Why economists are part of the problem

By Charles Ferguson
October 12, 2010

DEAL/

Charles Ferguson is the director of Inside Job, a documentary about the financial crisis. The opinions expressed are his own.

Both Glenn Hubbard and Laura Tyson (pictured above, left to right) have played major roles in American economic policy, and both also, unfortunately, exemplify the disturbing, opaque conflicts of interest that pervade the economics discipline.

Over the last thirty years, academic economics has been penetrated by special interests, particularly financial services, in the same way that America’s political and regulatory systems have been compromised by campaign contributions and the revolving door.  In fact, the “revolving door” is now a triangular trip between industry, government, and academia.

Prominent economists are now routinely paid to testify in antitrust cases, criminal trials, and regulatory proceedings; to testify in Congress; to give speeches to the industries and firms they study; to serve on boards of directors and as advisors; and to write supposedly objective analyses of industries, companies and policies. These payments and the conflicts of interest they generate are rarely disclosed, except when required by Federal law.

These activities are not marginal; they are now, literally, a billion dollar industry, managed by firms such as the Law and Economics Consulting Group (LECG), The Analysis Group, Compass Lexecon, Charles River Associates, and others.  Professors’ income from such groups often dwarfs their academic salaries.  That neither universities nor most publications require such disclosure was one of the most shocking facts I learned while making Inside Job, my documentary on the financial crisis.

From 2001 to 2003, Glenn Hubbard was chair of the Council of Economic Advisors in the George W. Bush administration.  He was a major force behind the Bush administration’s tax cuts, over half of whose benefits went to the wealthiest 1% of the American population.  Since becoming dean of Columbia Business School, Hubbard has written and spoken widely on financial regulation, and has served as co-chair of the Committee on Capital Markets Regulation, whose other co-chair is John Thornton, who is chairman of the Brookings Institution – and the former president of Goldman Sachs.  Hubbard’s recent or current affiliations include but are not limited to Met Life ($250,000 per year), Capmark (a major commercial mortgage firm during the bubble, which went bankrupt in 2009), KKR, and Black Rock.  In our on-camera interview, Hubbard refused to disclose his current consulting clients.

In 2004, Hubbard co-wrote a paper with William C. Dudley, then the chief economist of Goldman Sachs, entitled “How Capital Markets Enhance Economic Performance and Facilitate Job Creation.”  The paper praises securitization and the rise of credit derivatives (particularly credit default swaps), saying that they have increased economic growth, reduced systemic risks, and reduced both the size and duration of recessions.  Hubbard refused to answer when we asked him by letter whether he was paid to write the paper, and also refused to disclose whether he had ever received any payments from Goldman Sachs.

Laura Tyson was chair of the Council of Economic Advisors, and then director of the National Economic Council, in the Clinton Administration.  Shortly after leaving government and returning to U.C., Berkeley, she joined the board of directors of Morgan Stanley, which pays her $350,000 per year.  She also joined the board of AT&T and became a principal of the Law and Economics Consulting Group.  She agreed to be interviewed for my film, but then stopped responding to email and phone calls, so we were unable to interview her.  In general, she has confined her remarks on the financial crisis to extremely vague statements about “greed,” “human nature,” etc.

Other prominent economists heavily dependent upon financial services income over the past decade, and whose behavior is examined in my film, have included Larry Summers (hedge funds, investment banks), Martin Feldstein (AIG), Richard Portes (Icelandic banks), and Frederic Mishkin (Icelandic banks, unnamed U.S. financial services firms), all of whom have played prominent roles in public debate and policy.  So, unfortunately, Hubbard and Tyson are in prominent company.

12 comments

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For whatever reason economics is now considered by most to be a hard science like math, physics, and accounting. Yet, it is nothing of the sort. Why anyone would put their money on an economist forecast or estimate is beyond me. Yet governments, financial institutions, and whomever else hang on the next “guess” of their economic advisor.

John Kenneth Galbraith aid it best when he said “The only function of economic forecasting is to make astrology look respectable.”

Maybe we need to step back and take a second look at the current situation from a non-economic perspective.

