Edward C. Prescott, whose work explaining the economic shocks of the 1970s catalyzed new ways of thinking about fiscal and monetary policy, a breakthrough that won him a Nobel Prize in economics, died Nov. 6 at a facility in care in Paradise Valley, Arizona. He was 81 years old.
His son, Ned Prescott, said the cause was cancer.
Dr Prescott was a prominent member of the generation of economic thinkers who in the 1970s faced the breakdown of Keynesian models, which had dominated policy-making since the 1930s but proved incapable of account for the decade’s high inflation and weak growth.
Keynesian economics is largely demand-driven, changes in which it argues cause the business cycle to fluctuate. But Dr Prescott, working with his frequent collaborator Finn Kydland, wondered if the supply side – like energy costs, and especially technological progress – might be just as important, if not more so.
In fact, their work, particularly in a seminal 1982 paper, demonstrated that supply-side changes explained the vast majority of changes in the business cycle since the end of World War II. Their research helped spark decades of policies, beginning with President Ronald Reagan, that aimed to reduce taxes and regulation to maximize supply-side efficiency.
John Maynard Keynes himself might have agreed: as he once said, “Practical men, who think themselves quite free from intellectual influence, are usually the slaves of a dead economist.”
And to be fair, Keynes lacked the advanced computer modeling systems that made Dr Prescott’s work possible, and that gave him and Dr Kydland a perspective on the economy as a dynamic system. .
This understanding of dynamism was related to their second critical idea, concerning what economists call time inconsistency. As they explained in a 1977 article, politicians tend to set long-term policies and goals, but then undermine them for reasons of short-term expediency.
They cited, as an example, public flood insurance. A government can declare an area too risky to build and refuse to insure it. But once people build there, politicians are likely to give in to voter pressure – and, in fact, people will build because they expect politicians to give in.
This credibility issue was particularly problematic for Dr. Prescott and Dr. Kydland when it came to central banks. Bank leaders could make low inflation their main long-term objective. But if they are under political pressure, they are likely to shift their priorities towards higher employment, even if that means higher inflation.
Therefore, according to Dr Prescott, governments should establish long-term rules and stick to them, for example by insulating central banks from political pressures and establishing multi-year budgets.
Both of these ideas came about in the late 1970s. Dr. Prescott returned to public prominence in 2004, the same year he won the Nobel Prize, with an article exploring why Americans worked longer hours than Europeans. .
Unlike other economists, who have offered explanations that focus on cultural differences, Dr. Prescott argued that it was all about taxes, and he offered empirical data to prove it. In the 1950s, when taxes were higher in France than in the United States, French workers worked longer hours than Americans.
But that reversed in the coming decades, as tax rates rose in France and fell in the United States. This finding led Dr. Prescott to sign a letter with 367 other economists criticizing a proposal by Senator John Kerry, the 2004 Democratic presidential candidate, to roll back tax cuts for high-income earners.
“The idea that you can raise taxes and stimulate the economy is damn stupid,” Dr Prescott told reporters.
For their work, Dr Prescott and Dr Kydland shared the 2004 Nobel Prize.
“They proposed a new operational paradigm for macroeconomic analysis based on microeconomic foundations,” the Nobel committee wrote. “Kydland and Prescott’s work has transformed academic research in 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 germinated early, after watching his father, William Prescott, an industrial engineer, manage factory operations. His mother, Mathilde (Helwig) Prescott, was a librarian and homemaker.
Edward played football in high school and college, though physically light, and worked summers as a golf caddy and at a nearby stationery store.
He entered Swarthmore College intending to study physics on the way to a career in rocket science, but came to view the school’s department as insufficiently theoretical. He switched to mathematics and graduated in 1963.
He earned a master’s degree in operations research from the Case Institute of Technology, Cleveland, which a few years later merged with Western Reserve University, and a doctorate in economics from the Carnegie Institute of Technology in 1967, the same year the school merged with the Mellon Institute to form Carnegie Mellon University.
He married Janet Dale Simpson in 1965. Along with their son Ned, she survives him, as does their daughter, Wynn Prescott; another son, Andrew; 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 joining Arizona State University in 2003. In 1981 he became a consultant for the Federal Reserve Bank of Minneapolis.
At one point, he nearly 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. run the risk of a conflict of interest. Ned Prescott now works for the Cleveland Fed.