Headlines these days refer to central bankers “setting inflation targets” and “anchoring expectations.” Presidential candidates extol the merits of early childhood development. Politicians condemn “too-big-to-fail” bank bailouts. Cryptocurrency raises questions about the very nature of money.
These terms and theories might sound like products of East Coast intellectuals and enigmatic think tanks. But, in fact, they’re as Minnesotan as corn dogs and walleye — born from a historic partnership between the University of Minnesota and the Federal Reserve Bank of Minneapolis. Indeed, much of today’s economic discourse and policymaking builds on an intellectual foundation laid in our backyard, 50 years ago.
It’s a foundation we’ll honor later this month as some of the world’s most distinguished economists gather to discuss and salute the legacy and future of a remarkable Minnesota collaboration.
Six of the pioneering scholars who will convene here for an academic conference — Lars Peter Hansen, Finn Kydland, Robert Lucas, Edward Prescott, Thomas Sargent and Christopher Sims — are Nobel laureates who have conducted research at the University of Minnesota and the Minneapolis Fed (four as employees or while still grad students). Prescott, Sargent, Sims and their colleague Neil Wallace will take the stage Thursday, Aug. 22, at the U’s Ted Mann Concert Hall in a free public event — “The Four Horsemen of the Economic Revolution” — starting at 5 p.m.
The University-Fed partnership dates back to the late 1960s. Revolution was in the air, and economics was not immune. Prevailing economic theory could not explain why prices rose as jobs vanished. Nor did it offer a policy solution. President Richard Nixon tried wage and price controls. President Gerald Ford launched “Whip Inflation Now.” Both policies failed. Mainstream economists had no answers.
Out of this turmoil, the partnership between economists at the U and the Minneapolis Fed was born. Together, they worked to understand the causes of high inflation and economic stagnation. Understanding led to better policy prescriptions championed by Minneapolis Fed leaders. The result was a revolution in both economic scholarship and policy.
Lessons learned then remain relevant for today. Take the idea that economic policy affects the economy by changing people’s expectations of future policy. One implication is that the Fed’s most powerful tool is its credibility. Much of what the Fed currently does — the 2 percent inflation target to “anchor” inflation expectations, “forward guidance” on interest rates — builds credibility.
Other lessons have been harder to teach. Long before the global financial crisis, the partnership warned of “too-big-to-fail” banks. We also warned that the implicit promise of government bailouts of banks would lead to excessive risk-taking. These risks remain a problem despite the crisis; we offer a solution in the Minneapolis Plan to End Too Big to Fail.
The partnership’s lessons remain relevant for today’s scholarship as well. Economists everywhere continue to build on our research into the causes of business cycles. And our research scholars continue to tackle some of the toughest economic problems of our time.
• Dramatic disparities in economic circumstance and opportunity are the focus of taxation and social safety net analyses by our economists.
• Achievement gaps are the target of the Minneapolis Fed’s nationally recognized economic research on the importance of investing in early childhood development.
• Addressing economic disparities through research and policy solutions is central to the mission of the Minneapolis Fed’s Opportunity & Inclusive Growth Institute and the University’s Heller-Hurwicz Economics Institute.
• Recurrent sovereign debt crises that afflict nations worldwide are addressed by analyses and policy recommendations developed in Minneapolis.
• Sustained research on optimal fiscal and monetary policy highlights the importance of clarity and consistency in guiding public expectations.
What’s most impressive is how quickly these theoretical advances have been introduced into policy debates, a truly quick move to market. One of the deep legacies of the Minnesota partnership is the understanding that solid economic research is the bedrock of sound economic policy.
But this week’s conference is not a mere celebration of bygone research. Our glory days have not passed. Energetic, smart graduate students continue to shuttle between the university and the Fed, and they are proof that the future of the partnership is brilliant. In ways we cannot begin to imagine, when it comes to economic theory and policy, they will launch the next revolutions.
Art Rolnick is a former senior vice president and director of research at the Federal Reserve Bank of Minneapolis and now a senior fellow at the University of Minnesota’s Humphrey School of Public Affairs. Mark L.J. Wright is a current Minneapolis Fed senior vice president and director of research.