Don’t Crush the Fed’s Independence

Felix Salmon wrote a piece a little while ago arguing that President Obama’s nomination of Larry Summers to head the Federal Reserve would be the culmination of the politicization of the institution. He noted:

Make no mistake: Summers would be the most political Fed chair in living memory. Greenspan was pretty bad, especially when he testified — in clear support of the Bush administration’s tax cuts — that we had reason to be worried about budget surpluses. But Summers has been one of Obama’s closest economic advisers since the day that Obama took office: he’s much closer to Obama than Greenspan was to Bush.

Summers has spent most of the past five years doing everything in his power to shape and advance Obama’s agenda. Obama, of course, is very happy about this, and would love to reward Summers for his loyalty by handing him the Fed chairmanship.

That’s a move even Clinton would never have dared make: he kept Greenspan at the Fed for his whole presidency. And it sets a horrible precedent: the next Republican president will henceforth have no compunctions whatsoever about appointing a party hack to the post. From here on in, if Summers gets the job, we won’t just be voting for president in presidential elections. We’ll be voting for Fed chair, too. And the Fed will become just as politicized as the Supreme Court has become.

Salmon is being a bit overly dramatic here. While Obama’s nomination of Summers would be treated as a political appointment, it would also be the selection of a highly qualified economist who has extensive experience in and out of government. It wouldn’t be as good of a choice as Yellen. But it would still be pretty darn good. A Republican administration couldn’t nominate just anyone for the job. It would still have to be highly qualified candidate. And Mitt Romney’s rumored front-runners to take over for Ben Bernanke (Glenn Hubbard, John Taylor and Greg Mankiw) would have been equally as political Summers would be. Republicans are already working under the assumption that the Fed isn’t independent and we were already voting for a Fed Chair last November.

In a response to Salmon’s post, Slate’s Matt Yglesias commented that he doesn’t think this is a bad thing:

These are, however, both dysfunctions induced by the cult of central bank independence. A central bank chief who saw himself as a close political ally of the president, and recognized that poor macroeconomic performance would reflect poorly on the skills of his friends, colleagues, and protégés on the economic team, might be willing to put inflation paranoia aside. Even better, precisely as the Obama team apparently “worried” back in 2009, financial markets might believe he’d be willing to tolerate more inflation. That would be a de facto rate cut, and would boost the economy.

Of course, in the longer term, this strategy only works if the central bank chief really iswilling to overlook a bit of inflation in order to boost the economy. The belief that he’ll do it starts the cycle, but doesn’t end it. So the mere fact that people worry Larry Summers won’t be independent enough counts as a consideration in his favor. But to really seal the deal, he has to follow through and actually compromise the Fed’s inflation-fighting mission in order to help his friends in the White House.

I’m still not sold on the idea that he’s the best person for the job. But at the end of the day, Summers’ ties to the White House are a feature, not a bug. If Obama goes with him, as it looks like he will, let’s hope Summers doesn’t forget that he owes his position to a relatively narrow circle of friends that just so happens to include all the key economic decision-makers in the administration, and he owes them some favors.

This is a pretty scary post from Yglesias. Why not just make the Federal Reserve a cabinet in the government? There’s a very specific reason that the Fed is an independent institution: the best monetary and regulatory policies are not always in the best interest of the President and his administration. In the aftermath of the Great Recession, this has not been the case. Yglesias is right that the best thing Bernanke could have done was to allow for more inflation to spur on greater economic growth, which would’ve helped Obama stay in office. But that is just the case right now. It’s easy to think of counterexamples when a Federal Reserve chair too close to the President could lead to bad macroeconomic outcomes.

For instance, at times the Fed may have to raise interest rates to quash inflation, but this can induce a recession, which is certainly not in the President’s interest. This is what Fed Chair Paul Volcker accomplished in the late 1970s. Starting in 1977, the Fed started to raise interest rates, causing the economy to enter into a nasty recession. In 1980, President Jimmy Carter was defeated by Ronald Reagan, thanks in large part to the poor economy. The Volcker-induced recession may have cost Carter a second term (there were plenty of factors), but it tackled inflation. A less independent Fed may have been slower to raise rates to cut down on inflation. Is that something we want?

Or take regulation. New regulations impose compliance costs on companies. Many rules are created to prevent future crises. They hinder economic growth in the meantime, but are vital to the economy in the long-run. Yet, a less independent Fed Chair could feel pressure from the White House to implement looser financial regulations to spur on greater growth in the near-term and let a future president deal with the long-run costs. That sounds like a recipe for disaster as well. Thus, it’s incredibly important that we have an independent Federal Reserve.

