Undermining Federal Reserve Independence Is One of the Best Reasons to Put Larry Summers in Charge

“You run the Fed!” “No, you do it!”

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Lots of people dislike Larry Summers, and chairing the Federal Reserve Board of Governors is a very important job. Lots of people don’t want him to get the job, and so arguments against him have taken on something of a kitchen sink aspect over the past few weeks. Yesterday, for example, John Carney and Felix Salmon were fretting that appointing Summers would undermine the cherished principle of Fed independence.

If anything, undermining said independence is the best reason to hope Obama does tap Summers.

The case for central bank independence (well-stated by Summers in his long-ago monetary policy writings) is basically all about time-consistency. Over the long term, we all prefer low and stable inflation. But a slight upward jag in short-term inflation is often preferable to the alternative. So the risk is that politicians looking to election day will keep letting inflation overshoot “just a little bit” and promising themselves to get serious next year. I’d gladly pay you Tuesday for a hamburger today, in other words. This leads people to start expecting higher levels of inflation, which pushes inflation up even sooner and next thing you know everything’s out of control.

The horror, the horror.

Except that’s a dumb thing to be worrying about in the fall of 2013. Inflation has been running below the Fed’s 2 percent target for a while, unemployment is high, and nominal interest rates are at zero. If Summers’ close ties to Barack Obama and his team make people expect that monetary policy will err on the side of looseness and inflation overshooting, that’ll be good for the economy. It will lower real interest rates, reduce cash-hoarding instincts, and encourage firms to invest and households to buy durable goods.

The other thing is that, factually speaking, I think the idea of Summers undermining independence is a bit silly. Ben Bernanke was a Bush administration economic policy hand before Bush made him Fed chair. Alan Greenspan was active in Republican politics for decades before Ronald Reagan tapped him. Summers would be better-connected than the past few Fed chairmen, but it’s not as if the history of the job is Arthur Burns and then a bunch of monks. It’s an economic policy and it’s normal for it to be given to a person with executive branch experience.