Larry Summers has his haters, and Tuesday’s report from Ezra Klein that Summers is now the frontrunner to replace Ben Bernanke as the next Fed chair has doubtless set them off.
On this particular issue, I’m not really one of them. Some of the mistakes of his past, such as his role in deregulating derivatives (the Brooksley Born episode) or the Harvard interest rate blowup, don’t really tell us much about his capacity to guide macroeconomic stabilisation policy.
His more recent mistakes, specifically his failure to better advise Obama on the stimulus (should have been bigger) and housing policy (should have done more for people in foreclosure and underwater homeowners), included political considerations that are hard to untangle from his actual views.
Such considerations also played a bigger role in these advisory situations than they would as Fed chairman. And I’ve long thought that the problem of his overbearing demeanor was an overblown issue. Without excusing his mistakes, they don’t necessarily mean he’d make a bad leader of the Fed.
That said, in a head to head comparison Janet Yellen emerges as the much better choice. Here’s why:
1) The simplest reason is that she is more conventionally qualified for the job, boasting a much longer entry in her CV as a monetary policymaker. That includes her current gig as Fed vice chair. Not much more to add here.
2) Yellen has a much better track record than Summers at diagnosing economic conditions in real-time. A perusal of the 2007 FOMC transcripts reveals that she was much more worried than her colleagues about the potentially systemic damage that a housing downturn would bring about, and even pointed to shadow banking as a locus of trouble. This was before many others, even high-level policymakers, understood how these markets could pose a threat (or even how they worked). Bill McBride rounds up several more examples of her prescience dating back to 2005. The contrast with Summers is stark.
To repeat ourselves, recall that the variables governing the pace and eventual end of quantitative easing have remained vague and somewhat qualitative, hingeing on some definition of “substantial improvement” in the outlook for labour markets and increasing the economy’s “near-term momentum”. And the pace at which quantitative easing should be slowed (“tapering”) also remains uncertain, leaving quite a bit of room for discretion if you assume that a new reaction function isn’t introduced by January.
On rates policy, even the move to an Evans Rule hasn’t completely eliminated discretion. The unemployment and inflation thresholds are obviously the most important to follow, but other variables (labour force participation rates, for instance) influence how they are interpreted.
The point is that judgments about the economic outlook will continue to matter quite a lot during the time before the Fed begins to lift rates up from the zero lower bound, and Yellen has proved herself to be better at such judgments.
3) The transition period from now until the start of the eventual exit from unconventional policy also presents an incredibly tricky communications challenge, a lesson that should have been clear from the market’s reaction to Bernanke’s blundering attempt to telegraph the start of tapering. And it’s no slight to Summers to say that nobody has been paying more attention to the Fed’s communications policy than Yellen, who happens to chair the Fed’s subcommittee on… communications. Her April speech is a good place to start.
4) We have a decent sense of Yellen’s current monetary policy views, and if she turns out to be more hawkish than expected, she would have to explain why she changed her mind. Indeed she has come the closest of any Fed member to proposing NGDP targeting without explicitly calling it that. As for Summers, it’s mostly unclear what he would favour as Fed chair. Scott Sumner went searching for public statements from Summers on monetary policy, and all we really have is a column where he “falls into the trap of thinking low interest rates mean easy money, so what’s the point of doing more?”, as Sumner writes.
Tyler Cowen makes an interesting case for Summers on the grounds that he would have more of a voice with a Republican administration.
But if the economy is going well, this won’t be an issue. If the economy is either not doing well or remains stagnant, it’s hard to imagine that a Republican administration would offer so much more deference to Summers relative to Yellen that it would make much of a difference.
So I’m not convinced that such a consideration should outweigh the other factors listed above.