He discusses some of his research (full list available):
- 16:17 – The link between corporate social responsibility and a firm’s resilience during the COVID economic shock
- 25:29 – Changes in banking regulation and its impact on firms and racial discrimination
- 31:47 – If there’s a shock to the competitive environment facing a firm, do they increase or decrease corporate social responsibility?
And shares his passion for his students: “Because the class was so into everything, it made it easy and exciting for me to try to be the best version of it with myself and to give as much as I could to the class.”
[00:00:00] Paulina Lee: I’m Paulina Lee. This is here@haas, a student-run podcast connecting you to Hassies and the faculty that change our lives.
[00:00:13] This week on here@haas, we are joined by professor Ross Levine, the Willis H Booth chair and banking and finance at Haas. He’s also a research associate at the National Bureau of Economic Research and a member of the council on foreign relations. Thanks for coming on the show today.
[00:00:30] Ross Levine: Great to be here.
[00:00:32] Paulina Lee: How’s your Sunday going?
[00:00:34] Ross Levine: Oh, it’s a wonderful Sunday. Went for a long hike early in the morning because it’s kinda hot. And then, actually been doing some research the rest of the day.
[00:00:43] Paulina Lee: Oh, great. Well, we’ll have to ask about that research a little bit later. For starters, you did your undergrad at Cornell and your Ph.D. at UCLA but we’d love for you to share your background and your different jobs and roles you’ve had before coming to Haas.
[00:00:59] Ross Levine: Oh, I had many jobs. So, after graduate school, I met my wife in graduate school and she went on the job market the year before that I did and she got her dream job at the international monetary fund in Washington. And so, I followed her there and was able to finish my dissertation while working as an intranet, the federal reserve, the US central bank.
[00:01:23] And I was very fortunate. They offered me a permanent job. So, as you know, with dual careers, it was nice to end up about two blocks away from each other and we could both walk to work. And, I started out doing research on international finance exchange rates and decided I didn’t like that very much.
[00:01:43] Didn’t want to do research anymore. My wife was at the international monetary fund and her work going to countries and dealing with a variety of policy issues, it’s so much more interesting than my work. And so, in the evenings, I learned Spanish which was sort of a requisite for getting into the world bank.
[00:02:04] I couldn’t go to the IMF because she was working there. My wife is from Chile so she could help beyond the Spanish front. And then I moved to the World Bank which was really the defining time in my intellectual development. Now it’s a catchphrase to talk about diversity but boy, the world bank is diverse people from all over the world, all different religions, and different professional backgrounds. I would go on work with lawyers and bank regulators and I was an economist and it was just fantastic. And then I think I just didn’t want a boss anymore.
[00:02:46] I just wanted to pursue my agenda. And I was fortunate because at the world bank even though I had left the fed in order to stop research when I got to the world bank, I fell into doing some work that was completely different from my dissertation and really started a research agenda. And then I figured, okay, I just write one paper and then I’ll go back to doing the core work of the bank.
[00:03:12] And then just like one more paper and then one more paper then one more, then one more. Then when I left for academia, I was like, okay, I just have to finish this research agenda with no bosses and then I’ll come back to the world bank and that hasn’t happened yet. So, I’m then in academia did a little moving around, and ended up at the fantastic place that we know and love, Haas.
[00:03:34] Paulina Lee: That’s great. And taking a step back. I often wonder how people end up in their careers. And I think it’s part of my own curiosity about trying to figure out what I want to do. But did you have an aha moment when you’re like, this is it? I am going to become an economist or how did you start down that path?
[00:03:54] Ross Levine: It was a little bit more of an evolution. So, in high school, the only thing I wanted to do was play basketball. And, it kind of dawned on me at some point that I, that this really wasn’t going to be a very successful professional endeavor. And then I decided I wanted to be a columnist for the New York Times but I don’t write very well.
[00:04:15] And so, then I figured I’d better learn about how the world works, and then I could write for a broader audience. That was really the motivation. I was good at math and good at computers. And so, there was a natural link with economics. And then in economics, I was just struck by disparities between the rich and the poor and countries around the world.
