He Changed Economics

Here’s a challenge for the economics profession: to think up something suitable, an occasion or a prize, to commemorate the contribution of Martin S. Feldstein. For example, there’s the annual Ely Lecture, named for Richard Ely, the nineteenth-century reformer who organized the American Economic Association and served as its first president, before being ousted for exhibiting a little too much do-good zeal; and the John Bates Clark Medal, given every two years to an economist under forty judged to have a significant contribution to economic knowledge, named for the first American to have contributed to an important advance, the doctrine of marginal productivity.


In Feldstein’s case, there is no rush. He retired only last week, at 68, from his job as president of the National Bureau of Economic Research (though not from his Harvard professorship, nor from the NBER Project in the Economics of National Security which he leads). In thirty-one years of running that somewhat obscure professional organization, he changed the way economics is done around the world.


How?  He took advantage of a moment in time – a couple of decades when developments in computing, data, mobility, globalization and money harmoniously converged – to dramatically alter the incentives to do empirical economics. He thereby greatly accelerated a trend by which empirical economics left behind political philosophy to make the beginnings of an applied science.


Feldstein was an unlikely figure to play such a transformative role. He had, he has said, expected to become a physician after he finished Harvard College in 1961.  Instead he went to Oxford on a fellowship and became an economist specializing in health care, then a highly neglected field. In 1964, he bought a copy of Milton Friedman’s recent book Capitalism and Freedom. When he returned to Harvard in 1967 to teach, he discovered that in the opinion of his peers, he had become a conservative.


The following year, he was promoted to a tenured position, part of a dramatic overhaul of Harvard economics that also involved  hiring Kenneth Arrow, from Stanford; Zvi Griliches, from the University of Chicago; and Dale Jorgenson, from the University of California. Harvard’s Robert Solow had defected to the Massachusetts Institute of Technology in 1950; this time the university moved with alacrity to retain one of its own. Fortune didn’t hand out many second chances, the argument went. And sure enough, Feldstein won the Clark Medal in 1977, as Solow had won it in 1961.


Meanwhile, John Meyer, a pioneering econometrician, agreed to return to Harvard from Yale as part of the deal. With him, he brought from New York the headquarters of the National Bureau of Economic Research (NBER) – a trade as lopsidedly advantageous to Boston as was the 1919 deal which sent Babe Ruth to the Yankees favorable to New York.


The NBER had been established in 1920 by Wesley Clair Mitchell and Edwin Gay, patterned loosely on the Rockefeller Institute for Medical Research (today’s Rockefeller University), but with an elaborate governance structure (business, unions, government, universities, professional associations) designed to assure it would remain a non-partisan adjunct to various government agencies. For forty years it was home to many of the most inspired research strategies in American economics:  Mitchell studied business cycles; Simon Kuznets devised national income accounts; Robert Lampman investigated income distribution; Milton Friedman and Anna Schwartz produced their Monetary History of the United States; Gary Becker modeled human capital; and Robert Lipsey collected international price data.


By the 1960s, though, the NBER style of intramural research was running out of steam, thanks mainly to the rise of universities as rival centers of academic research. Leaving a rearguard office in New York, Meyer moved the organization to Technology Square near MIT and bought a giant Burroughs mainframe computer. The NBER Computer Research Center would become the portal to which economists brought their punch-cards for batch-processing.


But things were changing swiftly in the 1970s in the computing industry – in the economics profession as well – and new political winds were blowing. Feldstein’s research interests had shifted from health care to the distorting effects of public sector spending and income taxation. Harvard was once again attracting top students, in its competition with MIT; among Feldstein’s prize pupils in public finance were Alan Auerbach (now of the University of California at Berkeley), Laurence Kotlikoff (of Boston University), Joel Slemrod (of the University of Michigan), James Poterba (of MIT), Jeffrey Sachs (of Columbia) and Lawrence Summers (of Harvard); as well as Joseph Newhouse (of Harvard’s School of Public Health) and Frank Sloan (of Duke University) in medical economics.  When Meyer sought a replacement, in 1977, after ten years on the job, Feldstein agreed to take over, as long as there was a mandate for further change.


