US wins Nobel prize in economics

That line wound up on a popular comedy show.

But seriously, I found this impressive.

The Nobel in economic science was awarded on Monday to Thomas J. Sargent of New York University and Christopher A. Sims of Princeton University for their research on the cause and effect of government policies on the broader economy, a major concern of countries still struggling to address the aftermath of the recent financial crisis.

This is really interesting.

Back in the 1970s, Dr. Sargent and Dr. Sims were interested in figuring out how a new policy, like a tax cut or an interest rate increase, might affect the economy. But economists cannot run controlled experiments in real life to see what happens when a policy is executed and compare the results to when it is not. Instead, they have to study whatever history is available to them, with all the complicated conditions that happened to coincide with the policy change.

They could not have foreseen how much we would need their analysis at this point in the future.

Their new methodologies are used to figure out whether a policy change that happened in the past affected the economy or whether it was made in anticipation of events that policy makers thought would happen later.

“For both Sims and Sargent, their research is fundamental,” said Mark W. Watson, an economics professor at Princeton. “They figured out what it is you need to know to answer this cause and effect question, and then they developed methods for actually measuring the effects of causes.”

Okay, but wait…That’s all related to past events. What caused what, and how its anticipation affected its outcome. Or something like that.

Today I asked a professorial scientist something reasonable about cause and effect in advance of the result, and he smiled and said “If I knew that answer, I’d be in Sweden picking up a Nobel right now.”

Though the guys that did, didn’t exactly have the answers. Just interesting research methodology.

Dr. Sargent’s body of work is somewhat eclectic. For example, he spent the early part of his career building up the “rational expectations theory” — the idea that people make choices based on what they rationally expect to happen, and so expectations can affect outcomes — and then spent subsequent decades criticizing it.

“He’s an amazing character in that sense,” said Dr. Christiano, who wrote his dissertation under Dr. Sargent. “He contributed a revolution, and then tried to develop a revolution against that one.”

Looks like we have a new frontier.