Wednesday, July 24, 2013

Obama And Harvard Games: Summers Vs Yellen

Let me begin by noting that I was among the first to call for Janet Yellen to be appointed Chair of the Fed nearly four years ago, , a post that was sharply criticized in its 30 comments on many grounds then, although, ironically, the leading candidates were Bernanke, who of course got it, and, ahem, Larry Summers, whom I dissed sharply.along with Yellen as a dark horse third place candidate, also supported by Bill McBride then at Calculated Risk, who has reiterated his support recently, .  The arguments I made then about her competence and Summers's lack thereof regarding the Fed are even more true today than they were then, and I stand fully by them. 

But, of course, with Bernanke apparently preparing to step aside, whether willingly or not, the battle is on full between Summers and Yellen, with the disturbing news arriving from Ezra Klein that in the last few days, Summers has gained a strong lead in the White House for the nod (link is to Mark Thoma's "WTF?" with link to Klein's post): .  Klein lists three main arguments why supposedly Summers has the edge:

1) Obama likes Summers, having worked with him closely, and does not know Yellen.  Summers has visited the White House 14 times in the past year, and she has visited once, and never worked with or for Obama, although he did appoint her Vice Chair.

2) Somehow, Obama thinks that Summers is more able to handle a crisis than Yellen, an argument I shall consider in more detail further below, although will note here now may also be linked to another Ezra Klein post, linkable through his latest post, about the sexist whispering campaign against Yellen along the lines that she "lacks gravitas" and such stuff.  I shall not further address that nonsense.

3) Obama thinks the markets will trust Summers more than Yellen, atlhough I suspect that a) this is not true, and b) the only evidence for this is probably the whisperings of the Goldman Sachs gang in Obama's ears, with Treasury Secretary Jack Lew probablhy the most important such voice, channeling Rubin, Geithner, and others.

Let me first deal with this matter of how supposedly Summers would handle a crisis better.  Presumably this comes from Obama's experience with him at the WH, particularly in regards to the fiscal stimulus.  However, there are many who argue that Summers mishandled that badly, and that he was wrong to dismiss the arguments of Christina Romer to push for a larger stimulus.  It may well be that in the end, what was proposed was the maximum that could be passed, but it is far from clear that pushing for a larger one would have somehow ended up with a smaller one or none at all.

What is more serious is that there is lots of evidence that in fact Janet Yellen has been far more prescient than Summers in terms of recognizing and identifying real threats to the economy.  McBride in the post linked to above lays this out in terms of statements made by Janet Yellen in 2005 and 2006 warning of the dangers of the housing bubble and in late 2007, when virtually all other top Fed people thought things were hunky-dory, where she worried about the fragility of the financial markets.  She was completely correct and farsighted, arguably more than Bernanke or anybody else in the Fed.  And certainly more than Summers, who said nothing or nothing intelligent about any of this at the appropriate time.  Indeed, in 2005 he dismissed and ridiculed a paper by Raghuran Rajan that raised questions about financial stability of the system.  The hard fact is that Janet Yellen is simply head and shoulders the superior in terms of diagnosing the state of the economy than is Summers.  Argument #2 is just garbage, quite aside from the fact that the documented lack of collegiality of Summrs and his lack of knowledge of the Fed compared to Yellen does not bode at all well for him managing the Fed in a time of crisis, particularly one he would fail to foresse.

I think there is another game going on here that has not been spoken of, let us call it the Harvard Game, although I think it is also linked to the sexism whispering campaign stuff.  It is that Obama is a Harvard Man, so he takes the place seriously.  While Summers was one of the youngest (if not the actual youngest) person ever to be named a full professor at Harvard, and also served as President of that institution, even if he was thrown out on his ear after he lied to the faculty about his covering up for and helping out Andrei Shleifer, Yellen was turned down for tenure there in the mid-1970s, her first job after she earned her PhD from Yale.

