WASHINGTON -- Academic economists at major universities throughout the United States are earning extra income serving as consultants to the Federal Reserve, a practice that congressional critics say is muffling independent criticism of the Fed's rate-setting policies.
According to government records reviewed by The Bond Buyer, the Federal Reserve Board and 11 of the 12 regional Federal Reserve banks hired 209 consultants -- virtually all of them university professors -- in the period from Jan. 1, 1991, through June 30, 1993.
A total of 305 contracts worth more than $2.9 million were awarded over the period, with many of the academics getting paid for more than one contract. In some cases, the economists had contracts with several Federal Reserve banks and earned more than $20,000 for their work -- providing a substantial cushion to their regular income as faculty members.
The one exception for the period surveyed was the Federal Reserve Bank of Boston, which listed no contracts with outside economists. The Boston Fed has its own highly regarded research staff that is known for its recent work on discrimination in mortgage lending.
The New York Fed, which has the largest staff of economists outside of the Federal Reserve Board because of its role in executing monetary policy and watching financial markets, listed only a handful of outside contracts.
By contrast, the Federal Reserve Bank of Minneapolis has what is by far the most ambitious program of hiring outside researchers. Records show the bank signed 105 contracts with academics, including a number from universities outside the United States. Many were one-time deals to write specialized papers for the bank.
"The Federal Reserve employs hundreds of researchers in their research departments, but inexplicably also spends millions to pay hundreds of outside economic consultants," said House Banking Committee chairman Henry Gonzalez, D-Tex., a long-time critic of the Fed.
"There's no better example of pork than this," Gonzalez said. "The Fed is simply buying off potential critics by holding out contracts which offer academics extra money and use of the Fed's facilities. No agency that has to justify its spending would dream of this kind of extravagance and waste."
By all accounts, the practice of paying outside economists for advice to the Fed remains widespread. "You should be glad we're consulting with the best minds in the country and aren't making decisions on our own," said Fed spokesman Joseph Coyne.
In interviews, some of the economists paid by the Fed insisted that their intellectual integrity was not compromised and that their activities actually encouraged debate among policymakers. They defended the program as a useful way for the Fed to keep informed about cutting-edge developments in academic research.
Others argued that the Fed's staff members benefit from useful technical advice that in many instances does not go directly to the desks of senior officials.
But government records show that while other federal agencies have been pressured to downsize, the Fed remains the world's largest employer of full-time staff economists. A total of 608 economists, statisticians, and professional researchers are employed within the Federal Reserve System. They work on everything from regional economic analysis to macroeconomic modeling, forecasting, finance, and international trade.
Other federal agencies, albeit with smaller missions, pale in comparison in terms of the nuber of staff economists. The congressional General Accounting Office, for example, has 74 full-time economists. The Central Intelligence Agency, even with its new global mission emphasizing the collection of information on foreign economic activities, does not have nearly the number of economists employed by the Fed, according to congressional sources.
Despite the large staff, the Federal Reserve Board and the regional Fed banks contract regularly with academic economists for a wide range of services that include writing specialized papers, visiting with the Fed's staff members, and conducting in-house seminars.
Some of the professors routinely get what in effect are summer stipends to visit the Federal Reserve Board for a one-week period and are paid more than $300 per day. A fortunate few have been paid as much as $70,000 for what amounted to full-time work while they took time off from their regular academic duties.
Those paid by the Fed enjoy close interpersonal exchanges with staff members, and sometimes, the presidents of the Fed district banks. The work amounts to a privileged glimpse of the central bank's inner workings, a view that most Wall Street analysts and other members of the public never see.
Moreover, The Bond Buyer has learned that in the case of the Federal Reserve Board, all contractors are required to sign a non-disclosure statement promising to keep all information confidential. The statement is broadly worded to prohibit the release of any information "relating to past, present, or future activities" that can be considered "damaging to the board."
Congressional critics say requiring professors to sign such an agreement is likely to inhibit, if not legally prohibit, them from criticizing the Fed in public about policy on interest rates. "This is a device to control the flow of information from academic consultants," said one House aide.
