Did Summers Spoil It for Yellen?

AP Images/Mark Lennihan

Now that Larry Summers is out of contention for chairman of the Federal Reserve, the nomination of Janet Yellen should be assured.

Unfortunately, Yellen still is far from a safe bet.

Her qualifications, certainly, are not in doubt. Yellen is currently vice chair of the Fed and before that she was president of the Federal Reserve Bank of San Francisco.

She has had a distinguished academic career, which she interrupted to serve as chair of President Clinton’s Council of Economic Advisers, and after that, as a governor of the Federal Reserve.

Yellen is better positioned than any other woman to break the glass ceiling that has kept the Fed from having any female chair throughout its century-long history. Yellen, who began her scholarly career as a labor economist, has also been outspoken about the need for the Fed to continue its policy of economic stimulus to help strengthen the faltering economic recovery.

Nobel Laureate Joseph Stiglitz, who preceded her as chair of the Council of Economic Advisers and who was her teacher, recently wrote, “Ms. Yellen has a superb record in forecasting where the economy is going — the best, according to The Wall Street Journal, of anyone at the Fed. Ms. Yellen’s superlative performance should not come as a surprise. Janet Yellen, whom I taught at Yale, was one of the best students I have had, in 47 seven years of teaching at Columbia, Princeton, Stanford, Yale, M.I.T. and Oxford. She is an economist of great intellect, with a strong ability to forge consensus.”

Yellen, unlike most Federal Reserve governors, pays attention to high unemployment, not just to ghosts of inflation. In a remarkable speech last spring at the AFL-CIO, Yellen reminded the audience that the Fed’s mandate requires it to attend to high employment, not just keep inflation low. She added: “The Great Recession stands out both for the magnitude of the job losses that attended the downturn and for the weak recovery in employment that occurred after the recession ended.” In this recession, she went on,

“….[D]iscretionary fiscal policy this time has actually acted to restrain the recovery. State and local governments were cutting spending and, in some cases, raising taxes for much of this period to deal with revenue shortfalls. At the federal level, policymakers have reduced purchases of goods and services, allowed stimulus-related spending to decline, and have put in place further policy actions to reduce deficits."

With Democrats taking the heat for the sluggish recovery and some inflation hawks pressuring the Fed to cut back on its program of a stimulative monetary policy, Yellen’s views should be music to Obama’s ears.

So why is her appointment not a sure thing?

First, the Obama economic advisers who promoted the now failed campaign to install Summers are not high on Yellen. Unlike Summers, she has never been a member of the old boys’ club of former protégés of Robert Rubin. She has never worked on Wall Street, and the big bankers have no IOUs out on her. She has been obliquely critical of the administration’s emphasis on deficit reduction, and is somewhat tougher on financial regulation than the crew at the Treasury.

Second, just as no president likes to be denied a preferred nominee—as Obama just was denied Summers—no president likes to be pressured into making an appointment. The groundswell of support from progressive Democrats, leading women, and economists—nearly 400 of whom recently signed a letter in support of Yellen—has been unprecedented.

But the campaign puts Yellen herself in an awkward position. One is not supposed to campaign for a presidential appointment—though Summers surely did. Yellen is interested in the job. She has been interviewed for it by Obama.  She can’t prevent supporters from backing her. But the whole show is a bit unseemly.

With Summers now out of contention, many on Obama’s economic team are urging him to come up with a third candidate, arguing that Summers and Yellen should cancel each other out and that if Obama looks weak for having lost Summers, he would look even weaker if he were pressured to name Yellen.

But that’s just plain bad advice. Yellen is far and away the best person in contention for this important post. The fact that she is a woman is an added bonus, but nobody can claim that she is under consideration simply because she’s a woman.

Obama looked weak because he let the rumored and leaked Summers nomination hang fire for so long while opposition built, and then had to let Summers withdraw. If he swiftly gives the job to Yellen rather than dithering for several more weeks, he will look decisive.

The Fed chair serves a four-year term, so a Yellen appointment, which would take effect in January 2015, would be part of Obama’s legacy well after his own term expires.

There is something similar in the way Obama handled the Summers nomination and the issue of whether to launch a punitive attack on Syria, something that reveals some clues about the nature of Obama’s leadership. You decide whether it is a kind of three-dimensional chess or blundering into a happy ending via dumb luck: In the case of Syria, Obama’s advisers urged him to punish Assad with a one-time strike to “deter and degrade” Syria’s capacity for chemical warfare. Obama was not convinced, so he took the case to Congress. He was on the verge of losing the vote when Russia’s Vladimir Putin came to his rescue with a plan to have Syria give up its chemical weapons. Obama, via a three-way bank shot, got the policy he wanted. The U.S. doesn’t get dragged into a war, but Syria does give up chemical weapons, and Obama mends fences with Putin. A lucky break or astute brinkmanship?

In the case of Summers, Obama was more ambivalent than most press accounts contend. He had previously rejected Summers for the Fed job in 2010, and passed over him for president of the World Bank in 2012. Had Obama been clear that he wanted Summers this time around, he simply would have announced the appointment. But with his staff pressing him to name, Obama instead authorized leaks. The leaks only engendered massive opposition, forcing Summers to withdraw.

Was this what Obama wanted all along? Three-dimensional chess, or dumb luck? We will know the answer, I suspect, when we learn whether Yellen gets the job.

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