What's All the Yellen About?
This post originally appeared in National Journal.
Late Monday, in a flurry of calls, the White House notified top House and Senate Republicans of President Obama's overture for a mini "grand bargain" on corporate tax reform. Treasury Secretary Jacob Lew called House Speaker John Boehner, R-Ohio, and House Ways and Means Committee Chairman Dave Camp, R-Mich., while White House Chief of Staff Denis McDonough called Senate Minority Leader Mitch McConnell, R-Ky.
This was meant to soften the landing of Obama's call to link a reduction in corporate tax rates (from 35 percent to no higher than 28 percent, with a 25 percent manufacturing tax rate) with a one-time boost in spending on infrastructure, school construction, and community-college grants for worker retraining.
Republicans found the offer underwhelming. The White House didn't much care. "The bargain isn't supposed to be for the Republicans," White House Communications Director Jennifer Palmieri said. "It's supposed to be for the middle class."
Obama's approval ratings on the economy remain slightly to heavily underwater. But Congress is worse, and Republicans remain Obama's best foil.
Soon, however, Obama will have to make a decision with wide-ranging economic consequences that he will own for at least four years, and quite probably more. And while he may deploy the last-minute consultation techniques he used before rolling out his proposal Tuesday, no amount of hand-holding or soothing rhetoric from Lew, McDonough, and even Obama will shield the president from criticism or the consequences.
Obama is due to name a new head of the Federal Reserve in September. Current Chairman Ben Bernanke completes his second four-year term at the end of January. Already an intense and possibly divisive intra-party fight has broken out over the two likeliest nominees--current Fed Vice Chairwoman Janet Yellen and Larry Summers, Obama's former chairman of the National Economic Council.
The National Organization for Women backs Yellen and knocks Summers for alleged sexism while president of Harvard. Sheryl Sandberg, of Lean In fame, backs Summers as an advocate for women. The gender angle in the Democratic fight over the next Federal Reserve chairman tells you that the perception endures (among Democrats) that Obama will almost always choose a super-loyalist male over virtually any qualified woman.
Within economic circles, Yellen and Summers have their own loyalists, and the public jousting far exceeds anything before seen in a race to lead the Fed. The fever around the pick prompted The New York Times editorial board, a voice with outsized influence in the West Wing, to practically roar for Yellen's appointment. A majority of Senate Democrats have signed a letter urging Obama to appoint her.
Obama is well aware of the Yellen-Summers donnybrook. "I don't think it is good for the process," a senior administration official said. "But it's not going to materially affect the decision."
Top White House officials concede that both Yellen and Summers are in the running, but it's easier to find those willing to make the case for Summers. That's not dispositive and could be a head fake. Summers is not only in the mix, but is probably leading among outside odds makers who have been sifting Obama's recent rhetoric on wage disparity, anemic economic growth, and the ravages of long-term unemployment. There is also this. A senior official also said all the Democrats who signed the pro-Yellen letter have assured the White House they will back Summers. Preferences, after all, are not confirmation votes.
While Obama's umpteenth "pivot" to the economy has a familiar ring to it, there is something economically and politically new here. Obama is telling Congress, for the first time since Republicans won the House, that he's done with deficit-reduction politics. Debates over government shutdowns and default are too small, and Obama intends to use whatever rhetorical and policy leverage he has (the reaction to Tuesday's proposed grand bargain suggests it's minimal) to elevate growth and job creation over entitlement reform and sequestration.
That's where the Federal Reserve pick fits in. In Obama's interview with The New York Times, he said that the new Fed chair must understand that the central bank's role is not about the technical balance of the money supply in relation to inflation and a strong currency. "I want a Fed chairman that can step back and look at that objectively and say, let's make sure that we're growing the economy, but let's also keep an eye on inflation, and if it starts heating up, if the markets start frothing up, let's make sure that we're not creating new bubbles."
This may be Bernanke's most important legacy--the concept, now embraced by the president, that the Federal Reserve chairman can and should play a more active, anticipatory, and certainly remedial role in the future of the U.S. economy. Obama has almost no personal relationship with Yellen. This is counted against her. But she did, as the Senate Democratic letter points out, warn about a housing bubble before the market collapsed. And she gave an impassioned speech to the AFL-CIO in February about the Fed's active role in the economy. Of the chronically jobless, she said: "These are not just statistics to me. We know that long-term unemployment is devastating to workers and their families."
When White House aides talk up Summers, it is usually in the context of his relationship with Obama during the darkest days of the Great Recession, shaping policies Obama believes saved the country from another depression. That relationship is real and meaningful. But Summers did not anticipate the Great Recession, and some believe his advocacy for an end to Glass-Steagall helped set it in motion. Top administration officials disagree, but Obama's criteria appears clear: seeing a crisis before it strikes and dealing with Fed policy outside of its historically abstract sandbox. If you place the Summers-versus-Yellen campaigning aside, and take Obama's own words at face value, he's leaning toward Yellen.
