This winter, 16 eminent economists met at the Jepson School of Leadership Studies at the University of Richmond to discuss the American financial crisis. Sandra J. Peart and David M. Levy organized the meeting on "Leadership in Times of Crisis: Economic Science and the Constitution." (Read more and watch the Webcast of proceedings at http://news.richmond.edu/jepson/features/summit.html ) A theme that emerged is that economists – and experts generally – need to correct the persistent misconceptions of the causes. The conference organizers offer reflections on the meeting and the next steps.
A "teach-in" is how David Warsh referred to the conference near the end of a session attended by students, university trustees, professors and guests. In that significant moment, Warsh affirmed that the room had a teaching feel to it. Unspoken but significant was the acknowledgment that for too long the discussion among economists has been unhelpful or nonexistent. Indeed, a major rationale for organizing the conference was the glaringly obvious lack of debate among economists before passage of the bailout package last fall.
Indeed, that $700 billion bailout passed with surprising alacrity in the light of the serious difficulties that had become apparent. Too little discussion, public or private, preceded that enormous undertaking. And now the country's politicians have committed to spend an amount that exceeds TARP, again with little national discourse. More than this, as economists ourselves we were struck by just how long our discipline has been, as conference participant James Buchanan put it, "missing in action." Even the election campaign failed to spark substantive discussion of the bailout. Now, we've done it again. We've committed to spending another enormous sum of money with merely a few days of discussion and no substantive national dialogue about the significance of the event or how best to set up rules for spending in the stimulus package.
Though some economists are of course involved at the highest levels of policy making, the rest of the profession has been curiously absent from the discussion. We've seen a number of significant letters and some op-eds published as passage of one bill or another became imminent, but most of the profession remains on the sidelines.
Though we have been educating droves of economics and business majors for decades, we seem to have had little impact on the ability of the American public to understand the causes of the crisis.
Economists have been marginalized in part because we've been portrayed as entirely inept, unable to come to a consensus. But we've failed to educate the media and others that there is in fact a good deal upon which we do agree. On fundamentals, principles, there's less disagreement. Our January conference demonstrated just that. Though we had economists from the political left and right taking part, there was remarkable agreement on fundamentals.
On what did we agree? The current crisis is extraordinary because of the very unusual combination of financial and housing market collapses. Consumption spending, financed by expected increases in housing, has been fueled by unrealistic expectations, and now the price is being paid for the correction of expectations.
In partisan discussions today, people tend to "blame" one group or another for the crisis: Greedy financial tycoons caused it all, or government policies caused it all, the conventional wisdom goes. There is blame to go around, but a more fruitful way to look at the crisis is to forego finger pointing and accept that it's been caused in part by policy failings and in part by the actions of private individuals and organizations. Significantly, the economists who met in January did just that: We avoided partisan blaming and agreed that the crisis is the result of a combination of private and public failings. This came from economists whose political views spanned the spectrum of left to right.
We also agreed that it's unhelpful to pin the cause of the crisis on an increase in greed. People have always been subject to a mix of greed, self-interest and generosity, and that hasn't changed in the past decade. But new financial instruments were developed that were less subject to regulatory oversight than others. The complexity of those instruments made them non-transparent and encouraged buyers to trust the judgment of experts.
We agreed that prices are robust mechanisms to convey information. Not a new point, surely, but it is one that somehow was lost, as models were developed to evaluate the worth of non-traded assets. When we replaced market prices with estimates from models, we added non-transparency to the system.
We agreed on the need for transparency, and that simply calling for it won't ensure we obtain it. Sometimes the incentives are such that people want to hide information. The trick for policy makers is to think about how best to ensure it's not in their interests to do so. It is as true for politicians as it is for ordinary people.
We agreed that expertise is needed as we attempt to move out of the collapse. Moreover, discussion is needed to help all of us understand that the answer to our problems now can't happen in one sphere (public) or the other (private). Instead, we'll need to see a combination of fixes. Individuals will need to realize that before consumption can happen, the means to consume must be secured. Some of that restraint will eventually also be necessary in the public sphere. Meanwhile, the fix will have to take account of simple but important economic ideas, such as incentives, prices and transparency.
One final theme from the conference was that economists have marginalized themselves. As Dave Colander put it, the profession has increasingly trained up "show dogs" as opposed to "work dogs." The incentives in the profession are such that those who produce research for highly specialized journals are rewarded. Those whose work is grounded in problems of the here and now haven't been so much in demand.
This is why David Warsh said economists could provide a valuable service by holding more public sessions like the forum at the Jepson School of Leadership Studies. "It's easy to imagine economists of all stripes being involved in more discourse with the public," said Warsh, a former Boston Globe reporter whose blog, Economicprincipals.com, covers economic news and trends.
The time is ripe for more "teach-ins."