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?

OFF topic, Marcus Nunes has a very good new post showing the subtle change in the wording in the Fed’s new statement:

The changes in the post meeting statement were towards caution. While before the economy was expanding at a “moderate pace”, now it is seen as expanding at only a “modest pace”. Caution is also seen with the introduction of the qualifier “but mortgage rates have risen somewhat“.

Now “the Committee expects that, with appropriate policy accommodation, economic growth will pick up from its recent pace” while before it was: “The Committee expects that, with appropriate policy accommodation, economic growth will proceed at a moderate pace”.

.  .  .

While before the FOMC was nonchalant about inflation being persistently below target, now it believes it´s “dangerous”. Furthermore, if now the FOMC expects that inflation will move back to target, it is signaling it is ready to do something about it! At a minimum, the probability of an “early” tapering has decreased and the chances of further purchases have increased.

The markets reacted appropriately. Stocks up, long yields down and the dollar weakened.

It seems that the Fed is beginning to realize that I was right; inflation will stay below 2% and we won’t get the 2.3% to 2.6% RGDP growth they expected for 2013.  But I could have told them that back in January.

Regarding long yields, they were up again today on positive growth news (new claims and the ISM number), a reminder that a substantial share of the backup in long yields has been driven by positive growth data, although a substantial portion has also been driven by Fed tightening (taper talk.)  Until we get the NGDP futures market we won’t know how much is due to each factor.



23 Responses to “The Yellen/Summers debate”

  1. Gravatar of TallDave TallDave
    1. August 2013 at 07:45

    This is a valuable discussion, but it’s not the one the Obama admin is having. Larry Summers is a more reliable to bet to argue for fiscal expansion, so he’s going to get the job.

  2. Gravatar of srw srw
    1. August 2013 at 08:23

    Why are you so convinced that we will still be at the zero bound many, many years into the future? I can understand expecting that for the next couple years, maybe a bit longer. But decades? Really? Why

  3. Gravatar of ssumner ssumner
    1. August 2013 at 08:36

    srw, I do not expect the zero bound to last for many years, I expect it to reappear in future recessions.

  4. Gravatar of Midday Links | Across All Sports Midday Links | Across All Sports
    1. August 2013 at 08:58

    […] The Yellen/Summers Debate (Scott Sumner at his blog) . […]

  5. Gravatar of rbl rbl
    1. August 2013 at 10:35

    TallDave, if the WH really does appoint Summers for that reason, they will deserve the smackdown they get. I can sort of understand supporting Summers since they know him and think he is smart, but if they support him expecting that he will argue he can’t do anything…

  6. Gravatar of TallDave TallDave
    1. August 2013 at 12:20

    rbl — Tragically, I think there won’t be any smackdown. A few wonkish people on the left will complain, but not vociferously, and most of the right will think Summers is too dovish on inflation. In fact I expect virtually any candidate will see more flak from the right than left.

  7. Gravatar of Bill Ellis Bill Ellis
    1. August 2013 at 13:08

    Brad Delong, apologist for Summers…

    The cool thing is the comments section. Almost everyone including his loyal regulars call him out on it.

  8. Gravatar of Bill Ellis Bill Ellis
    1. August 2013 at 13:23

    Tall Dave,

    I think you are 100% right about there being no backlash, and that most of the flack will come from the “austrian” right.

    But, I think that there is no realistic hope for any significant fiscal stim. 🙁
    Obama has never come close to actually advocating anything close to an adequate level of Fiscal stim…(despite what I believe to be the insincere noise he makes about it ) So I don’t think support for it should be a big factor.

    But who knows ? You may have something. Maybe he will pick the person who he thinks is best for his messaging, not the FED.

    Best regards, Short Bill.

  9. Gravatar of TravisV TravisV
    1. August 2013 at 13:57

    Menzie Chinn:

    “Why Is Inflation So Low?”

