For a moment last week, 230 economists with about as many worldviews came together in agreement on one thing: disapproval of the federal government.
University of Chicago economics professors led in issuing a letter to Congress critiquing the first version of the Bush administration’s bailout plan, a proposal that sought to alleviate the economic crisis by pouring billions of dollars into ailing financial institutions.
Their letter critiqued the “fairness,” “ambiguity,” and “short-sightedness” of the original bailout plan, a three-page document that was less specific than the revised version of over 100 pages that failed to pass the House of Representatives on Monday and which passed the Senate, with amendments, on Wednesday.
The professors’ letter was a rare moment of accord between a large and diverse group of economists from over 20 universities. It acknowledged both “the difficulty of the current financial situation” and “the need for bold action,” but warned Congress “not to rush.”
“The list of people on there has very different opinions. We’ve got Democrats, we’ve got Republicans, I’m sure we’ve got a couple of Greens,” said John Cochrane, a Graduate School of Business (GSB) professor who helped organize the petition.
“It’s narrow and represents the one piece of consensus we all had: This is not a good idea,” he said.
But almost as soon as the letter was sent, disagreements resumed. For one thing, some of the economists condemned how the letter was being used once it gained publicity. It won attention from Senator Richard Shelby, Republican of Alabama, one of the bailout’s most vocal detractors. Shelby cited it to argue against any form of government bailout, linking to the letter on his website.
In a written statement, Shelby said that “even if the...plan works perfectly, which many doubt, including nearly two hundred economists, it will not stimulate new lending, stop deleveraging, help distressed home owners, or jump-start the economy.”
Shelby holds a more extreme position than some of the signers who favored government intervention but wanted a more specific plan.
“Some people [who signed the letter] e-mailed us that they were very unhappy with Shelby’s use of it because they disagree with that brand of person on other issues,” Cochrane said. “Sorry, you signed a public document.”
The letter originated with Paola Sapienza, a GSB professor visiting from Northwestern’s Kellogg School of Business, and Luigi Zingales, also a GSB professor.
“When we originally wrote the letter, we thought the proposal put forward was a really bad idea and it wouldn’t solve the problems,” Sapienza said.
The letter’s signatories included 45 U of C economists. In 260 words, it made three brief arguments against the plan. The organizers deliberately chose not to propose an alternative plan.
“In a group of 120 economists, you get 350 alternative plans,” Cochrane said. “The genius was to keep it very short and very sweet.”
GSB Professor Jean-Pierre Dubé, who signed the letter, noted diverse reviews.
“A bunch of colleagues in the field wrote to ask, ‘Why did you put your name on that?’” Dubé said. “There’s mixed feelings over it.”
Perhaps most striking about the letter is that it wasn’t more than that. Observing one of the most unstable economic periods in their lifetimes, this group of distinguished economists—a group that included two U of C Nobel Laureates and some of the best known economists in the world—had as much power at their disposal as the average American: the ability to write a letter to Congress.
“We sent it to Congress, and it turns out they actually read their mail,” Cochrane said.
“None of us here are policy economists,” he added. “We’re big-picture research economists. When it gets down to the nitty gritty of drafting bills in Congress, that’s not our specialty.”
But Cochrane said that at a time like this, that’s a frustrating position to hold.
“That’s why we exploded on Monday morning,” he said, referring to the day the letter was crafted. “The University of Chicago influences the world tremendously, but you don’t have to be there writing the text on page 352 of a joint resolution. You can kind of be there providing the big picture: How does the economy work? That’s usually where we influence the world. And we’ll probably go back to that soon.”
Sapienza said she was surprised by the visibility of the letter. “The amusing part of it was working on some research that would probably be published in three years and we thought maybe there was something more urgent we could do that we should do, so we decided to draft the letter. We didn’t expect so many people to sign it,” she said.
In any case, when the bill failed in the House on Monday, the economists’ reactions remained divergent.
“I’m not happy that the bill was pushed so far down the line and then was rejected, because it could have consequences on the financial market’s reaction,” said Sapienza, who saw the new version of the bill as an improvement over the original proposal. “I think the situation is bad enough that the market won’t fix it on its own. I actually think a bill is needed.”
Cochrane had a different take. “Our system is very resilient and can handle bank failures,” he said, describing the bailout as an unnecessary and “nuclear” reaction to the financial crisis. He was not pained to see the bill fail.
“The GSB finally had some effect on the real world,” he said. Sapienza thought it wasn’t clear to her that the letter contributed to the failure of the bill.
But as the bill awaits a re-vote in the House, there was still one thing the economists could agree on: uncertainty over exactly what’s to come.
“Who knows?” Cochrane said about how long the crisis will last.
“At this point, people are looking at how deep the crisis is from different angles and none of us is 100 percent sure how big it is,” Sapienza said. “I’m just wishing they’re going to be able to write a revised bill soon enough.”