So, it must be admitted that she was a bit of a slow starter out of the gate, and I think also did not have much help.  She published a number of respectable papers on budget deficits and labor economics in some top journals, most single authored, but not quite enough to get tenure at Harvard, while Summers published a string of attention-getting (and good) papers with a large number of well-known coauthors early in his career that put him ahead of the game.  However, over time the quality of his academic output has declined, with no really important paper published since the early 1990s, whereas especially after Yellen married eventual Nobelist George Akerlof, the quality of her papers rose over a long period of time, including those not coauthored with Akerlof, with many of those very important and even influential on Fed policy, with particularly her papers with Akerlof laying out the fundamentals of the behavioral economics approach to macroeconomics, which arguably strongly influences Fed policy.

This brings up an issue that nobody has mentioned, and some might think should not be mentioned, but which I am going to mention here and now.  Just as when Bill Clinton was elected president, we got Hillary as an advising First Lady (and some others who arguably helped their husbands perform better), getting Janet Yellen as Fed Chair, whom I think is superior even without this on grounds of knowledge, personality, and experience to Summers, we would get George Akerlof as "Fed First Gentleman."  It is certainly true that Summers did better at Harvard than Yellen as an Assistant Professor, and he might have a higher IQ than she does, but Akerlof is smarter than Summers.  He has a Nobel, and a really solid one unlike quite a few other recipients I could name, while Summer does not and never will.  While we are not supposed to talk about it, Yellen will be able to closely access the brilliance of her husband George Akerlof.

Let me close this with an example of when this might already have happened, although it remains not well known and was barely noticed at the time, and even now few note the link with the work of Akerlof.  This is the fact that Janet Yellen was responsible for the fact that now almost all central banks that target inflation target a 2% inflation rate.  McBride in the link above notes that it was Yellen who convinced Greenspan in 1996 that a 2% target was superior to a 0% target.  The Fed meeting minutes where the crucial exchange happened can be found at .  She cited work of Perry (recorded as "Parry" in the minutes) to support the argument, but it in fact drew on work by her and Akerlof, with the crucial Brookings paper being by Akerlof, Dickens, and Perry.  The behavioral econ foundation was the downward stickiness of nominal wages about which she and George had written extensively.  In the face of this stylized real fact, to have micro labor market efficiency with changes in real relative wages, one must have some positive inflation to allow for some nominal wages to rise faster than others.  This was and remains the argument, and once she convinced Greenspan, this argument spread across the world of central banking.

As it is, this will be one of the most important decisions Obama will make.  If he chooses Summers, it will be a very serious mistake, one of the worst decisions of his presidency.  I hope that the econoblogosphere can break through his bubble to convince him to appoint Janet Yellen instead.

Barkley Rosser

[Later Addition:  While the last two links work fine, the first two do not.  I am mystified regarding this as these are indeed accurate urls.  If you write out these urls specifically you will  reach the posts as advertised.  Why linking them from my post they do not go there, I have no explanation.  I apologize for this.]


Sandwichman said...

You wrote "blogpost" instead of "blogspot" in the first link and "2012" instead of "2013" in the second. That's why the links don't work. said...

Thanks for noting, S-man, but I have fixed those errors, and the darned links still do not work.

Scott said...

Did you mean to link to:

Discussion begins page 43

doclawson said...

Barkely, you fixed the text but not the hypertext link. said...

I confess my ignorance. I did not know that they were separate. How do I do the latter, please?

Mark A. Sadowski said...

Excellent post. In fact the "Harvard Games" *have* come up in econoblogosphere comments, and I have used your post as additional evidence.

Too much attention has been paid to Summers' publications ranking and not enough to the relevance what he has has actually written to contemporary monetary policy, which is to say not at all.

Mark A. Sadowski said...

"Obama thinks the markets will trust Summers more than Yellen, atlhough I suspect that a) this is not true,..."

I came across the following:

"Credit Suisse research note
“A Summers chairmanship would bring with it more initial uncertainty; the markets know Yellen’s views on monetary policy better than they know those of Summers.”"

I also think there are two separate issues here. There's how the *financial sector* feels about this and how the *markets in general* feel about this. I suspect the financial sector prefers Summers because of his previous record on deregulation, and Obama is of course up to his eyeballs in financial sector friendly advisers. But the markets in general rightly perceive Yellen as being better for the economy. said...

I agree Mark about your last point. I think the markets will view Yellen as substantially similar to Bernanke. Summers will be viewed as a loose and volatile cannon, unreliable.