Yellen or Summers: Who'd Be Better at Running the Fed?

Evan Soltas is a contributor to Bloomberg View.
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The race to be the next chairman of the Federal Reserve hasn't officially begun, but that needn't stop us from comparing runners' strengths. Fed Vice Chairman Janet Yellen and former U.S. Treasury Secretary Lawrence Summers are serious prospects. Who'd be better?

Ideologially, there isn't much in it. Loosely speaking, both are members of the New Keynesian school of thought, which takes a pretty orthodox free-market view and adds "stickiness" to prices to explain recessions. In terms of academic eminence, Summers has the edge: Yellen is an academic star, but Summers is a superstar.

Much of Yellen's research looks at imperfections in labor markets. One of her conclusions: Employers tend to pay workers extra and don't cut wages during recessions because high pay encourages hard work. She's written extensively with her husband George Akerlof, who won the Nobel Prize for economics in 2001.

As a young academic, Summers was known for his range, but he developed a specialty in financial markets: He's renowned for his work on "noise traders" and "rational speculation." He's also produced maybe the best empirical evidence that independent central banks keep inflation low and stable. A recent and widely-read paper he wrote with Berkeley economist Brad DeLong argued that in a recession fiscal deficits can cut the ratio of public debt to gross domestic product rather than add to it.

Yellen has an advantage in central-banking experience. She has held senior Fed positions since 2004 -- before Vice Chairman, she was President of the Federal Reserve Bank of San Francisco. As a former Treasury Secretary, head of the White House National Economic Council, president of Harvard University and chief economist of the World Bank, Summers can't exactly be called lacking in experience, but he's never been a central banker.

Policy differences? One possibility: financial regulation. Summers advocated financial deregulation as the head of Bill Clinton's Treasury. Yellen seems firmly behind the Fed's expanded regulatory role. Summers's views are sure to have evolved, but exactly how is unclear. He'll need to be compatible with other central bankers, such as Daniel Tarullo, who are keener on financial regulation. An interview he gave in 2010 sheds light on his reactions to the financial meltdown.

He supported the Dodd-Frank Act, including higher requirements for bank capital and liquidity. The rise of credit default swaps, he said, contributed to a change of heart on financial regulation. "Whatever one thought about how large a safety buffer was necessary ten days ago, one would have a bias towards" more, he also said after the J.P. Morgan & Co. "London Whale" trading debacle.

But he remains opposed to a new Glass-Steagall bill -- not surprising for the man that worked hard to slay the old one. And he sounded less than confident in Dodd-Frank's "orderly liquidation authority" to resolve insolvent big banks in a 2011 forum hosted by The Economist. He opposes proposals to cap the size of "too-big-to-fail" banks. No word on whether the recent hike of capital standards for banks is too much, just right, or not enough.

Where Yellen and Summers may differ most is in their leadership style. That may be the critical issue for a Fed that's trying to be more open about its thinking despite disagreements among its top policy makers. The Fed's minutes show Yellen as influential but not particularly loud and outspoken. It's safe to say Summers would be loud and outspoken -- and authoritarian rather than merely influential.

Would that be good or bad? Miles Kimball of theUniversity of Michigan tells me, good on the whole.The Fed needs a strong leader. "I fear that Yellen just isn't the right person to steer the committee through any big changes," he said.

My colleague Ezra Klein writes that this line of criticism -- Yellen as too "weak" to lead -- is sexist. I'm not so sure. The fact of it is that Yellen won't be shouting down her colleagues in monetary-policy meetings. Summers might. That difference is real. And leadership is in fact a plus for Yellen in my book.

Mark Thoma of the University of Oregon said Summers was too political to rebuild the Fed as an institution. "I want someone who is calm, not in the spotlight, and really has the ability to rebuild the Fed as an institution," Thoma said. "Everything he says will be big news, and it will be him, him, him."

Andrew Rose, a friend and co-author to Yellen, said he valued her caution. "I've even survived an earthquake with her," Rose said, referring to the severe 1989 Loma Prieta earthquake, which struck as they were working together at Berkeley. "She's an extremely careful and conservative person. She likes to think exhaustively about different positions and approaches. She is really loath to offend people."

DeLong, a frequent Summers collaborator, said: "I can envision Janet not doing what needs to be done because she doesn't have a consensus of the committee behind her," DeLong said, "and I can envision Larry going to the mattresses and leaving blood on the walls of the Eccles Building." I think that's a vote for Summers.

This column does not necessarily reflect the opinion of Bloomberg View's editorial board or Bloomberg LP, its owners and investors.

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