Interview with Robert E. Lucas Jr.
Economist Robert E. Lucas talks about expectations, economics and infielding.
David Levy - Vice President
Published June 1, 1993 | June 1993 issue
Considered the intellectual leader of the new classical school of economic thought and of the rational expectations theory, Robert Lucas, University of Chicago, has guest lectured across the United States and in China, Finland, England, Israel and Canada.
Referred to as the economist's economist, Lucas has been influential in setting the direction of economic research.
As editor of Journal of Political Economy, he oversees one of the most prestigious economics publications in the world... and plays a fair second base, too.
Region: In a recent paper, you advocated cutting the capital income tax to zero. In fact, you asserted that such a change in our tax policy would be "the largest genuinely free lunch I have seen in 25 years in this business." Could you explain why this would be such a good policy?
Lucas: Taxing capital involves taxing income twice: once when you receive it, before you save it, and then once again when you get the return on the savings. It gives a bias toward consuming now rather than consuming later and depresses capital accumulation. Many people have estimated, and this is not an original remark or observation of mine, that the U.S. capital stock could be 30, 40, 50 percent higher than it is now under a tax structure that doesn't penalize capital accumulation with this double taxation. It's an important issue.
Region: In another of your recent articles, "Making a Miracle," you surveyed current models of growth and trade and concluded that economic growth is closely related to on-the-job accumulation of human capital. What if any implications does this result have for the type of growth-oriented policies that the Clinton administration is trying to design?
Lucas: None, I would say. It would be a big mistake for the Clinton administration to imagine that it can pick the industries that offer high returns on-the-job accumulation of human capital.
Region: Some programs, like Head Start, are on-the-job training for kids. Are they pointed in the right direction?
Lucas: I'd just call Head Start "schooling," not "on-the-job training." There's a lot of controversy as to how effective the program is. Apparently it has some short-term effects: Kids who've been through the Head Start program have a lot better first grade than kids who haven't. But by the time they're ready for high school it's hard to tell the difference between those who've had the program and those who haven't. The crucial issue with Head Start is whether the effects of the program accumulate over time or decay over time.
Region: You've been a strong advocate of the quantity theory of money. And as a guide to monetary policy, however, it has been less than satisfactory. The Federal Reserve is having trouble finding a monetary aggregate target that has stood the test of time. We first abandoned M1 for M2; now we're not too happy with M2.
Is the Fed just using the wrong monetary aggregate or are we using the wrong theory?
Lucas: I'm not sure which monetary policy one wants a guide for. There's no monetary aggregate that's going to be adequate for some kind of short-run fine tuning of the economy, for stabilizing the inflation rate on a quarter-to-quarter basis. If you're interested in long-run price stability, which is what I think the Fed should be interested in, then M1 has stood the test of time. So has the monetary base. There is a wide choice of aggregates. It depends on how demanding you are. From my own perspective, I don't expect much from monetary policy and I don't find it hard to find an aggregate that is adequate for practical purposes.
Region: So there's not another aggregate that we should be keying on?
Lucas: There might be. The quantity of money in a modern economy is a mix of a lot of different things, from hand-to-hand currency to demand deposits to other kinds of deposits. People have proposed a lot of different ways of adding up or averaging these various components, and there may well be a better way to do it than we've discovered so far.
Region: What subjects do you think are on the economics frontier in the 1990s?
Lucas: In economic policy, the frontier never changes. The issue is always mercantilism and government intervention vs. laissez faire and free markets. And that's exactly what's on the frontier right now with the new administration. How mercantilist are they going to be? We don't know.
The research frontier? That's too hard a question. If I knew the answer, I'd be doing it.
Region: I read that you started your academic career as a historian but switched to economics. Why?
Lucas: I was a history undergraduate and began graduate work in history at Berkeley. I was there for a semester and took pretty much all graduate courses in economic history. I realized that I didn't know enough economics to do it, so I started sitting in on some economics courses. I was caught by surprise at the technical nature of economics, and realized I couldn't sort of pick it up on the side, so l moved here and entered the economics department. I suppose I thought I was going to get back into economic history, but one thing led to another.