  10. Gravatar of Steve Steve
    1. August 2013 at 14:36

    Appointing Larry Summers to the Fed would be like appointing Eric Holder to the Supreme Court (uh oh, I hope I don’t give him any ideas).

    These are institutions requiring top talents who are also respectful of the institutions. Not political insiders who are indebted to the president.

  11. Gravatar of TravisV TravisV
    1. August 2013 at 14:42

    Prof. Sumner,

    I know that Ryan Avent has raised concerns that, since we now live in a low-interest-rate world, we’re far more likely to fall into liquidity traps over, say, the next 50 years. As a result, I think he would prefer a long-run rate of inflation of 3% or 4% to make liquidity traps less likely. I think the higher inflation rate would provide more of a “buffer.”

    At any rate, isn’t Avent’s concern now way way way less urgent now that all these huge oil discoveries and innovations are being achieved in the U.S.? Aren’t potential oil shortages the main thing that could cause a big enough supply shock to throw the U.S. back into a liquidity trap?

    I understand that tight money from the Fed that reduces NGDP growth is the main threat that could throw us into a liquidity trap. But won’t they only do that if the U.S. suffers a severe supply shock?

    I’m not sure what else could be as damaging as the 2008 oil shortages. Huge terrorist attack / hurricane / earthquake?

  12. Gravatar of Benny Lava Benny Lava
    1. August 2013 at 15:15

    I had the same question as srw. I like your answer because we’ve historically seen recessions moving in this direction…but why? I haven’t heard convincing answers.

  13. Gravatar of ssumner ssumner
    1. August 2013 at 17:46

    Travis, The oil will help a little, but I doubt it makes a big difference.

    Benny, I’ve done some posts, but I admit that I don’t have all the answers. We can observe a 30 year downward trend in real interest rates.

  14. Gravatar of Benjamin Cole Benjamin Cole
    1. August 2013 at 18:49

    Excellent blogging, and btw Marcus Nunes does a whole lot of excellent blogging also. Kudos to the MM gang.

    On Yellen: What few have mentioned, but has been pointed out by Tim Duy, is Yellen has published papers suggesting a 1.5 percent inflation target is fine, and maybe even 1 percent. In other words, sad to say, she is yet another modern-day economist who genuflects to the exalted central banker mission statement of microscopic rates of inflation.

    The problem–and only Sumner seems to get this–is that we live in a world of secularly declining interest rates and very low inflation, and capital gluts.

    A central banker who target 1.5 percent inflation will soon find themselves in ZLB-land, the first whiff of a recession. See BoJ and Japan.

    Yellen, or any other central banker who says “I target 1.5 percent inflation” (and that, in practice, means 1 percent, as whenever a central banker gets close to the target ceiling, they start to tighten up) must also say “And I plan to either let the economy stall ala Japan, or go to QE as my conventional policy tool, long hard and often.”

    Sadly, what we need now is not inflation-fighting, but a dread intent to target robust economic growth, and show firm resolve in the face of inflation. If inflation runs up to 3-5 percent is of little import.

    Just ask the WSJ circa 1982, when they told Volcker to ease up—when inflation was about at 5 percent.

    Is Yellen up to that task? I wonder.

    Summers is so pig-headed, that if decided he wanted more growth, and screw inflation, that is what he would do.

    Yellen? Don’t know.

  15. Gravatar of Benjamin Cole Benjamin Cole
    1. August 2013 at 18:55

    But here we are, in 1965, huddled around our ham radio receivers and parsing Radio Tass broadcasts for clues as to Soviet policy.

    Oh, I meant, here we are, 2013, trying to decipher Fed statements.

    Please, can the Fed just outline what economic conditions would trigger what Fed actions? This peek-a-boo, hide-and-seek, coy Fed is not good policy, and poor democracy.

    Why do economists put up with this nonsense? They actually seem to like it.

  16. Gravatar of Mark A. Sadowski Mark A. Sadowski
    1. August 2013 at 21:07

    Benjamin Cole,
    With all due repect I think you have things exactly backwards with respect to Summers and Yellen.

