WASHINGTON -- Academic economists are earning extra income 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, the Federal Reserve Board and 11 of the 12 regional Federal Reserve banks hired 209 consultants -- virtually all of them university professors -- from Jan. 1, 1991, through June 30, 1993.
A total of 305 contracts worth more than $2.9 million were awarded over that 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.
This outside research augments the Fed's 608 in-house economists, statisticians, and professional researchers. The Fed is the world's largest employer of fulltime staff economists who 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 number of staff economists. The congressional General Accounting Office, for example, has 74 fulltime economists.
"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," Rep. Gonzalez said. "The Fed is simply buying off potential critics by holding out contracts that 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."
Fed spokesman Joseph Coyne responded, "You should be glad we're consulting with the best minds in the country and aren't making decisions on our own."
Some of the economists paid by the Fed insisted that they are not being bought off.
"Besides, they couldn't do that by paying everybody and shutting everybody up. They have deep pockets, but not that deep," said John Keating, an economist from Washington University who was paid $72,000 as a visiting scholar at the Federal Reserve Bank of St. Louis.
"Academics have beat up the Federal Reserve quite relentlessly over many years," added Bennett McCallum, a professor at Carnegie-Mellon University in Pittsburgh who earned $29,258 for his consulting services from 1991 to 1993. Economists argued 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.
"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," said Thomas Sargent, who splits his time between the University of Chicago and Stanford University, and earned $21,680 on six contracts.
Some of the professors routinely get what in effect are summer stipends to visit the Federal Reserve Board for one week and are paid more than $300 a 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, 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 that 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 was 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.
The one Fed bank that did not hire any outside economists during the period surveyed was the Federal Reserve Bank of Boston. The Boston Fed's own research staff 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, also listed only a handful of outside contracts.
By contrast, the Federal Reserve Bank of Minneapolis has 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.