going to have higher taxes later,’ maybe what they’ll do now is start to save more and spend less, and again that will counter what the government is doing.
“So, they are really two economists who were thinking outside the box. I’m not necessarily saying they were right, but they’ve given us a lot to contemplate.”