After eight years as chair of the US Federal Reserve, Ben Bernanke is stepping down. Fairly soon, President Barack Obama will need to choose a successor – a decision that will be among the most important that he will ever make. I believe he should be looking for a candidate who passes three tests.
First, he must find someone with the right experience. They must have served in a similar role, and served with distinction. Washington is an unusual place, and its bureaucracies are unusual institutions. People appointed to high federal office can learn on the job. But it is better if the bulk of that learning takes place before one is chairing the Fed.
Second, they must have the right values. Right now, America’s biggest economic problem is that employment is too low. In normal times there may be an argument that the Fed chair should care deeply about inflation and less so about other goals. But these times are not normal. The new chair must feel the pain of the unemployed in their viscera.
Third, they must understand the right model of the economy. Since 2008, Bernanke has worried too little about how spending might get trapped in a low-level vicious circle and how America might suffer from a prolonged jobless recovery. He has been continually surprised by growth, employment, and inflation outcomes – all of which have been constantly and consistently lower than he expected.
A good candidate for the Fed will be someone who understands the Minskyite and Keynesian dimensions of the economy: that herding financiers can do truly remarkable amounts of damage through their exuberance and pessimism, and that the spending flows that determine production and employment do not rebalance themselves without government assistance.
Five candidates are way above the rest: former Treasury Secretary Lawrence Summers; current Fed vice-chair Janet Yellen; former Fed vice-chair Alan Blinder; former Council of Economic Advisors chair Christina Romer; and former National Economic Council chair Laura Tyson. These are the Fabulous Five. Choosing any of them would make me happy. Choosing anybody else would be an unforced error.
If times were normal, my first choice among the Fab Five would be obvious: Yellen. Back in 1994, the Clinton administration pulled Yellen out of the academy and on to the Fed. She was a brilliant choice, with a profound understanding of economics and a proven record as a consensus-builder. She is often the most insightful person in the room, but does not feel the need to constantly prove herself such – and she has a 15-year record of success in Washington.
But these are not normal times. In normal times, the “short run” in which the economy remains below its normal relative level of activity is a year or so. It has been five years since we saw normality, and few would lay long odds that we will escape without a lost full decade.
In normal times the Fed’s senior policy makers are economic priests following a settled gospel of technocratic economic management. But right now, as John Maynard Keynes said in a similar crisis in the 1920s: “no one has a gospel”. Therefore, Keynes said then, “the next move [must be] with the head…” And the Fed, over the next four years, is the best place to do the thinking that must be done to recover and rebuild.
And this is why my preference is for Summers. He is the most creative thinker around. If I prepare for four hours for a one-hour discussion with Summers, it takes him 15 minutes to get up to speed, for the next 30 minutes I am holding my own, and for the last 15 he is coming up with insights that I would have missed had I spent 12 hours thinking the issue through. Unless things start getting better faster, in a year or two it will be clear that the Fed’s current policy consensus is past its sell-by date. And in that case a lot of outside-the-box thinking will be called for.
Could a Summers appointment be a mistake relative to a Yellen pick? Yes. If you told me that the next four years would be placid and that the current Fed consensus were close to optimal, would I still prefer Summers? No. Would the Federal Open Market Committee be a calm and happy place under him? Unlikely, but it wasn’t calm and happy under Paul Volcker either. Does Summers’ failure to maintain the confidence of the Harvard faculty when he was its president weigh against him? Yes. But does Obama believe Summers served him well as chair of his National Economic Council? Yes.
So the benefits to that move of a Summers appointment do, I think, outweigh the risks. My preference for Summers over Yellen is a very narrow one. If I weighted consensus and creativity differently – as other people, quite reasonably, do – I would come out on the other side. And I think Yellen would, in any case, be an excellent choice. Any of the five would. It’s just that I believe Summers would be slightly more excellent.
Bradford DeLong is a professor at the University of California, Berkeley.
Copyright the Financial Times 2013.