[00:04:36] I grew up in a very poor neighborhood, very kind of violent. And other people grew up in different neighborhoods. So, there were such dramatic differences, both in opportunities and outcomes that were fascinating to me. And like I said, went to graduate school, and what happens in graduate school?
[00:04:57] Sure. Everything becomes focused on writing a paper, writing a dissertation and if I would have gone to academia right after graduate school, I wouldn’t be a researcher now because I didn’t have an agenda that I loved. It was only after going to the fed where I could do work very different from my dissertation learned that I like policy work then go to the world bank and find an agenda that was exciting to me and that I wanted to pursue. And when I was deciding to go into academia, if you want to an aha moment, that is what I told my father, I’m going to go to academia. I have a good enough publication record. He asked me, he says, but what are you going to do? The question is that what does academia give you? Besides wonderful students, academia gives you is freedom.
[00:05:48] Let’s see. It’s like, okay, what, what are you going to do? And it took about a year for me to be able to write down in a few sentences what I wanted to do. And, that’s why I ultimately made the move there.
[00:06:03] Paulina Lee: May I ask what the sentences were?
[00:06:05] Ross Levine: Yeah. I wanted to figure out the role of the financial sector in addressing the questions that I mentioned about why are some countries successful, others less successful. Why are some people have more opportunities and others less? And so, for about two decades, I kept digging the questions surrounding the theme that evolved over time, which was that, Hey, the financial sector decides who can start a business and who can’t start a business.
[00:06:39] And the financial sector decides who can expand and who can’t. And the financial sector decides whether you can purchase a home and live someplace that’s conducive to the cognitive and non-cognitive development of your children. And even if you never deal with the financial sector at all, the financial sector determines whether you’re looking for work in a competitive environment, because part of the ways in which firms compete is by raising capital in order to do something.
[00:07:09] And so as I started to work on this and discover more and more, it came in agenda about how finance really shapes the contours of individuals and communities and country’s economic horizons. And that really became a sort of the defining theme for like I say, a couple of a few decades or so, and that that’s been fun, really fun and very rewarding, very rewarding.
[00:07:41] Paulina Lee: When you think about working at the world bank, you said you were learning Spanish. Is a requirement of the job bilingual?
[00:07:48] Ross Levine: Oh, it’s because as the world bank, it’s an international organization. And many people come from around the world. They have their home country language and so most people around the world learn English. There’s almost everybody comes as bilingual. But for somebody from the US, it’s very important to not just be US-centric.
[00:08:09] And so, I don’t know if it’s a requirement but it’s close to her requirement to be bilingual.
[00:08:17] Paulina Lee: An unspoken requirement, perhaps. Yeah. And what was it like working at the world bank? What do you think was your biggest challenge that you face and what was the biggest thing that you learned?
[00:08:28] Ross Levine: I love the world bank and if there’s something big like that, there’s always bureaucratic issues. But the most wonderful thing about the world bank was just, debating all sorts of issues with all sorts of people. And that was just wonderful. And it wasn’t just differences in nationalities, which is fun.
[00:08:54] It was also differences and professional approaches. So, given my area of finance, I would often go on trips to countries where there’d be a lawyer and there’d be a regulator. And there would be business people. Cause we’ll be talking to the banks. And it was learning how to communicate with all of these people with different expertise in a way such that we could come together and produce something useful for the country, at least tried to do that. And that was just wonderful. I love the collaboration and challenge of learning to interact with other people. There are always barriers; for example, the regulators always think that economists are just floating around an avatar space with their theories, and they can’t really do anything useful. And the economists tend to think of the regulators. You just have this rule book that’s given to you, those thoughts that go into it. This is a political outcome. And so how could you, given that you just know this rule book, design a new rule book. That’s not what you were trained for. But by talking and appreciating what different people bring to the table, something I’m sure that is a part of your work environment and training at Haas, but something that I lived through all of the time at the world bank, that was fantastic.
[00:10:30] It was just really defining years of my professional career. And then, yeah, just great.
[00:10:36] Paulina Lee: That’s awesome. And when you moved over to academia, what was the biggest shock for you?
