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Nobel Winner Kydland Brings Economic Views to UC

Photos By: Dottie Stover

   Students at the University of Cincinnati had a chance to hear the views of one of the top minds in the field of economics on Thursday, when 2004 Nobel Prize winner in Economics Finn Erling Kydland spoke in Zimmer Auditorium.

Finn Erling Kydland

The lecture was presented by UC’s Department of Economics.

Kydland delivered the 2009 James C. Kautz Lecture in Political Economy, and focused on his views on how government policy needs to mesh with long-term economic aims. “I think policy consistency is underrated by our policy-makers,” Kydland said.

He and research partner Edward Prescott were awarded their Nobel for work examining business cycles and the time inconsistency of economic policy. Kydland continues to examine similar questions from his faculty position at the University of California, Santa Barbara.

Kydland told his UC audience that as early as the 1970s, he and Prescott began to see that governments who constantly adjust economic policy in pursuit of the goal of creating optimal economic conditions at all times often suffer unforeseen consequences in the longer term. He said the inconsistency of such policy “turns out to be a problem. The other thing that Prescott and I discovered is that the alternative outcomes from this can be very bad.”

Kydland cited examples of countries in tandem that experienced positive and negative outcomes because of their policy paths, such as Argentina vs. Ireland and Chile vs. Mexico.

Technological change has been key to economic growth around the globe, Kydland asserted, but government policy and the consistency in how it’s applied to factors such as taxation, infrastructure development and monetary policy is a major factor in determining the overall economic equation for a nation.

Finn Erling Kydland and James C. Kautz

As for the current U.S. picture, Kydland pointed back to his comparisons of Chile and Mexico, which both suffered banking system problems in the early 1980s. Chile took over its banks, suffered severe near-term losses, but then returned them to private ownership after straightening out their structure and saw growth. Mexico also took over its banks, but fearing job losses and financial upheaval, kept them nationalized for the long term.

“Here is the key question, then,” Kydland said. “Which of those two cases comes closer to what the Obama administration is trying to do?”

The point that Kydland came back to are the virtues of long-term consistency in policy.

“The key message is policy has to be credible and forward-looking, with a focus on the long run and not the short run,” he said. “The reason I am nervous about our own situation is that investors have reason to be nervous that their taxes will be raised. Investing is a very forward looking activity.”