Ivy League White House Mimics Finance Masters

Shuffle - Kevin A. Hassett Shuffle - Kevin A. Hassett

Senior Fellow
Kevin A. Hassett



If Wall Street was brought down by the Ivy League's supposed best and the brightest--with their complete faith in risk-management models taught in business schools--then who failed to rein them in?

In many cases, their own classmates.

For the last eight years, the squinty-eyed president of the United States, George W. Bush (Yale BA, Harvard MBA), acted in a manner that mirrored that of the risk-lovers of Wall Street. He was the "decider" who put 100 percent faith in his own judgment, often casting aside prudent hedges that would have been a respectful nod to his critics for fear of showing weakness.

But there is wisdom in weakness.

This worldwide crisis has few precedents, so history offers little in the way of guidance. Show me a person who knows for sure what we should do, and I'll show you someone who needs medication.

The age of humility and second opinions is coming. The problem is, it's not here yet.

We may have traded a cocky Harvard MBA for a cocky Harvard-trained lawyer, Barack Obama. It shouldn't surprise us, even this early in the new administration, that little appears to have changed.

Take a look at the stimulus package. The economics literature is divided on the best countercyclical recipe.

Keynes and Lucas

The Keynesian school, which for many years has found its gravitational center in Cambridge, Massachusetts, is optimistic about the benefits of higher government spending and temporary tax rebates.

The neoclassical school, which emerged from the Nobel Prize-winning work of Robert Lucas of the University of Chicago, believes that Keynesian stimulus is ineffective and marginal tax rate reductions work better.

We are currently experiencing the worst economy of our lifetimes. Given the stakes, wouldn't it be prudent to pass a stimulus bill that tries a little bit of each type of medicine? That way, the risk of economic catastrophe would be significantly reduced if either school of thought is correct.

Instead, we get a measure that is entirely Keynesian. The $787 billion stimulus package that Obama signed on Feb. 17 contains roughly $288 billion in tax measures, and those intended to be stimulative are 100 percent Keynesian.

The biggest measure is the "making work pay" credit, a payroll tax cut worth as much as $400 for singles and $800 for married couples.

Billions to Spend

The remainder of the stimulus package is allocated among various Keynesian spending measures, including $144 billion for local and state governments, $111 billion for infrastructure spending and roughly $81 billion in additional funding to protect the vulnerable. The remaining spending is directed toward various health-care, energy and education measures.

There isn't a single neoclassical-style reduction of marginal tax rates in the law. Anyone who watched Wall Street implode because people put too much faith in a single view of how the world works should be nervous.

Which brings about the question: How can it be that the U.S. government has bet its future 100 percent on Keynes?

The answer is that the economic decision makers in the Obama administration are highly homogenous. One might even argue that the Obama administration is one of the least diverse in modern times.

Harvard lawyer Obama handed the keys of the economic team to former Harvard President Larry Summers. Summers is, without doubt, on the short list of the greatest economists I have ever met. Before he entered public life, his work was often miraculous.

Drank the Water

But collectively, the team that he assembled is long on people who are predisposed to agree with him and short on those who steered clear of the Keynesian water of Cambridge.

The list of Cambridge insiders includes the chairwoman of Obama's Council of Economic Advisers, Christina Romer (MIT); council members Cecilia Rouse (Harvard) and Austan Goolsbee (MIT); and even senior adviser Paul Volcker (Harvard). All told, of the 27 top advisers on the White House economic team or its Economic Recovery Advisory Board, 14 went to Harvard or MIT and 20 are Ivy Leaguers. As an individual, each of these team members is worthy of bipartisan praise. As a group, there is a disappointing lack of diversity.

Is it any wonder, then, that we would see a stimulus package that puts so much faith in Keynesianism? It would be like inviting only American League fans to a debate about the designated hitter.

The fear is that the same kind of hubris that brought down Wall Street will now do the same for everything else. The Keynesian school better be right. If not, we are all in for a long and terrible ride.

Kevin A. Hassett is a senior fellow and the director of economic policy studies at AEI.

Also Visit
AEIdeas Blog The American Magazine
About the Author

 

Kevin A.
Hassett

What's new on AEI

Love people, not pleasure
image Oval Office lacks resolve on Ukraine
image Middle East Morass: A public opinion rundown of Iraq, Iran, and more
image Verizon's Inspire Her Mind ad and the facts they didn't tell you
AEI on Facebook
Events Calendar
  • 21
    MON
  • 22
    TUE
  • 23
    WED
  • 24
    THU
  • 25
    FRI
Monday, July 21, 2014 | 9:15 a.m. – 11:30 a.m.
Closing the gaps in health outcomes: Alternative paths forward

Please join us for a broader exploration of targeted interventions that provide real promise for reducing health disparities, limiting or delaying the onset of chronic health conditions, and improving the performance of the US health care system.

Monday, July 21, 2014 | 4:00 p.m. – 5:30 p.m.
Comprehending comprehensive universities

Join us for a panel discussion that seeks to comprehend the comprehensives and to determine the role these schools play in the nation’s college completion agenda.

Tuesday, July 22, 2014 | 8:50 a.m. – 12:00 p.m.
Who governs the Internet? A conversation on securing the multistakeholder process

Please join AEI’s Center for Internet, Communications, and Technology Policy for a conference to address key steps we can take, as members of the global community, to maintain a free Internet.

Event Registration is Closed
Thursday, July 24, 2014 | 9:00 a.m. – 10:00 a.m.
Expanding opportunity in America: A conversation with House Budget Committee Chairman Paul Ryan

Please join us as House Budget Committee Chairman Paul Ryan (R-WI) unveils a new set of policy reforms aimed at reducing poverty and increasing upward mobility throughout America.

Thursday, July 24, 2014 | 6:00 p.m. – 7:15 p.m.
Is it time to end the Export-Import Bank?

We welcome you to join us at AEI as POLITICO’s Ben White moderates a lively debate between Tim Carney, one of the bank’s fiercest critics, and Tony Fratto, one of the agency’s staunchest defenders.

No events scheduled this day.
No events scheduled today.
No events scheduled this day.
No events scheduled this day.
No events scheduled this day.