My2Cents

Posted by dw85745 | Report as abusive

Excellent article! It shines a spotlight on economists with conflicts of interest and the role they played in the financial crisis. This is a topic that deserves more attention. Well done, Mr. Ferguson.

Posted by DanToronto | Report as abusive

where’re their ethics and marality?
they second and furnish the theoretic basis to cater for the financial institutions’ risky business practices. any of them be blamed for their faults?

Posted by mswusun | Report as abusive

I love it, especially the attention paid to consulting firms like Lexecon, Navigant, Chicago Partners, etc. that employ moonlighting university professors to provide “expert” testimony (in courtroom juries or television audiences) for whomever will pay their fees. They need defrocking.

Posted by dedalus | Report as abusive

Not even mentioned here is the role of the Fed in squelching any economic research that is not in lockstep with its agenda. Since economics journals are heavily dependent on grants from the Fed for funding, research which refutes Fed policy never sees the light of day.

Posted by Pete_Murphy | Report as abusive

I was enrolled in a PHD program in economics in the early 1990′s. I learned, much to my dismay, that such institutions of higher learning were not focused on discovering the truths that would make society work better for its citizens, but to put forth programs that would continue to gain financial support from government and business. Above all else, it was vital that they not turn out PHDs who would put forth theories that would upset the gravy train wherebye government could spend whatever necessary to expand and spend what is needed to get re-elected and that business could justify legislation that would increase market share and profits in the short run. So the conflict of interest begins in the universities where these economists are trained. If one is not willing to trade truth for advancement and or profit, one can not even get a PHD from many of our institutions of higher learning. Thank you Mr. Ferguson for raising this so important issue!

Posted by robecon | Report as abusive

Wow…how ironic! On many of these posts, if I replace “economics” with “global warming”…an interesting picture emerges.

So I guess we should say…it’s okay to “trust” scientists with their views on the science of global warming, but it’s not okay to “trust” the economists with their views on the economy. Guess we’re just lucky these altruistic scientists are morally superior to those evil economists who look out for only themselves. I feel so much better now…

Posted by Bob490 | Report as abusive

..economists and the Fed are the problem and how well the people know it..

Posted by gramps | Report as abusive

Seriously, is Economics a science?
If so, how come its predictive value is very often not better than that of flipping a coin?
Is there an explanation to the fact that over years, only a handful of economists noticed the formation the biggest economic bubble in history, and even fewer predicted that it would burst?
Such examples are abundant, so let’s agree to call Economics a Discipline, or a Profession, and toss the idea that economists’ have a way to see the future, or even the present… and that what an economist says is little more than their opinion, founded on some facts, and strongly influenced by personal beliefs.

Posted by yr2009 | Report as abusive

Seriously, No! Economics is not a science!
Economics may indeed be a “discipline”, a profession even, but then so is the Christian priesthood. To me there are too many parallels with religion.
There is a ‘Holy’ [sacrosanct anyway] Trinity of Father Capital, Money [Dollar Bill The $on of God], and Market the “unseen Hand” which guides and comforts us and IS NEVER WRONG. ….. Amen …

There is a chant of faith:
“Hail Banks, Mothers of Money; Blessed art Ye amongst companies!”

There is a creed: Money is the measure of all things so “Time is Money” and Competition is the Sacred Duty of all men. Economists, accountants and lawyers have to be in charge of the world because they are the only people who truly Understand the Sacred Truths.

Those of us who really want our species to survive, recognise that this asinine madness of mercantilism has to be subdued. We have to speak the truth about the world because time has run out. [past tense] If we change now and do what is needed then we can make this planet livable for everybody. But this cannot happen without compassion, democracy, ethics, and scientific method being embodied and manifest in all social organisations and projects. The writing is on the wall folks: “Shape up or die out!”

Posted by xodarap | Report as abusive

Economics is a social science, not a natural science or humanity.

Posted by Moionfire | Report as abusive

“Economics, as a branch of the more general theory of human action, deals with all human action, i.e., with mans purposive aiming at the attainment of ends chosen, whatever these ends may be.” Ludwig von Mises

Posted by Ben_Edes | Report as abusive