The top earner for the period from Jan. 1, 1991, to June 30, 1993, is David Wheelock, who collected $110,024 while he served as a visiting scholar at the Federal Reserve Bank of St. Louis for a year and a half. At the time, Wheelock was on leave from his position as professor of economics at the University of Texas. He subsequently left to join the research department of the St. Louis Fed.
Another top earner was Gikas Hardouvelis, a professor at Rutgers University who collected $81,810 while he worked as a consultant to the Federal Reserve Bank of New York. Hardouvelis is currently on leave at the University of Piraeus in Greece.
Dr. C.F. Lee, chairman of the department of finance at Rutgers, said he was unaware of the fees earned by Hardouvelis but that university regulations allow outside consulting of up to one day per week.
In the case of Hardouvelis, records show that as far back as 1990 he was paid $395 a day by the Federal Reserve Bank of New York over an 80-day period, for a total of $31,600. He was also a full-time faculty member at the time, a department official said.
Another top earner, Laurence K. Eisenberg, collected $74,246 and did work for the Federal Reserve Bank of Atlanta. Eisenberg could not be located for comment.
Other top earners include:
* Robert Chirinko ($73,780), an associate professor at the University of Illinois who was a visiting scholar at the Federal Reserve Bank of Kansas City.
* John Keating ($72,000), an economist from Washington University who was a visiting scholar at the Federal Reserve Bank of St. Louis.
* Peter Kretzmer ($71,960), now an economist with NationsBank in New York, who was a visiting scholar at the Federal Reserve Bank of Kansas City.
Records also show that several economists were able to sell their consulting services to a number of Federal Reserve banks. The most successful in this line of enterprise was Thomas Sargent, who splits his time between the University of Chicago and Stanford University, and earned $21,680 on six contracts.
Sargent, a specialist in macroeconomics and monetary theory, said he did work for the Federal Reserve banks of Minneapolis, Chicago, San Francisco, and Richmond.
Profs. Mark Gertler of New York University, Edward Green of the University of Minnesota, and Mark Watson of Northwestern University each signed five contracts for consulting services, according to records covering 1991 to 1993.
Economists participating in the various Fed consulting programs defended their activities and said they were not being influenced in their thinking about monetary policy. Instead, they stressed how much they enjoyed the contact and the intellectual exchanges with officials seeking to apply economic theories to real-world problems.
Indeed, Fed chairman Alan Greenspan is the quintessential economic egghead who thrives on the minute statistics and complex models of the trade. Given Greenspan's reputation for intellect, it is no surprise that the Fed system that he oversees encourages research and the pursuit of new ideas.
"These consulting arrangements are a way for the staff of the Federal Reserve and the presidents to get plugged into the best research that's being done in the academic community. There's a lot of information that flows. It's a very efficient way to communicate information," Sargent said.
He said the Federal Reserve Banks "have tilted the research of the academics toward problems that are of interest to the Fed. So much of the best research that has been done in the last 20 years on problems of Federal Reserve policy or macroeconomics in general has come out of academics having contact with the Fed and getting exposed to real-world, practical problems. That's the big attraction for academics."
The academic economists dismissed the idea that they were influenced by the fees they get. "The fees are very minor. They don't pay market rates. Most of the consultants could make far higher market rates, and there are some guys that are just too high-priced for them to attract," Sargent said.
Rather than muffling, economists said they stirred technical debate related to the conduct of monetary policy within the Federal Reserve system. But the debate typically does not extend to judgments about the appropriate level of interest rates, they said.
"I'm not going to tell them in substance what I think interest rates are going to be," said Prof. Steven Durlalf, an economist from the University of Wisconsin who has given weekly seminars at the Federal Reserve Board. "What I can talk to them about is what characteristics a statistical model should have when they use it."
"It seems pretty harmless to me," said Prof. David Romer, an economist from the University of California at Berkeley who has given one-week seminars at the Federal Reserve Board during the summer. "I think it's money well-spent on their end, mainly by raising the caliber of the people they can hire by bringing in some outside people now and then."
Other economists said the academic community's independent ability to assess the Fed has not been tainted. "Academics have beat up the Federal Reserve quite relentlessly over many years," said Prof. Bennett McCallum, a professor at Carnegie-Mellon University in Pittsburgh who earned $29,258 for his consulting services from 1991 to 1993.
