Monday, June 08, 2009

Summers vs. Bernanke? I’d Take Summers

The New York Times ran a front-page story today on personal tensions between Larry Summers and other top Obama economic advisors. Parsing through it, it looks like Austan Goolsbee, who argued against the Chrysler bailout, has the cheekiest relationship with Summers. Christina Romer takes a shot at Summers. Geithner does not, though the Treasury man says he’s not afraid to push back against the former Clinton Treasury official and Harvard president.

It’s hard to know what to make of stories like this. Conceivably, White House chief of staff Rahm Emanuel planted it as a Summers put-down, because the latter is getting too powerful. But I truly do not know the meaning of this part of the story. In the Reagan days we had plenty of internal economic tensions, which I think are good for policymakers -- not bad.

But the most interesting part of the Times story, at least to me, is the speculation about Summers vs. Bernanke. With Bernanke’s term expiring in January 2010, President Obama will make a decision about the Fed head before year-end.

So given the choice between those two, who do I like? Well, meaning no disrespect to Mr. Bernanke, I think I’ll go out on a limb and choose Summers. Why? Because during the Clinton years, when Summers held several Treasury posts (including Treasury secretary), a strong-dollar policy was in place. Back then I called it King Dollar. And I frequently praised Robert Rubin and Larry Summers for backing King Dollar.

And since I believe in a price-rule approach to Fed policy, where the dollar should be stable and the Fed head should watch open-market prices such as the dollar, gold, and commodities in order to promote price stability and economic growth, Larry Summers’s résumé as a Clinton-Rubin alumnus is closer to my liking.

And in terms of Mr. Summers’s so-called prickly personality, that might be an excellent credential for a truly independent Fed chairman. Paul Volcker had a prickly personality, but he was the inflation slayer (with Ronald Reagan’s help).

Ben Bernanke, on the other hand, seems to be targeting the unemployment rate, and he has never given much emphasis to a stable dollar as a key Fed-policy variable. Right now the bond markets are pricing in five or six Fed tightening moves as the economy shifts toward recovery. And at least until recently, the dollar was soft and gold was strong. But if Mr. Bernanke targets the unemployment rate, the Fed will overstay its easy-money welcome and inflation will shoot up in the years ahead.

Now, I can’t be sure that Summers would stick to a dollar-related price rule. But if history is any guide, he might. Of course, I can think of some other names that I would prefer to take over the Fed: Robert Mundell, Steve Forbes, Art Laffer, David Malpass. There’s even the late Milton Friedman, who after all said a computer should run the Fed.