There was; it came swiftly.  In 1978, Feldstein closed the NBER’s Washington office and transferred the Computer Research Center to MIT. (Harvard professor Otto Eckstein had offered unlimited computing time on the time-sharing computers of his Data Resources Inc. firm.)  He inaugurated six new collaborative research programs: Economic Fluctuations, directed by Robert Hall, of Stanford University; Development of the American Economy, directed by Robert Fogel, of Harvard University; Business Taxation and Finance, directed by David Bradford, of Princeton University;  International Studies, directed by William Branson, also of Princeton; Labor Studies, directed by Richard Freeman, of Harvard; and Financial Markets and Monetary Economics, directed by Benjamin Friedman, also of Harvard.  Robert Gordon, of Northwestern University, and Georges de Menil, of the Ecole des Hautes Etudes en Sciences Sociales, organized the first International Seminar, in Paris, in 1979. The first NBER Working Papers, dubbed “yellow jackets” because of their distinctive paperback binding, began appearing in the mail.


The most decisive change came when Feldstein leased the third floor of a modern office building in Putnam Square, a little distance down Massachusetts Avenue from the Harvard campus in the direction of MIT.  At a gala dinner for 450 members of what Feldstein long ago began to call the “NBER family” last week, Richard Freeman observed that the decision flew in the face of Harvard culture. The proper thing would have been to refurbish a grand old house.  But even though he still couldn’t open his office windows, Freeman said he was glad that Feldstein had made the choice he did.


The business-like new space was tailored to a very different style of operation.  Before 1050 Mass Av. – the Putnam Square address where the NBER now leases three floors of the six-story building – applied economists typically saw each other once a year, at the annual meetings of the AEA, or one-on-one, when they traveled to read papers at other institutions, frequently to be greeted with little more than polite applause and a good meal afterwards at a local restaurant.


After 1050, economists traveled twice a year or more to conferences, often in Cambridge, where they met their peers in sessions governed by a strict new protocol:  twenty minutes (no reading!); a serious discussant to furnish tough-minded criticism; followed by twenty minutes of open discussion. (In contrast, university historians still read their papers at conferences, word for word.)  Between times, conference-goers compared notes on latest developments in minicomputers, the new “personal computers,” and increasingly powerful software that economists were developing to analyze data that had begun to circulate, first on floppy disks and then via the mysteries of the Arpanet. Yellowjackets gradually morphed into pdf files.


Program directors and visiting fellows occupied offices; junior faculty, graduate students and even undergraduates had carrels in which they hung out round-the-clock. Harvard’s Griliches moved in and trained an entire generation (or two or three) in the microeconomics of technical change and productivity. The only prototypical NBER experience that Feldstein had never shared, Larry Summers told the dinner audience last week, was “to eat a whole pizza at three in the morning preparing a paper that was due the next day.”


In 1979, too, Feldstein arranged funding for the NBER’s first Summer Institute, a sleepy week-long meeting at Harvard’s Quincy House to talk about a single paper a day that has since grown into an intensive three-week affair, attracting some 1700 empirical researchers from around the world to incessant meetings at a Cambridge’s once somnambulant Royal Sonesta Hotel.


Almost immediately, the NBER model sparked imitation in Europe. Richard Portes, a Feldstein friend since Oxford days, founded the Centre for Economic Policy Research in London in 1983 and built it is to a similarly decentralized powerhouse of applied research. Feldstein, meanwhile, was broadening his own acquaintanceship with the rest of the world. After Paul Volcker’s high real interest rates and the Reagan tax cuts sent the value of the dollar soaring, he learned international economics from the late Rudiger Dornbusch, of MIT (who cracked, “in those days, international economists were thought of as [being] slightly dangerous people who often wore  single earring”).


Then, in 1982, Feldstein led an NBER team to a joint conference in Beijing with the Chinese Academy of Sciences that inaugurated an era of increasingly close cooperation. And before long, the NBER began a series of researchers’ tours of industrial clusters — “pin factory visits,” they were dubbed, after the famousl real-world example with which Adam Smith began An Inquiry into the Nature and Causes of the Wealth of Nations in 1776. “Marty brought the economics profession much closer to the economy and the economy much closer to the profession,”  Portes says.


Feldstein’s finest public hour began later that year, when he moved to Washington, D.C., to serve as chairman of the Council of Economic Advisers under President Reagan.  The deepest recession since World War II was grinding to its dramatic end; Reagan’s “supply side” advisers and their enthusiasts had been largely discredited. The administration badly needed a sophisticated defense. A long-time advocate of tax cuts of various sorts, Feldstein had the year before authored a widely-circulated article in The Public Interest titled “The Retreat from Keynesian Economics.” He was, in other words, precisely the doctor the administration had ordered.


Before leaving Cambridge, however, Feldstein took steps to protect the integrity of the “the Bureau.” Eli Shapiro, dean of MIT’s Sloan School of Management, replaced him as president; he persuaded Walter Heller, former adviser to President John F. Kennedy, to serve as chairman.  He took with him to Washington as senior aides many young economists, including Summers and Paul Krugman, both of MIT, and significantly more liberal than he.  And before long, he picked a memorable fight with the administration, with Treasury Secretary Donald Regan in particular, over the desirability of trimming the enormous budget deficits that the tax cuts had produced. The Treasury’s position was that they didn’t matter.


