Two deserving experts in how business booms and busts occur on Monday won the 2004 Nobel Prize in economics. Congratulations to them.
American Edward C. Prescott, 63, and Finn E. Kydland, 60, of Norway won the Nobel Prize for research that shows how supply shocks - such as a sharp increase in oil prices or a new technology - play a much greater role in causing booms and recessions than fluctuations in demand. Their work shed light on the consistency of economic policy in influencing business cycles.
Prescott, who teaches at Arizona State University in Tempe, and Kydland, who teaches at Carnegie Mellon University in Pittsburgh and the University of California Santa Barbara, will share the $1.3-million Nobel award.
But before we all get, uh, excited about the latest round of Nobel winners, answer this: Who won the Nobel Prize in economics last year? Or in 2002? Or 2001?
Unless you are a professional economist, it's doubtful you've heard of most past Nobel winners, or even Prescott and Kydland. The two are economics professors but also, befitting Nobel Prize winners, active researchers who frequently publish analytical reports with catchy names like Theory Ahead of Business Cycle Measurement or Time to Build and Aggregate Fluctuations.
Just in case it slipped your mind or your subscription lapsed, Time to Build and Aggregate Fluctuations is one of the most highly read economic journal articles of the past 30 years and was a key factor in the Nobel decision.
Truth is, the kind of economic research that eventually earns economists Nobel recognition is typically way beyond the understanding, math skills and interest of most folks.
That's okay. These two economists are still grappling with solutions to some important problems that should help us understand our day-to-day world, even if we can't follow all the details.
In their research on business cycles, for example, Prescott and Kydland concluded that various supply side shocks - for example, a cheaper source of raw materials or a boost in business productivity - could deliver a bigger effect on how the economy performs than traditional fiscal and monetary policy.
The economists also showed that policymakers who are not clear and consistent in their decisions can prompt false policy expectations that, in turn, produce unwanted economic behavior.
Here's how that concept might play out. If households expect higher taxes in the future, even if none are forthcoming, then they will spend more and save less now (because they assume they will have less money after taxes). If households or businesses anticipate higher inflation in the future, even if none occurs, then they will seek higher wages or set higher prices now.
Not all of their research is so theoretical.
Prescott, who is a senior monetary adviser at the Federal Reserve Bank of Minneapolis, this summer published an analysis titled Why Do Americans Work So Much More Than Europeans? The simplified answer is in keeping with his earlier theories. Americans work 50 percent more than workers in Europe, he said, because U.S. tax rates let U.S. consumers keep more of the money they earn.
Barriers to Riches, a 2000 book Prescott co-wrote with Stephen L. Parente, argues that a key reason for different standards of living is the inability of some countries to adopt technology as easily as other nations.
Kydland's recent work includes a working paper analyzing the economic depression of Argentina in the 1980s and why the country did not rebound more quickly in the 1990s.
To the community of economists, this year's Nobel Prize to these professors did not come as a complete surprise. Prescott, in particular, had been favored to win the prize last year and, in fact, had been expected to win it in any of the past five years.
Last fall, a betting pool ($1 apiece) of professors and graduate students in the nation's top economics programs had picked Prescott as a favorite for the prize in 2003. Instead, last year's Nobel in economics went to Robert Engle and Clive W.J. Granger.
Prescott won this year's Nobel Prize almost by default. As one observer who tracks economists noted of Prescott last year: "There is simply no other macroeconomist alive who has made more of a contribution to the field who hasn't yet won a Nobel Prize."
Among the dozen or more economists considered contenders for this year's Nobel Prize were Columbia University's Jagdish Bhagwati, a free trade supporter; Princeton University professor Avinash Dixit; and New York Times columnist, Princeton professor and the Bush administration's sharpest economic critic, Paul Krugman.
