Inside Job (39 page)

So, as a young economist you’ve just finished your research on the causes of Iceland’s financial bubble. Where are you going to publish it? Or, you’ve just finished your
analysis of Obama administration financial regulatory policy. You are thinking of applying for jobs of various kinds. Any chance you might run into Larry Summers? Well, here’s what he lists
on his CV under “Professional Activities”:

So you’re thinking about what your analysis might say. What are you going to do? Rock the boat? Good luck with that. Or maybe go along to get along?

How much do these forces actually affect academic research and government policy making? It is of course difficult to measure the effect precisely, and very few economists have tried, but my
experience and the available evidence suggest that the effect is large. In early 2012 Professor Luigi Zingales of the University of Chicago described his analysis of the 150 most frequently
downloaded economics papers on the subject of executive pay. Papers supporting higher executive pay were 55 percent more likely to be published in the most prestigious journals, and far more likely
to be cited in other papers.
³⁴

My own experience suggests that the effect of conflicts of interest in economics is far more severe than that. Two examples deserve mention: the financial crisis and antitrust analysis.

Both before and even since, academic commentary on the financial crisis by economists and finance specialists has been remarkably muted. There are, to be sure, some very notable and impressive
exceptions—Raghu Rajan, Nouriel Roubini, Simon Johnson, Lucian Bebchuk, Ken Rogoff, Robert Shiller. But for the most part, the silence has been rather deafening. How can an entire industry
come to be structured, and incented, such that employees are systematically encouraged to loot and destroy their own firms? Why did market forces permit this to occur? Why did market forces not
give rise to any firm that systematically collected and analysed information about the total size of risk exposures in the industry? Why did deregulation and economic theory fail so spectacularly
and completely? There has been astonishingly little examination and public discussion of these questions by economists, and what little they have said has not, for the most part,
been impressive. Conflicts of interest certainly play a major role here. Bloomberg News reported in 2012 that in the case of the Squam Lake Group, a committee of prominent economists
formed to issue reports on the crisis, thirteen of the study’s fifteen principal economists had ties to the financial sector.
³⁵

The fields of industrial organization and antitrust analysis have, if anything, been more severely affected by academic conflicts of interest. The overwhelming majority of both academic and
government work in these areas is devoted to examining whether a firm or an industry engages in predatory behaviour or charges excessive prices. Over time, even these limited questions have been
analysed in ways increasingly favourable to the interests of dominant firms and highly concentrated industries. My experience is that at least two-thirds of the leading economists in this area
routinely work for antitrust defendants, and that very few are willing to consult or testify for the US Justice Department in antitrust cases.

Equally important, economists simply avert their eyes, declining to study major issues if they threaten the interests of their consulting clients. There has also been very little examination of
how entrenched management groups have used their power and the power of their firms to enrich and perpetuate themselves. Economics has strikingly little to say about how the US economy has produced
the decades-long inefficiency of GM and Chrysler, IBM until 1993, the integrated steel industry, or, for that matter, Jimmy Cayne and Stan O’Neal. Nor has the economics profession spent much
time assessing the effects of industrial concentration or managerial entrenchment on the long-term performance of the US economy.

The avalanche of money from antitrust defendants and industries seeking relaxed regulation has thus unquestionably warped both economics research and public discussion. And this is an area in
which economic analysis truly is important to America’s well-being.

The release of the film
Inside Job
clearly touched a nerve with regard to these questions. I was contacted by a large number of students and faculty at Columbia, Stanford, Harvard, UC
Berkeley, the
University of Michigan, and other institutions. There has been a great deal of debate, and some forward movement. Stanford has generally excellent disclosure
requirements, far superior to those of most other universities, and several departments, including the University of Pennsylvania’s Wharton School of Business and Columbia Business School,
have adopted disclosure requirements for the first time. But most universities still have no public disclosure requirements at all, and few if any have any limitations on the existence of conflicts
of interest or of income from such sources. The same is true of most academic publications and industry associations. This is in striking contrast, for example, to the policies of most private
companies and journalistic organizations. Reporters at the
New York Times
,
Fortune
, and other major news publications are strictly prohibited from accepting money from any industry or
organization they write about. Not so in academia.

There has been one significant positive development. In response to the information presented in my film, in early 2011 the American Economics Association formed a committee to consider whether
the AEA should adopt a code of ethics—for the first time in its history. Then, in early 2012, the AEA actually adopted a disclosure requirement for the seven journals it publishes, which are
among the most important in the discipline. But most institutions and prominent professors continue to oppose further disclosure, and nearly all of them oppose any actual
limits
on financial
conflicts of interest. When I was making the film, most institutions and university presidents refused even to discuss the subject. The presidents and provosts of Harvard and Columbia declined to
be interviewed for my film, or even to discuss the issue off the record. I did discuss the issue once with President Hockfield of MIT, who clearly grew very uncomfortable and has declined further
meetings or conversation about it. Just before the release of my film, her office called to ask whether any MIT faculty were named; the concern was public image, not the reality of the problem. The
chancellor of UC Berkeley has also been very reluctant to deal with the issue, and avoided questions about it at one meeting I attended with him.