Despite fierce attempts to run him off, Feldstein stood his ground and returned to Harvard and the NBER only when he had said he would, at the end of his two-year leave, to teach introductory economics (the college’s biggest course), to build the economics department and the research network of the Bureau. Such principled opposition to the policies of the president who appointed him may not have been good for the Council of Economic Advisers – eight years later, Bill Clinton established the much more political office of the National Economic Adviser and appointed non-economist Robert Rubin to it – but it was a high-water mark for professional responsibility and ramified in the early 1990s, when Clinton’s advisers, Rubin and Summers, lobbied successfully for establishing a path to a balanced budget.


There were some disappointments. Surely the greatest of these was failing to be offered the presidency of Harvard University, in 1991. Feldstein made it to the final four; perhaps to the final two. But opposition was stiff in some quarters of the faculty – there was no telling what a man who would lease a new office building instead of an old house and work for Ronald Reagan might do – and Neil Rudenstine, a scholar of English literature, got the job.  In retrospect, it seems a shame. Feldstein’s dispassionate eye for talent was precisely what made him such a success at the NBER.


Another failure had to do with Feldstein’s ambitious attempt to convert the US Social Security to a system of private pensions.  As early as 1979, when it was still possible, he had taken the employees of the non-profit NBER out of the Federal system. (The 1982 Social Security reform promptly brought them back in.) He used the occasion of his 1996 Ely lecture to argue for its abolition in favor of a system of “Personal Security Accounts.”  He persuaded George W. Bush to adopt his plan and remained its prime mover among experts until 2006, when opposition to it (and the war in Iraq) ended the Republican hold on Congress.


Then, too, the NBER has begun to come up against its limits, just as no tree grows to the sky. For example, the Social Science Research Network has been expanding dramatically in recent years, in response to claims that the NBER network of around a thousand researchers in too much an insider’s club to be a sole-source provider of new ideas. Likewise, for all their success in reining in the more extravagant claims of amateurs, the applied economists have been surprisingly unsuccessful in convincing one another of the value of their favored policies and exactly how they might affect the economy – tax cuts or tax increases, in particular. Moreover, the real advances of the last three decades have tended to come from the community of practical theorists, less-than-pure but more-than-applied, in macroeconomics, microeconomics and growth theory. And, for the most part, they have been translated into matters of practical concern largely without the modality of the NBER.


Finally, Feldstein is thought to have been runner-up to Ben Bernanke in the sweepstakes to succeed Alan Greespan as chairman at the Federal Reserve Board – a job he clearly would have enjoyed. Feldstein is well-known on Wall Street. What led President George W. Bush to prefer the younger man? Memories of 1982-84 episode at the Council of Economic Advisers presumably were a factor.  Feldstein’s long record of service to the president’s father may have had something to do with it, too.


Whatever challenges these plum jobs might have offered, they probably pale in comparison to the satisfactions of the position that Feldstein devised for himself more than thirty years ago, hashing over the possibilities with friends while watching his daughters skate at the rink next to Belmont High School.  Today Feldstein is a grandfather. His economist wife, Kathleen, and their daughters came to the party the NBER threw for him. And like any father, figurative or otherwise, he is not without his flaws.


But his “family” has grown far beyond the thousand or so professors of economics or business who are research associates, bringing to their work together a broad spectrum of policy views.  The man who is replacing him as president of the NBER, MIT public finance professor James Poterba, is a Republican, too; but among Poterba’s prize students were Austan Goolsbee, of the University of Chicago’s business school, who has been Barack Obama’s principle economic adviser, and David Cutler, a Harvard professor, who has been devising the Democrat’s plans for health insurance reform. Summers, who advised Bill Clinton, was Feldstein’s student; but then so was Glenn Hubbard, who advised George W. Bush (he’s dean of Columbia’s business school today). Michael Boskin, John Taylor (both of Stanford University) Alan Blinder and Ben Bernanke (both Princeton professors) are senior NBER figures, too.


It is this attiude of civility and seriousness among the widely-distributed economics and business professoriate (not to be confused with the “we happy few” self-delight that charactertized Harvard University well into the 1960s), and its engagement with its counterpart business, government and professional elites, that probably assures Feldstein an unusual immortality in the annals of economics.  As the father of the modern NBER, he has been the author, not of a think tank, but of a new and better approach to the making of economic policy.