January 13, 2014

"Incentives matter," except to economists

Economics teaches us, famously, that "incentives matter," that human behavior tends to respond to monetary signals from the marketplace. The most notable exceptions to this foundational discovery of the science of economics are, oddly enough, economists themselves, who wholly transcend such grubby earthly concerns. 

For example, economist Stanley Fischer, who is President Obama's nominee for vice chairman of the Fed, was the number two man at the International Monetary Fund from 1994-2001, a period in which he implemented policies that were very well received by the big banks of Wall Street. On December 20, 2001, Fischer signed a contract with Sandy Weill and Robert Rubin to become a vice chairman of Citigroup, with a minimum guaranteed compensation in 2002 of $2 million, plus other pleasant upside opportunities.

Obviously, there was no connection whatsoever between the two events: the insights of economics simply don't apply to economists. If you can't trust economists to not be swayed by economic incentives, who can you trust?

Yet, one deluded individual tried to call into question Fischer's disinterestedness. This hallucinatory person's name is Joseph Stiglitz. Granted, he has a few random professional credentials as an economist: former chairman of the president's Council of Economic Advisers, chief economist of the World Bank, winner of both the John Bates Clark Medal in 1979 and the quasi-Nobel Prize in economics in 2001. But, obviously, he was wrong to write on pp. 207-208 of his 2002 book Globalization and Its Discontents:
Moreover, the IMF's behavior should come as no surprise: it approached the problems from the perspectives and ideology of the financial community, and these naturally were closely (though not perfectly) aligned with its interests. As we have noted before, many of its key personnel came from the financial community, and many of its key personnel, having served these interests well, left to well-paying jobs in the financial community. Stan Fischer, the deputy managing director who played such a role in the episodes described in this book, went directly from the IMF to become a vice chairman at Citigroup, the vast financial firm that includes Citibank. A chairman of Citigroup (chairman of the Executive Committee) was Robert Rubin, who, as secretary of Treasury, had had a central role in IMF policies. One could only ask, Was Fischer being richly rewarded for having faithfully executed what he was told to do?

Fortunately, Stiglitz immediately went on to say:
But one does not need to look for venality. The IMF (or at least many of its senior officials and staff members) believed that capital market liberalization would lead to faster growth for the developing countries, believed it so strongly that it did not need to look at any evidence and gave little credence to any evidence that suggested otherwise.

Still, The Economist immediately jumped in to right this wrong in its review of Stiglitz's book:
In an extraordinary paragraph, the book all but accuses Stanley Fischer, the Fund's deputy managing director during the years in question, of corruption: he inflicted needless punishment on borrowing countries, Mr Stiglitz implies, in return for a nice fat job with Citibank, whose interests that policy served. The author himself knows this is rubbish. Mr Fischer—no less eminent an economist than Mr Stiglitz, by the way—is a man of (hitherto) unquestioned integrity, admired right across the profession. With assaults such as these, Mr Stiglitz only shreds his own credibility.

So there. Fischer is a man of unquestioned integrity so any questions about his integrity must be rendered unquestions.

The IMF's PR guy also objected to Stiglitz's slander of the purity of Fischer's motivations:
Stiglitz, the IMF and Globalization 
A Speech to the MIT Club of Washington
By Thomas C. Dawson
Director, External Relations Department
International Monetary Fund
17. As part of this score-settling, Stiglitz has made some very mean-spirited observations about Fund staff and officials, past and present. One charge in particular should not go unanswered, particularly before this audience. Stiglitz notes that Stanley Fischer, the former deputy head of the IMF and former MIT professor of economics, went straight from the IMF to Citigroup. Stiglitz adds: "A chairman of Citigroup was Robert Rubin who, as secretary of Treasury, had a central role in IMF policies. One could only ask, Was Fischer being richly rewarded for having faithfully executed what he was told to do?" To anyone who knows Fischer's utter devotion to institutions he works for, whether it was the IMF or MIT, the suggestion that he used twisted IMF policies to ensure a job at Citicorp is repugnant. Stiglitz surely knows that Fischer is regarded as a man of unimpeachable integrity and yet he cannot resist the jibe at him.

Fischer is a man of unimpeachable integrity so his integrity can't be impeached. 

QED.

Seriously, I don't doubt that Dr. Fischer is, relatively speaking, a fine fellow, well above average both in intelligence and morals for a Big Time economist / politician. After all, Fischer couldn't have gotten to be the intellectual godfather of the economists running the global economy for the last two decades if he didn't possess supple intelligence and interpersonal skills.

