Economist at MIT Awarded Nobel Prize, Blasts Reagan : Hits ‘Disastrous’ Federal Deficit, Urges Tax Hike

Franco Modigliani of the Massachusetts Institute of Technology, won the 1985 Nobel Prize in economics today for theories he developed 30 years ago on personal savings, including how people provide for old age, and the value of businesses.

At a news conference after announcement of the award, the Italian-born professor blasted President Reagan for the “disastrous federal deficit” and called for a tax increase and a reduction in military arms spending.

“The deficit offsets the savings of people and leaves less money for investment,” Modigliani said. “The tragedy of the deficit is much greater than I expected (when formulating his theories) in the late 1950s, when I didn’t realize the full damage it could do.”

‘Should Cut the Fat’

“President Reagan is wrong to stick by his hard and fast rule of refusing to raise taxes and should cut the fat from the arms budget,” he said.

Modigliani said the $225,000 prize will help him speak out against “serious mistakes” being made by governments in the United States and Europe regarding deficits and depressions.

“I think they’re making serious mistakes,” he said. “I think now maybe . . . I will speak with a louder voice.”

Modigliani’s work “explains what we see and helps us understand the world,” Prof. Assar Lindbeck, a member of the prize committee, said after the award was announced.

The Royal Swedish Academy of Sciences said Modigliani, 67, had developed a life-cycle hypothesis of household saving and formulated theorems used to determine the market values of firms and capital costs.

‘Obviously Very Pleased’

“I obviously am very pleased,” Modigliani said this morning by telephone from his Belmont, Mass., home. “It’s always nice to hear that the work I’ve done is appreciated and regarded as important.”

He said he leaves decisions about household finances to his wife, Serena. “I give the general ideas, and my wife makes better specific decisions.”

His savings theories, worked out in the 1950s with a student, the late Richard Brumberg, helped demonstrate how people reduce their efforts to save for their old age when able to count on improved pensions.

The academy said the life-cycle hypothesis had proved to be “an ideal tool for analyses of the effects of different pension systems.”

Most such analyses, it said, “have indicated that the introduction of a general pension system leads to a decline in private saving, a conclusion in full agreement with the Modigliani-Brumberg hypothesis.

“These achievements are important contributions to economic science,” the academy said.

Corporate Finance

Theories Modigliani developed in cooperation with colleague Merton Miller, also in the 1950s, dealt more with corporate finance. The academy said they have had important implications for the theory of investment decisions.

They “represent a decisive breakthrough for the theory of corporate finance,” the academy said.

Lindbeck said the Modigliani-Miller theory showed that “a company manager should not maximize annual profits but maximize the value of shares on the stock market.”