The Yellen/Summers Debate

There’s been a lot of discussion of the relative advantages of Yellen and Summers, but most of it has missed the point.  Here’s one commonly expressed view:

While Summers’s views on monetary policy aren’t “totally clear,” he would probably be “somewhat less dovish than Yellen,” putting more emphasis on containing inflation than the current Fed vice chairman, said Michael Feroli, a former Fed staff member who is now chief U.S. economist for JPMorgan Chase & Co. in New York.

In fact, inflation will run at about 2%, or a bit lower, regardless of which person is picked.  That’s not the issue.

Ezra Klein offers a different interpretation:

The two leading candidates for the job are Janet Yellen, the current vice chairman of the Fed, and Larry Summers, the former Treasury secretary and an economics adviser to President Barack Obama. When it comes to monetary policy, they don’t differ drastically. Both support the Fed policy to maintain low interest rates and continue asset purchases — no premature“tapering” — until unemployment falls significantly.

Klein goes on to argue that the most important differences are likely to occur in the area of regulation.  But in my view the regulatory role is of trivial importance compared to the money policy role.  Indeed the two should be separated. Klein seems to agree on the separation point:

There just isn’t a perfect candidate to be both the nation’s top central banker and the top financial regulator. And because the Fed chairman’s central banker role is pre-eminent, the regulatory aspects of the job tend to be discounted.

It would be better to elevate the power and visibility of the vice chairman for supervision so that the president and the Senate could just choose the best financial regulator on offer. Right now, the position’s powers aren’t clearly defined, and the Obama administration hasn’t even bothered to name an official candidate.

The real reason not to appoint Summers is competence.  Ben Bernanke had a long paper trail indicating that monetary policy remains highly effective at the zero bound.  Summers has a paper trail suggesting that monetary policy is not effective at the zero bound.  Given that we are likely to spend a good share of the 21st century at the zero bound, Summers is not qualified for the post.  Would you want to make someone captain of a cruise ship who did not believe that turning the steering wheel caused the direction of the ship to change?  Especially when there was overwhelming empirical evidence to the contrary?

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