Edward C. Prescott, whose work explaining the economic shocks of the 1970s led to new ways of thinking about fiscal and monetary policy, a breakthrough that earned him a Nobel Prize in economics, died Nov. 6 at a Paradise care facility Valley, Arizona. He turned 81.
His son, Ned Prescott, said the cause was cancer.
Dr. Prescott was a leading member of the generation of economic thinkers who, in the 1970s, faced the collapse of Keynesian models, which had dominated policy-making since the 1930s but proved incapable of coping with the high inflation and low growth of the decade. explain.
Keynesian economics is largely demand-oriented, changes in which, she argues, cause the business cycle to fluctuate. But dr. Prescott, working with his frequent collaborator Finn Kydland, wondered if the supply side — such as energy costs, and especially technological advances — might be just as important, if not more so.
In fact, their work, especially in a seminal 1982 paper, showed that supply-side shifts accounted for the vast majority of business cycle changes since the end of World War II. Their research helped spark decades of policies, beginning under President Ronald Reagan, that focused on reducing taxes and regulations to maximize efficiency on the supply side.
John Maynard Keynes himself might have approved: As he once said, “Practical men, who think themselves free from any intellectual influence, are usually the slaves of a defunct economist.”
And to be fair, Keynes didn’t have the sophisticated computer modeling systems that Dr. Prescott, and who made him and Dr. Kydland’s perspective on the economy as a dynamic system.
That understanding of dynamics was related to their second critical insight, regarding what economists call time inconsistency. As they explained in a 1977 paper, politicians tend to establish long-term policies and goals, but then undermine them for short-term expediency.
They pointed to public flood insurance as an example. A government might declare an area too risky to build on and refuse to insure it. But once people build there, politicians are likely to succumb to voter pressure — and, in fact, people will build because they expect politicians to give in.
This credibility issue was especially problematic for Dr. Prescott and Dr. Kydland when it came to central banks. Bank directors could make low inflation their primary long-term goal. But under political pressure, they are likely to shift their priorities to more employment, even if that means higher inflation.
Therefore, argued Dr. Prescott, governments should set long-term rules and stick to them, for example by isolating central banks from political pressure and setting multi-year budgets.
Both insights came in the late 1970s. Dr. Prescott returned to public prominence in 2004, the same year he won the Nobel Prize, with a paper exploring why Americans worked longer hours than Europeans.
Unlike other economists who offered explanations focused on cultural differences, Dr. Prescott that it was all about taxes, and he offered empirical data to prove it. In the 1950s, when taxes were lower in France than in the United States, French workers worked longer hours than Americans.
But that changed in the decades to come, as tax rates rose in France and fell in the United States. This finding prompted Dr. Prescott signed a letter with 367 other economists criticizing a proposal by Senator John Kerry, the 2004 Democratic presidential nominee, to reverse tax cuts for high-income earners.
“The idea that you can raise taxes and stimulate the economy is fucking stupid,” said Dr. Prescott to reporters.
For their work, Dr. Prescott and Dr. Kydland the 2004 Nobel Prize.
“They provided a new and operational paradigm for macroeconomic analysis based on microeconomic fundamentals,” the Nobel committee wrote. “Kydland and Prescott’s work has transformed academic research into economics, as well as the practice of macroeconomic analysis and policy-making.”
Edward Christian Prescott was born on December 26, 1940 in Glens Falls, NY, a town on the Hudson River north of Albany. His interest in economics developed early, after watching his father, William Prescott, an industrial engineer, run the factory operations. His mother, Mathilde (Helwig) Prescott, was a librarian and housewife.
Edward played football in high school and college, even though he was physically frail, and worked summers as a golf caddy and at a nearby paper mill.
He attended Swarthmore College, intending to study physics on his way to a career in rocket science, but came to regard the school’s department as insufficiently theoretical. He switched to mathematics and graduated in 1963.
He received a master’s degree in operations research from the Case Institute of Technology in Cleveland, which merged with Western Reserve University a few years later, and a doctorate in economics from the Carnegie Institute of Technology in 1967, the same year the school merged with the Mellon University. Institute to form Carnegie Mellon University.
He married Janet Dale Simpson in 1965. She and their son Ned survive him, as does their daughter, Wynn Prescott; another son, Andreas; his brother, William Prescott; his sister, Prudence Robertson; and six grandchildren.
Dr. Prescott taught at the University of Pennsylvania, Carnegie Mellon, and the University of Minnesota before moving to Arizona State University in 2003. In 1981, he became a consultant to the Federal Reserve Bank of Minneapolis.
At one point, he almost took a job at the University of Chicago but decided against it because his son Ned was a graduate student in the university’s economics department and he didn’t want to risk a conflict of interest. Ned Prescott now works for the Cleveland Fed.