[00:10:43] Ross Levine: That’s a good question. I think the biggest shock is how strong the relationship is between a faculty member and a Ph.D. student. Because this Ph.D. student is there for five years and grows up in many different ways and different students grow up in different ways. And there’s a profound responsibility to the students, and difficult to discern when to tell someone that perhaps this isn’t the right avenue for them. And it’s just not clear. How am I supposed to know? We all struggle in the beginning. But at the same time, you don’t want to encourage somebody who’s certainly very bright and capable with lots of opportunities to spend years on something where if you don’t think that this is going to be fruitful for them.
[00:11:48] And then, once they jump in, there’s a lot of responsibility in guiding their work and figuring out how to guide their work. And how much do you intervene? How much do you let them make mistakes? It’s a kin a little bit to being a parent and then still am figuring out how to navigate the intensity of that relationship.
[00:12:13] Because teaching undergrads and teaching MBA students, typically it’s not a one-on-one intense relationship for many years where you have a major impact on how they enter their professional lives.
[00:12:31] So I think that was the hardest for me. There’s a woman in Hong Kong now who I met when I was on a trip. And we started working together about six years ago and she’s coming up for tenure and she has just done remarkably well. And to see her grow over this time period has just, it’s been a great joy.
[00:12:57] And so it’s both very satisfying, but it’s, you feel this intense responsibility.
[00:13:06] Paulina Lee: That’s a great point. My dad did his Ph.D. as well, and I know when he’s been mentoring other students, his number one thing is you have to find a really good professor or a sponsor to work under cause it’ll make or break your work, what you work on, everything that you do. So, it’s a good analogy because I think people probably on the outside looking in think it must be just like any boss manager, worker, but it’s actually much more intense and much more intimate than that. One of my favorite parts about class this past year was when we had time at the end of the class.
[00:13:42] And you gave the opportunity. Yeah. For research. I loved how you always would give us two or three options, and the whole class would vote.
[00:13:49] So would love for you to talk a little bit about your research and kind of where the bulk of it has been and what you’re working on today.
[00:13:58] Ross Levine: So first on the class, as I mentioned to you but not on your podcast, it was just a phenomenal class. The people were so engaged, so energetic. And by the way, because the class was so into everything, it made it easy and exciting for me to try to be the best version of myself and to give as much as I could to the class.
[00:14:30] And so the energy really is infectious. And just so the listeners know, I mean, you guys are coming from a workweek. You’re there on Saturday. It’s eight hours of the class with a short hour break for lunch, which is not really an hour because you’re standing aligned to things like that for some food.
[00:14:55] And so when it gets to be hour-seven and people are totally engaged asking questions, wanting for more and things like that, it‘s just unbelievable about the quality and the enthusiasm of the people in that room. So, I just, I missed everybody from the class. It’s, it’s just a fantastic group. Just a fantastic group.
[00:15:17] Okay. Research. So, I think the big, big, big research paper is what I mentioned that it’s really been about showing at finding exerts a first order impact on the economic growth of countries, on income inequality within countries, and poverty levels. And I think maybe interesting is that for poverty, it’s not about that a better financial system makes it easier for per a poor person to get a loan, to open up his or her business. It’s much more about that will the well-functioning financial system firms compete with each other to get funds, and they can get funds and then they go out and seek out the best workers in order to compete.
[00:16:10] And that’s what helps people at the lower end of the income distribution more than their ability to get money. Actually, I just finished something on COVID, which is a little bit different.
[00:16:20] So I was quite curious about which firms were more immune to the pandemic than other firms. And part of it was maybe this would be useful for investors cause going forward since there’s likely to be other global events. They may be able to isolate which corporate characteristics make them more or less resistant to shocks.
[00:16:48] So we looked at a variety of characteristics. We had information on about 8,000 firms across the world, so we could dig into many details. So, I thought I would tell you about one, because it’s something I was skeptical about. So maybe you’ve heard about corporate social responsibility.
[00:17:06] Paulina Lee: Yep. I work for a large corporation called Proctor and Gamble.