I’m very sad about this. I feel a great deal of affection for both UC
Berkeley, where I was an undergraduate, and for MIT, where I spent nearly a decade as a
graduate student and postdoctoral fellow. Both institutions have done great things to further knowledge and educational opportunity. For nearly all of its history, UC Berkeley was the best, and
most widely accessible, public university in the world. MIT has recently made its entire curriculum available online, and has begun to provide inexpensive certificates of completion for students
who study via the Web. This is wonderful and important. I love the academic world, which was very generous to me, and where I spent an extremely happy decade of my life. And I should perhaps also
make clear that I am not against professors making money, consulting to industry, or starting companies to commercialize something that they have invented. I have no problem with that at all; in
fact, I think that it is often very beneficial to academia as well as industry. But providing openly disclosed expert advice is very different from acting as a covert, highly paid lobbyist. Just as
Monitor is legally required to register as a foreign agent, so academics with conflicts of interest should be required to disclose them whenever they make any public statement about policy issues.
I also, frankly, think that it is completely improper for professors to be paid for making public policy statements of any kind—whether testifying in Congress or as “expert
witnesses” in antitrust, fraud, or tax cases, or appearing in the media. I truly hope that somehow the progress of this particular disease can be arrested, because it’s very
important.

However, the gradual subversion of academic independence by finance and other large industries is just one of many symptoms of a wider change in the US. It is a change that is more general, and
even more disturbing, than the financial sector’s rising power. As many others have recently noted, over the last thirty years the US has lost its historical status as a nation of fairness
and opportunity. America used to provide broad opportunity, particularly educational and economic opportunity, to its population. It no longer does. The rise of a predatory financial sector is just
one component, albeit a very important one, of a bigger issue. This is the issue to which I now turn, in order to conclude this book.

CHAPTER 9

I
T’S HARD TO BELIEVE
now that in the year 2000 the US was universally considered to be the first
“hyperpower” in world history—a nation so wealthy and powerful that it had achieved global dominance without seeming even to try.

The US was the richest and fastest growing of the major industrialized nations, with the most advanced technology base and an utterly dominant military. The Internet industry, the source of the
most profound technological and industrial revolution of the century, was completely dominated by America. With the former Soviet Union in collapse and China converted to government-led capitalism,
there would even be a “peace dividend”. Even during the Asian financial crisis of the late 1990s, American growth continued and the unemployment rate stayed below 5 percent. America
could do no wrong.

But the fall of the mighty is a classic theme of tragedy. And few
nations have fallen as far and as suddenly in the world’s eyes as the US since the beginning of the
new millennium. How could this happen? Superficially, it seemed to come from nowhere; but in reality, America’s descent has been in the making for decades.

One common interpretation, particularly among progressives and Democrats, is that the Bush administration did it. According to this view, a superbly managed Democratic administration
(Clinton’s) bequeathed a broad prosperity to George W. Bush, who squandered it on wars and tax cuts while letting the banks run wild. Then the Bush administration left the mess to Obama, who
is struggling to pick up the pieces and get the economy back on track, a task made even more difficult by the intransigence of Republicans in Congress.

There is
some
truth to this story. The George W. Bush administration was certainly in a class by itself. First, Bush devastated America’s finances with his incompetently managed
wars and enormous tax cuts. The tax cuts, which heavily favoured the very wealthy, were enacted even as military spending rose in the wake of 9/11 and the invasion of Afghanistan, and even though
tax revenues had plummeted with the collapse of the dot-com bubble. Then came the almost unbelievably incompetent, unplanned, politicized occupation of Iraq, which turned a three-week war into a $2
trillion, ten-year quagmire, at a time when the US already had its hands full with Afghanistan. And, of course, the Bush administration’s coup de grâce was the outrageous, frequently
criminal financial bubble that brought us to the edge of the abyss in 2008 and left the American (and world) economy damaged for years to come.

So, yes, there was unquestionably enormous hubris, greed, stupidity, and dishonesty in the George W. Bush administration. But, tempting as it may be, blaming everything on the Bush
administration is deeply wrong, and it misses the main point.

Because the main point is this: over the last thirty years, under the Democratic Party as well as the Republicans, America’s politicaleconomic system has lost its way. There have been
occasional episodes of real progress such as the Internet revolution; and in some areas, such
as theoretical computer science and entrepreneurial high technology, America
remains unmatched. But the dominant underlying trend has been, and remains, severely negative. America has quietly become a profoundly different place, with its economic competitiveness, its basic
fairness, the education of its population, and its politics all in sharp decline.

Economic power in America has become far more concentrated, both structurally and individually. Structurally, several of America’s largest industries and the American economy as a whole
have become far more concentrated since deregulation began. We have already seen this with regard to financial services. But the same thing has happened in energy (the four largest oil companies),
telecommunications (AT&T, Verizon, the cable industry), the media (which overlaps with the cable and entertainment industries), retailing (Walmart, Amazon, etc.), agribusiness and food
(McDonald’s, Yum Brands), and other industries, even information technology.