Janine Wedel - Unaccountable - How Elite Power Brokers Corrupt Our Finances, Freedom, and Security

Back in early 2011, a reader commented on the website of the New York Times , responding to an article on whether economists needed a code of ethics: “An ethical code for economists? That’s a bit like adopting a chastity vow at the Bunny Ranch.” 27

This comment is striking, and not just because it manages to put “economists” and “Bunny Ranch” in the same sentence: it shows the stark disillusionment many were feeling toward some in the profession who had presented themselves as impartial when dispensing economic advice, even when they may well have a personal interest at stake.

In the wake of the 2008 financial meltdown, academic economists are still called upon to expound on financial reform. Some top economists continue to pronounce on the economy and how to fix it, completely whitewashing their roles in screwing it up in the first place.

In 2010, Reuters examined nearly one hundred testimonies, mostly involving financial regulation, delivered by academics to the House Financial Services Committee and the Senate Banking Committee from late 2008 through early 2010. Among those they tracked who appeared before Congress while the most sweeping changes in financial regulation since the Great Depression were being debated: 28

• A Harvard law school professor who doesn’t mention his role on the board of a Wall Street firm.

• A professor of economics at Ohio State University who mentioned three affiliations, all ones that bolster his image as impartial scholar, but not the four financial-firm board directorships.

• A professor of finance at Louisiana State University. He described himself as the “Louisiana Bankers’ Association professor of finance,” but didn’t mention his directorship at an economic consulting firm.

• A University of Pennsylvania Wharton Business School professor of real estate, who didn’t mention consulting work for a real estate giant and GE Financial.

• A University of Chicago Booth School of Business professor who discloses that he is a consultant for a big bank trade association, but only in a footnote in his written remarks.

These professors are far from alone.

A few months before the Reuters report, Gerald Epstein and Jessica Carrick-Hagenbarth of the University of Massachusetts–Amherst released their study of the professional activities—outside the university—of academic economists. (While many economists work for financial firms, including those who helped devise the many faulty models we discussed earlier in these pages that measure risk, and they have been the subject of some criticism, much less has been aimed at the activities of academic economists who primarily identify as professors. 29) Epstein and Carrick-Hagenbarth examined the activities of nineteen mostly “prestigious academic financial economists” 30who were linked to both public and international institutions and who belonged to two groups that “put forth proposals on financial reform.” 31They investigated the economists’ connections to both public and private financial institutions. Some not only consult for, or serve on, the boards of these private firms; they own or co-own them. The report declined to name their names because there are so many others like them, and the authors felt it would be unfair.

What the scholars found was not exactly surprising. Out of these nineteen prominent economists—all of whom gave “expert” advice to the media and public about financial reform—the “vast majority of the time, [they] did not identify [financial] affiliations and possible conflicts of interest.” This was also true when the economists published their work in academic journals. 32For elite economists, agility in affiliations may be the norm, not the exception. In addition to an academic post, having some attachment to a big public body like the IMF, the World Bank, or a Federal Reserve Bank can garner them prestige and benefits. An association with a private firm may bring additional standing, not to mention money. 33

[The accompanying table] depicts the evident flexibility of moving from academic to public to private sector work for these elite economists. . . . The fact that well over half the economists we evaluated have positions with private financial firms shows how commonplace it is. . . . It is plain that the purely academic financial economist in our survey is a rare species indeed.

A Code of Ethics?

Epstein and Carrick-Hagenbarth lay some blame on journalists for not asking about or investigating possible conflicts. But they emphasize that it’s the economists themselves who really need a code of ethics. 34

. . . economists should disclose relevant sources of financial support and relevant personal or professional relationships that may have the appearance or potential for a conflict of interest in public speeches and writing, as well as in academic publications. . . . First, some may argue that this code would be redundant since many academic economists are already working under a . . . policy as put forth by their respective universities. But these codes primarily proscribe conduct that would conflict with the interests of their universities and do not address potential conflicts with respect to the broader public or government. Moreover, many economists are not academic economists and they too should be held to uniform standards of professional conduct.

Second, some economists may believe that listing their paid positions on their CVs and/or biographies constitutes a sufficient act of disclosure. However, we do not think this is sufficient disclosure. Our proposed code would require economists to disclose all relevant potential conflicts of interest in all relevant situations, particularly in academic articles, general media pieces, speeches and testimonies.

It’s interesting to note that while other fields of practice, such as medicine and law (but also journalism, engineering, and accounting, along with other academic disciplines such as anthropology and sociology), have long had codes of ethics, not so economics. 35

What happened to the proposed code of ethics? While some seventeen thousand economists belong to the American Economic Association (AEA), the code attracted fewer than three hundred signatories.

Nonetheless, the UMass-Amherst scholars’ work, the Reuters investigation, and the documentary Inside Job , which exposed freelancing academic economists-for-hire, all came out around the same time. When Inside Job won the Oscar in 2011, this brought a renewed burst of outrage and exposure to the problem.

The AEA was persuaded to act. New rules were adopted in 2012 requiring its members to disclose potential conflicts of interest in the AEA’s journals, including any “close relative or partner” of the author. An author who has received at least $10,000 from any “interested” party must be identified, defined as anyone with “financial, ideological, or political stake” related to the article. Paid or unpaid roles with corporations or nonprofits are also to be disclosed. 36

As for public speech, like op-eds, TV appearances, or government testimony, the AEA merely “urges” the same disclosure. 37The AEA code also does not cover the array of academics found in business schools, including the ones mentioned above such as a professor of finance or a professor of real estate. The general reader might have heard that economists had adopted a new code, but few will appreciate the difference between a finance professor and an economics professor.

And, as the New York Times found in 2013, those kinds of academics are still spinning, this time on behalf of those who didn’t want the government to put curbs on speculators in the commodity business, and who deny that speculators are driving up consumer prices. 38