Continuing the saga...
4. Oh, wait. They still haven't explained unemployment. So Prescott's students Hansen and Rogerson point out that if you have nonconvexities in the cost of labor supply (i.e. people have to drive to work), then when people have access to complete risk sharing (either through large households or other kind of device) the equilibrium response to a decline in the return to labor is temporary exit along the extensive margin. Which is fine... except that if you actually asked an unemployed person, he generally won't have access to extensive risk sharing (except temporary unemployment insurance, and not all unemployment is insured) and won't have enough liquid savings to come close. Score one for the "we don't really understand or care about the real world or the people living it" macro team. Nevertheless, Prescott and company think that this fairly obvious mathematical statement about nonconvexities is some tremendous insight, and go on to invent a garbled distinction between "micro" and "macro" elasticities.
5. Oh, wait. TFP shocks dominate the business cycle history of the postwar United States, but no one knows what they are or what caused them, and Prescott doesn't have even the slightest inkling of a concrete theory? Great. A few times he muses that aggregate TFP movements are probably caused by government policy rather than shocks emanating from the business sector. But despite the overriding importance of then figuring out what the f**k these policy shocks are and empirically documenting their properties, he doesn't seem to think it's that important. At best we're left with vague storytelling.
6. Now it's 2004, and Prescott wants to answer why Americans work so much more than Europeans. So he picks a few random data points, plugs them into his old log-separable utility function (20 years later, he has evidently not learned that more flexible and accurate parameterizations exist), and concludes that the magnitudes vaguely match. Never mind that adding more a handful of data points completely muddies the story (forcing Rogerson to write a separate paper about Scandinavia to rescue his adviser), and a more careful look at the time series shows that the difference in labor supply doesn't emerge at the same time as the difference in tax rates. (This would, of course, be more consistent with the idea of a long-term response to tax changes, which recognizes that due to institutional changes labor elasticities may be low in the short run but high in the long run. In fact, such a story is probably the best way to interpret the data. Unfortunately, low short-term labor elasticities would destroy Prescott's main body of work, so he ignores this line of argumentation and instead does casual data analysis at the level of a crappy undergrad thesis).
7. Now it's 2010, and Prescott wants to explain why there was just a huge recession from 2007-2009. As insane as ever, he decides to blame anticipation of Obama's policies. (Never mind the fact that, taken literally, this story would probably imply an anticipatory expansion, not a recession: you want to work a lot and accumulate capital before Obama comes in and destroys the productivity of the economy, and before Obama comes in and raises individual tax rates. Unless Obama was planning to completely expropriate capital, which he hasn't.) Some people viewed this as the early onset of senility; I think it's Prescott being his same old cognitively challenged self, only in a way that's a little more obvious to other economists.
By the way, this is a real story: http://newmonetarism.blogspot.com/2010/07/sed-report.html
8. Now it's 2012. There was never really any doubt, but some serious empiricists finally decide to come along, bite the bullet, and show how full of shit the "indivisible labor" hypothesis is as an explanation of unemployment. http://obs.rc.fas.harvard.edu/chetty/ext_margin.pdf
For one, you can get quasi-experimental evidence from large tax changes, like the temporary suspension of all income taxes in Iceland. If the indivisible labor explanation for cyclical unemployment is correct, said tax change should have caused an utterly massive decline in work hours. But... in fact the drop was fairly small, though certainly noticeable.
Second, you can perform obvious checks like "if my theory suggests that people verifiably far away from the extensive margin, like prime-aged males, should not be the ones unemployed during recessions, yet they do form a large percentage of those unemployed during recessions, maybe my theory sucks". This evidently never occurred to Prescott or Rogerson.
9. With Ed, it's always an adventure. And if you've managed to become the single dumbest individual ever to win a Nobel Prize (yes, I'm willing to say that Ed Prescott is dumber than Yasser Arafat), you're quite the lucky guy. Who knows what will happen next?