In many cases, academics are more interested in the theoretical problems of their research than the day-to-day activities of the Fed in setting rates, McCallum said. "I don't comment on current policy because I'm not an expert on what's happening at the moment. I try to be an expert on the way systems work and the general processes organizations use for conducting policy," he said.
McCallum, the author of a textbook on monetary academics who has done work for the richmond Fed, agreed with Sargent that the current consulting system fosters healthy intellectual debate within the Fed system. "It helps the people of the United States" to have "12 regional banks that are not under the thumb of the board of governors," he said.
Prof. Robert Solow, an economist at the Massachusetts Institute of Technology who criticized the Fed for lowering rates too slowly during the Bush Administration, said he does not see any harm in the current system.
"Academic economists don't pay much attention to current policy issues. Many of the best minds in the U.S. stay completely away from policy," Solow said. At the same time, he said, "there are plenty of professional economists in the U.S. who are critical on the monetary side."
"Sometimes the people that have this access have been rather uncomplimentary to policy at times, so I don't see any sort of empirical regularity that suggests the Fed protects itself in the academic community by doing this," said Keating of Washington University.
"Besides, they couldn't do that by paying everybody and shutting everybody up. They have deep pockets, but not that deep," Keating said.
Prof. Allan Meltzer, an economist at Carnegie-Mellon who recently delivered a paper at the St. Louis Fed, agreed that the central bank does not lack for critics. "I think the Fed gets more criticism than almost any agency in Washington from the academic community," he said.
Academic Economists Paid as Consultants by the Federal Reserve Board in
1993
* Sumru Altug, University of Minnesota
* Martin Baily, University of Maryland
* David Bizer, University of Chicago
* William Brock, University of Wisconsin
* Ricardo Caballero, Massachusetts Institute of Technology
* Richard Clarida, Columbia University
* Thomas Cooley, University of Rochester
* David Dejong, University of Pittsburgh
* Frank Diebold, University of Pennsylvania
* Steven Durlauf, Stanford University
* Jonathan Eaton, Boston University
* Barry Eichengreen, University of California at Berkeley
* Benjamin Friedman, Harvard University
* Mark Gertler, New York University
* Atish Ghosh, Princeton University
* Gary Gorton, University of Chicago
* Clive W.J. Granger, University of California at San Diego
* Edward Green, University of Minnesota
* Stuart Greenbaum, Northwestern University
* Jeremy Greenwood, University of Western Ontario, Canada
* Alastair Hall, North Carolina State University
* James Hamilton, University of Virgina
* Charles R. Hulten, University of Maryland
* Christopher James, University of Florida
* Soren Johansen, University of Copenhagen
* James Kahn, Hoover Institution, Stanford University
* Ken Kasa, University of Pennsylvania
* Michael Klein, Tufts University
* Albert P. Kyle, Duke University
* Robert Z. Lawrence, Harvard University
* Ed Leamer, University of California at Los Angeles
* Andrew Levin, University of California at San Diego
* Karen Lewis, University of Pennsylvania
* Louis Maccini, The Johns Hopkins University
* Dick Meese, University of California at Berkeley
* Rick Mishkin, Columbia University
* Katherine Morrison, Tufts University
* Ariel Pakes, Yale University
* George Pennacchi, University of Illinois
* Valerie Ramey, University of California at San Diego
* Assaf Razin, Tel Aviv University
* David Romer, University of California at Berkeley
* Christina Romer, University of California at Berkeley
* Andrew Rose, University of California at Berkeley
* Steve Salant, University of Michigan
* Anthony Saunders, New York University
* Robin Sickles, Rice University
* Bruce Smith, Cornell University
* Mark Watson, Northwestern University
* Ken West, University of Wisconsin
