Month: November 2008

How will the financial crisis affect the economics profession?

Paul, a loyal MR reader, asks:

What will be the impacts of the current situation for economics and economists.  It seems clear that we have screwed up.  We don’t even have the excuse that we understood what was going on but no one listened to us; economists have been in powerful positions for a long time, and it is generally agreed that Ben Bernanke is both a powerful and a well respected economist.  Will demand for economics courses fall? (It seems obvious that demand for finance courses and so for finance professors will decline.)  I am not teaching this semester, but I would like to know from those who are:  What do you tell students when they ask what economics had to say about the current mess?  It seems to me that this situation will have profound implications for economics as a scientific and also as an academic discipline and I would like to see a discussion.  Your blog is probably an ideal place for such a discussion.

I believe that demand for economics classes will rise, as it often does in economically troubled times.  Some of this will be "shaman demand" rather than "knowledge demand."  The consulting incomes of finance economists will fall and fewer talented people will go into finance.  Speaking fees will fall since fewer economists will give talks at hedge funds.  The relative status of macroeconomists will rise and the relative status of microeconomists will fall.  Economists will gain in fame and lose in income.  What do you think? 

John Smith hasn’t made up his mind yet

John Smith reports:

I am ready to move on – perhaps for a career where deadlines are
honored, ideas are exchanged and gimmicks and fads are routinely
avoided because they distract from advancing the mission of gaining and
sharing knowledge. Yes, it is time to find another line of work, where
I can enjoy the fruits of my labor, even if I realize that the grass is
grayer, if not greener, elsewhere.

John Smith is the pseudonym of a professor at a liberal arts
college. He asked to remain anonymous because he is continuing to teach
while he is job-hunting and doesn’t want his comments to reflect on his

Read the whole thing, from InsideHigherEd.  The guy swears he is quitting.  He is a tenured English professor in his mid-40s, highly employable in many sectors of our declining economy, especially those sectors where gimmicks and fads are routinely avoided.  I observe that a) John Smith seems to be quite a good professor, and b) John Smith needs one of Robin Hanson’s lectures on self-deception.


Wall Street unwittingly created one of the catalysts for the collapse of Bear Stearns, Lehman Brothers and American International Group by backing new bankruptcy rules that were aimed at insulating banks from the failure of a big client, lawyers and bankers say.

2005 changes made clear that certain derivatives and financial
transactions were exempt from provisions in the bankruptcy code that
freeze a failed company’s assets until a court decides how to apportion
them among creditors.

However, experts say the new rules might have accelerated the demise
of Bear, Lehman and AIG by removing legal obstacles for banks and hedge
funds that wanted to close positions and demand extra collateral from
the three companies.

“The changes were introduced to promote the
orderly unwinding of transactions but they ended up speeding up the
bankruptcy process,” said William Goldman, a partner at DLA Piper, the
law firm. “They wanted to protect the likes of Lehman and Bear Stearns
from the domino effect that would have ensued had a counterparty gone
under. They never thought the ones to go under would have been Lehman
and Bear.”

Here is the full story.  Here is previous MR coverage of this topic.  Here is a short article on petards.  Here is Wikipedia on petards.  Here are pictures of petards.

Book splat

Reflection of a Political Economist, Selected Articles, by William A. Niskanen; the nature of this book is self-evident.  globalization: n. the irrational fear that someone in China will take your job, by Bruce Greenwald and Judd Kahn; a good introductory look.  Hallelujah Junction: Composing an American Life, by John Adams; excellent for Adams fans, it helps make sense of the music.  Jan Zalasiewicz, The Earth After Us: What Legacy Will Humans Leave in the Rocks?  Not much.  A very good, fun introduction to some issues of geology.  Casanova: Actor * Lover * Priest * Spy, by Ian Kelly.  An underrated figure, an underrated book.  The Art of Strategy: A Game Theorist’s Guide to Success in Business and Life; a good introduction to game theory.  The Princeton Companion to Mathematics; a very heavy book, in more ways than one.

*When* should consumers cut their spending?

Paul Krugman argues:

Sooner or later, then, consumers were going to have to pull in their
belts. But the timing of the new sobriety is deeply unfortunate. One is
tempted to echo St. Augustine’s plea: “Grant me chastity and
continence, but not yet.” For consumers are cutting back just as the
U.S. economy has fallen into a liquidity trap – a situation in which
the Federal Reserve has lost its grip on the economy.

….The capitulation of the American consumer, then, is coming at a
particularly bad time. But it’s no use whining. What we need is a
policy response.

Krugman then calls for fiscal stimulus, as has Martin Feldstein.  I am more inclined to think that consumers need to cut their spending now.  It is widely understood that consumers have been living beyond their means.  Let us say instead that consumers maintain their spending (say through fiscal stimulus, a cut in sales taxes, or sheer exhortation) but that everyone knows consumer spending will fall in three years time.  In three years time, the "liquidity trap" (not exactly how I think of it) will be over, but in the meantime investment commitments will be lackluster, given that people will be waiting for the economy to digest the forthcoming change.  Maybe we need to spend less now and get the adjustment over with more quickly, even though that will be painful.  Or say we don’t know when the spending decline will come — markets often dislike uncertainty most of all.

I view the goal as hurrying up needed sectoral adjustments and minimizing unneeded or temporary sectoral adjustments.  That suggests any "stimulus" funds, whatever their magnitude, should go to preserving expenditure patterns of state and local governments.  Such an allocation also ensures that the money will be spent, if indeed that is the goal.  Greg Mankiw offers a related idea.

The St. Augustine quotation in Krugman’s column is apt.  Do many people in fact use temporary sex as a successful path to abstinence?  Some do, yes, or at least so I have heard.  But it would be odd to accept such histories as the default view of how to get there.

Addendum: Excellent comments from Interfluidity.

Cow [Vache]

Nobody leads the cow
To the greenery cropped and dry
To the greenery without caresses,

The grass which receives it
Must be sweet as a silken thread,
A thread of silk sweet as a thread of milk.

Ignored mother
For the children it is not lunch,
But the milk on the grass
The grass before the cow,
The child before the grass

That is by Paul Eluard, translated by Ted Hughes.  I’ve still been very much enjoying Letters of Ted Hughes

Elsewhere in the world of fiction, I found the "philosophical" European bestseller The Elegance of the Hedgehog precious and unbearable; I couldn’t get to page 30.  The new John Updike novel, The Widows of Eastwick, has been mostly panned, but I agree instead with this very positive NYT review.