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A Nobel Visit with Edward Prescott

Nobel Laureate Edward C. Prescott stood in front of a filled auditorium at the Tepper School of Business as the inaugural speaker of the Tepper Lecture Series, a new public forum that welcomes distinguished doctoral alumni back to campus to share insights with the Carnegie Mellon community.

Prescott earned his Ph.D. in economics at Carnegie Mellon University (CMU) in 1967 and returned to join the Tepper School faculty in 1971, remaining through 1980. He currently is a senior monetary advisor at the Federal Reserve Bank in Minneapolis, and holds the W.P. Carey Chair in Economics at Arizona State University.

In 2004, Prescott and Finn E. Kydland, the Richard P. Simmons Distinguished Professor and University Professor of Economics at the Tepper School, were jointly awarded the Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel. Their groundbreaking work transformed macroeconomic thinking, specifically regarding economic policy and business cycles. The Nobel Prize Selection Committee recognized Prescott and Kydland for “their contributions to dynamic macroeconomics: the time consistency of economic policy and the driving forces behind business cycles." 

The student audience was joined by a number of Tepper School faculty, including colleagues of Prescott’s during his teaching days at CMU. Dennis Epple, the Thomas Lord University Professor of Economics and department head, opened the presentation. He welcomed Prescott, whom he had known as a fellow Tepper School faculty member in the 1970s. He remarked on Prescott’s role at what was then known as the Graduate School of Industrial Administration, as both an intellectual leader and a role model in research and doctoral student guidance, and noted Prescott’s organization of a faculty seminar series to facilitate interdisciplinary exchange.

Epple also relayed a memorable piece of advice he received from Prescott. “It’s not a good idea to spend too much time reading the literature,” Prescott had said. “It will draw you into the mindset of others. It’s better to think more independently.” Epple then added, to a roomful of laughter, “In one respect, Ed’s advice has been completely ignored. His top four papers alone have 21,000 citations. So Ed, despite your advice, a lot of people are reading your papers.”

Prescott then took the podium, commenting on the great honor and pleasure it was to be back at the Tepper School, as well as “the fun and exciting times” his years at CMU represented.

As he began to discuss his most recent paper, Prescott described it as theoretically “very much in the tradition of a truly great GSIA faculty member, Merton Miller,” adding “There are looming problems, and we’ve got to do something – we’re economists!”

Prescott’s work, “On Financing Retirement with an Aging Population,” co-written with Ellen McGrattan, examined a timely concern. Along with many other countries, the U.S. is facing the challenging policy question of how to finance retirement consumption as the population ages and the number of workers per retiree declines.

He explained that while the U.S. relies heavily on taxing income to make lump-sum transfers to retirees, a saving-for-retirement system with no retiree entitlement programs could be a better choice. Proposals for such a system, however, have been met with resistance in the belief that some age groups would suffer. Prescott noted that his work demonstrates a successful transition path from the current U.S. structure to a saving-for-retirement method that actually increases the welfare of all, including estimates of future welfare gains that are double those which are calculated with typical models.

Prescott outlined his assumptions; most importantly, a larger estimated productive capital stock and more detailed capital tax policy. He described the gains by factor, first with the elimination of payroll taxes on Medicare and Social Security, then showing further welfare gains with tax reforms that eliminate capital taxes and flatten and broaden the tax system.

Prescott discussed these conclusions and his presentation drew to a close. As a reception began in the next room, audience members jumped at the chance to come downstage and speak personally with the guest of honor.