A Rare Prize for an Economist Looking at the Big Picture

(Bloomberg Opinion) -- The John Bates Clark medal is arguably the most exclusive award in the field of economics. It’s given to only one economist each year — unlike the Nobel prize, which often is shared among several (though the Clark medal is only for Americans). And one must be under age 40 to receive it. This year’s prize goes to Emi Nakamura of the University of California-Berkeley, an undisputed star in the field of macroeconomics.

Unlike the Nobel, it’s rare for a macroeconomist to get the Clark medal. Arguably the last winner whose research dealt mainly with the business cycle was Lawrence Summers, who received the prize all the way back in 1993. For at least the past two decades, macroeconomics has tended to be a discipline ruled by consensus and by incremental innovations, with few standout geniuses. Nakamura is a rare exception.

Nakamura is one of the leaders in the field of New Keynesian economics. This school of thought, which has become the dominant paradigm at central banks around the world, holds that recessions happen because companies are unable to adjust their prices in response to events like a financial crisis or a big rise in interest rates. Without the ability to adjust prices, the theory goes, companies cut their output and lay off workers instead. In a 2008 paper with frequent co-author and husband Jon Steinsson, Nakamura showed that even very small amounts of this so-called price stickiness can generate large recessions, and make the economy very sensitive to changes in monetary policy.

Exactly why companies can’t adjust prices, however, remains something of a mystery. Nakamura’s research has helped to shed light on this question. Another 2008 paper with Steinsson helped to establish that price stickiness probably results from multiple factors.

But despite her status as one of the leading lights of New Keynesian economics, Nakamura has spent much of her career challenging the idea. In a recent paper with Steinsson, she showed that interest rate cuts tend to boost expectations of future growth without raising expected inflation much — in contradiction of what standard New Keynesian models (and the intuition of many macroeconomists) would predict. In another paper the two economists questioned the assumption of many New Keynesian models that inflation causes as much harm to the economy as unemployment.

The biggest failure of standard New Keynesian models is that they assume a central bank always has the ability to fight recessions by lowering interest rates. The recent Great Recession exposed the limits of this tool because nominal interest rates can’t go much below zero. Some economists have suggested that in lieu of cutting rates, central banks could use forward guidance — that is, promising to keep rates lower for longer even after the recession ends — to much the same effect. But together with Alisdair McKay and Steinsson, Nakamura showed that theories that predict big effects for forward guidance are highly unrealistic.

If interest rate cuts and forward guidance fail, what can be done to fight recessions? One of the most potent weapons might be fiscal stimulus via government spending programs. In 2011, as the U.S. was struggling to get its economy growing again and politicians were debating whether to enact deep budget cuts, Nakamura and Steinsson came out with the first version of a paper measuring the effects of stimulus. Looking at differences in military procurement across states, the economists measured how changes in local government spending boosted local economies. Their conclusion — that each dollar of government spending stimulated about 50 cents of additional private economic activity — was influential both within the economics profession and outside of it.

But macroeconomics being the inexact science that it is, even very well-done papers like Nakamura and Steinsson’s can’t prove beyond a shadow of a doubt that stimulus works. That’s why macroeconomists often have to act like detectives, gathering shreds of statistical evidence from a variety of sources and aggregating them into a coherent picture. In a recent survey paper, Nakamura and Steinsson discuss statistical approaches that macroeconomists can use to be more confident that the correlations they observe really represent causation.

Thus, over the past decade, Nakamura has contributed a vast amount to economists’ understanding of the theory and evidence regarding business cycles. Even this list doesn’t really provide a full summary of her contributions — for example, in a recent paper with Masao Fukui and Steinsson, she showed evidence that women’s entry into the labor force hasn’t crowded out men very much. She has also done work on the economics of housing, exchange rates, distortions in Chinese economic data, the impact of uncertainty on the business cycle, and the relationships between retailers and wholesalers. In an age of hyper-specialization, Nakamura stands out as a virtuoso.

Macroeconomics is an inherently difficult subject, where theory and data are both extremely limited and progress tends to proceed in small increments rather than leaps and bounds. But the contributions of Emi Nakamura show that there are still top minds working in macroeconomics. The world will be better off as a result.

To contact the editor responsible for this story: James Greiff at jgreiff@bloomberg.net

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Noah Smith is a Bloomberg Opinion columnist. He was an assistant professor of finance at Stony Brook University, and he blogs at Noahpinion.

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