The debate over who president Obama will choose to lead the Fed when Ben Bernanke retires as expected next January has attracted an unusual amount of attention for the typically arcane topic of Fed chairman. It’s also beginning to sound like the choice that Henry Ford gave to his customers: “Choose any color you like, so long as it’s black.” Supporters of Harvard professor Lawrence H. Summers and those of Federal Reserve Board Vice Chair Janet L. Yellen both appear to be saying that Obama can choose any candidate he likes, so long as it’s their candidate.
For example, reporters for The Washington Post recently asked whether the 67-year-old Yellen has “what it takes to lead the Fed” and then followed up with a piece pointing out reasons why Obama’s advisers don’t want him to choose Yellen. As Neil Irwin wrote, “I came across aspects of the vice chairwoman’s style and experience that help explain why Obama’s inner circle of economic advisers has little apparent enthusiasm for her as Fed chief.”
That lack of enthusiasm surprises me, since Yellen has worked in just the sort of banking jobs that make her qualified to lead the nation’s central bank, an independent agency that is charged with keeping both inflation and unemployment in check as well as with supervising and regulating financial institutions. She began her Fed career as an economist, has twice been a member of the Fed’s Board of Governors, served as president of the San Francisco Fed, and is professor emeritus at the University of California at Berkeley. She’s been number two at the Fed since October 2010.
It’s hard to find someone more qualified than Yellen to step up to the Fed chairmanship.
Summers’ resume is equally impressive, although he has largely made his mark in fiscal, rather than in monetary, policy. The 58-year-old Summers has been president of Harvard, chief economist at the World Bank, deputy secretary and then secretary of the Treasury Department under President Clinton, and most recently, chair of Obama’s National Economic Council. He’s also worked in the financial industry, most notably at Citigroup and the hedge fund D.E. Shaw.
Summers certainly has the intellect, experience and talent to move from fiscal expert to monetary policy expert.
I don’t know Yellen, who came to Cal’s business school when I was just finishing. But, I’ve known Larry since 1985, when I visited him at Harvard when I was thinking about where to go for graduate school. We spoke that day about some challenging economic issues — I recall that we talked about why corporations continue to pay dividends.
I ended up attending Harvard and Larry became my thesis adviser, where I saw his brilliant insight up close. For example, when I told him I was moving to Brussels to do research, he suggested that I study a form of corporate income taxation that U.S. states use that might be appropriate for the European Community, as it was then known. I followed his advice and wrote my thesis and a book on introducing formulary apportionment into the European Union. His insight came to fruition in 2011 when the European Union proposed moving to the system that Larry suggested I analyze 22 years earlier. There’s no doubt that Larry has an incredible ability to think of new ways to approach economic policy.
Larry does have some negatives, however, including his views about women. On that score, I never experienced any discrimination because of my gender (I would have liked to have played tennis with him some time, although I don’t think that has anything to do with sexism. A lot of men don’t like to play sports with women.). There weren’t a lot of women in Harvard’s graduate department back in the mid-80s, so it wasn’t unusual to not see many women lining up for office hours.
What mattered for Larry was intellect, and when he found a brilliant student, he seized the moment. For example, when I was a teaching assistant for his public finance class, he asked me which student scored the highest on the midterm. Sheryl Sandberg, I replied. Though he might have been surprised that she received the top grade, he ended up becoming a mentor for Sandberg at Harvard and continued this mentorship when she joined him at the World Bank and then at the Treasury Department. Sandberg is now number two at Facebook.
Is there something about Summers’ people skills that might lead some to ask whether he has what it takes to lead the Fed? Maybe, but if so, that’s nothing new and it’s really the unknowns, not the knowns, that we should worry about.
I recently came across a yellowed Wall Street Journal article from May 1985 about Harvard’s economics department that quoted Larry in a way that seems very prescient. In that piece, Larry recounted that when he told his students that “rent control was the best way to destroy a city next to bombing it, the students thought I was Attila the Hun. Now, they take that sort of idea for granted.” It’s in Larry’s genes to make bold, provocative statements to teach policy lessons.
Those genes, however, have sometimes led Larry astray when he’s left the academic world and made statements that make perfect economic sense, but little political sense. For example, while working on Michael Dukakis’ presidential campaign, Larry pointed out that the theory of comparative advantage says that he should hire someone to mow his lawn while he thinks deep economic thoughts. Economically rational? Yes. Politically wise? Not really.
Several years ago, when he was president of Harvard, Summers inflicted some pretty bad damage on himself in a speech to an academic conference on diversifying the science and engineering workforce. After discussing the usual reasons why women are under-represented in high-end scientific professions, he referred to the “different availability of aptitude at the high end” as another factor, saying that statistically speaking more men than women reach this high end because even “small differences in the standard deviation will translate into very large differences in the available pool substantially out.” Translation: there will be more men than women at the very high end because men have a greater aptitude than women.
Summers didn’t help his case when he added “that in the special case of science and engineering, there are issues of intrinsic aptitude, and particularly of the variability of aptitude, and that those considerations are reinforced by what are in fact lesser factors involving socialization and continuing discrimination.” When the Harvard faculty learned of his comments, many took offense and Summers resigned. Summers has apologized.
Those slip ups, however, seem to be a thing of the past. He now mostly sticks to talking about economic ideas, such as taxing carbon and treats.
I know Larry, I like Larry and I’d love to see him lead the Fed. I’d also love to see Yellen lead the Fed. So, how to choose? Truth be told, I’d like to see them both at the Fed. So, I’d like to see Obama continue to make history by nominating Yellen, who would be the first woman to lead the Fed, as the chairman and to see him nominate Summers to take over Yellen’s post and become so-called chairman-in-waiting at the Fed.