* James Wilcox, University of California at Berkeley
* Stephen Woodbury, University of Stirling, Scotland
* David Zervos, Temple University
Academic Economists Paid as Consultants by the Federal Reserve Federal
Reserve Bank of Boston
None
Academic Economists Paid as Consultants by the Federal Reserve Bank of
New York, 1991 - 93
* Ben Bernanke, Princeton University
* Richard Clarida, Columbia University
* Ted Fikre, Princeton University
* Mark Gertler, New York University
* Gikas Hardouvelis, Rutgers University
Academic Economists Paid as Consultants by the Federal Reserve Bank of
Philadelphia, 1991 - 93
* Andrew Abel, University of Pennsylvania
* Laurence Ball, Princeton University
* Douglas Bernheim, Princeton University
* Anne Case, Princeton University
* Frank Diebold, University of Pennsylvania
* Robert Inman, University of Pennsylvania
* Rafael Rob, University of Pennsylvania
* Anthony Santomero, University of Pennsylvania
* Robert Schweitzer, University of Delaware
Academic Economists Paid as Consultants by the Federal Reserve Bank of
Cleveland, 1991 - 93
* Robert Avery, Cornell University
* Patricia Beeson, University of Pittsburgh
* Stephen Cecchetti, Ohio State University
* Richard Jefferis, University of Colorado - Boulder
* Finn Kydland, Carnegie-Mellon University
* Edward Montgomery, University of Maryland
* Peter Ritchken, Case Western Reserve University
* Alan Stockman, University of Rochester
Academic Economists Paid as Consultants by the Federal Reserve Bank of
Richmond, 1991 - 93
* Douglas Diamond, University of Chicago
* Mark Gertler, New York University
* James Hamilton, University of California at San Diego
* Milton Harris, University of Chicago
* Robert King, University of Rochester
* Robert Laroche, University of Virginia
* Bennett McCallum, Carnegie-Mellon University
* Don Patinkin, Hebrew University, Israel
* Thomas Sargent, Hoover Institution, Stanford University
* Alan Stockman, University of Rochester
Academic Economists Paid as Consultants by the Federal Reserve Bank of
Atlanta, 1991 - 93
* Janice Boucher, University of South Carolina
* Laurence Eisenberg, Ph.D., University of Pennsylvania
* Stephen Smith, Georgia Tech
* Charles Whiteman, University of Iowa
Academic Economists Paid as Consultants by the Federal Reserve Bank of
Chicago, 1991 - 93
* Charles Calomiris, Northwestern University
* Larry Christiano, Northwestern University
* Steven Davis, University of Chicago
* Martin Eichenbaum, Northwestern University
* George Kaufman, Loyola University
* Thomas Mondschean, DePaul University
* Bruce Petersen, Washington University
* Thomas Sargent, University of Chicago
* Vefa Tarhan, Loyola University
* Mark Watson, Northwestern University
* Paul Worthington, Northwestern University
Academic Economists Paid as Consultants by the Federal Reserve Bank of
St. Louis, 1991 - 93
* Charles Calomiris, University of Illinois
* Kenneth Chrystal, City University Business School, London
* Kevin Dowd, University of Nottingham, England
* John Keating, Washington University
* Kees Koedijk, University of Limburg, Netherlands
* Alvin Marty, Baruch College
* Manfred Neumann, Institut fur Intl. Wirtschaftspolitik, Bonn
* Jodi Scarlata, Johns Hopkins University
* David Wheelock, University of Texas
* Geoffrey Wood, City University Business School, London
* Piyu Yue, University of Texas
Academic Economists Paid as Consultants by the Federal Reserve Bank of
Minneapolis, 1991 - 93
* Marianne Baxter, University of Rochester
* Valerie Bencivenga, Cornell University
* R. Anton Braun, University of Virginia
* Drusilla Brown, Tufts University
* Stephen Burnell, Victoria University of Wellington, New Zealand
* Craig Burnside, Queen's University, Canada
* Ly-June Chang, Hoover Institution, Stanford University
* Varadarajan Chari, Northwestern University
* Lawrence Christiano, Northwestern University
* Russell Cooper, Boston University
* Dean Corbae, University of Iowa
* Mario Crucini, University of Rochester
* Jean-Paul Danthine, University of Lausanne, Switzerland
* Javier Diaz-Gimenez, Universidad Carlos III, Madrid
* John Donaldson, Columbia University
* Wouter Den Haan, University of California at San Diego