Region: Who were the main influences on you at Chicago?
Lucas: Milton Friedman's courses were the major event in graduate study here. I didn't work with Friedman on my thesis, but his price theory courses were tremendously exciting. They changed my whole way of looking at economics and social science. I wrote my thesis with Arnold Harberger and I worked with a lot of other people. Zvi Griliches and Donald Bear were two of my favorite teachers. Dale Jorgenson visited here, and was very helpful to me. H. G. Lewis, a labor economist in Chicago, was a tremendous help to me as well.
Region: As you studied macroeconomics the Keynesian model must have been pervasive.
Lucas: I took macroeconomics from Martin Bailey, Carl Christ and Harry Johnson. It was basically all Keynesian models.
Region: But later you became a central figure of the new classical thinkers and a standing critic of the Keynesian doctrine, calling it poor economics. That's quite a transformation.
Lucas: I guess so, but no one ever thought Keynesian economics was good economics. From the start, at least in the United States, there was an effort to unify Keynesian economics with neoclassical economics. Paul Samuelson really started that, or maybe Franco Modigliani. So even Keynesians were unhappy with Keynesian economics. There was an effort that everyone was engaged in to provide a microeconomic foundation for Keynesian models. Thinking that was a desirable thing to do was not the same as opposing Keynesian economics. Everyone believed in it.
It just seems that as we got further and further toward finding something that looked like it might be a microeconomic foundation, it got less and less Keynesian. Finally some of us decided it wasn't Keynesian at all, and that was that.
Region: But your battle against Keynesian ideas is almost an intellectual passion. Is that correct?
Lucas: Oh I don't know. I used to feel embattled. I felt that [Thomas] Sargent and I and Neil Wallace and other people were getting a lot of misguided criticism back in the `70s, and we hit back. Those days seem a long time in the past.
A new set of ideas that people have labeled Keynesian economics has arisen in the last 10 years, but it doesn't have any real connection with the old. These ideas haven't had much influence, and it is hard to feel much passion about them, for or against.
Region: Referring to President Clinton's economic conference, New York Times reporter Sylvia Nasar said. "After 20 hours of talk in Little Rock, Ark., last week about the economy, the intriguing question is "what wasn't said?" From your perspective, what wasn't said?
Lucas: I didn't read the accounts of that get-together. It was basically a Democratic Party victory celebration, and I wasn't hurt that I wasn't invited. It didn't pretend to be a balanced or across-the-board sampling of the economics profession. My view is that the recession is kind of over, and anti-recession policy should be far from the top of the agenda of the new administration. The recession was a campaign issue, and numbers that came out after the election showed that the recovery was already going full steam ahead in the third quarter. It's time to move on to something else.
Region: This question may relate to what you were saying just a minute ago about the old Keynesian ideas and the new Keynesians. Have the neo-Keynesians once again stormed the castle in Washington?
Lucas: It's hard for me to say. What troubles me about neo-Keynesians is not so much that they have a definite clear-cut ideology that I dislike, but that they have too little ideology. They're too good at rationalizing anything. So if I'm worried about anything, it's that economics as a kind of independent force won't really be operating in this administration. These guys have enough talent to put a kind of semi-respectable economic rationale on whatever the hell the politicians come up with. I don't see a neo-Keynesian agenda on policy issues.
Region: In your academic career, unlike many of your colleagues, it seems you have seldom played the role of the day-to-day activist and have disdained the notion of fine tuning. Is that correct?
Lucas: I am an opponent of fine-tuning, but I certainly do not look on economic advising with disdain. It is an important task, and those who do it with honesty and skill perform a real service.
It's also important for some economists to function as independent critics, outside of government.
I have done very little advising myself, but that doesn't differentiate me from most of my colleagues. Most economists are not waiting for a call from Washington. It just isn't what most of them spend their time doing, even in a policy-oriented area like macroeconomics. Most of us spend time on basic research and will be pleased if our ideas contribute something 10, 15, 20 years down the road.
Region: People often refer to the "Chicago School" and its enormous influence. From your perspective, what is the Chicago School and what has it come to in 1993? Is it vigorous? Has it been supplanted?
