In this week’s Chronicle of Higher Education, Charles Ferguson offers up the latest version of the argument that the financial crisis was caused (at least in part or perhaps significantly) by deregulation — and claims that deregulation was pushed by economists who were on the consulting payroll of large banking and financial firms that stood to benefit from it. The conclusion Ferguson invites us to draw is that pro-deregulation economists are just paid hacks of the financial industry who could care less about the consequences of their theories and who will go to some lengths to avoid disclosing their financial entanglements with firms that stand to profit from those theories.
It’s hard to know where to start, but let me first indicate a point of agreement: Economists should be no different from other professionals in being candid about any possible conflict of interest when they engage in public intellectual activity. If I’m on Citigroup’s payroll and I’m writing an article that advocates a position that could directly affect Citigroup’s bottom line, I think I have an obligation to indicate that fact. Granted, the complex interconnections in economics are hard to disentangle in deciding objectively what counts as a “direct effect,” but if you’re paid by Citigroup and writing on banking, that seems straightforward enough to warrant disclosure.
That said, Ferguson’s article commits two common errors made by critics of free markets and free-market economists. First is the argument that the last 30 years have seen systematic deregulation of banking and finance. As Peter Boettke and I document in our essay “The House that Uncle Sam Built,” the ratio of legislation that increased regulation to legislation that decreased it is about 4:1. One could also look to other measures, such as pages in the Federal Register, and quickly discover that the last 30 years have hardly been a free-market paradise in the financial world.
Pete and I also argue that it was the variety of regulatory interventions in the housing market, in particular those that had implications for its relationship with the financial industry, that turned the Fed’s expansionary monetary policy into a housing boom, which in turn fueled the complex financial innovations that proved so problematic when the housing market turned downward. For people like Ferguson to suggest that the ideas of “free-market economists” are responsible for the boom and the bust flies in the face of the historical evidence and the role that regulation played in generating the boom and therefore the bust.
Ferguson also seems to think that anyone who supports any sort of deregulation is a “laissez-faire economist.” The list of economists discussed in his article is certainly an all-star roster of contemporary practitioners, but not one of them would ever think of himself or herself as a devotee of laissez faire. Lawrence Summers, Frederic Mishkin, Laura Tyson, and Glenn Hubbard (and even Martin Feldstein) are all very accomplished economists, but none of them are, by any stretch of the imagination, hard-core free-market supporters. They have worked for politicians across the political spectrum and are fairly typical of prominent economists: mild interventionists whose default position might well be something close to free markets, but who also can find lots of exceptions to that default position. Only to someone approaching economics from the outside, and from the left, could this collection of economists be confused for a cadre of believers in laissez faire.
Horwitz’s First Law
Finally, Ferguson embeds an assumption into his analysis that he questions only once but then quickly dismisses: He assumes that the free-market position is in the interest of the firms paying these economists’ salaries. That is, he thinks corporations do best when markets are deregulated. That assumption is worth challenging. If it were true, we would never see firms lobbying for government intervention and regulation. In fact, corporations often benefit from existing regulations and will not hesitate to ask for more if they believe they can benefit. In what I call Horwitz’s First Law of Political Economy, we should always remember that “no one hates capitalism more than capitalists.” Ferguson needs to explain why so many firms lined up for bailouts and why financial firms have historically supported regulation that limited competition and assured them profits.
Contrary to Ferguson’s claim that these economists seem not to make “policy statements contrary to the financial interests of their clients,” one could easily argue that economists who argue for deregulation are in fact arguing against the “financial interests of their clients.”
Again, this doesn’t mean it’s okay to refuse to disclose financial ties to the industry one is writing about, but it does mean that critics cannot assume that pro-deregulation economists have been bought by their corporate paymasters. The relationship between free markets and corporate self-interest is a lot more complicated than people like Ferguson believe, and if they are going to comment on the role of economists on corporate payrolls, it would behoove them to learn a little bit more economics.