[00:17:10] Ross Levine: Fantastic. Okay. Yeah. So, I was very, very skeptical, and was being very, very skeptical about how important core corporate social responsibility is for the actual functioning of firms, as opposed to a mechanism for doing some publicity but not actually having an impact. And I was proven wrong, or at least my research proved me wrong.
[00:17:36] And so one argument is that part of what goes on in a firm is that workers come together. There’s a community in which the firm operates, there’s suppliers to the firm and of course their formal contracts but there are lots of arrangements that have to take place between all of these stakeholders that are more informal in nature.
[00:18:04] And so that’s where trust can be an important input because it’s difficult to write a contract for every sort of behavior and contingency. So, some people have argued that if you’re a firm and you engage in responsible actions and you treat people fairly and well, then when there’s a shock, those stakeholders, those workers, those suppliers will be willing to work with you to overcome the shock more effectively than if they don’t trust you. And there’s a sense of, okay, this is a shock. We’re going to have to give a little bit for this firm, this firm has always done right by us in the past when things turn around, and hopefully, they do turn around, then the firm is going to do right by us in the future.
[00:18:50] And we just can’t write a contract contingent on all the possible outcomes. So, they, well, people would argue for that. I didn’t believe it. But it holds up very, very strongly that controlling for many features about firms. And that’s the wonderful thing about having so much data. Firms that had engaged in more corporate social responsibility in the past were more resilient to the shock in the sense that their stock prices took much less of a hit than otherwise similar firms, even within the same country, within the same industry.
[00:19:23] So that sort of one finding that surprised me. And maybe you find stimulating, too.
[00:19:32] Paulina Lee: For sure. I mean, as someone working in a large corporation, as an employee, we got to see a lot of the things that the company committed to local communities, to the employees themselves, providing PPE, and the way that they handled the whole situation. And they have a pretty large platform of corporate responsibility that they stand up too.
[00:19:52] Paulina Lee: And I’m curious, how does research typically start? Does it start with you? You have an idea. You have a budget, you go and run with it. Do you have to get any approvals or what does that really look like?
[00:20:02] Ross Levine: So, this is different from economics from most of the physical sciences. So, there’s some differences in economics, but for my work, I have an idea. Much of the time my coauthors have an idea and they bring me in and we discuss it and we refine it and then we go forward and the main expense oftentimes is purchasing data. But that’s much, much less expensive than what chemists, biologists, and people doing environmental sciences have to do. It’s just an order of magnitude different. There’s some people who do experiments with people. And that’s more expensive and at the business school and in the economics department but I haven’t done that.
[00:20:54] So for me, that’s why for me, given the shock of the pandemic, as horrible as it is for everyone, it doesn’t affect my research very much because most of my coauthors are somewhere around the world. Hong Kong, Frankfort, Israel, London. So, it doesn’t matter very much. Work has gone along pretty well.
[00:21:20] Paulina Lee: That makes sense because for the most part, you’re using existing databases, right? From different surveys that are out there.
[00:21:28] Ross Levine: And even when we construct data, it’s very different from the physical sciences, even willingly it’s constructing data, it’s going to different types of websites and putting together a new data but it’s not putting people through questionnaires or things like that.
[00:21:45] Paulina Lee: Got it. I know you’ve done a lot of research, and you shared a lot of these in our class time as well, but do you have one or three of your papers that you would say were the most surprising in terms of results or that you got the most out of?
[00:22:03] Ross Levine: So….
[00:22:05] Paulina Lee: It’s a loaded question. I know you have a lot of paper.
[00:22:08] Ross Levine: No, the problem is I can’t remember. I have a lot of papers and I’m old when you combine those two things, that’s a problem. I think that there’s, I’ll go to three. So, the first one, I couldn’t believe as I mentioned to you, one of the big things that I started doing research on was the links between finance and how countries perform in the long run over one, two, three decades.
[00:22:35] And one of the things I did there was it was different at the time was to really put together lots of good data on the functioning of banking systems around the world. Found very strong results. You looked at banking systems at the beginning in 1960, you could predict growth over the next three and then four decades.
