One of the trends to come out of the financial crisis has been an analysis of the financial sector based on the ideas of political economy. The biggest purveyor of this kind of thinking has been the economist Simon Johnson, whose ideas I wrote about last spring. But in a nutshell, he believes that understanding how power and influence work on economic institutions is as important to comprehending them as macroeconomic modeling. This world view helps explain the phenomenon of, among other things, banks that are too big to fail. But now Huffington Post political reporter Ryan Grim has turned this analysis on to the economics profession itself, with astounding results:
The Federal Reserve, through its extensive network of consultants, visiting scholars, alumni and staff economists, so thoroughly dominates the field of economics that real criticism of the central bank has become a career liability for members of the profession, an investigation by the Huffington Post has found.
... The Federal Reserve's Board of Governors employs 220 PhD economists and a host of researchers and support staff, according to a Fed spokeswoman. The 12 regional banks employ scores more. (HuffPost placed calls to them but was unable to get exact numbers.) The Fed also doles out millions of dollars in contracts to economists for consulting assignments, papers, presentations, workshops, and that plum gig known as a "visiting scholarship." A Fed spokeswoman says that exact figures for the number of economists contracted with weren't available. But, she says, the Federal Reserve spent $389.2 million in 2008 on "monetary and economic policy," money spent on analysis, research, data gathering, and studies on market structure; $433 million is budgeted for 2009.
It's really worth reading the whole thing. But it's a pretty simple formula: if you're getting paid by handsomely by an institution, it's hard to analyze its work objectively. As the economics profession answers a lot of hard questions about why it failed so deeply in the last decade -- see Paul Krugman's recent article for a more traditional macroeconomic take -- there can be no escaping the idea that pernicious power relationships played a major role in the dual relationships between economists, Wall Street and the central bank.
-- Tim Fernholz