New Economic Thinking

Based in the Department of Economics, USC Dornsife will launch the USC Dornsife Institute for New Economic Thinking (USC Dornsife INET), which will bolster research in globalization, regulation of financial institutions and collaboration with schools and institutes across the university.

New York-based INET supports economics scholars by providing money, advice and access to thousands of like-minded individuals.

INET President Robert Johnson said the profession of economics needs fundamental renewal. 

“Renewal in its underlying assumptions, renewal in the scope of accepted methods of inquiry, renewal in its norms of evaluation of what constitutes excellence, renewal in what is taught, and renewal in its focus on the issues and problems that threaten the fabric of society,” Johnson said.

“Our new institutional partnership with USC will help us make a vital contribution to reinvigorating discourse and overcoming the resistances to the sorely needed evolution of economics and social sciences in the face of urgent human challenges.”

The collaboration between INET and USC Dornsife comes with direction from Hashem Pesaran, the John Elliott Distinguished Chair in Economics, professor of economics and director of the USC Center for Applied Financial Economics.

The international economist joins renowned longtime faculty at USC Dornsife such as Richard Easterlin, University Professor and professor of economics, and Geert Ridder, professor and chair of economics. They along with key economics professors Juan Carrillo, Simon Wilkie, Guofu Tan, Chen Hsiao, Michael Magill and Hyungsik Roger Moon are among the collaborators.

“Our partnership with INET validates us on a national scale,” USC Dornsife Dean Steve Kay said. “What INET sees in USC Dornsife is not only that we’ve been able to land stars recently in the general areas of economics and applied economics, but they see that we are committed to strengthening our economics department for the next several years.”

One major area being strengthened is postdoctoral training.

“We’re still very committed to our Ph.D. programs and are even creating new Ph.D. programs,” Kay said. “But we’re all recognizing that postdoctoral training is something that we really want to foster here at USC Dornsife. And this is right across the board — in the natural sciences, social sciences and the humanities.”

Also key in creating USC Dornsife INET was the USC Provost’s Institutional Pre-doctoral and Postdoctoral Training Grants program. Funds from that provost grant program and INET made USC Dornsife INET possible.

“USC is pleased to support institutional training grants that help attract the most competitive Ph.D. and postdoctoral students, who are creating new knowledge in areas closely aligned with national research priorities such as the revitalization of our global economy,” said USC Provost Elizabeth Garrett. “In launching USC Dornsife INET, USC demonstrates our belief that rigorous empirical investigation framed by theoretical sophistication will provide the most effective solutions to economic policy issues that ripple through society.”

Postdoctoral training is just one aspect of USC Dornsife INET, which will be comprised of university-wide researchers using new tools from decision theory to tackle problems of unemployment, increased economic inequalities and financial crises, to name a few areas.

Pesaran, who was previously at the University of Cambridge in Cambridge, England, and helped to create The Cambridge INET Institute, identified the main research themes under the auspices of USC Dornsife INET. He said recent global financial crises are a reminder of the economic risks and challenges that lie ahead. Economies and markets have become more inter-connected than ever before, with fewer possibilities for risk diversification (reducing risk by investing in a variety of assets), he said.

“A seemingly local crisis can rapidly acquire global dimensions,” warned Pesaran. “A purely individualistic approach to economic analysis is no longer tenable and seems unlikely to provide satisfactory insights or solutions for today’s problems. New economic approaches that take into account the correlated nature of economic behavior are needed.”

Other research themes include:

• Modeling Global Macroeconomic and Financial Interactions: Many aspects of macroeconomic and financial developments have been significantly influenced by increased globalization and financial market integration, particularly over the past two decades. One area of interest is the analysis of financial crises and the mechanisms underlying them.
• Emergence of China, Financial Market Integration and the Global Economy: There is currently a clear imbalance between real and financial developments in China’s economy and their implications for the development of world economy and financial market integration. Over the past 15 years China’s importance in the world economy has increased dramatically.
• Forecasting Financial Variables using Pooling and Panel Techniques: The recent crisis has been a timely reminder of the perils of forecasting financial markets. The problem is particularly serious when markets and economies are subject to major technological, political and institutional changes.
• Empirical Analysis of Social Networks: In this research project, we take on the unique challenges that data in social networks pose. Social networks affect the outcomes for their members and this dependence of outcomes complicates the empirical analysis.
• Subjective Well-Being and Public Policy: Measures of subjective well-being such as happiness and life satisfaction, are gaining increasing attention in policy-making circles as possible goals of government policy. But research on the way in which specific policy measures affect well-being is very limited. This project contributes to filling this gap.

Kay emphasized the connection between global economy research and USC’s location and affiliations.

“One feature of USC is its global nature,” Kay said. “Clearly, INET recognized that if you are interested in new economic thinking then the real crucible of economic growth is now on the Pacific Rim. USC’s position as a global university with strong connections to many countries in Southeast Asia, China, Korea, etc., was an attractive component for INET. We have so many foreign students on our campus; we have so many connections to the growing economy of the Pacific Rim.”

Long gone is the time when universities could rely on federal funding to conduct this kind of rigorous research, Kay noted.

“Our collaboration with INET shows exactly how USC Dornsife is managing challenges like sequestration,” Kay said, referring to the 2013 budget sequestration, which resulted in automatic spending cuts to the United States federal government. “In the era of sequestration where we cannot always rely on the federal government to provide the research funding we once had, programs like USC Dornsife INET take on increasing importance.”

Marshall Auerback, director of institutional partnerships at INET, said USC was selected for its forward-thinking views and Pacific Rim location.

USC is a partner that “shares the commitment to move beyond dry status quo thinking and has the courage to challenge many of the prevailing myths and misconceptions which created the sense of a discipline — economics — that has gone astray,” Auerback said.   

“We were immediately struck by USC’s commitment to bolster its resources, to champion new kinds of economic thinking, as well as to embrace the multidisciplinary approach needed to restore the credibility of economics in the 21st century. And as a Pacific Rim-based university, USC avoids the traditional ‘northeastern elite’ bias toward Washington consensus style market fundamentalism.”

Auerback said Pesaran was also a draw.

“In Hashem Pesaran, we were blessed to find a remarkable ‘practitioner-scholar’ whose career has literally embodied the multidisciplinary heterodox approach we are seeking to champion,” he said. “His work spans from his early and courageous critique of the rational expectations school — at a time when its popularity was paramount — to his experience working in finance, which allowed him to appreciate the huge role finance plays in today’s economic system.”

By contrast, most economics textbooks tend to treat finance as a footnote. Pesaran’s scholarship shows the superficiality of that approach, he said.

“We look forward to a long and fruitful collaboration with a university that has made a genuine commitment to embrace a very different kind of economics for the next generation of scholars,” Auerback said. “We hope we can use this partnership as a means of propelling economics forward toward new and greater heights.”