Back to Cranks

When John Makin, an economist long associated with the American Enterprise Institute, died last week, reporter Nick Timiraos gave him a gallant send-off  in The Wall Street Journal: “Economist Who Elevated Think-Tank Discourse.”

Makin, 71, had long been a favorite source for serious journalists. A University of Chicago Ph.D., he quit his professorship at the University of Washington to join the conservative think-tank in Washington, DC, in 1984.

Twenty years as chief economist for Caxton Associates, a New York hedge fund, retiring as a principal in 2010, maintaining his AEI affiliation, boosted his credibility.  Caxton founder Bruce Kovner served as AEI chairman during the presidency of George. W. Bush.

Makin’s hiring in 1984 was widely taken as a sign of AEI’s determination to buttress its reputation as a source of serious opinion-making.

A few years earlier, WSJ editorial writer Jude Wanniski had used a year in residence at AEI as a planform from which to launch his 1978 best-seller, The Way the World Works: How Economies Fail – and Succeed, one of the first in a series OF works by various authors that later  would be deemed “neo-conservative.”

With its twin contentions, that personal tax cuts would pay for themselves by boosting growth, and that the Smoot-Hawley Tariff Act of 1930 had caused the Great Depression, the book caused no end of embarrassment among the traditionally conservative economists at AEI.

With the election of Ronald Reagan in 1980, the AEI moved towards the center of the economic debate, hiring Makin, among others.  There began in Washington what was, in retrospect, a golden age of consensus.

Congress raised taxes slightly in 1982 to prevent deficits arising from the  Kemp-Roth tax cuts of the year before from spiraling out of control. In 1983 a “Gang of Nine” legislators negotiated measures advocated by the National Commission on Social Security Reform to put the US retirement system on a sound actuarial basis for another fifty years. Brandeis economist Stuart Butler floated his proposal for health-care reform – a legislated individual mandate – from the still-more conservative Heritage Foundation.

But the splintering of the conservative alliance had already begun.  Wanniski, dismissed by the WSJ for political campaigning, advocated for presidential bids by US Rep. Jack Kemp (cosponsor of the 1982 tax cuts) and magazine publisher Steve Forbes.  Data systems magnate H. Ross Perot ran as third- party candidate in 1992.  Newt Gingrich delivered a Republican majority in the House of Representatives with his “Contract with America” in 1994.  Fox News launched in October 1996.  George W. Bush was inaugurated in 2001 and abruptly confused the issue.The Tea Party made its appearance in 2010.

Today the most peripatetic figure among the AEI’s roster of experts is probably attorney Peter Wallison, general counsel to the Treasury Department, 1981-85,. and White House counsel to Ronald, Reagan, 1986-87, but better known for his dissent-within-a-dissent to the Financial Crisis Inquiry Commission, 2011.

Three other Republican members of the commission – Bush administrations insiders Keith Hennessey and Douglas Holtz-Eakin and US Rep. Bill Thomas – dissented together from the majority report.  They zeroed in on the financial panic that ensued after Lehman Brothers failed, Wallison felt their explanation was overly elaborate. The basic cause of the 2008 financial crisis, he argued, was simple. It was government housing policy, particularly the two giant government- sponsored enterprises, Fannie Mae and Freddie Mac,that bought mortgages from banks, savings and loan associations and other lenders,

A new book by Wallison, Hidden in Plain Sight: What Really Caused the World’s Worst Financial Crisis and Why It Could Happen Again (Encounter, 2015) extends the argument that that government policies were solely to blame, and that none of the other factors commonly cited – the flow of funds from abroad, financial deregulation, rapid innovation, shifting boundaries among firms, investors’ increased appetite for risk, lax credit- agency monitoring, the panic that followed the Lehman default – were significant contributors to the outcome.

A “false narrative” has triumphed, Wallison writes:

We frequently hear that the events of 2008 were the worst financial crisis since the Great Depression and that only quick and decisive action by government officials prevented completer meltdown of the world’s financial economy.  If that is true, and the world was as close to financial catastrophe as is claimed, it is troubling that there was so little debate – in Congress, the academic world or the media – about the causes of the crisis… [T]here was little understanding that a house price bubble of historic proportions had developed between 1997 and 2007.

