The surprising mistake that could cost Larry Summers the Fed chairmanship

July 30, 2013
Larry Summers hasn't said much about his monetary policy views. Was that a mistake? (Photo by Jerome Favre/Bloomberg)
Larry Summers hasn't said much about his monetary policy views. Was that a mistake? (Photo by Jerome Favre/Bloomberg)

Larry Summers is among the most prominent public intellectuals on economic topics of our age. He writes columns for the Financial Times, testifies before Congress, and gives speeches before all sorts of groups. Want to hear the Summers take on fiscal policy? Trade? Education? Poverty reduction? He’ll talk about them all day long.

On everything, that is, except the one responsibility that he wants to have for himself, of leading U.S. monetary policy as chairman of the Federal Reserve

At a breakfast sponsored by the Wall Street Journal last month, he attributed his reticence to an old habit acquired when he was Treasury secretary, who by tradition does not comment on the Fed’s monetary policy decisions. But for a man with no shortage of opinions, the real reason is very likely his desire to maintain viability to be named to the Fed chairmanship. And it may, paradoxically, end up costing him the job.

One of the peculiarities of politics in general and the Fed chair job in particular is that the best way to be viewed as a strong candidate for the job is to project general competence while saying very little about how you will actually do the job. It seems a little nuts; if you were applying for a job as CEO of a company, the board would very much want to know what you planned to do if you got the job!

But with a high-profile appointment like for Fed chair or the Supreme Court, vagueness becomes a virtue. When Senate confirmation is the goal, a candidate wants to maintain wiggle room and let people project upon you whatever their preference is.

What Summers is trying to do is to create a situation in which conservative senators view him as a tough, no-nonsense central banker who will maintain the integrity of the dollar against those dirty hippies who want to debase the currency. Simultaneously, he wants liberals to view him as someone who will do whatever he can to try to strengthen job creation and find creative ways to improve growth.

Is monetary policy right now too tight, too loose, or just right? Is the Fed’s strategy of setting thresholds for the unemployment or inflation rates that would trigger interest rate increases a wise one? His silence on these topics, in theory, at least, allows him to have it both ways.

But given how polarized the reaction has been, particularly from Democratic senators, to word of a possible Summers nomination, it may be that merely being vague isn’t enough for Summers. He may have outsmarted himself. Because the other leading candidate for the job, Janet Yellen, helped engineer the Fed's current efforts to keep monetary policy supportive of growth, and has given numerous speeches articulating her views on monetary policy in detail. If she gets the job, Democrats know what they're getting in the Fed chair, and most of them like it.

For Summers, on the other hand, because his precise views on policy are unknown, Senate Democrats can only judge based on their view of Summers as a person in deciding whether they will support him -- and he is a polarizing figure who has made plenty of enemies in his two decades in the public eye. For the Democratic majority in the Senate, it's a choice between someone whose views they know and generally approve of (Yellen) or someone whose views they aren't sure about and whom many of them don't like very much.

Vagueness can help preserve viability, in other words, except when it hurts.

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