[00:23:01] So this is just, it was like amazing when I found this. And you looked at other things that everybody talked about, and everybody talks about international trade. No, it doesn’t predict it. Everybody talks about political uncertainty and revolutions include, nope, it doesn’t predict growth over the next few decades.
[00:23:19] And then you look at all, it’s the macroeconomy and it’s inflation in deficit. No, but it doesn’t predict growth. It was like only finance predicts growth.
[00:23:28] And then I said, well, why are we only focusing on banks? What happens if we look at stock markets and the intuition was that oftentimes the banks do they form a relationship with the firm. And by forming a relationship with the firm, they get lots of information about the firm. And so, if you have better functioning banks, part of what that phrase means better functioning is that they may be better at picking out the best firms. And if in a country, banks are better at picking out the best firms, in other country banks are not so good at picking out the best firms.
[00:24:03] Maybe they just lend money to their political friends, their cronies, the politicians, and one country you’re going to get a better allocation of capital and faster growth than the other slower. So, for stock markets, I said, Hey, the stock markets do something else. Maybe stock markets allow you to diversify risk.
[00:24:22] And so you could think of many situations. For example, let’s say you’re going to build a railroad, and you know it’s going to be profitable, but it’s not going to be profitable for 10 years. So, people may be reluctant to invest in the railroad because you put your money in, and it’s going to pay off big in 10 years.
[00:24:39] But let’s say in two years you need money to go to graduate school, in two years you need money, somebody is sick in your family, in two years you need money your kids need to go to college or whatever it is. So, there’s this issue of liquidity risk. And that may keep people from investing.
[00:24:56] It’s like, well if you have a stock market, you just sell your share to somebody else. And so that reduces the reluctance to invest as well as the ability to hold a diversified portfolio. So, I was like maybe they both affect growth. Again, you were looking across like 90 countries over 40. Is this so I kind of just said, okay, I’m gonna include both of these, both of these at the same time.
[00:25:16] And they both enter significantly. They both predict growth, world banks, and stock markets. That shocked me. That one shocked me. So, the other thing that shocked me was I grew up in a very different neighborhood from most people and that my neighborhood, so it was in Plainfield, New Jersey and it was ravaged by race riots in the late sixties.
[00:25:54] And many white people sort of fled. And especially they fled to the public schools. The public schools were about 90% African American. And my parents very much believed in integration in public schools. And so, I went to public school. And so, you had a very interesting mix because relatively well-to-do black families also took their kids out of public schools.
[00:26:26] And so it was a very distinct group, and I became very aware of the disparity in the US not by reading it in a book but by living it. And I always wanted to come back to studying race and didn’t have a particular and unique strategy for saying something valuable. Many people study race and had great insights and things to say.
[00:27:04] And just because I wanted to do something, it didn’t mean they had anything valuable to add. But I kept thinking how can finance give me an avenue in, and it was very interesting because I was at Brown University and there was a faculty member there, Yona Rubinstein, who’s a genius. I think one of the smartest people I’ve ever met. And he would go to seminars. No matter what seminar he went to, he always had something insightful to say. So, I decided to take a class of his. His Ph.D. class. He was an assistant professor. I was a senior faculty member but the guy who was brilliant, so I took his class and he talked about Gary Becker’s theory of racial discrimination.
[00:27:56] And Gary Becker argued that one, not the only, but one manifestation of racial prejudices could be that a white owner might, because of his or her racial biases may be reluctant to hire black workers and that if this happened at a big enough scale, these white owners might be willing to forgo profits. And they might be willing to hire a less capable white person in order to satisfy their desire to have white workers. And this is called taste-based discrimination because it’s very much the purest form of racial discrimination. There are other types as well. And this theory requires that the owner be willing to accept less profits in order to get what the owner wants, which is a white workforce. And so in sitting in Yonas class, I said, man, I wonder if finance can say something because I knew what had happened in the US that there had been some very peculiar changes across the individual states of the US.
