“A Nobel for Non-Keynesians,” my piece on the Nobel prize winners, Thomas J. Sargent and Christopher A. Sims, ran in the Wall Street Journal today. I wrote it yesterday a.m., which is why I didn’t take time to post on it yesterday. Suffice it to say that I strongly disagree with Arnold’s dismissal. Here is a long excerpt, followed by a paragraph the editors cut. The excerpt is on Sargent, the person whose work I know best. By the way, he wrote the entry on Rational Expectations for the first edition of The Concise Encyclopedia of Economics.


This conclusion was at odds with the Keynesian model, which dominated economic thinking from the late 1930s to the early 1970s. The Keynesian model posited a stable trade-off between inflation and unemployment. In 1970, major U.S. econometric models, built on Keynesian assumptions, predicted that the government could get the unemployment rate down to 4% if it accepted an increase in inflation to 4%. In a 1977 article titled “Is Keynesian Economics a Dead End?” Mr. Sargent wrote, “[I]nstead of 4-4, in the mid-1970s we got 9-9, a very improbable occurrence if econometric models of 1969 had been correct.”

In his later work, Mr. Sargent explored expectations in other contexts. An important one is the issue of how a government can end high inflation. Mr. Sargent studied four countries that had hyperinflation in the early 1920s–Germany, Austria, Hungary and Poland. All used inflation to finance high government deficits. They all succeeded in eliminating hyperinflation, but to do so they had to be credible. Of course, they got rid of their old currencies and started new ones. But they also had to affect people’s expectations by committing to substantially lower budget deficits. All four governments did.

Although the Nobel committee did not cite his work on unemployment insurance, Mr. Sargent, with Swedish economist Lars Ljungqvist, found that high, long-lasting unemployment benefits in Europe have caused many European workers who lose their jobs to stay unemployed for years and, thereby, erode their “human capital.” This makes them less employable in the long run. The fact that the U.S. government has extended unemployment benefits in many U.S. states to 99 weeks, said Mr. Sargent in a 2010 interview with the Federal Reserve Bank of Minneapolis, “fills me with dread.”

The interview linked to above is the single best popular piece for getting to know the sharpness of Sargent’s thinking. I had already been impressed by Sargent. Reading some of his work yesterday deepened that impression.

In fact, it was based on that interview that I wrote this paragraph, which got deleted:

Sargent is actually quite ecumenical. In the same interview, Sargent praises articles by left-wing economists Joseph Stiglitz and Jeffrey Sachs. Stiglitz and Sachs, he points out, “executed a rational expectations calculation to compute the rewards to prospective buyers” of “toxic assets” under President Obama’s Public-Private Investment Program of 2009. “Those calculations,” says Sargent, “showed that the administration’s proposal represented a large transfer of taxpayer funds to owners of toxic assets.”

HT for help with understanding Sims to Alex Tabarrok and Tyler Cowen.