An Evening with Fancy Economists

Readers of this blog may remember that I visited the American Academy of Arts and Sciences last spring for a forum on "Prospects for the Economy."  I blogged about that forum under the title An Evening with Fancy Bankers. As I recounted, the most memorable, and appalling, speaker on the panel was not a banker but an economist, James Poterba of MIT and of the National Bureau of Economic Research.  In response to a question from the audience about industrial policy, he said that he thought that government shouldn't "pick winners," and that markets did a good job of deciding where capital should be invested. I was so stunned by his answer, given the obviously horrible job markets had obviously done recently, that I sent him a follow-up email;  in his email response, he stood by his answer (see the exchange here).

Given my experience at the forum in April, I was interested, but also apprehensive, when I was invited to another forum at the Academy, this time featuring a group of academic economists on the topic of "The Financial Crisis and Economic Policy."  A later invitation tweaked the topic to focus on the Fed's $600 billion quantitative easement, but the speakers stuck to the original topic, which was tied to the theme of the Fall issue of Daedalus, the Academy's quarterly journal.  The speakers included moderator John Campbell, chair of the econ department at Harvard; Nobel-Prize-winning economist Robert Solow; another Harvard economist, Benjamin Friedman (who had co-edited the special issue of Daedalus with Solow);  and Peter Temin, an MIT economist.

I was amused by Campbell's presence on the panel (as moderator), given that I'd heard that he'd gotten grilled and kind of embarrassed by Charles Ferguson in the documentary Inside Job (which is in theaters now, at least in Boston).  I haven't seen the movie yet, but here's an account of that grilling from a review of it by Frank Pasquale at the legal blog Concurring Opinions:

When Ferguson grills Harvard Econ Dep’t chair John Campbell on the cozy relationship between academe and the finance sector, Campbell shrugs it off. Ferguson then asks Campbell what the difference is between an economist who, say, champions a deregulatory policy while failing to disclose payments from a party interested in the policy, and a doctor who promotes a drug while failing to disclose he is paid for doing so. The response (or lack thereof) is priceless. Harvard luminary Martin Feldstein also proudly claims to have “no regrets” for his long time service on the AIG board. And Columbia Business School Dean Glenn Hubbard imperiously declaims “this is not a deposition” when asked to reveal the companies he consults for which are not listed on his resume. Ferguson goes on to describe a multi-billion dollar industry of “academics for hire.” In his review of the film, Dean Baker concludes that “the economics profession . . .richly deserves the abuse” Ferguson delivers.

Actually, people who've seen the movie tell me that Campbell's response when Ferguson pressed him with the doctors/drugs analogy was to say something like, "This interview is over."  Having heard him in person now I am even more eager to see that part of the film--he came off as suave and self-effacing (at least in front of senior colleagues), with a tony Brit accent; it would be fun to see him ruffled.  (There is a nice piece by Ferguson on Larry Summers in the Chronicle of Higher Education, of all places, called Larry Summers and the Subversion of Economics.  I don't think of the Chronicle as being all that critical, so good for them for carrying that piece.)

Everyone's remarks, but especially Benjamin Friedman's, were a refreshing departure from the earlier Academy event I'd been to.  Friedman's contribution to the Daedalus special issue is entitled "Is Our Financial System Serving Us Well?", and his remarks in the forum focused on the role that financial markets play, in a "free-enterprise system," in allocating the economy's capital.  Friedman's conclusion:  "The recent evidence is that the financial system has been making big, big mistakes," and it costs a lot.  In his talk (and his paper) he calls for a study of the costs and benefits of running our financial institutions.  So:  he started off questioning the very point that Poterba was so secure in making in the previous forum I'd attended.  Solow and Temin spoke in a similar vein--nothing radical, but at least showing some awareness that something is seriously wrong in the financial sector (when, for example, as Solow pointed out, the total value of credit default swaps was $60 trillion before the financial collapse), and Solow in particular spoke about the inadequacy of the Dodd-Frank banking reform.

I'd come to the forum wanting to ask something about the complicity of the economics profession in the financial crisis and the recession, and I had asked  D&S economists John Millerand Alejandro Reuss for help formulating a question.  Alejandro's suggestion:  "For Solow, in particular, I'd ask him to comment on what Krugman has argued is the economics profession's unlearning of the accumulated macroeconomic knowledge from the 1930s to the 1960s. (To the point that there's widespread ignorance of Keynes and what he actually said, even among well-known economists at major institutions--including one that's just down the road.) Does he agree? What would be the key lessons that, in his opinion, should be informing macroeconomic policy now, but aren't?"  John's version of this:  "You could ask this way:  Hyman Minsky once claimed that there is nothing  wrong with macroeconomics that another depression wouldn't cure--meaning that a crisis would lead to a wholesale re-embrace of Keynesian  economics and Keynesian policies. While there were some initial signs of the cure taking hold during the  Great Recession, it now seems that macroeconomics has gotten sicker and  not cured--i.e. that is moving further away than closer to Keynes--after the Great Recession."

First of all, it was gratifying to have asked one of only three questions they had time for, and the other two questioners were muckity-muck Harvard senior faculty members (one was Nathan Glaeser; I didn't catch the other guy's name).  And I think they spent by far the most time on my question.  Again, their answers weren't radical, and in some ways they missed the chance (or I didn't press them enough) to take a critical look at the economics profession (hardly surprising, especially given Campbell's response to Charles Ferguson).  But there were some memorable bits.  For one thing, I should have figured that these guys (or the older ones, Solow and Friedman, at any rate) would have been pals with Minsky, and in fact Solow took the opportunity to reminisce a bit. He told an anecdote about how Minsky had tried to set him (Solow) up with Solow's future (and current) wife.  It didn't work, but they did end up meeting later.  And there was some anecdote about Samuelson.  Friedman assured me and the audience that lots of grad students are working on Minsky now.  But Solow said something to the effect that he wished some of his junior colleagues thought more about what it might be like to be unemployed.  And he joked that he couldn't say much about people rediscovering Keynes, since he himself had never lost Keynes (though some students of Keynes might say that Samuelson's neoclassical synthesis, to which neo-Keynesians like Solow subscribe, is not real Keynesianism).  But he did say he didn't see much change in the profession.  Whereas there was a "massive earthquake" in the economy, there were "only the tiniest tremors" in the economics profession.  The consensus seemed to be that none of this disconfirmed Minsky's quip, since there hadn't in fact been another depression--just a Great Recession.

On the whole, then, there was some hand-wringing and finger pointing (mostly at the financial sector, not much at the economics profession); some expressions of distress about the state of the economy, the inadequacy of reforms, and the difficulty of learning the lessons of history; a bit of compassion for the millions who are, unlike Harvard and MIT professors, suffering from the Great Recession.  All a bit of an improvement over the previous forum, but not much.

--Chris Sturr

PS  I have bunches of other stuff to blog about (mostly reposts, much of it about banking but some more monetary policy stuff).  I aim to do that tomorrow.