The Next Federal Reserve Chairperson
Some months ago it became known that Federal Reserve Chairman Ben Bernanke was likely to step down as the end of his second term of appointment drew near. Initially, Federal Reserve Vice-Chair Janet Yellen appeared the favorite to succeed Bernanke, but now it seems as though Larry Summers has become the Obama administration’s preferred candidate. Summers’ candidacy raises grave political and policy concerns.
The case for Larry Summers rests on claims that he is a seasoned, crisis-tested, and known policy maker. His experience includes a stint as treasury secretary in the late 1990s and a stint as director of the National Economic Council from 2009-2011, where he oversaw the stimulus and recovery program. He is also a known quantity on Wall Street, where he has earned millions in speaking and consulting fees. Add in his academic credentials as an economics professor at Harvard, and Summers appears to be a model candidate - experienced in government and trusted by financial markets.
But digging deeper, the flaws begin to show. Many critics have pointed out that Summers led the charge for financial deregulation in the 1990s. Worse yet, he opposed updating regulation to deal with financial innovation, as exemplified by his opposition to derivatives regulation in 1998.
In the 1990s, Summers also initiated the “strong dollar” policy that has damaged US manufacturing, added to the trade deficit, and hurt the US economy by tacitly promoting currency under-valuation in the rest of the world. And in 2000, Summers supported giving China full access to the U.S. market without any safeguards against an undervalued currency.
Lastly, perhaps reflecting his graduate school training under Republican policy advisor Martin Feldstein, Summers has been a long-standing advocate of fiscal austerity. That policy disposition may help explain his opposition to a larger fiscal stimulus package in 2009, a decision that - in retrospect - was tragically flawed.
This is a record of major policy blunders that challenges claims of Summers’ brilliance as economist and policymaker. In his defense, it can be said Summers was following the “Washington Consensus,” and all mainstream economists would have made similar decisions. However, that only highlights the dire state of economics, the need for profound policy change, and how far away we are from such change being politically possible.
Unfortunately, Summers’ policy inclinations remain questionable. Along with much of the economics profession, he now acknowledges the need for greater financial regulation, (although there also remains an underlying intellectual bias among economists against regulation). As for fiscal policy, he has shifted from austerity now to austerity later when economic recovery is more entrenched. Beyond that, little else has changed. In economics, it is difficult for an old dog to learn new tricks.
These concerns about Summers’ policy judgments are compounded by concerns about his personality and political baggage. On the upside, he is widely acknowledged as charismatic and persuasive; on the downside, he is viewed as arrogant and over-confident.
Given the Federal Reserve’s unique institutional character, many believe arrogance could prove a disastrous characteristic because the chairperson must fashion consensus, working with senior bankers and Federal Reserve governors who have egos of their own.
Also troubling is the tendency to over-confidence that promotes unwillingness to listen to others. Mainstream economics already suffers from closed-mindedness owing to its claims of a monopoly on economic truth, which helps explain why the profession was blindsided by the financial crisis. Mixing that intellectual attitude with a personality disposed to not listen is the stuff so-called “black swan” disasters are made from.
As for his political baggage, Summers exemplifies the revolving door between government and Wall Street. This is a profound Washington problem, but it is especially significant for Democrats.
For too long, Democrats have taken money and marching orders from Wall Street. That has undercut their claims to represent the economic interests of working families, a problem that has become more acute in the wake of the 2008 financial crisis. At this stage, the enthusiasm of democratic voters for Democrats has evaporated, and it is only fear of Republicans that keeps the party in the game. There are limits to that fear. Appointing Summers, with his Wall Street-tainted personal and policy history, could be the straw that breaks the camel’s back by spawning a mentality of a pox on both their houses.
A second piece of political baggage concerns women. As president of Harvard, Summers outraged women by making unscientific public speculations about how women are inherently inferior to men in math and science.
That sexist history is now doubly problematic because Summers’ main rival for the job is Fed Vice-Chair Janet Yellen. She too is a seasoned, crisis-tested, and known policy maker, and her curriculum vitae can easily go head-to-head with his.
Appointing Yellen would offer President Obama the historic opportunity of appointing the first female Federal Reserve Chairperson, whereas appointing Summers would smack of having the “old boy” Clinton White House network win out. Overlooking Yellen risks infecting President Obama and Democrats with Summers’ political problem with women.
In the best of possible worlds, Larry Summers would never have made it as a contender to head the Fed, given his flawed economic policy record. But this is not the best of possible worlds and the Obama administration has actually adopted his economic policy frame; “continuity” has been its watchword, not “change.” The administration also appears comfortable with Summers’ personality, partly because it is staffed with many of his protégés.
That means weight of political baggage will likely be the deciding factor. It also suggests the possibility of a nomination confirmation fight between Democrats and President Obama. Whereas the President has run his last election campaign, Senators have not. That gives Senators reason to be leery of Larry Summers.
This op-ed was originally posted by Project Syndicate on July 29, 2013.