We’ve heard a lot of arguments in the last two weeks about the relative merits of Janet Yellen and Larry Summers to be the next Fed chairman. It is the first time I can remember that the public and private discussions have been so open, which in general would be a good thing, particularly for an institution so steeped in a kind of “Holy-of-Holies” secrecy such as the Fed has been. What is less attractive is that it has now turned into something more like a political campaign.
Central banks are effective only to the degree that they are perceived as politically independent — or at least as independent as possible in a system in which the members are appointed and confirmed by politicians. There’s a ton of academic literature on that point that’s fairly uncontroversial. Nobody who gets appointed Fed chairman is ever ideologically neutral or perfectly centrist, but at the least there’s been a great deal of effort to assure us that they have not been seen as partisan or tools of the White House. As a recent authorized biography of Paul Volcker points out, the one exception to that was Arthur Burns, an otherwise distinguished economist, who wound up laying the foundation for double-digit inflation in the late 1970s after caving to pressure from the Nixon White House on interest rates.
In all the debate about Yellen and Summers, we’ve heard a lot about how tough or not they would be on financial regulation, how hawkish they will be on inflation, how nimble and effective they would be in a financial crisis, how collegial they will be within the Fed. But one thing few have mentioned is how unpolitical and unpartisan they are and will be perceived. And on that criteria, which I think should be given equal weight, Yellen is more appealing.
For all his considerable strengths, and they are many, Larry Summers has become a big player in the Democratic policy establishment and a close and highly trusted adviser of the president. He served as a key policy adviser and negotiator to the last two Democratic presidents, sat in on lots of meetings in which political and campaign strategy were discussed, and gave speeches and interviews meant to win public support for administration positions. His political judgments haven’t always been as sound as his economic ones, but as anyone knows who has talked with him about policy during the time, political considerations have played a significant role in his role as economic policy maker, which is reasonable given the positions he is in.
By and large, those things have not been true about Yellen. Although she did serve as chairman of the Council of Economic Advisers in the Clinton White House in the late 1990s, she saw that job, like Ben Bernanke and most others who have held it, as giving the president and the administration the best economic advice they could, uncolored by political considerations. Indeed, what frustrations she might have had in not having more influence on administration policy was in part because Summers and many of those now supporting his candidacy dismissed the advice as insufficiently informed by political reality.
Given his history and his closeness to the current president, appointing Larry Summers to be Fed chairman at this point in his career would be a very political act. And while he could turn out to be a great chairman, his appointment would represent a step toward the politicization of an institution whose non-political, nonpartisan reputation has been one of its great strengths — all the more so today as Washington becomes more polarized by partisan politics by the day.