    1) Fortunately Yellen is an open book with respect to monetary policy objectives and is very rules oriented. That was one of the whole points of Tim Duy’s post. Despite widespread perceptions Yellen is a dove, an objective reading is that she is actually extraordinarily well balanced in the pursuit of those objectives

    Unfortunately Summers is a black box when it comes to monetary policy objectives. He hasn’t said or written a coherent thing on monetary policy in nearly 20 years. And when he did, he stated he favored discretion over rules.

    Who knows what he thinks the objectives of monetary policy should be?

    2) FOMC transcripts show Yellen to be a dogged and fiesty opponent when arguing over monetary policy objectives. On the other hand when in a position to recommend fiscal stimulus proposals to the President, Summers, who is on record as thinking that monetary stimulus is far less effective than fiscal stimulus at the zero lower bound, decided that the two largest proposals were too large to show the President because he was more interested in not appearing to lose politically than he was in promoting an economic recovery.

    The unpleasant side of Summers’ personality is invariably reserved for trivial ego primping, almost never for anything of value. Yellen is the one who is more likely to fight for expansionary policy if that is what the monetary policy objectives call for.

  17. Gravatar of Benjamin Cole Benjamin Cole
    2. August 2013 at 00:00

    Mark S.–

    I always enjoy your commentary, even when it is over my head,

    I hope I am wrong and Yellen proves to be a very expansionist Fed chief.

    However, she is on record as stating a central bank should target extremely low rates of inflation—low enough to be noose-like. Low enough to easily slide in ZLB in world of capital gluts.

    Perhaps the economics profession is getting over its peevish fixation with microscopic rates of inflation. It would be nice if economists start again talking about how to obtain robust economic growth—especially at the Fed.

    I confess I do not know how Yellen stands on the democratic responsibility—and good policy—to make clear, transparent statements as to monetary policy, and to clearly state the economic conditions that will lead to policy changes. As in, “We will buy $100 billion a month in bonds until we see inflation at more than 4 percent, or unemployment under 6 percent.”

    I can see a Summers-type deciding only he should know what he plans to do.

    Lastly, how did we get into the choice of only two people on Planet Earth for the Fed chairmanship? Summers is a cipher (and reputed to be arrogant) and Yellen may feel the need to prove her street cred and be “firm” in response to the slightest jiggle upwards in inflation.

    We need a Paul Volcker of expansionism. We need someone who says they will pint money until the plates melt. LIke Abe–“I will double the money supply and take that.”

    I say Scott Sumner should be the next Fed chief. With Chuck Norris as his enforcer…er, I mean, vice chair.

  18. Gravatar of Mike Sax Mike Sax
    2. August 2013 at 00:17

    “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…”

    Is that because you think the two roles would be separated or because you don’t think the financial system needs to be regulated? That it would better police itself?

  19. Gravatar of TallDave TallDave
    2. August 2013 at 06:19

    But, I think that there is no realistic hope for any significant fiscal stim.

    Fortunately not, and the Fed has no real control there anyway. But Obama was brought up in the “eternal critique” school of thought. That’s why he’s rhetoric runs down his own economy, and why Summers is his perfect pick: he can employ the Fed’s credibility on Obama’s behalf by attacking fiscal restraint.

    I think that piece is what most people are missing — a quiet dove is less useful to Obama than a vociferous hawk. The former will put him on the defensive even if the economy does better.

  20. Gravatar of ssumner ssumner
    2. August 2013 at 06:27

    Ben, In fairness to Yellen, I’ve also become more aware that a 1% trend rate of inflation can create problems in a low real interest rate environment.

    Mike, With no FDIC and no too big to fail, I support no regs. With FDIC and TBTF, I support regs to make banks more conservative (although I’m not certain they will work in practice.

    TallDave, Or maybe Obama just doesn’t have a clue.

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