[00:29:22] There were changes in banking regulations that intensified competition among banks and by intensifying the competition among banks, it intensified competition among firms. So, the link there was that let’s say you always lend to me, and even though there’s another firm out there that’s probably better than I am. You and I go golfing together; we go hiking together. So, you just lend to me. Okay. But now all of a sudden, let’s say another bank is going to come and compete with you. That other bank is going to lend to the other firm that’s better, put me out of business and put you out of business, or hurt you. And so, you respond to competition by looking for the best firm. Not just your golf buddy. And this intensifies competition not just in banking, it intensifies competition among all firms.
[00:30:26] And that’s sort of the link back to Gary Becker and racial discrimination because now the shock to banking which is occurring for reasons that have nothing to do with racial discrimination. It’s going to intensify competition among firms. So now if you go back to our story, if before if I am a racist and I was willing to pay more for a less competent white person, I can’t do that anymore because I have no profits to spare.
[00:30:57] So it’s not that my racial attitudes change, it’s just that I had in order to stay in business, I have to hire the best people, not the whitest people. So, I was like, okay, we’ll try this out. And it shows up very, very strongly that with this change and competition, you do see a reduction in the gap in wages between black workers and white workers with the same education and experience and things like that.
[00:31:27] So this was, this was also something that’s surprised me that I learned from and that had an impact.
[00:31:35] Paulina Lee: And it’s a positive one too. I remember you sharing that one in class And it was reassuring that competition actually does help in that sense.
[00:31:46] Ross Levine: Yep. By the way, if we wanted to talk about the positive things about competition, the paper that I’m working on today with before we have had this opportunity to talk. It’s also about corporate social responsibility. And so, there are different views about why firms take their money and invest in corporate social responsibility. And so, one view is that executives are reluctant to invest in corporate social responsibility because this may give up some of the bonuses that they want to receive. And that owners of firms, shareholders, would like to invest more in corporate social responsibility because that’s going to establish this trust.
[00:32:36] That’s going to help the firm in the long run where the executives focused on the short run. And so, it’s very difficult to figure this out because there are many moving pieces and so, what we decided to do is we have information on shocks to competition.
[00:32:57] So then we can ask the question when there’s a shock to the competitive environment facing affirm, do they increase or decrease corporate social responsibility? So, one argument and this was sort of a little bit implicit in your question was that, Hey, maybe competition forces people to focus on the short run and they don’t do that.
[00:33:22] They don’t kind of invest in corporate sponsors. The other view is that actually with competition, you can’t mess around. You have to be focused on the long run and you have to sort of get rid of executives that are focused too much on the short run and the competition forces better governor in some of the firms.
[00:33:43] And one of the responses of better governance is to increase expenditures on CSR. And that’s what we find.
[00:33:50] Paulina Lee: Okay, well, that’s kind of fun too.
[00:33:52] Ross Levine: I’ll make that my third. That’s my third one.
[00:33:56] Paulina Lee: Okay. Okay. But I’m curious, cause you mentioned earlier kind of the crux of your research looks at finance and the implications on countries over a decade.
[00:34:09] So, are there certain things that you’re keeping an eye on or certain indicators that you’re watching right now as countries combat COVID and combat the economic crisis and the different changes in the economy so that in 10 years from now, 5 years from now, whatever the timeline is, you can write a really good paper on it?
[00:34:31] Ross Levine: Wow. That’s a very good question. So, I think I’m going to go very broad on this but I’m not sure how I can get it to be a paper. The overarching tension in public policy has to do with the role of government. So, you have a spectrum, and so on the one hand over on one side, typically viewed as the left side, there’s a belief that the government should play a major role in solving many problems.
[00:35:14] On a more right side of the spectrum, and right and left don’t work very well in the US right now, there’s typically a view that you want limited government on limited questions and the role of government should be focused on facilitating private sector solutions to problems. And this is just the classic problem in a debate that’s existed for a very long time. And this is going to be maybe super nerdy, but it’s been interesting to me is I’ve been comparing a little bit in my spare time, Adam Smith and James Madison, and they wrote about the same time the wealth of nations in 1776, which is also pretty big date for the US.
