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Edward C. Prescott, 81, East; He won the Nobel Prize for studying business cycles.

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 earned him a Nobel Prize in economics, died November 6 at a care center in Paradise Valley, Arizona. hello what 81

His son, Ned Prescott, said the cause was cancer.

dr. Prescott was a leading member of the generation of economic thinkers who in the 1970s faced the collapse of Keynesian models, which had dominated policymaking since the 1930s but failed to explain high inflation and low growth in the economy. the decade.

Keynesian economics is largely focused on demand, changes in which, positively, cause the business cycle to fluctuate. But Dr. Prescott, working with his frequent collaborator Finn Kydland, asked if the supply side, like energy costs and especially technological progress, could be just as important, if not more.

In fact, his work, especially in a seminal 1982 articleshowed that supply-side changes explained the vast majority of changes in the business cycle since the end of World War II. His research helped ignite decades of policies, beginning under President Ronald Reagan, that aimed to cut taxes and regulate to maximize supply-side efficiency.

John Maynard Keynes himself might have approved: as he once said: “Practical men, who believe themselves free from all intellectual influence, are often the slaves of some deceased economist.”

And to be fair, Keynes did not have the advanced computer modeling systems that made Dr. Prescott’s work possible, and that gave him and Dr. Kydland’s perspective on the economy as a dynamic system.

That understanding of dynamism is related to his second critical insight, regarding what economists call time inconsistency. As they explained in a 1977 articlePoliticians tend to set long-term policies and goals, but then undermine them for short-term convenience.

They pointed to public flood insurance as an example. A government could declare an area too risky to build on and refuse to insure it. But once people build there, politicians are likely to cave to voter pressure and, in fact, people will build because they expect politicians to cave.

This credibility issue was particularly problematic for Dr. Prescott and Dr. Kydland when it came to central banks. Bank directors could make low inflation their main long-term goal. But if they come under political pressure, they are likely to shift their priorities toward more employment, even if it means higher inflation.

Therefore, Dr Prescott argued that governments should set long-term rules and stick to them, for example by insulating central banks from political pressure and setting multi-year budgets.

Both ideas arose in the late 1970s. dr. Prescott returned to public prominence in 2004, the same year that he won the Nobel Prize, with an article exploring why Americans worked longer hours than Europeans.

Unlike other economists, who offered explanations centered on cultural differences, Dr. Prescott argued that it was all about taxes and offered empirical data to prove it. In the 1950s, when taxes were lower in France than in the United States, French workers worked longer hours than Americans.

But that was reversed in the decades to come, as tax rates rose in France and fell in the United States. This finding prompted Dr. Prescott to sign a letter with 367 other economists criticizing a proposal by Senator John Kerry, the 2004 Democratic presidential nominee, to roll back tax cuts for high-income earners.

“The idea that you can raise taxes and stimulate the economy is pretty stupid,” Dr. Prescott told reporters.

For their work, Dr. Prescott and Dr. Kydland shared the 2004 Nobel Prize.

“They offered a new and operational paradigm for macroeconomic analysis based on microeconomic foundations,” the Nobel committee wrote. “The work of Kydland and Prescott has transformed academic research in economics, as well as the practice of macroeconomic analysis and policy making.”

Edward Christian Prescott was born on December 1. On January 26, 1940, in Glens Falls, NY, a city on the Hudson River north of Albany. His interest in economics arose early, after observing his father, William Prescott, an industrial engineer, who managed factory operations. His mother, Mathilde (Helwig) Prescott, was a librarian and homemaker.

Edward played football in high school and college, despite the fact that he was physically thin, and worked summers as a golf caddy and at a nearby paper mill.

He entered Swarthmore College planning 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 received an M.A. in operations research from the Case Institute of Technology in Cleveland, which merged a few years later with Western Reserve University, and a Ph.D. in economics from the Carnegie Institute of Technology in 1967, the same year the school was founded. merged with the Mellon Institute to form Carnegie Mellon University.

He married Janet Dale Simpson in 1965. Along with their son Ned, he is survived by her, as is their daughter, Wynn Prescott; another son, Andrés; 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 transferring to Arizona State University in 2003. In 1981 he became a consultant to the Federal Reserve Bank of Minneapolis.

At one point he was about to take 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 risk a conflict of interest. Ned Prescott now works for the Cleveland Federal Reserve.

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