Teaching outside the classroom

In March 2006, the finance professor took the stage at NYU’s Stern School of Business to present his suspicions of a housing bubble in a presentation titled “Money Illusion and Housing Frenzies.”

“It was fairly obvious that housing was overheating,” Brunnermeier recalled.

Some researchers shared his concerns, but despite their warnings, speculators continued investing in real estate and prices continued to rise — until the bubble burst in 2008.

While many economists, investors and regulators were caught off guard by the financial crisis that ensued, many of them are both comforted and disconcerted that Brunnermeier and his colleagues had suspected that a collapse was coming: It was comforting that economic analysis could demystify a market, yet disconcerting that their concerns did not effect change.

For professors in Princeton’s economics department, a critical question from the financial crisis is whether they will adjust their approach in the future to communicating research findings to policymakers and the general public. While professors said that better communication is important, they also raised doubts about whether change is possible.

Economists recognize that there is a communication gap with the general public. Unlike medical advancements — which routinely make headlines — findings in economic research are rarely presented to the public.

Paul Krugman, a Wilson School professor who writes a biweekly New York Times column on the intersection of economics and politics, said that there is a dearth of accessible economic research literature, while most economics that is discussed in the media is divorced from academia. “Most economists that [people] see on TV aren’t real economists,” he explained.

Alan Blinder ’67, a professor of macroeconomics and a columnist for The Wall Street Journal, said that the public needs to understand what happened in the recession before they can trust economists’ policy recommendations. “At least some economists need to communicate outside the tribe in order, hopefully, to get better economic policies,” he said.

For people to understand basic economic ideas such as utility and comparative advantages, economists will have to repeat these ideas many times, he added.

Blinder said that, realistically, the responsibility for communication will rest on the “minuscule number of economists” who already have an established niche in the public’s eye — like his colleague Krugman.

Krugman said that most other economists in academia don’t speak to the general public for a reason.

“You never want most researchers to be engaged in public communication,” Krugman said. “I’ve seen people who I think are good writers, who write good [academic] papers, trying to write op-eds or trying to be on TV, and they haven’t actually figured out how to talk to people who haven’t gone to grad school.”

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Beth Bogan, a professor in the department, added that it is difficult to translate research conducted in economics into words that the general public can understand, with many economists reverting to inaccessible jargon and equations to explain their points.

Krugman admits that when he first started writing for the general public 20 years ago, he was “terrible.”

Yet most active researchers said they are not interested in spending more time communicating with the public.

“You can’t simultaneously do research and be a guru,” said Harrison Hong, a professor of finance. “They’re two different jobs, and they’re both time consuming.”

Reaching out to the public also has very few professional rewards.

“I wouldn’t advise anyone who’s not tenured to do it,” Krugman said. “It’s not the way to get tenure.”

Blinder added that academics who reach out to the public are often frowned upon by other academics for losing their “purity” as an academic.

While economists do not seem optimistic about a new era of communication with the public, they interact more readily with economic regulators and policymakers. While the same problem of time constraint exists, government economists at least share their language.

“One way of improving social good is to foster more interaction between regulators and academics,” said Brunnermeier, who is now a visiting fellow at the Federal Reserve Bank of New York.

For professors interested in reaching out to policymakers, the department offers unparalleled ties to government economists at the highest levels. Blinder served as vice chairman of the Federal Reserve under Alan Greenspan. Whitman College Master Harvey Rosen, who teaches a course on public finance, served on President George W. Bush’s Council of Economic Advisers. Alan Krueger was assistant secretary of the Treasury in the Clinton administrator before returning to the department. Now, he is on leave again as President Barack Obama’s pick for Assistant Secretary of the Treasury for Economic Policy. While Brunnermeier visits at the New York Fed, Alan Potter, who directs economic research there, is a visiting professor this year.

And, of course, Ben Bernanke, the chairman of the Federal Reserve, was selected from his perch atop the department.

Yet some professors remain skeptical that attempting to influence policymakers is worthwhile. Finance economists questioned the ability of regulators, especially those in the Federal Reserve, to respond to problems created by the financial sector.

Hong said that Federal Reserve regulators were not “trained” to think in terms of bubble economies. Because the Federal Reserve was created in the early 20th century to prevent bank runs and panics, Hong said he believes that it did not have the proper mindset to deal with bubble economies.

This lack of confidence in the Federal Reserve’s ability to effectively regulate the financial sector also leads some professors to question the value of increased regulation, as proposed in the financial reform legislation now moving through Congress.

“I don’t think regulating this particular product or that particular product is a universal panacea,” said Yacine Ait-Sahalia, director of the Bendheim Center, “simply because the amount of money at play is so large that very smart people will find a way around regulation.”

Ait-Sahalia said that the monetary incentives on Wall Street, coupled with the training that most Wall Street bankers receive, would make it difficult for the government to effectively regulate financial derivatives, a key component of the proposed legislation. If the government attempts to regulate derivatives, financiers would develop new derivatives outside the new system.

“I don’t think regulators can outsmart Wall Street,” he said.

But other professors are more optimistic about the potential for government regulation.

In his New York Times column, Krugman has consistently advocated for stricter regulations since the crisis began.

Hong said that proper regulation during the early stages of the economic downturn could have contained the bubble.

Bogan, however, warned against clarity of hindsight. Because the beginning of a bubble, characterized by high trading and rising prices, are similar to a stage of intense growth. “It’s never easy to say whether this is good strong growth or if we’re in a bubble,” she said. “And we never want to stop economic growth.”

One area that professors agreed upon was the importance of educating their students.

Ait-Sahalia said he recognizes that many of his finance students will be tomorrow’s Wall Street bankers.

“We certainly talk at length about the effect of incentives,” Ait-Sahalia said, adding that “we alert [students] to what is ethical behavior in financial markets and what is not.”

Blinder noted the importance of teaching economics to a broader audience in his introductory macroeconomic course.

“Most people I teach will not become economists,” he said, “and that’s important, because they’re the ones who will pass it [economic ideas] on to others.”