The Economics Nobel Goes to Sargent & Sims: Attackers of the Phillips Curve

12 Oct

This morning when Thomas Sargent of New York University (along with Christopher Sims of Princeton) won the Nobel Prize in economics, it marked the lucky seventh time the Nobel has been given for work critical of the “Phillips curve.” The Phillips curve being one of the greatest of Keynesian warhorses. It’s a graph that was developed in the 1950s showing a trade-off between unemployment and inflation. When one goes up, the other goes down.

Readers of this column will recall that back in March I had occasion to marvel that six Nobels – if you’re counting, for Edmund Phelps, Edward Prescott, Robert A. Mundell, Robert E. Lucas, Milton Friedman, and F.A. Hayek – dating back to 1974 have been given for torching the Phillips curve. And then comes today’s citation for Sargent:

“In the early to mid-1970s, Sargent wrote a number of highly influential papers, where he showed how rational expectations implied a radical reinterpretation of empirical macroeconomic phenomena and rendered invalid conventional statistical tests of macroeconomic relations….Taken together, these papers had a profound impact on central hypotheses about the role of monetary policy and the Phillips-curve tradeoff. Compared to other researchers at the time, Sargent focused more on actual data and on ways to evaluate theory by taking active expectations formation into account. He was thus able to show why earlier tests had gone wrong and how new, more accurate, tests could be constructed.”

The citation goes on:

“[Sargent and his co-authors’] estimates suggest that the central bank was initially fooled by an incorrect belief about the Phillips curve, which led to a gradual increase in the inflation rate. But the sequence of shocks in the 1970s, along with a revision of the central bank’s beliefs, generated a subsequent fall in inflation.”

As citations go, it’s actually pretty coy. For the “incorrect belief about the Phillips curve” was that the curve was wholly inaccurate. But when you’ve given seven Nobels for the same thing, it’s time for some circumlocution.

The 1970s, when Sargent did the work that resulted in this prize, inflation and unemployment were together doing a mad tango where they kept scaling ever more dizzying heights. First there was the recession of 1969-1970, when unemployment and inflation were both at the moderate-to-high level of 6%. Then there was the double-dip recession of 1974-1975, when unemployment touched 9% and inflation 11%. Then there was the soul-crushing 1980-1982 experience, when inflation scratched 14% and unemployment 11%.

And then there were the beauteous Reagan-Clinton decades when inflation plunged to 3% and unemployment to 5%.

No wonder at one point in the citation, it dryly states that Sargeant proposed that the Phillips curve might be “vertical.”

This time, the Nobel committee is striving to say that this prize was given specifically for Sargent’s corrections to the initial criticisms of the Phillips curve. Not that the curve is cogent; it’s just that the initial remonstrations (for which all those other prizes were given) were not as penetrating as they could have been.

I ask friends in the sciences if Nobels are ever given for the same discovery made over and over again, if in different ways. They say of course not. Seems to be the same thing in literature and peace: uniqueness all around. But in economics, you have to repeat yourself to the point of folly.

Yet Sargent’s prize remains pertinent. Just last month, the president of the Chicago Federal Reserve, Charles Evans, strongly implied that the Fed should fight unemployment with a gusto worthy of the Phillips curve; the president’s former top economist, Christina Romer, has been extolling its virtues lately; and it very much seems to be part of Fed Chairman Ben Bernanke’s toolkit through the Quantitative Easings and Operation Twists.

In the Gospel of Christianity, it is asked, “How many times should I forgive my brother? Seven times?” Jesus’s response is no, “seventy times seven times.” If the Phillips curve is a sin (and you can bet it is), the structure of experience suggests that in the eons ahead of us, many dozens of prizes are yet to be awarded for meritorious service in striving to hack it down.

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