Summers v Yellen

HOW to choose someone for the most powerful economic job in the world? With name-calling and innuendo, it seems. A rancorous campaign for the Federal Reserve’s top job has disturbed the normal August sleepiness in Washington, DC. Janet Yellen, an esteemed economist and vice-chairman to current Fed chairman Ben Bernanke, has been dismissed as lacking “gravitas” in what could easily be mistaken for thinly veiled sexism (no woman has yet held the role). Another front-runner, the brilliant and polarising Larry Summers, is caricatured as a nightmare to work with and a handmaiden to Wall Street. However petty the race, Barack Obama’s eventual decision, which will come this autumn, will prove momentous.

Much has changed since Mr Bernanke took the helm in 2006. Since late 2008 the Fed has taken unprecedented steps to battle the recession and pep up the recovery, cutting interest rates to near zero and printing trillions of dollars to buy up government and mortgage-backed bonds (“quantitative easing”, or QE). It has also tweaked its obscure policy statements to link rate rises to concrete labour-market progress. His successor must decide if the treatment still suits the ailment—and in time wean the economy from the medicine.

Although they boast similar credentials the two leading candidates have very different reputations. Mr Summers has been a dominant figure in Democratic policy circles for two decades, serving as Bill Clinton’s treasury secretary and chair of Mr Obama’s National Economic Council. For his management of the financial crises of the 1990s Time named him a member of “the committee to save the world”. Yet his roles have often been marked by blunders. A stint as president of Harvard University ended badly, after missteps prompted a faculty vote of no confidence.

Janet Yellen’s service on Mr Clinton’s Council of Economic Advisers in the late 1990s was comparatively quiet. She is little known outside the world of central banking. From 2004 to 2011 Ms Yellen was president of the Federal Reserve Bank of San Francisco; since 2010 she has worked as the Fed’s vice-chairman, helping craft the central bank’s response to a weak recovery.

Dark horses cannot be ruled out, like Donald Kohn, a retired Fed veteran and Ms Yellen’s predecessor as vice-chairman, or Timothy Geithner, Mr Obama’s first treasury secretary. Still other names may be on the list. Yet the campaign for the Fed job has become an intense and occasionally uncivil battle between supporters of Mr Summers and Ms Yellen.

The low tone of the debate is disappointing. Not enough attention is being paid to the candidates’ economic views. In a 2003 study of past Fed chairmen Christina Romer and David Romer of the University of California, Berkeley, reckon that a candidate who subscribes to a “sound” framework of basic monetary principles is most likely to do well. They find that appointees’ past statements are a valuable guide to their later actions.

That presents a problem. Ms Yellen’s views are an open book. She has written and spoken extensively on monetary policy and the thinking behind the Fed’s current strategy. And she has argued that more could be done to help the jobless given the Fed’s dual mandate: price stability and maximum employment.

Mr Summers’s writing suggests his views are conventionally Keynesian. He reckons the government can help most by boosting demand. But he has sat out the day’s heated monetary debates—save for a mildly sceptical take on QE in remarks at an April conference— and focused instead on fiscal issues. His most recent research argues that fiscal spending could be self-financing if it shortens unemployment spells. Although he is surely more open on monetary policy with Mr Obama, the rest of the world is left guessing his views.

Personality and management style will also be factors. In 2012 Laurence Ball, an economist at Johns Hopkins University, speculated that Mr Bernanke’s retiring temperament may make him too eager for consensus. A more assertive and self-confident chairman, in the mould of Mr Summers, could be more comfortable pushing unpopular policies such as a temporary increase in inflation (which Mr Bernanke recommended for a struggling Japan in the 1990s, but has rejected as treatment for America’s economy). Yet policymaking by consensus may also enhance the Fed’s credibility. The central bank has promised to keep interest rates low beyond the end of Mr Bernanke’s term, for example. Were the current chairman a more bull-headed figure, markets might assume that policy would change with personnel.

A chairman’s greatest challenge is to anticipate—and react to—surprises. Mr Summers’s backers argue that no one can match his nimble mind. Ms Yellen’s partisans contrast Mr Summers’s past enthusiasm for financial engineering with her prescient forecasting record. She was the most accurate of Fed officials between 2009 and 2012, according to a recent survey.

Some wonder whether the net for candidates should have been cast wider. Under Mr Bernanke the Fed has performed well relative to peers but has repeatedly missed its own inflation and unemployment targets. A true outsider is unlikely to be appointed but could be just the thing.

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