Monday, September 9, 2013

Jannet Yellen And The Soft Bigotry Of Low Monetary Policy Expectations

I've found the debate over who Obama should appoint to be chair of the Federal Reserve to be quite fascinating. The contest has basically boiled down to being between Janet, Yellen the current Fed vice chair, and Larry Summers formerly of the White House economic team and Harvard University.  Unfortunately for us, the discussion itself has been notably free of content in the liberal blogosphere. Basically everyone except Brad Delong thinks Summers is history's greatest monster either because he once said something that made the faculty at Harvard mad and/or he once worked with with Robert Rubin. We are then told that Yellen would be much better because she's "more qualified" (whatever that means) and also because nominating her will fix some messy issues around identity politics for the Obama Administration. Meanwhile very little at all is said about her views or record on monetary policy itself, the most important part of being chair of the Fed.   

What strikes me about this whole argument is that we liberals have concocted a terrible way to debate who should become one of the most powerful people in the world.

Some smart progressives have been pointing out for a while that we basically ignore the Federal Reserve system even though it holds enormous clout when it comes to controlling the American economy and thus a variety of policy outcomes that we liberals care about (including who wins elections). It largely does this by controlling monetary policy (a phrase that only appears in Amanda Marcotte's anti-Summers article once, in a quote where we learn that "[Yellen is] very knowledgeable about monetary policy.") In short the chair exercises enormous influence on the Fed's board o' governors that sets the interest rate in the American economy through a variety of policy tools. By lowering interest rates the Fed can general encourage the economy to grow, and in certain times of high growth that can encourage inflation. The Fed can conversely raise interest rates which in turn can cut back on inflation, but this also have a tendency to slow and economy or start a recession by making it harder for business and consumers to get credit. In theory the Fed has a "duel mandate" to reduce unemployment and keep inflation low, but in recent years they don't really act like that at all.

While the Fed (and a lot of people in the press) likes to portray itself as a "neutral" entity with all our best interests at heart that does things to manage the economy like a "maestro", the reality is quite different.

In fact in Anderson's Concise History of the Federal Reserve Since Greenspan we can read the story of two Fed chairs not acting like highly qualified geniuses controlling the economy, but rather political actors working in a political system. As Anderson explains, we recently have had two pretty bad Fed Chairs who are terrible in altogether different ways. Noted Ayn Rand follower Alan Greenspan decided in the late 90's to "cool the economy" i.e. cause a recession to make sure the Democrats lost the White House pop a dangerous bubble because of "irrational exuberance." Then the Maestro did an about face in the early aughts and kept rates at record lows to make sure Bush got re-elected fight the terrorists. While this succeed in wining the election not having the American economy go off a cliff after 9/11, it unfortunately laid the ground work for the creation of the American housing bubble, one of the biggest speculatory bubbles in world history. After Greenspan left Ben Bernanke failed to deal with the bubble until it popped and nearly destroyed the world economy. Fortunately Uncle Ben was able to keep the great white ship, the SS Wall Street Banks, off the rocks during the grim days of late 2008 and early 2009. Unfortunately for the rest of the American people his response to deal with unemployment and a shrinking economy since then has been woefully inadequate. This resulted in the American people suffering years of high employment, slow growth, pain and misery. Oh and since 2010 he's been assisted in crafting his timid and far to weak response to this "Lesser Depression" but his able deputy, one Janet Yellen. And all this happened despite the fact that Bernanke was considered "the most qualified" person for the job.  Which is a round about way of saying that the Fed's monetary policy is very important and the "how" and "why" of the manner in which one creates the Fed's policy can be more important than the "qualifications" on one's "resume".

Which brings me to the problems of liberal commentary on Summers and Yellen. While tens of thousands of words have been written on the subject, the question of how each would employ monetary policy (to what ends? for whose benefit?) has largely been ignored by liberals. A typical New York Times anti-Summer editorial uses the phrase monetary policy only once, in a paragraph not about monetary policy at all:
Mr. Summers’s reputation is replete with evidence of a temperament unsuited to lead the Fed. He is known for cooperation when he works with those he perceives as having more power than he does, and for dismissiveness toward those he perceives as less powerful. Those traits would be especially destructive at the Fed, where board members and regional bank presidents all bring their own considerable political power and intellectual heft to the Fed’s decision-making on monetary policy and financial regulation. Putting Mr. Summers in charge would risk institutional discord or worse, dysfunction. 
So basically Summer's shouldn't get the job because he might say something that hurts the feelings of the hard money people on the Fed's board of governors who have been arguing for higher interest rates and tighter money (and thus less growth and higher unemployment) to stop non-existent inflation. This sort of discussion is like trying to pick a presidential nominee based on musical tastes, not only is it irrelevant, but it distracts from the important questions about the position that should be being asked.

As I see it, there wouldn't be much policy difference between these two. Both are brilliant center-left economists with longstanding ties to the Democratic Party. Both would focus on lowering unemployment as their main goal over stopping non-existent inflation. And while their styles and personalities may differ, it's hard to know whether these differences would be better or worse for the American public. Summer's rougher style might alienate allies and make his job harder, but then again a swift kick in the pants might get the Fed to start actually addressing unemployment in a meaningful way. Meanwhile Yellen might change the direction of the Fed, or she she might turn out to be full of the same weakness and moral cowardice that have been driving Bernanke's "two steps forward, one step back" policy for years now. There's no way to tell, we'll have to wait and see.

But when it comes to the liberal project in general it really is frustrating to see so many smart people ignoring monetary policy and what the Fed actually does for the same warmed over meal of accusations of sexism and hatred of Robert Rubin. Full employment really could transform American society in more ways than one, but too many liberals seem to not understand this, or just not care. This makes me sad.

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