Exploring forces of economic growth

Washington University Record – November 11, 1999

For Steven Fazzari, Ph.D., the grit and grime of a summer job became grist for scholarly mill

By Gerry Everding

For much of this century, economists such as John Maynard Keynes have argued over what conditions encourage firms to invest in new plants, hire more employees and expand operations that fuel economic growth. And, conversely, what brings these processes to a grinding halt in a recession?

Steven Fazzari, Ph.D., professor and chair of the Department of Economics in Arts & Sciences, began arguing these same issues long before he’d heard much about the great British economist Lord Keynes. As a high-school kid in the 1970s, Fazzari spent summers working with his father in the grit and grime of a gray iron foundry along Lake Michigan near his hometown of Racine, Wis.

“It was the classic Midwestern smokestack industry, and in those days the industry wasn’t doing very well,” Fazzari said, recalling the monotony of days spent grinding castings, breathing noxious fumes and sweating alongside crucibles of white-hot molten iron.

While pundits blamed the recession on high interest rates, high taxes, low-cost imports and an overvalued U.S. dollar, Fazzari heard much more emotional opinions on the foundry floor. There, grizzled union veterans talked of wage concessions, mass layoffs and plant closings. No one knew for sure if the industry would ever come back.

Against this backdrop Fazzari escaped to begin freshman studies at Cornell University, fully expecting to launch a successful career in the sciences. Little did he know he would spend much of his career as an academic struggling to explain the mysterious economic forces he’d left behind. He had no clue that his foundry work would some day help him better understand and expand upon radical economic theories proposed by Keynes decades earlier.

“I started out in economics as a skeptic,” Fazzari said. “I don’t think the mainstream perspectives on economics are necessarily wrong, but they’re not as obvious, clear or well supported as some people think.”

Like Keynes, Fazzari has spent his career challenging the conventional wisdom of mainstream economists. Keynes’ ideas on the causes of unemployment revolutionized macroeconomic theory in the late 1930s and profoundly altered government’s involvement in the economy. Similarly, Fazzari’s ideas also have begun reshaping the consensus on some basic tenets of economic thought.

In 1988, for instance, Fazzari and fellow Washington University economist Bruce Petersen, Ph.D., co-published a widely cited paper on how internal cash flow influences a firm’s decisions to invest in equipment. This study and others by the same authors helped launch an entire new area of empirical research, most of which supports Fazzari’s contention that microeconomic fluctuations in firms’ access to finance play a strong central role in shaping cycles of recession and recovery at the macroeconomic level.

In 1993, Fazzari published a study suggesting that lower interest rates might not spur long-term business investment nearly as much as many mainstream economists claim. His research, which tracked the investment behavior of 4,000 firms over two decades, found that investment was most influenced by a firm’s sales growth and cash flow, regardless of interest rates. The study had important implications for a then-hotly-contested Clinton administration proposal to lower interest rates by aggressively trimming the national budget deficit.

The danger of saving

In a current working paper, he assails the long-held economic truism that high rates of individual savings are critical to the growth and expansion of the economy. Fazzari contends that robust economic expansions are fueled, at least in part, by the antithesis of personal savings — prolonged spurts of enthusiastic spending and consumption.

“It’s clear that individuals become wealthy by saving more, but in the aggregate, it’s also clear that less spending may not be good for the economy,” Fazzari said. “As a nation, we might actually hurt ourselves by saving more. That’s not to say that business doesn’t need capital for investment, but savings is not the primary source of business capital. To use an extreme example, if everybody saved all their income, businesses would sell nothing and the economy would collapse.”

A member of the faculty here since 1982, Fazzari became a full professor in 1996 and department chair in 1999. It is the latest milestone in a career path that, like the economies he studies, has been riddled with hard-to-predict influences.

Romance, it seems, played a substantial role in Fazzari’s decision to pursue economics at Stanford University. During his freshman year at Cornell, Fazzari felt the tug of a relationship he’d begun the summer before with a girl from his high school. Jasmine was now studying biology at Stanford, and Fazzari opted to join her there for his sophomore year. He and Jasmine sang together in the Stanford choir, and by the time Fazzari entered his second year of graduate school, they had married, rented a small apartment and had their first child.

