Lawrence H. Summers’ decision to withdraw his name from consideration to replace Ben Bernanke as chairman of the Federal Reserve has nothing to do with economics and everything to do with politics.
In the past few days, it seemed increasingly likely that members of President Obama’s own party weren’t going to support Summers, a former treasury secretary and White House advisor, in his quest to lead the nation’s central bank. Three democratic members of the Senate banking committee, Jon Tester of Montana, Sherrod Brown of Ohio, and Jeff Merkley of Oregon, had each said they would not support Summers. Those defections meant that Summers would have had to receive support from some of the ten Republicans on the Banking Committee for his name to be sent to the full Senate for confirmation.
More than anything else, that simple math likely led Summers to tell the president in a letter he sent on Sunday that he had “reluctantly concluded that any possible confirmation process for me would be acrimonious and would not serve the interest of the Federal Reserve, the Administration, or ultimately, the interests of the nation’s ongoing economic recovery.”
Both Summers, who is a professor of economics at Harvard, and Janet Yellen, the now likely nominee who currently serves as vice chair of the Fed, are supremely qualified to lead the Fed. The 58-year-old Summers’ resume is widely known and appreciated: Treasury secretary, Harvard president, and chief economic advisor to President Obama. The 67-year-old Yellen’s resume may be less widely known, but it’s no less impressive: member of the Fed’s Board of Governors, head of the Council of Economic Advisors, president of the San Francisco Federal Reserve Bank.
Summers has been identified as a close friend of the president. Obama released a statement on Sunday saying “I will always be grateful to Larry for his tireless work and service on behalf of his country, and I look forward to continuing to seek his guidance and counsel in the future.”
What’s been lost to a great extent in this debate is that the Federal Reserve is an independent agency. The head of the Fed isn’t supposed to be the president’s best friend. The Fed chair is supposed to set policies that may, in fact, work against the president’s best interests. That’s one lesson that President Jimmy Carter learned in the late 1970s, when the person that he appointed to lead the Fed, Paul Volcker, pursued a policy that contributed to Carter’s defeat by Ronald Reagan in the 1980 election.
Carter had nominated Volcker to lead the Fed in August 1979. Inflation was running at double-digit rates and unemployment was stuck at around 8 percent. Carter’s approval rating had fallen to about 30 percent. He sought a strong chairman who could tame both inflation and unemployment. He chose Volcker who had been president of the Federal Reserve Bank of New York since 1975 and who had a reputation as a strong fighter against inflation.
Volcker took office and immediately implemented a restrictive monetary policy, raising interest rates to combat inflation. That strategy contributed to an economic recession that eventually brought down the rate of price increases to a sustainable level — but only after Carter had lost to Reagan. Volcker led the Fed for eight years until Reagan nominated Alan Greenspan to lead the Fed in August 1987. Greenspan held the position for the next nineteen years until Bernanke took over in 2006.
In 2013, the U.S. economy faces a different set of problems than it did when Carter appointed Volcker. Inflation has been historically low, as have interest rates. Unemployment has been the main problem for years. Although it has fallen from its 10 percent peak in October 2009 to 7.3 percent in August, the sustained high unemployment rate means that the U.S. economy has not fully moved out of the Great Recession that began more five years ago.
Yellen has a long history of pursuing pro-employment policies. In work with her husband, the Nobel-prize winning economist George Akerlof, written while she was president of the San Francisco Fed, Yellen argued that the Fed must take into account the high costs to the economy when people are out of work for sustained periods, Bloomberg reported.
“Policy makers should be compelled to take action given the serious costs of long-term unemployment when overall unemployment is already high,” they wrote in their 2004 paper. “A week of unemployment is worse when it is experienced as part of a longer spell.”
Unemployment is a major problem today. As of August, 4.3 million workers have been unemployed for more than 27 weeks, or nearly 38 percent of those looking for work, according to data from the Department of Labor. By contrast, the share of long-term unemployed was just 17.4 percent when the recession began in December 2007. Dealing with this sustained long-term unemployment — the average person is now unemployed for 37 weeks — seems to be a greater problem for the U.S. economy than inflation, which has hovered between 1 and 2 percent for the past couple of years.
If the process can rise above politics, Yellen, with her strong reputation as a fighter against high unemployment, would seem the ideal economist to lead the Fed.