Charles Ferguson has made a documentary that must be seen if you want to understand why the same people who let the housing bubble and the 2008 financial meltdown happen are still in charge. But if you can’t go out and see Inside Job right away (it opened in New York and Los Angeles Friday), read Ferguson’s article, “Larry Summers and the Subversion of Economics,” summarizing his case in the Chronicle of Higher Education.
The thesis of Ferguson’s film (a trailer is available here; a New York Times review is here) is simple, and astonishingly obvious: economics, as a profession, has been subverted by its proximity to power and money.
Prominent academic economists (and sometimes also professors of law and public policy) are paid by companies and interest groups to testify before Congress, to write papers, to give speeches, to participate in conferences, to serve on boards of directors, to write briefs in regulatory proceedings, to defend companies in antitrust cases, and, of course, to lobby.
Ferguson dwells most on the example of Larry Summers, the whiz-kid who went on to be Treasury Secretary, president of Harvard University, and then President Obama’s chief economic advisor. Summers has also made a fortune in the financial services industry, mainly as a hedge fund advisor.
But perhaps the most important example offered in Ferguson’s article is Martin Feldstein, another Harvard professor who for 30 years ran the prestigious National Bureau of Economic Research. The NBER is not a government agency, despite the name. But it’s the gateway to a high-level career in economics for bright young scholars. Feldstein used his position at the NBER to promote a menu of conservative economic policies, including cutting back and privatizing Social Security, deregulating the financial sector, and removing barriers to “free trade” that hinder corporate expansion. . . .
For decades, if you wanted to reach the pinnacles of the economics profession – top academic posts, Treasury Secretary, chair of the president’s Council of Economic Advisers – the surest route was to publish papers early and often with the NBER. But of course, Feldstein was merely pursuing what he considered to be the truth, right?
Feldstein [was] for 20 years on the boards of directors of both AIG, which paid him more than $6-million, and AIG Financial Products, whose derivatives deals destroyed the company. Feldstein has written several hundred papers, on many subjects; none of them address the dangers of unregulated financial derivatives or financial-industry compensation.
Summers was a Clinton and Obama counselor. Other examples Ferguson offers taint the Bush administration.
Glenn Hubbard, chairman of the Council of Economic Advisers in the first George W. Bush administration, [is] dean of Columbia Business School, adviser to many financial firms, on the board of Metropolitan Life ($250,000 per year), and formerly on the board of Capmark, a major commercial mortgage lender, from which he resigned shortly before its bankruptcy, in 2009. In 2004, Hubbard wrote a paper with William C. Dudley, then chief economist of Goldman Sachs, praising securitization and derivatives as improving the stability of both financial markets and the wider economy.
The top ranks of the economics profession are a rarefied and exclusive world. The people who make it there are bright if not brilliant. But they also display a knack for bolstering rather than questioning the conventional wisdom. This is why equally accomplished academics like Paul Krugman and Peter Diamond don’t get the politically powerful jobs – or, in Diamond’s case (he’s now waiting to be confirmed as a governor of the Federal Reserve) have to wait decades for such recognition. This is one of the reasons that bad ideas like phasing out social insurance systems like Social Security and Medicare keep coming back, year after year: because there are always plenty of prestigious economists who are ready to chime in with research that presses the interests of the people who provide their pocket money.
Money, then, is one of the main reasons that the thinking of the people at the top of the profession is so uniform, despite party differences. It’s safe to say that the misbegotten bailout that Ben Bernanke, Tim Geithner, and Hank Paulson engineered in the fall of 2008 would have taken essentially the same form whether the administration at the time had been Republican or Democrat.
It’s clear, too, why none of the people who got us where we are today – Summers, Geithner, Bernanke, to name a few – have been punished for their actions, either legally or in the context of their career paths. Instead, they’ve been rewarded. (I doubt even Alan Greenspan has seen much diminution of his speaker fees he collects on the rubber chicken circuit.) At the time Bernanke was reconfirmed as Fed chair and Geithner was confirmed as Treasury secretary, the mantra in the corporate media was that these actions of the Obama White House would reassure the financial markets that the new administration would do nothing “disruptive.”
This is always the case: No one who doesn’t accept the conventional wisdom need apply. And the surest way to a successful economics career is still to ingratiate oneself with the NBER.
My only quibble with Ferguson’s presentation is his chronology.
Over the past 30 years, the economics profession—in economics departments, and in business, public policy, and law schools—has become so compromised by conflicts of interest that it now functions almost as a support group for financial services and other industries whose profits depend heavily on government policy.
Actually, it didn’t start in the 1980s. It started as far back as the late 19th century, when the Robber Barons endowed what are now the leading business schools and economics departments and stocked them with economists who hugged the neoclassical (as it was then known) line. The poster boy back then was John Bates Clark, for whom a prestigious medal is now named. Larry Summers’ name first made it onto the map when he won the J.B. Clark medal early in his career.
So the confluence of top-tier economics and money goes back much further than Summers. For instance, one of the original academic boosters of neoclassical economics was Earl Rolph, who earned his Ph.D. at Cornell University (founded by Ezra Cornell of the Western Union fortune), then ran the economics department at the University of California, Berkeley, for many years. There, he trained George Break, who in turn taught Michael Boskin. Boskin was George H.W. Bush’s chair of the Council of Economic Advisers and later, under Bill Clinton, headed a commission that attempted to revise the Consumer Price Index for the transparent reason of slowing the growth of Social Security benefits.
For a detailed account of this evolution, see Mason Gaffney, “Neoclassical Economics as a Stratagem against Henry George,” in Mason Gaffney and Fred Harrison, eds., The Corruption of Economics (London: Shepheard-Walwyn (Publishers) Ltd, 1994). But the essential point is made in Inside Job. Like the rich in the famous exchange between Ernest Hemingway and Mary Colum, bigfoot economists are different from us in this way: they have more money.
[Eric Laursen is an independent journalist who’s been covering political and financial news for more than a quarter-century. He's been studying and writing about Social Security for more than 15 years, and recently completed a history of the Social Security debate, The People’s Pension: The War Against Social Security from Reagan to Obama. You can find Eric at his blog, The People's Pension, and follow him on Twitter.]