Wall Street is right: Janet Yellen has the edge

Ed Luce is bullish that his old boss Larry Summers is the slight favorite in the race to head the Federal Reserve. This is a perplexing proposition, not only because it’s counterintuitive to everything we’d expect, but also because suggested criticisms against Summers (in short, arrogance) are really of no issue and obscure more legitimate concerns.

It almost goes without saying that Yellen is far more established as a academic and policymaker insofar as monetary policy. All we need is a quick Google search to see the extent to which this is (perceived to be) the case. As former Treasury chief and NEC chairman – and in general a brilliant academic – Summers is the more eminent personality: yielding 6,310,000 search hits to Yellen’s 467,000.

But change the query to “[Larry Summers/Janet Yellen] monetary policy”, Yellen comes ahead at 206,000 to Summers’ 131,000. Now I’m not suggesting this is a particularly smart way to judge scholarship on a subject, but it gives a very visceral sense of Yellen’s online footprint insofar as monetary policy is concerned. Moreover, Yellen’s hits are almost entirely pages that are really concerned with relevant policy.

Deriving from his comparative fame, even Larry Summers’ “monetary policy” search hits are of no relevance. At the top are links to his Wikipedia entry, a brilliant profile comparing Larry Summers and Glen Hubbard, something about healthcare, and Now please don’t get me wrong. Summers’ is probably one of the smartest economic policymakers alive today and would make great choice for central banker. But Yellen’s history and deep erudition in this subject – as well as a functioning understanding that “full employment” is 50% of the Fed’s mandate, not just scribbles on a paper – are unquestionably in her favor.

But, his straw men considerations against Summers’ are more curious still:

Which leaves Mr Summers. I should disclose that I once worked for him (and that he writes regularly for the Financial Times) but I have not spoken to him for this column. People’s chief concern is rightly about his emotional quotient rather than his IQ. No one has any doubt on the latter. Since the Fed chairman’s job is to build consensus among sometimes fragile egos, Mr Summers’ abrasiveness would count fatally against him, critics argue. Such worries are exaggerated. Even if he has greatly mellowed in recent years, as his friends insist, charm is overrated. He would make a bad choice as a mediator in Syria. Fortunately, a Fed chairman faces lesser diplomatic challenges. The most important quality is intellectual leadership – something Mr Summers would offer in greater abundance than the others.

The only time the Fed Chair really has to deal with irrational babies is Congressional testimony. Indeed if Michelle Bachmann wins in 2014 said Chair will have to deal with some “fragile egos”. However, I can’t help but think Luce floats the “emotional” counterpoint only as a way to make light of other, realworries (which I will get to later). I cannot imagine any FOMC member actually balking against Summers’ stature. Surely these are the most preeminent monetary economists of our age. To think that Summers’ emotions will get in the way of governance is remarkably absurd. (And seriously, as far as arrogance is concerned, does anyone think Larry Summers actually believes he’s that much smarter than, say, Narayana Kocherlakota?)

Which is why this op-ed is a highly biased argument. Luce is arguing against a straw man. Larry Summers’ felicity with debate is well-known. Indeed Ron Suskind in his Confidence Men speaks of Summers’ influence in the Obama administration in much a similar tone as Walter Isaacson does Steve Jobs. Persuasive men, the both of them, seem to be gifted with what Isaacson dubbed a “reality distortion field”. And, by the way, he doesn’t have much of a problem admitting when he was wrong. (Indonesia).

So clearly I think Summers is a gifted scholar. For one, it’s kind of funny Yellen’s experience in the central banking system is taken as a bygone conclusion, with far more emphasis on Summers’ “intellectual leadership”. The question is “to whom”. You take a few smart and relatively well-educated people. You put Larry Summers and Janet Yellen in a room with them. There’s probably a very good chance Summers would come out as the “more impressive” character.

But you take two, highly-competent economists, and I’m willing to bet they’re equally confident in Yellen’s intellectual leadership. Now let’s actually talk policy, for a second. I won’t dwell on this because Yellen’s monetary credentials have been discussed in great depth for a while. She’s the rare Fed Official who actually seems to realize that inflation targeting is a disaster, and has endorsed a nominal spending target in all but name. (Christina Romer, my preferred option, has explicitly supported the same).

I don’t even know Larry Summers’ opinion on NGDP targeting  – the hottest thing in monetary policy. It’s understandable for a standing Fed official to be muted on revolutionary policy changes. Indeed a single utterance can rock the markets. But it is curious that Summers has not in his astute punditry post-NEC discussed the option much, especially for a leading contender.

No doubt, Larry Summers strikes me as the guy that can read all the new literature on the topic in a night, and have a clearer opinion than anyone else over coffee next morning. But, just like the Google search hits, it betrays a curious hush on monetary affairs. In what capacity will Barack Obama choose Summers over Yellen?

And here, I submit, Ron Suskind gives us an answer. It is clear that over all the politics and drama in Obama’s first two years, the two men shared a special relationship, with deep mutual respect. Luce knows better than I whether Obama’s respect for Summers will play a more important role than past scholarship.

But I must disagree with Tyler Cowen. This is not a particularly insightful expose on Larry Summers’ chances at the Federal Reserve, unless I’m missing something big. Luce can tell us that Larry Summers’ emotions are fine, or that “worries about Mr Summers’ Senate hearings are also overblown”. Indeed. I like Luce a lot (his work on India is brilliant) but to generate an op-ed solely from the weakest presentation of criticism and ignore the repository of Yellen’s work, quipping “when Wall Street predicts something will happen in Washington, it is often wise to bet on the opposite” does not seem like the debating strategy his old boss would encourage.

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