Lucas: This department is extremely vigorous right now. There is a tremendous group of people here in their 40s, already recognized as the leaders of their cohorts, who are going to carry on the tradition. So in terms of standing, I think this department is as strong as it's ever been. Whether we still want to call it the Chicago School, it's hard to say. No one would describe the younger faculty here as "followers" of Becker, Rosen and me, but I don't know if we could be described as followers of people like Milton Friedman and George Stigler, or they of Frank Knight and Jacob Viner.
It seems to me the common factor all of these generations share is the focus on basic science, as opposed to a focus on the immediate influence in the current political scene. This can make our writing and speaking look irrelevant or utopian but which as time passes, you can find yourself in the mainstream without changing a thing.
Region: The Chicago School was known for its orientation toward free market thinking. Is that still part of the Chicago School? Is that the essence of it?
Lucas: I would have a hard time taking a given political issue going down the list of my colleagues and predicting who stands where on any given issue. It's not that political a group and a lot of people, particularly younger people, haven't really written or spoken much on political issues.
With that said, I guess Chicago has a pro market bias or maybe a better way to put it is just a skepticism about the efficacy of government programs. The beauty of neoclassical economics is that it's not a revolutionary all-or-nothing kind of thing. It s a reformist line of thought so that you really have to take issues one at a time. I think most people here would agree that, for example, medical insurance in the United States is in bad shape and needs attention and they respect the fact that the new administration is facing up to that. Whether or not they're going to face up to it in a way that I like or some of my colleagues like, we'll have to wait and see. You've really got to take it issue by issue.
Region: Turning to a more personal question, I learned that you were a pretty good shortstop at one point.
Lucas: I played second base. I didn't have the arm for short. We had a slow-pitch softball team at the business school at Carnegie, and I played there. In Chicago we play softball with these 16-inch softballs, which are so big you can't use a glove and you have to throw them kind of like a football. And you gotta weigh 280 lbs. to hit the damn thing anywhere. So my career ended when I moved here in 1974.
Region: Are you a baseball spectator? Do you follow the Chicago teams?
Lucas: Yeah. A little bit. Go to one or two games a year.
Region: And one of the other things that I learned about you is that you've quite well read outside of the world of economics. Correct?
Lucas: I read a lot of contemporary fiction. Some history and some theology. Anything that looks interesting.
Region: To close the interview, is there something we haven't touched upon that you would like to add?
Lucas: The Minneapolis Fed has really quite a remarkable, unique role in macroeconomics in the last 20 years that your readers should know about. I guess it was started with John Karaken and Neil Wallace when they joined the Research Department, and there's just been a tremendous stream of outstanding people through, some of whom are connected with the University of Minnesota, some of whom are not. The Minneapolis Fed has become an exciting place for younger people to spend time, a place where you can learn a lot. Ed Prescott's been an incredible addition to the place.
Region: Remarkable enough that it's affected mainstream economic thinking?
Lucas: Certainly, I guess what's impressive about the place is that the presidents of the bank have supported this group and continue to let its members follow their own noses. There's really been nothing like it in the Federal Reserve System. It's converted me to the virtues of having 12 regional banks, which I had always thought of as just a political concession at the time the Federal Reserve System was founded. But the fact is that, at least in research, it's led to a tremendous amount of diversity, and more and more banks are following the Minneapolis model and supporting basic research.
Region: Thank you Mr. Lucas.
More about Robert Lucas
John Dewey Distinguished Service Professor of Economics, University of Chicago
Editor, Journal of Political Economy
Member, National Academy of Science
Fellow, National Academy of Arts and Sciences
Doctorat Honoris Causa, Universite Pari-Dauphine
"Making a Miracle," Econometrica, March 1993.
"Efficient Unemployment Insurance" (with Andrew Atkeson). Working paper, 1992.
"Supply Side Economics: An Analytical Review," Oxford Economic Papers, 41 (1990): 293316.
Recursive Methods in Economic Dynamics (with Nancy L. Stokey and Edward C. Prescott). Cambridge: Harvard University Press, 1989.
Lucas's Autobiography (OFFSITE)