If Obama nominates Summers, he won’t be selecting the best candidate for the job, but it will still be a very good one. It won’t be the culmination of the politicization of the Fed and that’s a good thing. It will be a strong choice and Summers will likely do a good job in the position. Let’s not blow this out of proportions.


It’s More Than A Gender Bias Working Against Yellen

Ezra Klein wrote an insightful blog post yesterday outlining the hidden sexism that has permeated the coverage of who will be the next Fed Chair and how it has harmed Yellen’s candidacy. Here’s Ezra:

People get understandably defensive when you use the word “sexist.” But here’s the simple fact: There’s no male candidate Andrew Ross Sorkin could’ve named who would’ve elicited fears from Fisher that the pick was being “driven by gender.” Not Don Kohn. Not Alan Blinder. Not Roger Ferguson. It would’ve been either a laugh line or a controversy if Sorkin had asked about Tim Geithner’s chances and Fisher had brought up his gender.

When a woman is up for the job — no matter how qualified — the lurking worry is that the pick will be “driven by gender.” When a man is up for it, gender never enters into the conversation. That’s how privilege works in practice: Gender is invisible when it comes to male appointees but a constant presence when it comes to female appointees.

That gets the situation backwards.

There’s never been a female Federal Reserve chief. There’s never been a female Treasury Secretary. There’s never even been a female president of the powerful New York Federal Reserve. This isn’t an accident, and it’s not because women can’t manage those positions. It’s because gender really has played a driving role in appointment processes for a long time. It’s just done so on behalf of men.

I don’t disagree with any of this, but I want to extend it a bit. The title of Ezra’s post is “Funny how gender never am up during Bernanke’s nomination. Or Greenspan’s. Or Volcker’s.” You know what also didn’t come up in those nominations? Race. Sexual Orientation. Religion. You know why none of those things are coming up this time? Because both Yellen and Summers are white, straight and Jewish. That’s nothing new at the Fed. But a woman as Fed Chair? That’s new.

This creates two different levels of bias against Yellen. The first is the explicit and implicit sexism in whether Yellen has the necessary “gravitas” to be Fed Chairman. Of course she does! No man with Yellen’s resume would face similar questions.

There’s also a second form of bias that I’m going to term “newness bias.” This is the bias that exists because everyone is ultra concerned that the Fed choice will be “driven by gender.” After all, for a position as important as Federal Reserve Chairman, it’s vital that the President select whoever is most qualified. He shouldn’t choose an inferior candidate just to break a gender barrier. But no male nomination can ever be “driven by gender,” because every Fed chair before has been male. It’s the same reason neither Yellen or Summer’s selection could be “driven by race.” When there’s never been a female in a certain position, the immediate reaction to breaking that barrier is that the President is doing so just to nominate a woman, not because it’s the right choice.

That’s what Yellen is working against. Ezra spells this out perfectly:

And then, when a female candidate does threaten to break into that top echelon, the whispers begin that the pick is really driven by gender, that more qualified men are being passed over, that it’s all just about political correctness. But the truth is typically closer to the opposite. A woman (or an African American, etc) can only get to the point where she can hold a top position after clearing a much higher bar than the male candidates.

The President may feel that if he is going to name Yellen as the next Fed Chairman, she must be by far the best candidate for the job. Because if not, he’ll face criticism for choosing her over Summers just to install the first woman at the helm of the Fed. It’s an absurd bar that only candidates facing the “newness bias” confront. If Richard Ferguson receives further consideration for the job, expect the fact that he’d be the first African-American Fed Chairman to come up more frequently. And expect analysts to start asking whether his selection would be “driven by race.” He wouldn’t face the blatant sexism about “gravitas” that Yellen faces, but he’d still confront the “newness bias.”

So remember this whenever you hear people questioning whether Yellen’s choice is “driven by gender.” The fact her selection would break a gender barrier doesn’t mean she needs to be more qualified than other candidates to justify her selection. She’s the best candidate for the job and that’s what matters. President Obama would do well to tune out any worries about her “gravitas” or that her nomination would be “driven by gender.” Those are just not-so-subtle ways for her opponents to use her gender to tear her down. It isn’t fair and it isn’t right. I hope the President doesn’t fall into that mindset as well.