Origins of the Carnegie Rochester Conference
By Allan H. Meltzer
I have been asked to talk about the origin of the Carnegie-Rochester Conferences, what
we intended to achieve. I will comment at the end on where I think we have come and where we
are now. The conference has met about 75 or 80 times in the past 40 years. It has had support
from the National Science Foundation in all or most of those years.
My teacher, co-author and lifetime friend, Karl Brunner, was a builder of institutions. He
started and edited two major journals the JMCB and the JME that continue to uphold his high
standards. And, with me, he started several conferences that still continue—this one and the
Konstanz Seminar in Germany. The purpose of the Konstanz Seminar was to encourage
development of modern economics not just in Germany, but in Europe. In addition, he ran the
Interlaken Seminar in the Swiss Alps where, among others, the famous Mechling-Jensen paper
developed and also my own paper on political economy with Scott Richard.
In the 1960s, while at UCLA, Karl ran a number of conferences on economic and
especially monetary topics. When we planned Carnegie Rochester in the early 1970s, we wanted
to create a more useful and more widely known and used set of papers. To do that, we decided
that the conference volumes must be a serial, published as a journal. That way the papers would
not get lost in conference volumes. Professors could send their graduate students to read and
build on the papers, increasing the chance that papers would be read and cited. That encouraged
authors to produce their best work for our conferences. From the very beginning, we ran an open
forum by inviting economists with different views and always including staff of the policy
agencies that the papers analyzed and discussed.
The intellectual aim of the conference was to improve policy by bringing modern
economic theory to bear. This aim was important to us, and we expected it would influence the
economics profession. And it has. The major policy conference at the time was the Brookings
conference. Their way, then, was to run mostly ad hoc regressions and use the output to draw
policy conclusions. I can’t recall how many different ad hoc estimates of the Phillips curve were
run. Alas, none of them recognized the role of inflation expectations as they might have done if
their models started from economic principles.
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We believed that policy should be based on evidence developed using models based on
available economic theory. An example from the first Carnegie-Rochester Conference is Robert
Lucas’s classic paper, “Econometric Policy Evaluation: A Critique.” An outstanding example,
but there are many others. Some, like a paper by Timothy McGuire, are less well-known but
very much in the spirit of the conference. McGuire introduced a novel econometric procedure to
study price wage interactions.
About this time, Lucas, Sargent, and others were developing dynamic models using
rational expectations. Our conference built on and promoted this development. An interesting
example is the contrast between Ed Prescott’s paper and the paper by the Board of Governors
staff on the best way to develop dynamic models.
Looking back, it is fair to say that our way of doing policy became the standard that
economists now use in their published papers. That might seem a good place to stop after
congratulating the many authors on their many excellent contributions, perhaps singling out an
especially influential contribution that we published, for example the Taylor rule for monetary
policy.
But I have to recognize a serious failure, not just a failure of this conference but a major
professional failure of the economics profession, or at least of its prominent practitioners.
The major objectives of this conference were to improve economic policy by developing
and presenting economic models as the basis for policy decisions and developing economic
models that deal with real economic problems. One way of contributing to both objectives was
to include policy making staff in each of our sessions. We invited policy staff from many
countries. We wanted to stimulate dialogue between the policy staff that had to recommend
policy actions and academics who worked on models applicable to economic problems. We
believed, then and now, that it is not an accident that policy and politics have the same Greek
root. I am very pleased that several of the papers at this conference include a role for politics in
choosing and implementing policies.
Our original intention was to get two way interaction. The academics would propose
analysis; the policy staff would help the academics to understand the problems that they faced.
Together, we would improve policymaking.
Think of what has happened. We went into the credit and financial crisis of 2008 with
many economists in the academies and the policy staffs using Michael Woodford’s elegant
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model. His model gave no role to money, credit, or asset prices. The principal problems that
gave rise to the crisis occurred in the very markets that the Woodford model ignored. That’s a
loss for economics as a policy science. Much more important, it is a terrible loss for the
economies of the world. How could staff be alert to mortgage and credit market risks, if they
were treated as always adjusted to the policy rate and fully implemented rational expectations?
That was not the only or even the most important failure that ended in a major crisis.