Opinions about the reasons for the severity of the crisis can still be found all  over the map, but they have begun to converge the center on the panic that occurred in markets for short-term funding that occurred after Lehman failed.  This is the view of those who were there at the time: administration insiders Hennessey and Holtz-Eakin, expressed in the FCIC; former New York Federal Reserve Bank president Timothy Geithner, in his book Stress Test; Fed chairman Ben Bernanke, in a series of speeches and lectures (Bernanke’s autobiographical account is scheduled to appear in the fall). Even Wallison gives a good account of the phase when the panic set in; he just doesn’t think it should have happened, if only Bear Stearns had been allowed to fail, or if Lehman had been saved.

In other words, in his single-minded emphasis on government housing policy, Wallison is way out beyond the consensus. It’s not that nobody has a kind word to say. Economists Martin Feldstein, of Harvard University, and Eugene Fama, of the University of Chicago’s Booth School of Business, contributed blurbs. Former Sen. Phil Gramm, (R-Texas), a fellow AEI scholar, went so far as to write,

I don’t remember any period in modern history when the analysis of historic economic events has been more dominated by the clear thinking of one person… [Wallison] has dispelled more myths and provided more insights than all other scholars and commentators combined.

That’s pretty wild. There are fine points to admire in Wallison’s argument — his discussion pf how the Federal Accounting Standards Board’s decision to require that mortgage-backed securities be marked to plummeting market prices, for example. He is, however, a lawyer, with no sense of what constitutes a satisfying economic explanation. What makes him a crank is the affable certainty with which he asserts a partial truth explains the whole.

No sensible analyst thinks that political pandering to poor people is a sufficient explanation of the crisis. Probably not since Wanniski’s The Way the World Works has the gap been so great between a non-economist writing for a think-tank and the relevant community of professionals.  John Makin stayed the course, remained well within the limits of matters on which experts can be expected to legitimately disagree.  AEI has gone back to cranks. It is fairly well established by now that the GOP establishment has swung around against Tea Party thinking.  If the Jeb Bush candidacy advances, it will be interesting to watch what happens in the think-tank world.

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The press of business last week kept me away from the annual conference of the Royal Economic Society at the University of Manchester – and to the subsequent (un)conferencethere of the Society for Post-Crash Economics. I go to the RES meetings whenever I am able.  It’s not just that British economics has survived so well the profession’s migration to the US; European up-and-comers flock to give papers as well.

At least my copy of the 125th anniversary edition of the Economic Journal arrived in the mail, thirteen articles commenting on landmark articles that first appeared in the EJ, packaged along with the original articles themselves.  As a bonus, there’s an explanation of the little bee that has appeared on the cover in most years with the motto, Amor Urget Habendi. It’s from Virgil: “Innate acquisitiveness impels the bees to ply their several tasks.”


  • Anthony Atkinson and Andrea Brandolini on the changes since Hugh Dalton’s “The Measurement of the Inequality of Incomes” appeared in 1920;
  • Joseph Stiglitz on Frank Ramsey’s “Contribution to the Theory of Taxation: in 1927;
  • John Pencavel on the exchange on wages between John Dunlop and John Maynard Keynes in 1938-39;
  • Lawrence Blume and Thomas Sargent on Roy Harrod’s “Dynamic Theory” of 1939;
  • James Heckman’s introduction to Gary Becker’s “A Theory of the Allocation of Time” of 1965 and Pierre Chiappori and Arthur Lewbel’s essay on its subsequent history;
  • and Simon Dietz and Nicholas Stern on William Nordhaus’s “To Slow or Not to Slow: the Economics of the Greenhouse Effect” of 1991.

RES membership is a good deal for some of us, not just because the EJ often contains surprising material not seen elsewhere.  The Society’s Newsletter, edited by Peter Howells, of Bristol Business School, arrives quarterly, with bits of news, essays, obituaries and lively columns from Angus Deaton in the US and Michael Burda in Berlin.

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