Even as a teaching assistant, Fazzari’s skills in the classroom were evident. In 1981, the Stanford economics department honored him as a distinguished teaching fellow. His research efforts were less universally appreciated. His early work was so unconventional that it left even him unsure whether it could be categorized as macroeconomic research.

In 1982, as he neared completion of his doctorate in economics, Fazzari called the economics department here to check on his application for a junior faculty position. When a helpful secretary began reading his rejection letter over the phone, departmental chair Laurence Meyer overhead the conversation and offered to explain the decision to Fazzari. The department needed someone to teach macroeconomics, and no one was sure Fazzari fit the bill.

“Then, Larry Meyer talked to me about my research and came to the conclusion that what I was doing really was macroeconomics,” Fazzari said. “They still weren’t sure about my background, but they had faith in me and hired me anyway.”

In 1989, Fazzari was named an associate professor with tenure. Shortly after his promotion, he headed out on one of his frequent backpacking trips, this one a challenging hike through the Swiss Alps with fellow economics professor and then-departmental chair Wilhelm Neuefeind (at left, above, with Fazzari in Colorado).

“I just about killed myself,” recalled Fazzari. “I slipped and tumbled down a steep snowfield, breaking my right ankle. Wilhelm was wonderful. He had to hike across the snow for about 45 minutes to the next trail hut to bring back help. I survived, but for a long time the joke around the department was that this was no accident – that it just showed how far Neuefeind would go to get rid of a faculty member with tenure.”

Fazzari rose to the challenge, preparing himself to teach by delving more deeply into the fundamentals of Keynesian economic theory. He read it, taught it, studied it relentlessly, and from this experience, the foundation of his research emerged.

“It was my need to truly understand macroeconomic theories for teaching that led to much of my whole program,” Fazzari said.

A key influence on Fazzari’s career was Hyman Minsky, a prominent Washington University economist who was among the first to argue that banks, lending and capital markets all play an important part in the long-term performance of the economy. Minsky’s body of research spurred Fazzari to begin his own landmark work with Petersen on the role of investment and cash flow.

“He was a real source of support for me,” Fazzari said of Minsky. “He was a primary contributor to my work and to my success.”

Fazzari’s intellectual debt to Minsky might explain his own diligence in providing a helping hand to his students. Fazzari routinely receives top marks in student evaluations, especially for his willingness to entertain any question and his availability for one-on-one counseling.

“I learned more from working with Steve on our various projects than I did in all my other classes put together,” said Andrew Meyer, a 1997 doctoral graduate who co-published with Fazzari and now works with the Federal Reserve Bank of St. Louis. “He’s very thorough, relentlessly ethical and incredibly intelligent, but he’s also very good at communicating his ideas to others.”

Fazzari and his wife now have two children. His daughter, Renee, is a sophomore at Pomona College in California and his son, Anthony, is a sophomore at Ladue High School. Jasmine works part time in a Washington University biology lab and sings in the St. Louis Symphony Choir. She’s also a master gardener and often enlists her husband in landscaping projects around their home in Olivette.

Fazzari manages to escape for annual backpacking trips, usually to the mountains of the western United States. Since the late 1980s, he’s been taking piano lessons with Sona Haydon in the music department.

“I played the accordion in wedding bands during high school and always wanted to play the piano,” Fazzari said. “I decided to start taking lessons as a present to myself when I got tenure.”

Although his daughter has yet to buy his pitch, Fazzari has no qualms about selling students on attending the University. He is convinced that the undergraduate experience here in Arts & Sciences is among the nation’s best, and that an economics major is an increasingly wise option.

“Economics offers all the benefits of a broad liberal arts education, but it also provides a firm grounding in technical analysis skills that are becoming essential to advanced work in many other disciplines,” he said. “People in business, law, public policy and government use economic principles to explain how things work. Economic concepts are becoming critical to the understanding of new thinking in the social sciences. They have become the basis for some of our most interesting and important interdisciplinary research.”

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