* Cristina Echevarria, University of Saskatchewan, Canada
* Zvi Eckstein, Boston University
* Mark Gertler, New York University
* John Geweke, University of Minnesota
* Eric Ghysels, Yale University
* Ed Green, University of Minnesota
* Jeremy Greenwood, University of Rochester
* Lars Hansen, University of Chicago
* Gary Hanson, University of Pennsylvania
* John Heaton, Massachusetts Institute of Technology
* Richard Highfield, Cornell University
* Ravi Jagannathan, University of Minnesota
* Boyan Jovanovic, New York University
* John Geweke, University of Minnesota
* Jeremy Greenwood, University of Rochester
* Patrick Kehoe, University of Pennsylvania
* Robert King, University of Rochester
* Narayana Kocherlakota, University of Iowa
* Finn Kydland, Carnegie-Mellon University
* John Laitner, University of Michigan
* James Lesage, University of Toledo
* Deborah Lucas, Massachusetts Institute of Technology
* Albert Marcet, Universitat Pompeu Fabra Balmes, Barcelona, Spain
* Kiminori Matsuyama, Hoover Institution, Stanford University
* Ellen McGrattan, Duke University
* John Moore, London School of Economics
* Maurice Obstfeld, University of California at Berkeley
* Masao Ogaki, University of Rochester
* Stephen Parente, Northeastern University
* Ariel Pakes, Yale University
* Daniel Peled, University of Western Ontario
* Tortsen Persson, Stockholm University, Sweden
* Gerhard Pfann, University of Limburg, Netherlands
* Andrew Postlewaite, University of Pennsylvania
* Edward Prescott, University of Minnesota
* Danny Quah, London School of Economics
* Balasubrahmanian Ravikumar, University of Virginia
* Victor Rios-Rull, University of Pennsylvania
* Nouriel Roubini, Hoover Institution, Stanford University
* Peter Rupert, State University of New York at Buffalo
* Febran Sancho, University of California at Berkeley
* Thomas Sargent, Hoover Institution, Stanford University
* Peter Schotman, University of Limburg, Netherlands
* Karl Shell, Cornell University
* Christopher Sims, Yale University
* Bruce Smith, Cornell University
* Tony Smith, Queens University, Canada
* Bart Taub, University of Illinois at Urbana-Champaign
* Linda Tesar, University of California at Santa Barbara
* Ernst-Ludwig Von Thadden, Stanford University
* Xavier Vives, Univesitat Autonoma de Barcelona, Spain
* Martin Weale, Cambridge University, England
* Charles Whiteman, University of Iowa
* Eric Van Wincoop, Boston University
* Jeffrey Wrase, Arizona State University
* Randall Wright, University of Pennsylvania
* Peter Zadrozny, Washington State University
* Goufu Zhou, Washington University
Academic Economists Paid as Consultants by the Federal Reserve Bank of
Kansas City, 1991 - 93
* John Caskey, Swarthmore College
* Robert Chirinko, University of Illinois
* Charles Engel, University of Virginia
* Mark Gertler, New York University
* Peter Kretzmer, University of Southern California
* Keith Maskus, University of Colorado
* Shirley Porterfield, University of Missouri
* Anne Sibert, University of Kansas
Academic Economists Paid as Consultants by the Federal Reserve Bank of
Dallas, 1991 - 93
* Nathan Balke, Southern Methodist University
* Joyn Bryant, Rice University
* Thomas B. Fomby, Southern Methodist University
* Scott Freeman, University of Texas at Austin
* Shengyi Guo, Southern Methodist University
* Gregory Huffman, Southern Methodist University
* David B. Oppedahl, Southern Methodist University
* Roy J. Ruffin, University of Houston
* John Welsh, University of Northern Texas
* John Wood, Wake Forrest University
Academic Economists Paid as Consultants by the Federal Reserve Bank of
San Francisco, 1991 - 93
* James Booth, Arizona State University
* Michael Dooley, University of California at Berkeley
* Luigi Ermini, University of Hawaii
* George Evans, University of California at Berkeley
* Maria Gochoco, University of the Philippines
* Michael Hutchinson, University of California at Santa Cruz
* Dwight Jaffee, University of California at Berkeley
* Andrew Rose, University of California at Berkeley
* Tom Sargent, Stanford University
* Carl Walsh, University of California at Santa Cruz