That title belongs to the political influences and pressures in both Democrat and Republican
administrations that changed housing policy. An excellent book by the New York Times
columnist, Gretchen Morgenson, tells the details of the politicization of housing policy. Both
parties were delighted by the increased home ownership by minorities. Alas, they forgot to ask
themselves and each other what someone owns if they buy a house but make no down payment.
At best, they have an option on the future house price.
One cannot understand housing policy, and many other policies, while neglecting
politics.
Regularly, I receive papers with models of optimal economic policy. I am puzzled that it
never occurs to the authors that policies are made by political agents. It is not an accident that
policy and politics share a common Greek root. Was the US mortgage market policy of Fannie
Mae and Freddie Mac an example of optimal economic policy? Is the Federal Reserve policy to
buy almost all of the mortgages an optimal policy? Is the Federal Reserve policy of allocating
credit optimal policy? Or are these better understood as political decisions?
If economics is to remain a major policy science, it must recognize that optimal policies,
if such there be, have both economic and political dimensions.
These criticisms of what we do are important, I believe, but there is a more serious
problem in the making of current economic policy. I will begin by telling a story told to me by
the late Jacob Viner, a giant of the economics of his time and ours. Much of his work on trade
remains worth reading. As I said, he is a giant.
Viner worked in the Roosevelt Treasury during the 1930s. The US government was
much smaller then. There was no Council of Economic Advisers or National Economic Policy
agency.
President Roosevelt often invited intellectuals from all parts of the government to
informal evening sessions in the White House. Viner was one of the members of the select
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group. Viner told me that one evening, the president began by reading a letter from his former
law partner, Basil O’Connor. The message in the letter was that by calling businessmen
“economic royalists,” by trying to pack the Supreme Court, by passing an excess profits tax, by
starting an active anti-trust campaign under Thurman Arnold at the Department of Justice and in
other ways, the president alienated the businessmen that he needed. They must invest and
expand or his policies would fail, the letter said.
Viner said the president made fun of the letter. Viner spoke up, telling the president that
he should take the letter seriously. He needed investment by business to create employment and
recovery from the deep 1937-38 recession. Viner ended the story by telling me that he was never
again invited to the sessions. Such is the price of integrity and “speaking truth to power.”
President Roosevelt continued his populist policy and the weak recovery until he began
to prepare for war. After the end of the populist policy, President Roosevelt appointed one of the
principal “economic royalists” to run war production. Recovery strengthened a few months
later.
There are lots of similarities in the investment and employment data in this slow
recovery. And there are similarities in the administration’s attitude toward business and
businessmen and women.
I told the Viner story because we now have a Council of Economic Advisers and a
National Economic Council. Economic advisers meet with the president regularly. None tell
President Obama what Viner told President Roosevelt: the policies of raising taxes, increasing
costly regulation, and criticizing business reduces investment and slows recovery.
These are real problems. They cannot be solved by producing more bank reserves that
remain idle on banks’ balance sheets. Nor can they be ameliorated by increasing money growth.
They are real. By this time in the development of our discipline it is long past time when
economists in government should distinguish real and monetary problems and recognize that
increasing monetary reserves does not increase employment.
If economists in policy positions won’t explain to their political masters that there is no
dispute by economists on whether raising taxes and increasing costly regulation harms growth,
what useful function do they perform?
I believe it is a black mark for the economics profession that they do not give the
president information that is well-established.
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This is not the first time the Federal Reserve made the mistake of not recognizing a real
problem. When I interviewed Steve Axelrod, the principal adviser to the Chairman in the late
1970s why the Fed did not distinguish between real and monetary interest rates, he said
something like this: “I sometimes thought about that but didn’t mention it in the briefings.”
Let me close by inviting anyone who is interested in comparing investment and
employment in 1938-40 and the current slow recovery to look at a paper on my website. I make
that comparison for a simple reason. The slow 1938-40 recovery is the only very slow recovery
like the present recovery. I am aware that comparing two recoveries does not create truth, but it
does suggest where one might look for more evidence.
Let me close by repeating an earlier comment. Economics is one major input in
understanding policy. But the examples should illustrate that politics, and income redistribution,
are others. If we are to be relevant in the future, we must pay more attention to politics by
building models in which political choices are part of the policy process.
I have been a practicing, professional economist for almost sixty years. I have enjoyed
that time immensely and I have had opportunities to advise governments in many countries.
I wish all of you the same good careers. Economics is an unfinished discipline. Make it
better.
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