[00:36:13] And what Madison argues in the Federalist papers is that the great challenge of government is how do you empower this government to solve problems while at the same time obliging it to control itself so that it doesn’t do lots of pernicious things. And the scene theme has come up in the wealth of nations where the invisible hand is obviously the most popular catchphrase, but Smith is for compulsory public education is very much aware of the need for infrastructure. And very importantly is very aware that industry is likely to capture government in order to restrict markets, whether it restricts trade or creates monopolies that protect the few. And this tends to be the biggest criticism of government involvement. It’s like, why would you ever trust the government? For example, for people now on the left and the US who want more and more government involvement, I sometimes ask them the question.
[00:37:31] Have you looked and see who’s in charge of the government? Like, and why do you want more of this empowerment of the government? Like, you’re so sure that that a different set of people are going to be able to behave in a better way. And so, this is this classic tension and I think what we’re clearly seeing with the pandemic is a move toward more government involvement. And I don’t know whether this is a good thing or a bad thing. I’m not but it’s a change that’s likely to have far-reaching implications besides laws having to do with sheltering in place and wearing a mask. And in my work on finance, this has potentially very dangerous implications. There’s something in economics called moral hazard, which is a poor name but it is the title of it. And the court intuition is that if I have some money and I get the upside and I’m insured against the downside loss I’m going to take on big risks. And so, if the government stands ready to bail me out, if I’m a bank or finance or any other financial institution, if I fail, I’m more likely to take on big risks, which also increases the vulnerability of the economy.
[00:38:53] And my concern now is that by creating an explicit or implicit safety net for all types of institutions in the US and around the world, what we are doing is creating incentives for excessive risk-taking. And there are debates about this. I think that the global financial crisis was largely or partially a reflection of that force.
[00:39:35] And my concern is that with the central bank interventions around the world and all sorts of financial markets, that we are creating the possibility for very, very big problems in the future.
[00:39:52] Paulina Lee: Yeah, it’s been interesting to obviously be in business school during this time and kind of learn real-time in the classroom with it. And I was listening to a podcast the other day and they talk about how J Pal’s role has really changed because of the pandemic. Usually very separate from government but now in a sense having to do more hand in hand because of everything that’s going on.
[00:40:16] Ross Levine: Yeah.
[00:40:17] I was asked recently to sort of write a book about rethinking regulation. And, so I approached two people. We’ve written two books together on regulation. And this is sort of the theme that we’re bopping around, which is that it’s not just banks; it’s non-banks, it’s insurance companies, and its many other elements of financial markets that one would never think of having a government backstop. And now we see that they do. And the one thing that we know from economics is that responds to incentives. And these incentives are pointing very clearly in one direction.
[00:41:11] And that should not make policymakers very comfortable.
[00:41:15] Paulina Lee: Right. I wanted to ask a couple of questions about Ross Levine outside the classroom. What types of hobbies do you do? What do you do in your free time outside of research and teaching?
[00:41:26] Ross Levine: I do a lot of hiking and a lot of swimming. That’s kind of that’s the main thing. A lot of hiking, a lot of swimming. When I can go, you drove out to Wyoming. Our daughter is there and went hiking with her in the Grand Tetons a couple of weeks ago. My son who works for a startup in this virtual space, he has been in a couple of places.
[00:41:50] He’s going to come home for a little bit. That’ll be nice. And I’m sure he’ll want to play basketball which is going to kill me and do a little reading, bought some TV. That’s about it.
[00:42:01] Paulina Lee: Oh, that’s great. And, what was it like working with your wife, filming those videos that we had to watch in class?
[00:42:08] Ross Levine: Oh, it was fun. Yeah. We’ve been working together for…. we met in graduate school. So, it’s been, it’s been a long, wonderful partnership. The first time we taught together, actually in the class was interesting, it was in Brown and my wife who worked at the IMF is Chilean.
[00:42:30] There were lots of advantages for her maintaining her diplomatic passport when she was at the IMF. And then when we decided to move to academia, then it became appropriate for her to get. That would be said to become a citizen. And so, we were going to the courthouse for her swearing-in, and there’s this long line.
