Is Inside Job Correct About the Corrupting Influence of Money on the Economics Profession?

I think it may be, but not in the way implied by the movie. Charles Ferguson makes a big deal out of the fact that Glenn Hubbard, Frederic Mishkin, Larry Summers and Martin Feldstein were paid well by financial institutions and governments who wound up becoming major contributors to the crisis. HIs implication is that all of these well-known economists ignored the danger signals arising from financial deregulation because they were well paid to do so.

I really doubt this is true. I say this because I remember thinking at the time it was passed that Gramm-Leach-Bliley was on net good policy, because is was (1) necessary in order to allow New York to compete with London and (2) I thought people at places like Goldman Sachs (especially Goldman Sachs) were smart and competent and would protect their franchise. I was, at the time, very impressed with Alan Greenspan and Robert Rubin. I had no financial stake at all in any of these beliefs, other than the fact that I wanted my kids’ college fund and my wife and my retirement fund to do well.

And by all indications, the economy was doing well. Unemployment fell to historically low levels, the employment to adult population ratio hit its zenith, and low wage workers were seeing increases in income. I even remember walking to work in Madison in 1999 or so, and thinking to myself, “could the economy get any better than it is?” I am thus in no position at call to complain about others having the same view. All this said, Ferguson was spot on when he called for economists to disclose financial interests that might in any way be related to their research.

But the problem, I think, is far more insidious. For people who are both successful and reflective, there must often be an undercurrent of doubt as to whether the success is “deserved:” is it a product of virtue or of luck. The neoclassical paradigm allows successful people to feel good about themselves. It is not much of a leap to infer from it the proposition that people in a neoclassical world can make their own choices, and that when they make “good”choices, they are rewarded, and when they make “bad” choices, they are not. The number of important choices available to us are, however, limited. I try to remember that I did not get to choose the country where I was born, I did not get to choose that I had loving, well-educated parents, I did not get to choose that I grew up in a safe community, and I did not get to choose that I have never been seriously ill. The problem with economics, I think, is not the money people take from various countries and companies, but a broader lack of reflection on the circumstances that produce outcomes.

To me the most disturbing aspect of Inside Job is not the revelation of consulting relationships, but the fact that the economists interviewed by Ferguson seem not to have changed their view of the world even a little. Feldstein’s statement that he had “no regrets” about AIG was the ultimate expression of this.

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