Despite flaws, Summers is the best candidate for Fed chair
The two-horse race to replace Ben Bernanke as the Fed chairman appears to have come down to gender. In a letter to the president, about a third of Senate Democrats have made clear they would like Bernanke’s deputy Janet Yellen to replace him, primarily — though they do not openly say it — because she is a woman.
The White House, it seems, would prefer Larry Summers, Bill Clinton’s Treasury Secretary who was also director of Barack Obama’s National Economic Council. Summers is a distinguished economist, a former chief economist of the World Bank and briefly, until he was subsumed by controversy, president of Harvard University. (Summers writes a monthly column for Reuters.)
It is true there are not enough women in top positions. It is true, too, that Janet Yellen is a distinguished economist with considerable reserve bank experience. But her gender should not in itself be enough qualification for her to be awarded with one of the most important jobs in the nation.
The Fed chairmanship has always been a powerful position, but when there is gridlock in government thanks to the Republican majority in the House deciding to pass no new measures whatever — Speaker Boehner defines his job as repealer-in-chief, not legislator-in-chief — the Federal Reserve is the sole provider of economic policy. For that pivotal post we need the best person for the job.
There is a strong case for giving the job to Summers. He is not only a distinguished theoretical economist but an original thinker at a time when what we need above all is ingenuity. He is hard to pigeonhole. He has firm views and is headstrong, which should commend him to those who believe the Fed has become obedient to the executive branch. Although a lifelong Democrat, Summers rarely follows the party line.
His views on taxation are far from the tax-and-spend mantra many in his party hold to. On the contrary, he is skeptical of the efficiency of capital gains taxes, believes that unemployment insurance (which is a form of tax) and welfare payments make long-term unemployment worse.
The first issue to confront the next Fed chairman is what to do about quantitative easing. Yellen is expected to follow closely in the footsteps of Ben Bernanke, the current chairman whose principal remedy for the L-shaped recovery we are currently enduring is to keep money cheap to the horizon until unemployment is tolerable. That means more QE. Even to mention that there may be a “tapering” of QE caused the markets to panic, so weaning the nation off cheap money and raising interest rates is not going to be easy.
Yet QE is a one-note samba. By now it has lost its potency. What does Yellen have in mind? We don’t know. She, too, is an academic economist who, after a brief spell as chair of Clinton’s Council on Economic Advisers, has spent the last nine years in the closed world of reserve banking. She has followed the reserve bankers’ understandable reluctance to say too clearly what she thinks so as not to alarm the markets.
On the assumption he was in the running for the Fed chairmanship, Summers has also kept mum recently about what he would do to replace QE. In April, however, he was candid and clear. “QE in my view is less efficacious for the real economy than most people suppose,” he said. He is concerned the economy will settle down into a “new normal” where we accept sluggish growth and high unemployment. He therefore recommends altering QE and allowing interest rates to rise.
“If we have slow growth, we are not going to keep thinking that 5.5 percent unemployment is normal,” he told the Financial Times. “We are going to decide rightly or wrongly that the potential of the economy is less and therefore we are going to decide that we are closer to that potential and that is going to operate in favor of suggesting that we should normalize interest rates.” What is needed is a subtle manipulator of the money supply at the Fed, which would recommend Summers to replace Bernanke.
So long as the Fed offers bold, confident leadership, Summers is bullish about the economy. “I think the market is underestimating the pace at which the Fed will alter its current course and the consequences of that for interest rates,” he said. That does not mean money will become expensive to borrow, nor does he expect the current easy money regime will lead to inflation. “I think we are a long way from tight labor markets and therefore that the risks of acceleration in inflation are substantially less than many people suppose,” he said.
Yet Summers comes with baggage. The least important is that since leaving government employ in 2010 he has been hired by Wall Street firms to proffer advice. This criticism comes from a most unlikely source, the Wall Street Journal, which, in a front page story, tried to make mischief by suggesting there was something wrong with being paid by Citigroup, NASDAQ, hedge fund D.E. Shaw, venture capitalists Andreessen Horowitz, and asset managers Alliance Partners. The paper even suggested there was something not quite right about him taking speaking fees.
Since the Chinese walls between church and state were torn down at the Journal by its new owner, Rupert Murdoch, muddying the waters between opinion and news, it is hard exactly to fathom whether this ad hominem criticism of Summers is policy-driven or merely vindictive. One of Summers’s principal qualifications to lift the economy out of the doldrums is that he is welcome in Wall Street boardrooms and they highly value his opinions. He is no ivory tower theorist but a practical economist who wants private enterprise to lead the nation to prosperity.
It was telling the Journal could not resist reminding its readers in the second paragraph that Summers “remains on the Harvard University faculty after a tumultuous tenure as the school’s president.” The reference is not so much to his part in investment decisions that ended up losing Harvard $1 billion, but to his criticisms of faculty member Cornel West that caused the head of the African American Studies department to decamp for Princeton, and his questioning of why women do not prosper in science and engineering, which many interpreted as male chauvinism. Summers’s ability to provoke argument and take unpopular positions will be used against him, but it provides further evidence of the independence of thought and action that would prove useful as head of the Fed.
More pertinently when discussing the Federal Reserve, Summers and Fed chairman Alan Greenspan helped free the financial industry from the clutter of inhibiting regulations, a relaxation of the 1933 Glass-Steagall rules imposed during the New Deal that many believe contributed to the financial crash of 2008. That is a pertinent line of enquiry for senators to pursue if Summers is placed before them. It is on his answers to that thorny subject — can you cure the problem you helped create? — rather than on trumped up charges about race and gender that he should be judged.
Yellen is the safe choice; Summers a gamble. Yellen’s appointment will sail through the Senate; Summers will have to survive some tough grilling. Yellen has little experience living in the harsh limelight that comes with high office; Summers is an old soldier who will keep pounding on come what may. It would be far easier for the administration if Obama chose Yellen; that fact alone should commend the talented if tricky Summers.
Nicholas Wapshott is the author of Keynes Hayek: The Clash That Defined Modern Economics. Read extracts here.
PHOTOS: Federal Reserve Vice Chair Janet Yellen addresses the 29th National Association for Business Economics Policy Conference in Washington March 4, 2013. REUTERS/Gary Cameron U.S. economist and Harvard University professor Lawrence Summers holds a news conference as he attends the Asian Financial Forum in Hong Kong January 14, 2013. REUTERS/Bobby Yip