[00:42:50] And that was the day that Lehman Brothers failed. So, we’re rolling. Well, I asked her, well, are you sure you want to become a citizen of this country? There’s still time to back out. Then, of course, two economists, the major economic event, we start arguing about what this means.
[00:43:10] So that’s about an hour.
[00:43:13] Yeah. As we wind our way in and take our seats and stuff. So, we’re arguing, arguing, arguing, and arguing, and we get there and there’s a nice ceremony. And then I said, do you know what? I had a big class that afternoon was about 200 people. I was teaching finance says, why don’t you come to class?
[00:43:30] And we’ll just have this debate, this argument in class. Yeah, because the students are not going to look. The world is ending. The students are going to want to hear about the ending of the world. They’re not going to want to hear about whatever I was going to talk about. So, she came to class and we had this debate.
[00:43:47] And what was great was that she quickly made it personal, which the students just loved and, and especially, it wouldn’t work the other way around because she’s a petite person, it’s like a large male being sort of personally, it just wouldn’t work, but her doing it, people just loved it.
[00:44:14] And so then, she decided to ask me to come. She was teaching a very large class, a macro. So, I went there and people heard and so many students were on campus. It was like 300 students there. So, we had a very, very good time. I think she played it up too much, but, but it was, it was, it was a lot of fun. We haven’t done a joint class at Haas but working together is just, we enjoyed it a lot.
[00:44:41] Paulina Lee: That’s so fun. One of my favorite podcasts, Planet Money, is doing a series right now. They’re calling summer school and they feature two economists who are also professors at the University of Michigan. And one thing that I love that they always do, Planet Money is really good at, is they take basic economic principles and apply it to real life.
[00:45:02] So they’ve covered sunk costs and data, food banks, allocations. So, I’m curious, my question is do you have a favorite basic economic principle that you use every day or the one that you always fall back to in conversations?
[00:45:19] Ross Levine: I think the honest answer is no, not really. If I have to come up with one, this issue of moral hazard comes up a lot in my business of finance and it’s sort of, it’s pretty helpful, but nah.
[00:45:38] Paulina Lee: All right. Fair enough. And you said you were reading. Would you like to share your top three books that you’ve read recently or that you always find yourself coming back to?
[00:45:48] Ross Levine: Ooh. I read a couple of biographies. Read a biography of Winston Churchill and a biography of Napoleon. And those were kind of interesting for me. Things that I keep coming back to. I read a lot of US history. I liked that. And part of what’s been, it’s not interesting but there’s almost like this revelation in the US that there’s this racist past and I’m sort of like, where have you people been? It’s like, what do you think the Europeans did to the native Americans?
[00:46:28] And how, what, what do you think is the few centuries of the behavior first of the Europeans and then the US towards African Americans and Native Americans. There’s a book on that’s actually pretty good. This is something called Original Meanings. It’s by a guy named Raikov who’s a political scientist at Stanford, and it’s about the creation of the constitution. I find it interesting because you think of the constitution is this pure or thing and there’s no other way it could have been and that’s sort of handed down like some sort of tablet and you just see all of the compromises and the just in time voting of some person that got it to be in this type of a form, which is what you would expect from a bunch of flawed human beings like we all are coming together and trying to put together some simple rules for government.
[00:47:25] And it’s a little bit of a humbling statement that these people did their best. There’s a lot of risk and uncertainty and random events and then they put this together and they treat it too much like gospel’s probably he, reflects more of what we need rather than what, even what they saw it as.
[00:47:48] Paulina Lee: Right. Anything else you’d like to share for our listeners or for current or prospective students?
[00:47:48] Ross Levine: I think Haas is a great place to be in to get an MBA. I think it’s a wonderful environment. I hope to see them. I hope to see you have to see them in class.
[00:48:06] Paulina Lee: Okay. Well, thanks so much for coming on the show this week.
Ross Levine: Thank you. My pleasure, Paulina.
And thanks for listening to this week’s episode of here@haas. If you loved hearing professor Ross’s story, don’t forget to leave us a rating and review and make sure you hit that subscribe button so you don’t miss out on future stories. Until next time. I’m Paulina Lee. And this is here@haas.