In Writing this Blog, I Have a Conflict of Interest

Filed Under (Environmental Policy, Finance, Health Care, Retirement Policy, U.S. Fiscal Policy) by Don Fullerton on Jan 14, 2011

In his documentary movie about the financial crisis called “Inside Job”, and in his article in “The Chronicle of Higher Education,” Charles Ferguson talks about “the hugely damaging conflicts of interest of the senior academic economists who move among universities, government, and banking.”   Indeed, he says that these conflicts of interest are “what is wrong with economics, with academe, and indeed with the American economy.”

Before going any further, let me note that I am a senior academic economist, and I am a former Deputy Assistant Secretary of the U.S. Treasury (for Tax Analysis).  I’m mostly interested in trying to do good research, and trying to help make good economic policy that will increase general economic well-being.  For this reason, I do very little if any consulting, and I’m not on any corporate boards.  However, I will NOT claim to have no conflicts of interest.

Indeed, that’s the point.  We ALL have conflicts of interest.  When a student asks me a question, I may respond “please work it out on your own.”  But we have no way to know how much of that response is intended to save me the time and effort of explaining, or to help the student learn the material.  It’s both.  But the student will certainly remember it better by active problem solving than by passive listening. 

I do have my own political views, and I don’t doubt that some of them seep into my economics research.  It would be incredibly naïve to think that such research is void of personal biases.  All we can do is try to state findings as objectively as possible, and let others pick it apart or use their own models and data to find competing results.  Then we’ll discuss it!

Thus, I think Ferguson is beyond hyperbole when he says that this “revolving door … is the result of an extraordinary and underappreciated scandal in American society: the convergence of academic economics, Wall Street, and political power.”   Scandal?   Really?   A scandal is something previously kept hidden.   Did anybody not know that academic economists often take a leave-of-absence to work for the government, or that they often do consulting for business?  It’s really not news when he says: “Prominent academic economists (and sometimes also professors of law and public policy) are paid by companies and interest groups to testify before Congress, to write papers, to give speeches, to participate in conferences, to serve on boards of directors, to write briefs in regulatory proceedings, to defend companies in antitrust cases, and, of course, to lobby.”

That is not to say his article has no validity, however.  Despite the hyperbole, his points are basically right, and it’s worthwhile to remind readers and the public to be aware of potential conflicts of interest.  Indeed, you should already be aware of HIS conflict of interest: he is writing a somewhat sensationalized story, in order to draw attention to himself and his movie, in hopes you’ll pay money to see it.  He’s not wrong to do that; it’s just an inherent and unavoidable conflict of interest.

To be clear, I’m not trying to claim that all is right with academia.  Much more relevant and bothersome is when professors don’t disclose specific financial conflicts of interest.  That part of Ferguson’s story may point to potential scandals that somebody is trying to hide.  That’s the part of the story that Ferguson should have focused upon.  And yet, if professors are not revealing financial conflicts of interest, then that’s the part of the story most difficult to document.

Ferguson’s overstatements may induce some to dismiss his story, and not hear the important and correct point he makes. It’s not wrong to have conflicts of interest; it’s wrong not to disclose them.

I would hope to think that most professors do routinely reveal financial conflicts of interest, and that we can use their resulting research to learn something useful – as I said above:  “let others pick it apart or use their own models and data to find competing results.  Then we’ll discuss it!”

As long as it is revealed, we can USE inherent conflict of interest to help students learn about how to interpret such results. Consider the following two published articles in refereed academic journals about the costs of the oil spill from the Exxon Valdez in 1989:

Hausman, Jerry A., Gregory K. Leonard, and Daniel McFadden (1995), “A Utility-Consistent, Combined Discrete Choice and Count Data Model: Assessing Recreational Use Losses Due to Natural Resource Damage,” Journal of Public Economics 56: 1-30. 

Carson, Richard T., Robert C. Mitchell, Michael Hanemann, Raymond J. Kopp, Stanley Presser, and Paul A. Ruud (2003), “Contingent Valuation and Lost Passive Use: Damages from the Exxon Valdez Oil Spill,” Environmental and Resource Economics 25: 257-86

Hausman et al find that the cost is about $3 million.  That’s a lot of money, if it arrived in my own personal bank account.  But that’s million, with an “m”.  Carson et al find that the cost is about $3 billion.  That’s billion with a “b”.  Is somebody joking here?  No, and in fact, they both are correct!  They are just measuring different things.  Hausman et al measure the lost “use” values of the few thousand Alaskans who will not be able to use that area for recreational hunting, fishing, hiking, and boating.  In contrast, Carson et al measure the lost “NON-use” values of 300,000,000 Americans who likely never visit Alaska but who nonetheless feel badly for the damaged ecosystem and wildlife, and who would be willing to help pay for protection of that natural environment.

The example is an opportunity to teach students about how properly to interpret academic research and to understand the different perspectives of different researchers.  And although it shouldn’t really surprise anybody, here are the quotes from those two papers’ acknowledgement footnotes, with proper revelation of financial interests:

Hausman et al, finding that the cost is $3 million: “This paper reports on research funded by Exxon Company, USA. It should not be interpreted as representing the views of any parties other than the authors.”

Carson et al, finding that the cost is $3 billion:  “The State of Alaska provided funding for this study. … All opinions expressed in this paper are those of the authors and should not be attributed to the State of Alaska, the Alfred P. Sloan Foundation, or the authors’ home institutions. The authors bear sole responsibility for any errors or omissions.”