Inside Job (38 page)

Financial services is not, however, the only industry that employs university presidents. Shirley Jackson, the president of Rensselaer
Poly-technic Institute, is on seven
boards of directors including those of IBM, FedEx, and Marathon Oil.

These conflicts of interest in academia show up with disturbing directness in later appointments to government office. Indeed, most of what we know about academic conflicts of interest comes
from mandatory US government disclosures—to the SEC for public companies, to regulatory agencies, and to the government when professors take government jobs. For example, the chief economist
of the US Justice Department’s antitrust division is typically an economics professor. Three people who have held that position are Carl Shapiro, Daniel Rubinfeld, and Richard Gilbert, all
economics professors at UC Berkeley. All three have done extensive antitrust defence consulting for telecommunications and/or energy companies, both before and after their government service.
Rubinfeld and Gilbert were cofounders of the Law and Economics Consulting Group. When Gilbert was appointed to be the Justice Department’s chief economist, he had to sell his large block of
LECG stock; but two years later, as soon as he left the Justice Department, he bought it back. A few years afterwards, he and Rubinfeld left LECG to found their own firm, which was acquired by
Compass Lexecon, which has become a large and prominent firm, particularly in antitrust consulting. Compass Lexecon also represented Angelo Mozilo when he was sued by the SEC for fraud; the
firm’s 2010 newsletter proudly states: “After depositions, the Defendants settled with the SEC on the eve of trial on favorable terms that were widely described as a ‘slap on the
wrist’ in the press.”
²⁸

America’s largest telecommunications firms—particularly AT&T and Verizon, the two incumbents who still have significant monopoly positions—have been extraordinarily
thorough in buying economic support. Prominent economists consulting for them, and often writing and testifying in Congress about telecommunications policy, and/or serving in government, have
included Jerry Hausman at MIT, Robert Crandall at Brookings, Paul Macavoy of Yale, Gregory Sidak of Tilburg University, Carl Shapiro of UC Berkeley, Peter Temin of MIT, David Teece of UC Berkeley,
and many, many others. A number of years ago,
I spoke with senior officials in the Justice Department’s Antitrust Division about possible antitrust action against
AT&T and Verizon. They told me that one significant barrier to any such action was that few if any prominent telecommunications economists would be willing to testify for the government,
because nearly all of them worked for the incumbents, at pay rates typically ten to fifty times higher than government consulting rates. As we shall see in the next chapter of this book, the
telecommunications issue is important. The US currently ranks about twentieth in the world in broadband deployment, and continues to fall further behind other nations in both Europe and Asia. Since
broadband deployment is a major driver of future economic growth, as well as critical to reducing greenhouse emissions and dependence on foreign oil, this lag is a significant problem for the US.
The inefficiency, structural concentration, and political power of the US telecommunications sector all contribute to this state of affairs. However, economists hired by the industry have
consistently defended it against antitrust and regulatory actions that might increase competition.

Other industries that make heavy use of the same techniques, and many of the same people and firms, are energy (of course), several industries related to health care, and software. Richard
Schmalensee, a professor and former dean of the Sloan School of Management at MIT, was Microsoft’s chief economic witness in its antitrust trial; in his testimony, he was caught contradicting
his own prior academic work. He had testified that Microsoft’s persistently very high profits were not indicative of any monopoly power, when he had previously written precisely the contrary.
In 2004 Steven Weber, a professor at UC Berkeley, published a book about the open-source software movement entitled
The Success of Open Source.
The book described how noncommercial,
bottom-up activism in software produced successful open-source products such as Linux. Nowhere did the book mention that much of the open-source movement has been funded by IBM, Hewlett-Packard,
Dell, Google, and other large companies as a way of reducing the power of rivals such as Microsoft and Oracle. Nor did the book mention that
Professor Weber was, at the time,
consulting for IBM on precisely this issue.

The phenomenon of paying professors for policy advocacy has recently begun to expand beyond economics and law into political science and foreign policy. The most extraordinary recent case,
though not the only one, involves Libya. In 2006 Muammar al-Qaddafi, Libya’s dictator for more than forty years until his overthrow and execution in 2011, decided that it was time to improve
his image. And there was an extraordinary collection of highly prominent British and American academics ready to help him.

ANTHONY GIDDENS IS
famous in the academic world. He is a longtime professor at the University of Cambridge and former director of the London School of
Economics (LSE) and was an adviser to Prime Minister Tony Blair and “New Labour”. In 2007 Giddens wrote a column for the
Guardian
, “My Chat with the Colonel”,
describing an interview with Qaddafi. To investigate the genuineness of new policy attitudes on Colonel Qaddafi’s part, Giddens says that he “went to Libya with David Frost and
Professor Benjamin Barber, a celebrated theorist of democracy, to engage him in debate.” Describing Qaddafi as “an imposing figure, clad in a gold-colour robe,” Giddens
concluded:

Giddens did not mention the Palestinian medical student and the group of Bulgarian nurses Qaddafi had long been holding under sentence of death on the absurd charge of intentionally infecting
hundreds of children with AIDS. But when Qaddafi finally released the nurses later that year, Giddens’s companion, Benjamin Barber, a professor at Rutgers University, in New Jersey,, wrote in
the
Washington Post
:

