When should we worry about public debt?

If you had perfect research conditions and all the necessary data, what’s the biggest question you’d want to ask? Why exactly this question? Ed Prescott encourages his students to think beyond what’s possible, and he’s followed his own advice too: his fundamental contributions to economics span many fields, such as: economic growth theory, policy analysis, economic theory, econometrics, methodology and labor market research.

For Prescott, an interesting question has to "address some policy issue. It needs to be something where current theory isn’t very good". His rigorous yet straightforward thinking and research processes resulted in his paradigm-shifting work on the time inconsistency of economic policies, and a methodological framework for understanding economic cycles. Close collaboration with his former graduate student and later colleague Finn Kydland won the two economists the Nobel Prize in 2004.

Edward C. Prescott

The Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel (shared), 2004

At a glance

Born: 1940, Glens Falls, NY, USA

Field: Macroeconomics

Prize-winning work: Contributions to dynamic macroeconomics: the time consistency of economic policy and the driving forces behind business cycles

Unfulfilled wish from the Sputnik era: To become a rocket scientist

Rule to go by: Thank people who criticize you for their time

Gets easily bored: When nothing changes

His most spectacular hike: The Milford Track in New Zealand

Predicting the effects of political decisions

As co-author of papers written with both Finn Kydland and Bob Lucas that continue to define and shape economic research, Prescott never ceases to come up with thought-provoking, policy-relevant questions. "Whenever you delve into a problem, interesting questions pop up," says Prescott in a down-to-earth manner. "When you finally find the answers, it changes your thinking. You have better ways to address the complexities of reality. It’s amazing how useful our incredibly simple models are for drawing inferences and making predictions of what will happen if a certain policy or regime is followed."

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Maintaining relevance

When it was published four decades ago, Prescott’s work marked a watershed moment for macroeconomic research. Since then he may have stepped into new terrains with new questions, but he never abandoned the old ones. He keeps connecting with ever-changing current events, particularly when discussing time-inconsistency with his undergraduate students. In his own way, Prescott creates continuity for understanding the fundamentals of economics and builds a history of policy-making to pass on to the next generations. Change is an integral part of his work, rather than an impediment to progress.

His students seem more than appreciative, because apart from learning concepts in an applicable context, they learn to connect the past with the present and fully grasp change. Student Daniel Weser relates: "He constantly updates everything he has ever learned to see how it compares with what’s occurring today. He wouldn’t claim that the past is a great predictor of tomorrow, but rather that the past is still relevant."

Lessons on thinking outside of the box

If there’s a secret to Prescott’s method, then perhaps it’s his ability to always approach a problem from a fresh, novel angle, and not giving up until the answer reveals itself. "I’m very good at forgetting," jokes the laureate in his office overlooking the Arizona State University campus in the desert. "So I don’t get locked into old ways of thinking. I often reinvent wheels." His technique to remaining open to ideas and solutions is to not make sure he never gets locked into circular thought patterns. "You’ve got to leave it be, come back to it later - and when you forget your old way, you may find a new one that works," he says.

Using people as inspiration

Prescott finds inspiration in conversation rather than introvert thought. After all, it’s people that make Prescott enthusiastic about economics as a science. "Social sciences are different from natural sciences. We have people. That makes things much more interesting in our models," concludes the economist.

The accumulation of Prescott’s inspiration and motivation from interactions with others creates a ripple effect that spreads among his students. He encourages and inspires both students and colleagues to build their own legacies in their own style. Indeed, his colleague at ASU Berthold Herrendorf recalls expressing his gratitude to Prescott by noting: "You’ve given me so much." The Nobel Laureate responds by saying "as long as you give it to the next generation". Commitment to the education of future generations is his way of addressing time-inconsistency in research.

How much government debt should there be?

While many of his students see him as an incredibly generous person both with his time and ideas, it’s precisely in their classroom he finds the fertile soil to nurture these ideas. For instance, one of his current research interests is in understanding the complex issues surrounding the public debt, which arose while explaining the tools for conducting inquiries to his undergraduates.

"We wondered in class how much government debt should exist. It’s not zero, except in certain periods. In the 1950s, given the demographics, it was zero. Now we have a lot of old people, so we need a lot of government debt. It’s a lot more than the value of the stock market." Prescott finds his ideas are often at odds with other scholars when it comes debt and deficit. "I look at the ratio to the GNP and whether that’s going up. We need to figure out how much people will want to save for retirement. Compare the sum of this number with gross national income, then subtract from that the value of business equity, houses and factories and stocks. If debt starts going way above this number, I’d worry," he says.

Setting up better systems

In his research, Prescott’s shown that people worry less about public debt. Rather, they want tax reforms and other systems that don’t seem to be working fairly. "Change is essential to progress," he says. "I get a little worried when I see systems set up that are wasteful. The U.S. has a really high-quality medical care system and it’s better than people realize. But it’s excessively expensive. I wish we could set up a better system."

Give things a try

Leaving Prescott to prepare for an upcoming conference on gender equality in labor markets that he’s hosting at his university, we ask him for a piece of advice for young people. He responds with a smile:

You only live once, so work hard and enjoy life. Give things a try, if you do your best and it doesn’t work, you should be proud of yourself because you tried. A lot of times you’ll surprise yourself.

He adds some personal proof to the pudding: "Everybody thought I’d fail miserably on the public speaking tour after I got the Nobel, and I thought I would too, but I surprised myself. They asked me back."

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