Hence it's only natural that these incredibly powerful people want to reward their friend and mentor, and crush the slightest skepticism about Fischer's right to work as a top policymaker for two separate countries in succession. Because if outsiders, or even other top economists like Stiglitz, are allowed to ask any questions about a great guy like Fischer, who knows what they could ask about the rest of our gang?  

27 comments:

sunbeam said...

I don't get the full court press.

Have you ever in your life seen one of these appointments, particularly for a "dull" position like this garner much attention from the American people?

Or even if they do get excited about something, has their indignation done much of anything to stop one of these?

I've seen talking heads over the years get excited about things and talk as though there was some wave of reaction or something that was going to reach out and magically stop some appointment or another.

It doesn't work that way. Unless one of these things is scheduled right around an election, and I mean right around one, the voters won't remember long enough to punish someone at the polls.

Very occasionally you see some massive talking head explosion like Bork or that woman from Texas Bush nominated for the Supreme Court.

These public events are inevitably a kind of smokescreen or public posturing to validate some yay or nay of ... call them interested parties with pull.

You could have 90% of the country be dead set against some nomination, and it would not make one iota of difference if the right people wanted it.

And to reiterate, I dunno, you might get Ron Paul's guys to get excited about a Fed appointment, but there aren't too many other people who are going to pop a vein over it.

And of course things get worse and worse, but nobody knows why exactly.

Oh well, just the way this country rolls.

Steve Sailer said...

Right, I mean who cares about establishing the precedent that top policymakers can work for both Israel and the U.S. in immediate succession when there are lane closures in New Jersey to obsess over?

Steve Sailer said...

And if I weren't wasting my time thinking about the inner circle of global economists, I could be contributing original insights to the Great Debate over Peyton Manning v. Tom Brady.

Anonymous said...

Hence it's only natural that these incredibly powerful people want to reward their friend and mentor, and crush the slightest skepticism about Fischer's right to work as a top policymaker for two separate countries in succession. Because if outsiders, or even other top economists like Stiglitz, are allowed to ask any questions about a great guy like Fischer, who knows what they could ask about the rest of the gang?

Exactly. There's a cult-like atmosphere that gets generated around a figure like Fischer and former students and people connected to the personality have a strong incentive to maintain the cult-like atmosphere since it helps their own reputations and career prospects.

Anonymous said...

And if I weren't wasting my time thinking about the inner circle of global economists, I could be contributing original insights to the Great Debate over Peyton Manning v. Tom Brady.

You are possibly the only person seriously blogging about this.

better way said...

Sailer, You know how to take this guy out...He's a homophobe. I mean, I have seen no evidence that he supports LGTB, so he must be. How are his policies going to address this most important constituency? They are not? Just like all the others. Plus isn't about time a man who dresses like a woman held this post? Isn't so-and-so available?

anony-mouse said...

Economists agree that incentives matter, but incentives aren't always monetary ones, hence the term maximizing 'utility'.

I am sure that Stanley Fischer could make more money now being something other than vice-chair of the Fed (the pay of Fed chair is $180,000), assuming that at age 70 he wanted to work at all.

For that matter the chair of ISteve could probably make more money than he is now, but it would not be a utility maximizing endeavor.

Eric Falkenstein said...

I think this isn't one of our bigger worries...of course, he'll have his hands full getting us off of Quantitative Easing, but really nobody knows how to do that so it's not as if there's someone better.

Anyone who really understands finance will have experience working with financial institutions, because that's where they have the most value. It would be perverse to have economists with basically no financial experience at the helm of the Fed. Elizabeth Warren and Janet Yellen fit that bill, one a lawyer, the other a labor economist, but but are truly clueless about Fed policy, why I'm sure Yellen is quite happy to have Fischer to tell her what she thinks.

Fischer has gravitas, respect, and that's quite useful for a Fed honcho.

Dave Pinsen said...

So what's Fischer's incentive now? He could be making 7 figures on Wall Street. I can see how Fed Chair or World Bank president or something might be worth it for the prestige, but second banana at the Fed? Can anyone name the previous one without Googling it?

leftist conservative said...

so are you with me on the idea that it is 'those at the top' versus the white majority?

Do you then agree that it is a good idea to control those at the top?

David said...

What is Fischer's motivation for accepting the nomination? This man is old and has a lot of money. "High honor" and all that, but the job is stressful and he has collected numerous high honors already.