Later that same year, Joseph S. Nye, a former dean of Harvard’s John F. Kennedy School of Government and a former assistant secretary of the US Department of Defense, also wrote of
visiting Qaddafi, who, amazingly, displayed copies of the professor’s latest book,
Soft Power.
Nye wrote in the
New Republic
, “There is no doubt that [Qaddafi] acts
differently on the world stage today than he did in decades past. And the fact that he took so much time to discuss ideas—including soft power—with a visiting professor suggests that he
is actively seeking a new strategy.”
³¹

Nye, however, was at least honest—unlike most of the others. He voluntarily disclosed that he had visited Qaddafi because he had been paid to do so, by a consulting
firm called the Monitor Group. In 2011
Mother Jones
magazine revealed that Monitor had been hired by Qaddafi to improve his public image; Monitor was paid $3 million.
³²
The “one-on-one conversations” that Barber described in his Post article—as if he just happened to be in the area, and Qaddafi naturally invited him to
drop in—were arranged as part of a public relations campaign. (Barber also served on the board of the Saif Qaddafi International Charity and Development Foundation, named after
Qaddafi’s son Saif, until Barber resigned in February 2011 following Qaddafi’s violent repression of Libyan demonstrations.) Monitor also arranged for another Harvard professor, Robert
Putnam, to visit with the colonel. At the time all of these people, for a fee, were perfectly happy to be used on behalf of Monitor’s contract. Putnam voluntarily disclosed that he was paid,
although he did not mention that he was part of a Libyan public relations campaign run through Monitor. He later said that he regretted doing it. Giddens and Barber did not even disclose that they
were being paid, much less that they had a relationship with Monitor, and have refused to discuss their fees.

The Monitor Group was founded in 1983 by Harvard Business School professor Michael Porter. Its initial focus was on corporate strategy, Porter’s primary field, but Monitor later expanded
into consulting for foreign governments. In fact Monitor was also working for Jordan, likewise to improve its public image, at the same time it was working for Qaddafi. In both cases, Monitor
appears to have violated the law by failing to register as a foreign agent. No one may act “within the United States as a public relations counsel, publicity agent, information-service
employee or political consultant” for a foreign government without registering. On its website the US Justice Department states that the law “facilitates evaluation by the government
and the American people of the statements and activities of such persons in light of their function as foreign agents.”
³³
Precisely. That is the
whole point of disclosure.

Giddens, Barber, Putnam, Nye, and Monitor were not alone in helping out Libya. Qaddafi’s son and heir apparent, Saif, attended the London School of Economics.
Professor David Held, a faculty member, was on the Saif Qaddafi Foundation board at the same time as he was Saif Qaddafi’s PhD thesis advisor. LSE awarded Saif Qaddafi his PhD shortly after
Qaddafi pledged to donate approximately $2.5 million to the school and the Libyan government awarded LSE an additional contract for training government officials. In March 2011 LSE’s
director, Howard Davies, resigned, citing “errors of judgment”. Monitor later admitted that it had helped Saif Qaddafi with his thesis, which appears to have contained substantial
plagiarism.

THE PROBLEM OF
academic corruption is now so deeply entrenched that these disciplines, and leading universities, are severely compromised, and anyone
thinking of bucking the trend would rationally be very, very scared. Consider this situation: you’re a PhD student, or a junior member of the university faculty, considering doing some
research anytime in the past decade on the effect of, say, compensation structures on risk taking in financial services, or the potential impact of public disclosure requirements on the market for
credit default swaps. The president of your university is . . . Larry Summers. The president of the National Bureau of Economic Research is . . . Martin Feldstein. The chairman of your department
is . . . Laura Tyson, or Glenn Hubbard, or Richard Schmalensee, or John Campbell. Or you’re at MIT, and you want to examine the decline in corporate tax payments over the last quarter
century. The president of MIT is Susan Hockfield, on the board of GE, a company that has managed to avoid paying any corporate taxes for several years despite having billions of dollars per year in
profits.

Or, if you’re at the think tank run by the Council on Foreign Relations, you might notice that Robert Rubin is cochairman of the council.
Other members of the board
include Stephen Friedman, who is on the board of Goldman Sachs; Henry Kravis of KKR; and David Rubinstein of the Carlyle Group. The place you work for is called the Maurice R. Greenberg Center for
Geoeconomic Studies—as in Hank Greenberg, former CEO of AIG. The chairman of the Brookings Institution board of trustees is John Thornton, former president of Goldman Sachs; about half the
members of the Brookings board are financial services executives. The Brookings Hamilton Project, focused on improving US economic prosperity, was established by Robert Rubin.

You also know that the committees that review grant proposals and the review panels that decide whether papers get published in academic journals are full of professors who consult for financial
services companies. These people will have a major say in whether you get published, get a job, or receive the security of permanent tenure.

Here is what Frederic Mishkin—a comparative lightweight relative to, say, Larry Summers or Glenn Hubbard—lists on his CV under “Journals”: