The End of L’Affaire Summers

Just halfway through the month, and it’s already been a September to remember for President Obama. First the humiliating debacle over his Syrian red line, and now the collapse of his effort to make pal Larry Summers the next Federal Reserve chairman. Like the Syria mess, l’affaire Summers was an unforced error. Given Summers’s role in Clinton-era financial deregulation, controversial comments about the math intelligence of women, and Wall Street ties, Senate Democrats were always bound to deliver a large measure of pushback. And Team Obama surely had to realize that a Summers nomination would be perceived as coming at the expense of Fed vice chairman Janet Yellen, loved by liberals for her monetary dovishness and for the historic nature, due to her gender, of her potential nomination. Also not helping: Syria, which depleted Obama’s reservoir of goodwill among liberals.

Summers had probably already lost four progressive Democrats from the Senate Banking Committee, meaning he would have needed Republicans to do some heavy lifting for him. And for a while, Obama and Summers seemed to think that was a real possibility. Really. An amazing bit of self-deception among Summers supporters led them to believe they could count on a pass from Republicans. That was never going to happen, not when a good chunk of the tea-party GOP thinks the central bank needs auditing — and then abolition.

But stimulus-architect Summers, in particular, would have received a rough going-over. And not only for his role in Obama’s massive Keynesian fiscal experiment. After all of the Democratic “war on women” nonsense, Republicans would have surely brought up the Harvard comments (as well as his $2 billion bad bond bet while running the university). And tired of Democrats’ blaming Republican policies for the financial crisis, GOP lawmakers would have conducted a detailed examination of Summers’s time in the Clinton administration and the role of Clinton housing policies in creating the housing bubble. Republicans could also have made a crony-capitalism argument against Obama for appointing a hedge-fund millionaire to the Fed, which is also a bank regulator. Summers was dead right in his withdrawal letter when he noted the confirmation process would be “acrimonious” — and, we know now, apt to be embarrassingly unsuccessful.

Obama will no doubt try to put this mess quickly behind him, nominating Yellen without much delay. The White House might well prefer Mr. Indispensable Timothy Geithner, a made man in Obamaland. But in the short time since the Summers nomination imploded, Geithner has again waved off any interest in the position. And Obama probably has as much chance of changing Geithner’s mind as he does of persuading Ben Bernanke to stick around for a while longer, though Obama could always choose former Bernanke deputy and dark horse Donald Kohn.

None of this is to suggest that a Yellen confirmation would be a coronation. Democrats are unlikely to have substantive criticism, but Republicans would ask plenty of tough questions about the quantitative-easing bond-buying program that she’s helped oversee and her views on inflation. It’s hard to imagine Republicans blocking the first female Fed nominee, however, given Yellen’s indisputable qualifications for the job.

But Obama does have a unique opportunity to foster much-needed bipartisan spirit in Washington. There is growing consensus among economists on the left and right that monetary policy should be rule-based rather than discretionary and that the rule should involve targeting a certain growth in the economy’s nominal output — real GDP growth plus inflation — each year. To generalize, right-leaning economists like the rule-based aspect, while left-leaning economists like that it would result in aggressive monetary stimulus when growth is weak and inflation low. So why not nominate a Republican economist, such as Harvard professor and former Romney economic adviser Greg Mankiw, who advocates nominal-GDP targeting? Not only would such a Fed nominee be apt to win broad approval and create some bipartisan momentum in Washington, but he would help depoliticize a major element of U.S. economic policy. The Summers implosion doesn’t have to be the political disaster that it’s currently shaping up to be.

— James Pethokoukis, a columnist, blogs for the American Enterprise Institute.