2010-11 Chair Appointments

Margaret Mendenhall Blair

Milton R. Underwood Chair in Free Enterprise
Margaret Mendenhall Blair

A few short days after the sudden economic downturn of 2008, Vanderbilt law faculty gathered for an impromptu one-hour session which economist Margaret Blair had volunteered to lead. In a single hour, Blair, who teaches Corporations and other courses in Vanderbilt's popular Law and Business Program, explained the "series of unfortunate events" that had precipitated the U.S. financial system's near collapse. "Understanding the events that contributed to the crash was, and continues to be, a challenge," said Associate Dean for Academic Affairs Lisa Bressman, "but Margaret brought them into much better focus in just one hour."

Blair has since focused on studying the overriding causes of the downturn and its long-term implications. In her Underwood Chair Lecture on April 15, "Financial Innovation, Leverage, Bubbles and the Distribution of Income," she discussed "a number of troubling trends" she believes will continue to create a roller-coaster cycle of financial booms and busts. One key trend is increasingly unequal income distribution, with most growth in income going to the top 1 percent of American earners and almost 50 percent of all income growth going to those among the top 10 percent. Another is the growing share of the U.S. gross domestic product (GDP) that goes to the financial sector, which includes real estate lending and leasing; the financial sector now account for 7.5 to 8 percent of the annual GDP, three times the share of GDP represented by this sector 60 years ago.

Although the financial sector has captured a larger share of the GDP, the number of people employed in the sector has essentially remained flat since the mid-1980s. "That means that the compensation of those employed in the financial sector has increased substantially," Blair said. "On average, financial-sector employees now make more than $100,000 a year. My question is, 'What is finance doing that makes it worth a growing share of the output of the economy?'" Blair is also exploring her hypothesis that "an extreme degree of leverage creates instability in the financial system and in the economy," noting that, at the time of the 2008 collapse, "Leverage in the financial sector as a whole was higher than 96 percent." Because the lax regulatory conditions that led to the 2008 downturn persist, Blair said, "It's only a matter of time before we go through another cycle of bubble and bust."

Blair, who holds a Ph.D. in economics from Yale, was appointed to the Milton R. Underwood Chair in Free Enterprise in fall 2010, having joined Vanderbilt's law faculty in 2004 after teaching at Georgetown Law Center and serving as a research fellow at the Brookings Institution. She was appointed to the chair after it was vacated when Professor Emeritus James W. Ely Jr. retired. "I want to express my great appreciation to the Underwood family of Houston for funding this chair," Blair said.

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