The impact of short-sighted policy
28 February 2019
It can be argued that one of the world’s most prestigious accolades you can be awarded is the Nobel Prize, whether you are a researcher, academic, scientist, author or economist. The LINK had the honour of speaking to two of these laureates; Norwegian Finn E. Kydland and Cypriot-born Christopher Pissarides when they visited London. We talked to them about their award-winning theories, Brexit and the biggest challenges ahead, whilst participating in the UBS event ‘Nobel Perspectives Live!’. The event is part of a UBS initiative, partnering with Nobel Laureates in Economics to explore the life and work of these great minds. The ambition is to inspire, educate and strengthen people’s understanding on the big issues shaping the world and our lives.
On 27 November 1895, the Swedish inventor, entrepreneur, scientist and businessman Alfred Nobel signed his last will and testament, giving the largest share of his fortune to a series of prizes in Physics, Chemistry, Physiology or Medicine, Literature and Peace. Namely, the Nobel Prizes. It was Nobel’s wish that the bulk of his fortune would be awarded to individuals who had during the preceding year conferred the greatest benefit to humankind. Ever since 1901, five years after Nobel’s death, the Nobel Prize has been honouring individuals from all around the world as well as putting Sweden on the map. The Sveriges Riksbank Nobel Prize in Economic Sciences was first introduced in 1968 and since then, 81 laureates have been presented the award.
Finn E. Kydland and Moderator. Photo: UBS
“You should ask my wife to explain it. When I try to do it, it takes ten minutes, but my wife does it in one sentence. She says, ‘he showed why central banks should be independent’,” Finn E. Kydland said when asked about how he earned his Nobel Prize. He went on to explain that the prize was awarded to him and his research colleague Edward Prescott for two reasons; one was related to business cycles and a new framework to analyse these and the other was the theory of why central banks should be independent.
According to Kydland, the extent to which banks are independent varies a lot. “In the old days, the German Bundesbank were the champions of good monetary policy. It was consistent and you could depend on what they were doing. Another country we have studied which is on the other end is Argentina, where the monetary policy is about as bad as it gets.” He added that the Scandinavian countries also rank highly among the countries with good monetary policies. “After 2004, I have spoken to the heads of the Swedish and Norwegian central banks and they claim that they are very much aware of our theory and that it influences their thinking”, Kydland said.
When being asked about the biggest challenges ahead in his field of research, Kydland emphasised the importance of short-sightedness. He explained: “To me, the biggest risk is that nations will succumb to the time inconsistency problem which in laymen terms just means that policy becomes very short-time oriented instead of thinking about the long run. A notable example of short-sightedness is from three-four years ago when I predicted that we were likely to see more and more countries impose trade restrictions. I must admit that I did not predict that the big push would come from the United States, but here we are and see what happened. In my view, this is an example of something that looks tempting to naïve politicians in the short run.”
Kydland also pointed out that the way of thinking is one of the reasons why some Latin American countries have seen slower growth than for example Asian countries like Japan and Hong Kong. “Some Latin American countries just willy-nilly impose trade restrictions and are not realising that it’s a bad idea. If you try to protect domestic industries it gives those industries less incentive to be more productive over time which means that in the long run, it actually reduces the nations productivity.”
BREXIT IS SHORT-SIGHTED
Another recent example of short-sightedness is the UK’s decision to leave the European Union, according to Kydland. He said: “The main problem with Brexit and the discussion around it is the amount of uncertainty there is. In order to make important decisions in the field of economy there needs to be a sense of what the future government policy is going to be. The Brexit discussion has introduced a lot of unnecessary uncertainty.”
Fellow Nobel laureate Christopher Pissarides agreed with Kydland and said that Brexit creates a lot of worries and concerns for businesses as well as individuals. Pissarides, who was awarded the Nobel Prize in 2010, has mostly done research on the labour market and macro economy and said that the debate around immigration before the Brexit referendum “was naïve”. He said: “To think that immigration is taking jobs is complete nonsense. You should see it in a more rational way. Ask yourself where bottlenecks are and what they can contribute with. In fact, I would say that overall, immigrants contribute more to a country than they take out of a country. This is especially true for the immigration of Europeans in the open market.”
Christopher Pissarides. Photo: UBS
Pissarides was awarded the prize for his “analysis of markets with theory of search frictions”. He explained that he had researched the reason why unemployment levels were rising while there were jobs still available and what connection this had to the support that governments give the unemployed in different countries. “We noticed something that we call friction in this case. It means that you can’t quite bring the supply and demand of labour together with a single price that will satisfy everyone. There is something that interferes there. Something that doesn’t match.”
Pissarides and his research colleagues then started to look at what the reasons could be for this friction and what keeps employers and employees apart. “It’s usually skills requirements that the employer want that are different from what the worker can offer but it’s not always that black and white,” he said. He added that other factors include other job opportunities that need to be considered as well as the government support offered. Pissarides said: “Suppose the government comes along and says we are going to give you some support, some income, then the pressure on you to make a quick decision is reduced, it’s practically gone, so it could take months to decide. You remain unemployed for nine months out of a year. But if the government says it’s your problem, find a job, then you think you need to take a job immediately. That’s one factor that explains the higher unemployment in situations where you have more generous unemployment compensation.”
RELEVANT AS LONG AS THERE IS UNEMPLOYMENT
Although his research dates back decades, Pissarides said that his theory will be relevant as long as there is unemployment, despite the introduction of new technology such as Artificial Intelligence (AI). “Even now with robotics and AI this is still the theory being used to try and understand what implications it will have for unemployment. Tech always affects the development. In the 70s we had this realisation. We started thinking more about tech and the impact it will have. We published a study, we called it ‘the job creating and job destruction’. We are seeing that today with jobs being created by the development of AI but there is also job destruction. I think there is a good balance, but workers must make the transition from destroyed jobs to the created ones.”
Although tech can be seen as an opportunity as well as a challenge, Pissarides pointed out that the biggestfuture challenge in his field is inequality. He said: “New tech companies have a tendency to have a concentration of economic power. You get global companies like Google, Apple, Amazon and Facebook that are global companies. Managers become extremely wealthy compared with the workers whereas the manufacturing industry wasn’t like that with minor exceptions.”
Despite becoming science superstars and recognised all over the globe after winning the Nobel Prize, both Kydland and Pissarides continue to do research and teach in their different fields. Kydland said: “It is true that once you get the prize it changes your life and you have less time. But research is the reason I became a professor and ended up doing what I do so I make sure I keep up the research with my co-authors.”
Nobel Perspectives explores the life and work of Nobel Prize Winners in Economics through an online platform and a global event series, Nobel Perspectives Live!. Four successful events have taken place to date in Shanghai, Singapore, NYC, and London. More info on www.ubs.com/nobel.