We are left with empty ambition or patriotic zeal as his most likely motive. If it's the latter, the question is: patriotism for which country?

Steve Sailer said...

"I can see how Fed Chair or World Bank president or something might be worth it for the prestige, but second banana at the Fed? Can anyone name the previous one without Googling it?"

Janet Yellen

Thomas O. Meehan said...

It seems that there are numerous reasons to accept a person with such nebulous loyalties. But the question is not why reject him. It's why he is being put forward at all given his ties to a parasitic rogue state.

anony-mouse said...

Economists agree that incentives matter, but incentives aren't always monetary ones, hence the term maximizing 'utility'.

I am sure that Stanley Fischer could make more money now being something other than vice-chair of the Fed (the pay of Fed chair is $180,000), assuming that at age 70 he wanted to work at all.

For that matter the chair of ISteve could probably make more money than he is now, but it would not be a utility maximizing endeavor.

Anonymous said...

I'm not an American and often marvel at firstly how the 1-2% of the American people who self identify as Red Sea Pedestrians have such a huge amount of influence but even more so how this topic is such a forbidden subject for discussion

I guess no American is prepared to risk be labelled a Nazi for voicing any opinion on this topic

jody said...

2 red bulls per day, minimum.

am i close?

Anonymous said...

If one imagines a probability space with events:

Decision is good for U.S.;

Decision is bad for U.S.;

Decision is good for Israel;

Decision is bad for Israel;

Decision is neither good nor bad for Israel;

Decision is neither good nor bad for the U.S.

Now, after assigning probabilities to the intersections of these events;

Then perhaps the informative probabilities to estimate are the probabilities of events: Bad for U.S./Good for Israel, and Good for U.S./Bad for Israel.

How probable is it that Dr. Fischer would encounter decisions of this type, and if he did, what decisions might he make?

Finally, would the probabilities change if "Bad" was replaced with "Disastrous"

Of course I am assuming that Dr. Fischer, following standard monetary principles in his position of authority, would be capable of real effect on the welfare of Israel and the United States.

Neil Templeton

gubbler said...

Why, he's the Fischer of man.

Everyone line up for free fish and bread from Stanley the messiah.

Btw, I recall the Economist promoted Obama this way back in 2008.

Isn't journalism supposed to be skeptical, dogged, suspicious, and probing?
Should it be holy propaganda telling us that a man of power is pure as snow and it's unspeakable to question his integrity?

Economist should be renamed Iconomist.

Reverence for brother stanley! On your knees.

Anonymous said...

Of course, power is incentive enough.

http://www.youtube.com/watch?v=qjv6Z9QmoAw

Anonymous said...

yoda!

Anonymous said...

Stanley Fischer is the kindest, bravest, warmest, most wonderful human being I've ever known in my life.

If gentiles seek power out of greed, vanity, megalomania, tribalism, and corruption, Jews like Fischer reluctantly accept responsibility to serve humanity with selfless integrity.

Anonymous said...

http://www.youtube.com/watch?v=055wFyO6gag

What? Lucy lie to us? Never!

Mr. Anon said...

"Anonymous said...

Stanley Fischer is the kindest, bravest, warmest, most wonderful human being I've ever known in my life."

How about a nice game of solitaire?

Hunsdon said...

Anonydroid at 9:56 PM said: Stanley Fischer is the kindest, bravest, warmest, most wonderful human being I've ever known in my life.

Mr. Anon said: How about a nice game of solitaire?

Hunsdon: Bravo. Bravo, gentlemen, well played.

dearieme said...

I may have told you before of the advice my wife was offered before we let out our house in a college town: let it to nobody who studies, or teaches, Law, Business or Economics.

Anonymous said...

Steve,

Extraordinary work. Your contrasting Fischer's appointment with the GW bridge nonsense emphatically drives the point home.

"Fischer is a man of unimpeachable integrity so his integrity can't be impeached.

QED."

I had to look up the acronym QED. At first I ignorantly thought it was an iteration of qualitative easing, with the "D" standing for something like "delightful".

I thank you for actually constructing a statement that is truly "begging the question". It is a pet peeve of mine how that phrase is routinely completely misused.

Keep it up.

Steve in Detroit

Svigor said...

There's a cult-like atmosphere that gets generated around a figure like Fischer

There's a culture of cult-like atmospheres that gets generated around Jews. Messianism, Freud cult, Boas cult, Fed cult, etc. It's what they do. Kevin MacDonald has a lot of details, and the footnotes will get you the rest.