Bush’s top economist as the Great Recession unfolded
Edward Lazear helped aid recovery during the financial crisis and spent his career trying to improve workplace dynamics
Edward Lazear was an innovative economist who sussed out workplace dynamics as an academic and played a critical role in the US response to the 2007 financial crisis as chair of the Bush administration’s Council of Economic Advisers.
Widely considered one of the foremost labour economists of his generation, Lazear brought to the so-called dismal science “a caffeinated interest in an economics to help people”, according to R Glenn Hubbard, a predecessor at the council. Lazear adhered strongly to the tenets of free-market capitalism but attracted admirers among liberal as well as conservative economists with the elegance of his ideas.
“He was somebody who would take a very complex problem and think about it in just an amazingly simple way,” said Kevin Lang, a professor of economics at Boston University and editor-in-chief of the Journal of Labour Economics, which Lazear founded.
Lazear, who has died aged 72, was regarded as the father of a field known as personnel economics, which aims to explain and ultimately improve the management of human resources.
In a noted article published in the Journal of Political Economy in 1979 – titled “Why Is There Mandatory Retirement?” – Lazear identified what Lang described as an “implicit contract” between many workers and their employers. According to the contract, workers are underpaid for their work, relative to what they produce, when they are young and overpaid when they become more senior.
“They’re holding back part of your compensation to create an incentive for you to work hard now,” Lang explained. “Later in your time with that firm ... they start returning the bond to you, but eventually they’ve returned the bond.” At which point, according to Lazear’s argument, the employee should retire.
In another paper, published in 2000 in the American Economic Review, Lazear studied changes in compensation at the Safelite Glass Corporation, a manufacturer of replacement windshields, to test the assumption that workers respond to incentives.
In the mid-1990s, the company replaced hourly wages with piece-rate pay, in which workers were paid according to the number of windshields they installed.
The change, according to Lazear’s analysis, resulted in a 44 per cent gain in average output per worker. “The firm shares the gains in productivity with its workforce,” he wrote. “A given worker receives about a 10 per cent increase in pay as a result of the switch to piece rates.”
Although Lazear was most known for his work on personnel economics, he also “conducted fundamental research on the economics of entrepreneurship, immigration, language, education, and sales”, noted Robert Moffitt, a professor of economics at Johns Hopkins University and president of the Society of Labour Economists, which Lazear founded.
He played his most public role as chair of the White House Council of Economic Advisers from 2006 to 2009, essentially the president’s chief economist.
“He is the PhD who knows the science of economics,” Keith Hennessey, who served in the Bush administration with Lazear as director of the National Economic Council, said. By contrast, leaders of the US Treasury Department and the Federal Reserve Board are responsible for implementing policy.
According to Hennessey, Lazear was planning to leave the White House in 2007, shortly before the implosion of the subprime mortgage market initiated the financial crisis known as the Great Recession. Bush asked him to stay. “The president valued having him around and having his advice,” Hennessey said.
Hennessey credited Lazear with playing a leading role in the establishment of the Troubled Asset Relief Programme, for which the US Congress initially authorised $700bn to stabilise the banking, auto, insurance, housing and other industries. The programme was deeply unpopular but, according to Lazear and many other administration officials, urgently necessary.
He was somebody who would take a very complex problem and think about it in just an amazingly simple way
“We were in a situation where we were concerned about losing a million jobs,” he told PBS NewsHour in 2008, describing the crisis in the auto industry. “That means a million people out of work directly at a time when the economy is struggling, when jobs are not easy to find. We didn’t want to exacerbate that problem.”
Also teetering was the secondary market for student loans, which Hennessey said Lazear helped to steady. “Had it not been for his work, college students might not have gotten their student loan checks in the middle of fall semester,” Hennessey said.
Taken as a whole, the economic crisis proved far more complex than many economists at first understood – a point that Lazear sought to explain years later by comparing dominoes to popcorn.
“Under the domino theory of contagion, one domino falls and knocks over the other dominoes, and they all topple, and you’ve got a mess on your hands,” he said in a speech in 2011 at the University of Chicago. “That looked like the way to go.”
“Unfortunately,” he continued, “the model was not dominoes; it was popcorn. When you make popcorn, you heat it up in a pan and, as the kernels get hot, they pop. Taking the first kernel to pop out of the pan doesn’t do anything. The other kernels are still getting hot, the heat is on, and they’re going to pop no matter what.”
Edward Paul Lazear was born on 17 August 1948, in New York City and grew up in Los Altos, California. His father was a hospital maintenance worker, and his mother worked in retail.
Lazear received bachelor’s and master’s degrees in economics from the University of California at Los Angeles, both in 1971, and a PhD in economics from Harvard University in 1974. He taught at the University of Chicago for nearly two decades before joining Stanford, where his graduate classes, according to the university, were “oversubscribed”.
Bush, who also named Lazear to his Advisory Panel on Tax Reform, described Lazear in a statement as a “trusted confidant who helped guide us out of the financial crisis”. The president had nicknamed Lazear “Stork” for his angular features, according to The Wall Street Journal, and often cycled with him at Camp David.
Edward Lazear, economist, born 17 August 1948, died 23 November 2020