In other disciplines to leave your university because another offers to pay you more entails personal humiliation and status degradation to a not inconsiderable degree: you are supposed to value ideas and colleagues and students, not cash. In economics, however, the thrust of the discipline makes a failure to respond to market forces a moral fault in itself.
Mishkin was an academic economist making a very healthy amount of money: $300,000 a year from Columbia, on top of (in 2006 alone) $242,632 in consulting fees, $434,000 in royalties from Pearson Publishing, and a $75,000 advance on a new book. Add it all up and you get a seven-figure income.
Let’s say that Mishkin, pace DeLong, was rationally seeking to maximize his income and saw no reason why it should top out at a million per. And was invited to become a Fed governor on a salary of $168,000 per year – something which would involve giving up his Columbia salary and his consulting gigs, but not his book royalties.
True, he’d need to get by on a mere $600,000 per year or so – at least for a couple of years. (Of course, we’re not including here any income he gets from investments.) But then he could resign after a couple of years, long before his term was up in 2014, and at that point he’d be a former Fed governor, and therefore even more in demand.
So joining the Fed can make good economic sense, even if it does involve taking a pay cut. On the other hand, the government would have been unlikely to hire Mishkin as a Fed governor if they knew he intended to stay only long enough to burnish his résumé a little – which implies that there might well have been something of a lie of omission during the job negotiations.
Perhaps Mishkin genuinely did intend to stay longer than a mere two years, and was surprised at how much he missed living in New York, or something like that. Or, perhaps he was surprised by the credit crunch, and saw an enormous amount of demand for former central bankers from buy-side institutions. Never mind little consulting gigs for the Icelandic Chamber of Commerce, he could get something much more lucrative right now if he put his mind to it. And if he stayed on as a governor much longer, there’s a risk the Fed might actually do its job, the credit crunch would be over, and those job offers would no longer be on the table.
Central bankers are like judges: everybody knows they could earn much more money in the private sector, but it’s understood that there are other reasons to carve out a career in public service. On the other hand, central bankers are also economists, and are much more likely to expend some serious thought on working out the costs and benefits of the two options. And that means, I’m afraid, that we might see many more of these toe-touch terms as governor.