Lessons From the Financial Crisis For Teaching Economics

Last week at Stanford the American Economic Association hosted its first conference ever on teaching economics. It was a great success and a second conference will be held in Boston next year, sponsored by the Journal of Economic Education (JEE).

I was asked to speak at the conference about the impact of the financial crisis on teaching economics. Here are the slides from the talk, which will eventually be published in the JEE. I emphasized that one’s view of how economics teaching should change depends greatly on one’s view of the crisis. For example, Alan Blinder and I have different views of the crisis and the policy response, so naturally we have different views about how the crisis should affect teaching.

In my view the problem was that economic policy deviated from basic economic principles which had worked well. The result was a great recession, a financial panic, and now a very weak, nearly nonexistent, recovery. The deviations included a monetary policy which set interest rates too low for too long and a regulatory policy which failed to enforce existing rules. The deviations from sound principles continued when government responded with an ad hoc bailout process and temporary fiscal stimulus programs. The good news for the economy is that economic growth and stability can be restored by adopting policies consistent with basic economic principles.

The good news for teaching is that the crisis has left us with many examples where teachers can illustrate basic economic principles including that incentives matter, the permanent income hypothesis, regulatory capture, and the money multiplier. Moreover, the heated disagreement among economists about the crisis presents another opportunity to make the subject more interesting to students.

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