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Friday, September 26, 2003

A grand Old Man is Gone

Franco Modigliani, he of the Modigliani-Miller Theorem, and the life cycle savings model is gone. He died yesterday. Even to the end of his life he remained active in defence of the ideas which he felt to be important. Even as recently as last Tuesday he was to be found alongside Samuelson and Solow denouncing Berlusconi's version of the Mussolini era. We will miss him:

Franco Modigliani, who received the Nobel Memorial Prize in Economic Science in 1985 for his pathbreaking explanations of how people save and the role of debt in determining the value of corporations, died yesterday at his home in Cambridge, Mass. He was 85.

He died in his sleep, the family said. The evening before, he and his wife, Serena, had attended a dinner in honor of a fellow economist, John Kenneth Galbraith, and Mr. Galbraith's wife. Mr. Modigliani had taught at the Massachusetts Institute of Technology for 28 years, until he retired in 1988, but continued to teach at least one course each spring. Mr. Modigliani, who was Jewish, often recounted his experiences with fascism in his native Italy. As a young man just out of law school — active in the antifascist movement — he fled to France and then the United States after Mussolini promulgated racial laws in 1938. His enduring hatred of the Mussolini government flared up one last time this week. In a letter to The New York Times published on Tuesday, he protested the decision of the Anti-Defamation League to present Prime Minister Silvio Berlusconi of Italy with its Distinguished Service Award. Mr. Berlusconi had been quoted as saying that Mussolini did not murder anyone; he only sent them into long exiles. Mussolini in fact "was responsible for the deaths of many political opponents, partisans and Jews," Mr. Modigliani wrote in the letter, which was co-signed by two other Nobel laureates, Paul A. Samuelson and Robert M. Solow, also of M.I.T.

His various early teaching jobs brought him to the Carnegie Institute of Technology in Pittsburgh in the 1950's. There he developed the life-cycle hypothesis, his best-known work. Economists had thought that only the rich saved, or people saved only when their incomes rose. Mr. Modigliani, who persisted in testing theories against experience, doubted this. Talking it through with Richard Brumberg, then a graduate student, he came up with the insight that everyone saves and accumulates wealth through the early decades of their lives and then spends the accumulated wealth in old age.

Across a nation, savings rise as an economy and a work force grow and productivity rises, Mr. Modigliani concluded. After World War II, that was the experience of the United States, then Japan and now China. In life-cycle theory, the accumulated American savings should be spent soon by the baby boomers now approaching old age. "Modigliani's theory was a powerful searchlight on what was happening," Professor Samuelson said. "It is the best explanation of what has actually been happening in the great swing of American life since the 1950's." Holding this view, Mr. Modigliani criticized what he considered the dissipation of built-up national savings as a result of the Bush administration's tax cuts and the rising deficit. In a similar vein, he has opposed the various Social Security privatization plans and had planned to reiterate his views in a meeting with two congressmen this week, his family said. As it now stands, Social Security gives poor people a greater return relative to their contributions than higher-income Americans, Mr. Modigliani argued.

The Nobel he received in 1985 also honored him for his insights into corporate financing. Working with Merton H. Miller, who won a Nobel in 1990 for his contribution, Mr. Modigliani demonstrated that leveraging a company through a lot of debt did not in itself affect a corporation's value. Until Mr. Modigliani and Mr. Miller came along, much attention had been devoted to determining just the right mix of debt and equity. But the payoff from expansion through debt, for example, is offset by the risk that the company might not be able to repay the debt. What investors focus on, in fact, is profitability, and they offset the risk of purchasing stock in a leveraged company by holding safer investments in their portfolios. Mr. Modigliani thought of himself as a Keynesian who nevertheless melded Keynesian theory with classical economic concepts. He believed, as the classicists do, that economies reach an equilibrium. The demand and supply of labor, for example, balance each other — but not always at the high level of employment that classical economic theory postulates. Mixing in Keynesian stimulus — that is, a combination of public spending and central bank manipulation of interest rates — he played a big role in developing a forecasting model still used by the Federal Reserve and by private forecasters.
Source: New York Times

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