Thomas J. Sargent

It’s an unlikely location to interview a Nobel economist, quite different from dusty offices, but it is the perfect place to tell a good story. Which is exactly what Sargent is about to do.

How does Sargent explain the role of data and pattern recognition?

The Nobel Laureate of 2011 likes to take examples from the past to illustrate his points. When asked about his Nobel work, he mentions the great physicist Richard Feynman, explains why economics is like a game of chess, but, finally, decides to take us back to the 16th century. At a time when people still believed that the earth was the center of the universe Nicolaus Copernicus, and later Johannes Kepler, were trying to figure out the laws of planetary motion. “It’s a beautiful analogy,” Sargent begins. He explains how Kepler put his many observations into mathematical equations. “It was pattern recognition,” he says. Similar to the work of an economist today who works with huge amounts of data in order to select patterns. “You’re very agnostic and don’t try to have a prejudice at that point. Much of one.”

But the most challenging task is to turn a non-causal model into a causal one. For astrophysics, it took 60 years before Isaac Newton used Kepler’s work as a basis and established a causal model that explained the forces that gave rise to what his colleague had described. “That’s the gold standard,” Sargent says. “You can teach a machine to do what Kepler did. But you need something else to do what Newton did.”

How do fiscal policies influence the economy?

It’s quite similar to what Sargent and his co-workers did when they developed a method for interpreting patterns. Their work was not concerned with planetary motion but with fiscal and monetary authorities and their influence on economic variables such as GDP, inflation, employment and investment. Sargent established methods to analyze causal relationships concentrating not on the effect of unexpected events, as his fellow Laureate Christopher Sims was, but on temporary and long-term policy changes.

Sargent emphasizes the legitimate power the government as the fiscal authority has, for example on taxation and social security systems. How much money does the government take in and from whom? How does it spend money and for what? “If you’re like the United States now, we spend more than we tax. And it’s going to get worse,” says Sargent, alluding to controversies around the US tax reform of 2018.

Why does Sargent say fiscal policy matters more than central banking?

“Fiscal policy has a huge ability to affect an economy but the central bank is a sideshow,” Sargent says smiling. “This is not what you hear in the news, but to a first approximation, it’s a place to start. In the long run, it can affect the price level under certain circumstances but it can only have temporary effects on interest rates.”

Fiscal policy has a huge ability to affect an economy, but the central bank is a sideshow.

What limits the impact of monetary policy, according to Sargent?

Expansionary policies of monetary authorities can’t affect unemployment, the economist argues, citing the famous Milton Friedman. “This is largely decided elsewhere,” he explains and mentions the work of his colleagues Peter Diamond and Christopher Pissarides, both Nobel Laureates for their theories on matchmaking in labor markets. “If you ask what determines whether you have a job or not, the central bank would be way down the list. All it can do is open market operations. Its assets are government bonds and its liabilities are money.”

When does the line between fiscal and monetary policy blur?

He acknowledges that the strict separation between fiscal and monetary policy is a theoretical one, and he remembers times in history when it broke down like the German hyperinflation of the early 1920s or the current crisis in Venezuela. “They’re taxing people who are trusting the government holding its currency,” Sargent explains.

How should we structure welfare programs?

Sargent has also been studying unemployment outcomes in both the United States and Europe. He focused on the design of welfare systems, the duration of unemployment compensation programs and the depreciation of human capital as a consequence of long-term unemployment.

Why can some welfare programs create disincentives?

“Welfare programs can trap you into having it in your own best interest to stay on government benefits,” he points out. It’s similar to what he said when addressing the audience at the Nobel banquet in Stockholm in 2011. “People respond to incentives, including the people you want to help.” Replacement rates and duration of payments are the crucial factors of compensation programs. Sargent illustrates how after World War II, many European countries would gradually decide to set up systems in which a huge percentage of the last wage was paid, for an infinite amount of time.

People respond to incentives, including the people you want to help.

What happens when wages fall below unemployment compensation?

Those systems were doomed to break down when globalization came and competition from abroad increased. It’s similar to any new major technological change, Sargent argues. “Your skills are wiped out. But if your unemployment compensation is linked to your last wage and now you have skills that are much less valuable, you get offers for wages less than your compensation.” Why would you agree to that? “You’re in a trap,” Sargent concludes. “And your skills will deteriorate further.”

Why is retraining essential in the modern economy?

He points out that there are various ways for any government to use its money in the wisest way. Instead of giving a flat rate of compensation and then cutting people off, setting an amount of compensation that depends on how long you’ve been unemployed. “It turns out that gives you the incentive to look hard early.” There are also several countries working on a different approach to their welfare systems – to help people, not lead them into a trap.

Since there remain a lot of people who were high skilled once, but have become “wards of the state” due to technological developments, Sargent also emphasizes the importance of retraining programs, whether it’s outside or inside the job. “You need to think about this stuff.”

How can people stay adaptable in a changing world?

Especially when it’s hard to predict which ways technologies will go, Sargent feels that it’s extremely important to stay flexible and to keep learning, even as you age. To him, the key ingredient is to be interested and enthusiastic. “That’s what counts.” He explains that he was once very good at using what is now an old obsolete computer, and that he was a specialist on economic models no one is referring to anymore. But it doesn’t bother him. Despite his age, he has learned some new computer languages fairly recently to keep himself feeling agile.

Today, he’s spending some of his time in Shenzhen and Beijing, figuring out new ways to use statistics to learn more about the Chinese economy. It’s fun for him to be in China. “They’re very eager to exploit technological developments. They train a lot of engineers and scientists and they’re very ambitious.” His continued motivation makes him living proof of the value behind his argument.

What challenges do young people face entering the job market?

Though Sargent clearly believes that everyone has his or her own part in having a chance to succeed, he also explains that policy reforms are highly important. In the past, he has used computer models to tackle labor market problems. In his mind, there are two harmful features, especially to young people: job protection and minimum wages.

“A minimum wage really hurts young people who are just getting in the market,” argues Sargent. To him, it’s evident that you learn various important skills when being new on a job. Therefore, accepting a low wage can be an entry to something better in the long run. “High minimum wages,” though they may help some people, “cut that off.” The Nobel Laureate believes that it decreases the flexibility needed for a modern, vibrant economy. “You’ve got to let entry and exit go on.”

What inspires Thomas Sargent about teaching and mathematics?

When talking to Sargent, you get the impression that he must be a wonderful teacher. He is good at explaining without overcomplicating things, he makes a joke from time to time, he has a calm and comforting way of talking. At one point, he remembers how he once had the dream of starting his own high school that was very different from other institutions. “I taught at a university in Korea. They make students work way too much. If I were in their shoes, it would destroy my interest in anything. You’re supposed to be having fun. I’m not talking about having fun doing drugs or drinking,” he laughs. “I’m talking about having fun looking at the beauty of physics.” He pauses for a moment, and adds, “Or having fun realizing that some stupid little mathematical equation, which you are able to understand, can actually explain how the planets are going around the sun. That’s magic.”

Having fun realizing that some stupid little mathematical equation, which you are able to understand, can actually explain how the planets are going around the sun. That's magic.