Lawrence Summers, the former Harvard University president whose reputation as an economic genius proved useless when his work for the first Obama economic team produced the longest period of stagnation in the postwar era, has quit his campaign to become Chairman of the U.S. Federal Reserve Bank.
Summers was ostensibly a favorite of the right, and his withdrawal clears the way for Janet Yellen, vice chairwoman of the Fed’s Board of Governors. Yellen is an open inflationist whose candidacy is supported by loose monetarists convinced that increased inflation will result in the creation of more jobs. Summers and Yellen have been the most discussed candidates for the Fed chair throughout the summer.
“Earlier today, I spoke with Larry Summers and accepted his decision to withdraw his name from consideration for Chairman of the Federal Reserve,” President Obama announced this afternoon. “Larry was a critical member of my team as we faced down the worst economic crisis since the Great Depression, and it was in no small part because of his expertise, wisdom, and leadership that we wrestled the economy back to growth and made the kind of progress we are seeing today. I will always be grateful to Larry for his tireless work and service on behalf of his country, and I look forward to continuing to seek his guidance and counsel in the future.”
In fact, Summers’ tenure as the director of Obama’s National Economic Council was notably free of success. Summers antagonized high-spending enemies on the left by opposing any proposal for a stimulus package of more than a trillion dollars.
Summers also failed to calm critics on the debt-hawk right. The American Recovery and Reinvestment Act still came in at more than $800 billion. The ARRA stimulus is now seen as an expensive failure, with even its diehard defenders unable to muster arguments stronger than claims that America’s suffering would have been worse without it. The U-3 unemployment rate, which was 7.8 percent when Summers’ tenure began in January 2009, had jumped to 9.8 percent by the time he left in November 2010. Labor force participation also plummeted during Summers’ tenure.
Summers’ abrasive personality and high self-estimate have also earned him many opponents, a point he obliquely referred to in a resignation letter to Obama.
“I have reluctantly concluded that any possible confirmation process for me would be acrimonious and would not serve the interests of the Federal Reserve, the administration or ultimately, the interests of the nation’s ongoing economic recovery,” Summers wrote.
Yellen is expected to follow a looser monetary policy as part of a crusade for job creation. The Federal Reserve is tasked by Congress with a “dual mandate” based on a discredited economic notion called the “Phillips Curve,” which posited that inflation and unemployment are inversely related. Although the Phillips Curve’s reputation has faded after repeated failures to pan out in the real economy, it remains the lone intellectual pillar for the Fed’s two-part job description: to maintain a steady rate of inflation and to maintain maximum possible employment.
Yellen’s supporters hope she will print money more aggressively than Summers would have, and possibly more aggressively than current Fed Chairman Ben Bernanke has already done. Although the monetary base has increased more than fourfold since 2008, believers in economic planning say even more dollars need to be created.
This year marks the 100th anniversary of the Fed’s creation.
Bernanke’s second term ends Jan. 31, 2014.