Nye, however, was at least honest—unlike most of the others. He voluntarily disclosed that he had visited Qaddafi because he had been paid to do so, by a consulting firm called the Monitor Group. In 2011 Mother Jones magazine revealed that Monitor had been hired by Qaddafi to improve his public image; Monitor was paid $3 million.32The “one-on-one conversations” that Barber described in his Post article—as if he just happened to be in the area, and Qaddafi naturally invited him to drop in—were arranged as part of a public relations campaign. (Barber also served on the board of the Saif Qaddafi International Charity and Development Foundation, named after Qaddafi’s son Saif, until Barber resigned in February 2011 following Qaddafi’s violent repression of Libyan demonstrations.) Monitor also arranged for another Harvard professor, Robert Putnam, to visit with the colonel. At the time all of these people, for a fee, were perfectly happy to be used on behalf of Monitor’s contract. Putnam voluntarily disclosed that he was paid, although he did not mention that he was part of a Libyan public relations campaign run through Monitor. He later said that he regretted doing it. Giddens and Barber did not even disclose that they were being paid, much less that they had a relationship with Monitor, and have refused to discuss their fees.
The Monitor Group was founded in 1983 by Harvard Business School professor Michael Porter. Its initial focus was on corporate strategy, Porter’s primary field, but Monitor later expanded into consulting for foreign governments. In fact Monitor was also working for Jordan, likewise to improve its public image, at the same time it was working for Qaddafi. In both cases, Monitor appears to have violated the law by failing to register as a foreign agent. No one may act “within the United States as a public relations counsel, publicity agent, information-service employee or political consultant” for a foreign government without registering. On its website the US Justice Department states that the law “facilitates evaluation by the government and the American people of the statements and activities of such persons in light of their function as foreign agents.”33 Precisely. That is the whole point of disclosure.
Giddens, Barber, Putnam, Nye, and Monitor were not alone in helping out Libya. Qaddafi’s son and heir apparent, Saif, attended the London School of Economics. Professor David Held, a faculty member, was on the Saif Qaddafi Foundation board at the same time as he was Saif Qaddafi’s PhD thesis advisor. LSE awarded Saif Qaddafi his PhD shortly after Qaddafi pledged to donate approximately $2.5 million to the school and the Libyan government awarded LSE an additional contract for training government officials. In March 2011 LSE’s director, Howard Davies, resigned, citing “errors of judgment”. Monitor later admitted that it had helped Saif Qaddafi with his thesis, which appears to have contained substantial plagiarism.
The Consequences
THE PROBLEM OF academic corruption is now so deeply entrenched that these disciplines, and leading universities, are severely compromised, and anyone thinking of bucking the trend would rationally be very, very scared. Consider this situation: you’re a PhD student, or a junior member of the university faculty, considering doing some research anytime in the past decade on the effect of, say, compensation structures on risk taking in financial services, or the potential impact of public disclosure requirements on the market for credit default swaps. The president of your university is . . . Larry Summers. The president of the National Bureau of Economic Research is . . . Martin Feldstein. The chairman of your department is . . . Laura Tyson, or Glenn Hubbard, or Richard Schmalensee, or John Campbell. Or you’re at MIT, and you want to examine the decline in corporate tax payments over the last quarter century. The president of MIT is Susan Hockfield, on the board of GE, a company that has managed to avoid paying any corporate taxes for several years despite having billions of dollars per year in profits.
Or, if you’re at the think tank run by the Council on Foreign Relations, you might notice that Robert Rubin is cochairman of the council. Other members of the board include Stephen Friedman, who is on the board of Goldman Sachs; Henry Kravis of KKR; and David Rubinstein of the Carlyle Group. The place you work for is called the Maurice R. Greenberg Center for Geoeconomic Studies—as in Hank Greenberg, former CEO of AIG. The chairman of the Brookings Institution board of trustees is John Thornton, former president of Goldman Sachs; about half the members of the Brookings board are financial services executives. The Brookings Hamilton Project, focused on improving US economic prosperity, was established by Robert Rubin.
You also know that the committees that review grant proposals and the review panels that decide whether papers get published in academic journals are full of professors who consult for financial services companies. These people will have a major say in whether you get published, get a job, or receive the security of permanent tenure.
Here is what Frederic Mishkin—a comparative lightweight relative to, say, Larry Summers or Glenn Hubbard—lists on his CV under “Journals”:
Editorial Board, American Economic Review, 1982–85.
Associate Editor, Journal of Business and Economic Statistics, 1986–93.
Associate Editor, Journal of Applied Econometrics, 1985–2000.
Associate Editor, Journal of Economic Perspectives, 1994–2004.
Editor, Federal Reserve Bank of New York, Economic Policy Review, 1994–1997. Editorial Board, 1997–2006.
Associate Editor, Journal of Money, Credit and Banking, 1992–2006.
Advisory Board, Macroeconomics and Monetary Economics Abstracts, 1996–2006.
Editorial Board, Central Bank of Chile Series, Central Banking, Analysis, and Economic Policy, 2001–2009.
Editorial Board, Journal of International Money and Finance, 1992–present.
Advisory Board, International Finance, 1997–present.
Editorial Board, Finance India, 1999–present.
Associate Editor, Emerging Markets, Finance and Trade, 2008–present.
Editorial Board, Review of Development Finance, 2010–present.
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”:
Board of Trustees, The Brookings Institution, 2002–present
Board of Trustees, Committee for Economic Development, 2002–present
Board of Directors, Center on Global Development, 2001–present
General Member, Council on Competitiveness, 2001–present
Member, Trilateral Commission, 2001–present
Member, Bretton Woods Committee, 2001–present
Board of Directors, Institute for International Economics, 2001–present
Member, Inter-American Dialogue, 2001–present
Board of Governors, Partnership for Public Service, 2001–present
Board of Directors, Global Fund for Children’s Vaccines, 2001–2005
Member, Group of 30, 1997–present
Permanent Member, Council on Foreign Relations, 1989–present
Editor, Quarterly Journal of Economics, 1984–1990
Executive Committee, American Economic Association, 1989–1992
Member, American Economic Association Commission on Graduate Education, 1988–1990
Board of Advisors, Congressional Budget Office, 1986–1990
National Science Foundation Economics Panel, 1986–1988
Consultant, Foreign Governments of Jamaica, Indonesia,
Canada, Mexico, and Japan Program Committee,
Econometric Society Meetings, 1982, 1984
AEA Meetings, 1986, 1987
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
* * *
A RIGGED GAME
The Harder They Fall
IT’S HARD TO BELIEVE now that in the year 2000 the US was universally considered to be th
e 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.
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