Nobel Winner Prescott Says QE2 May Not Have ‘Much Consequence’

Edward Prescott, a Nobel Prize- winning economist and senior monetary adviser to the Reserve Bank of Minneapolis, comments on quantitative easing.

He spoke at an insurance industry conference today in Warsaw.

“The big problem of the U.S. is spending too much. Milton Friedman said to spend is to tax, and I say to tax is to depress. I think it has been established.”

People “have studied what gives rise to fluctuations in the U.S. economy in the postwar period, and it comes down to two factors. One, a big one, is productivity, and the other big one is what happens to the tax rates. These account for things and don’t leave much room for the monetary policy. What determines a price level is monetary policy, and I think in there the Fed has done a very good job.

“Buying all these assets is like shifting entries on the balance sheet, and I don’t know how this is going to have much of a consequence.

“I don’t think this policy is going to be bad, but nobody has come up with a mechanism that says that the Fed can affect unemployment, and the empirical evidence is lacking. The theoretical evidence is lacking as well. If this is just hidden off the balance-sheet debt of the U.S. government, of those government-sponsored enterprises, then I worry.”