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November 30, 2008
David Warsh, Proprietor


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More Rivals

Economic advisers to President-elect Barack Obama marched into the spotlight last week. Who knew that there would be so many of them?

 

Before they begin work, therefore, let’s prepare a scorecard of the players. For the pecking order among them is far from clear. A fundamental distinction worth keeping in mind is between specialists and general practitioners – between those whose fundamental understanding of the world was acquired in graduate school, not exactly academics (too pejorative), but not quite scientists, either; and those whose insight derives chiefly from experience, from making a constant stream of decisions in government or business.

 

No sensible person doubts the need for both kinds of minds to work harmoniously at the center of things. There are some things that experts – economists, in this case – understand full well, that most of the rest of us do not. There are other things, however, that the experts do not understand very well at all. Wisdom consists of knowing and buffering the difference between the two.

 

First, then, the identities: The designated experts so far are Lawrence Summers (National Economic Council), Christina Romer and Austan Goolsbee (Council of Economic Advisers), and Peter Orszag (Office of Management and Budget). All received their PhDs from research universities, and all but Orszag made their livings as university professors.

 

The practitioners include Timothy Geithner, Treasury Secretary designee; Paul Volcker, the former Federal Reserve Board chairman, famed for the successful campaign he led  against inflation at the Fed from 1979 until 1987, named to head a short-lived outside advisory board; and, of course, Obama himself.  Geithner obtained a masters degree from Johns Hopkins University; Volcker, a masters from Harvard in 1951; Obama is a graduate of Harvard Law School: none ever worked in a discipline where the research frontier is equated with truth.

 

Next, a word about hierarchies.  Among experts, professional standing is determined by powerful, nearly autonomous networks of peers, mainly on the strength of internal debate and published research. Harvard University’s N. Gregory Mankiw drew attention to this dimension of things last week when he cited one of many possible rankings to establish that George W. Bush, too, had employed some pretty good economists (including him). But in the last quarter-century, only Summers, his Harvard University mentor Martin Feldstein, and Joseph Stiglitz, of Columbia University, have been designated the most influential academic economists of their generation (by the John Bates Clark Medal, awarded every two years) before turning to government service.

 

In government, status is determined differently: the office defines its occupant. Until last week, Summers capparently hoped to be named Treasury Secretary, a title of such antiquity and heft that its possessor stands fifth in the line of succession to the presidency. It was the job he’d held briefly at the end of the Clinton years, before his misadventures at Harvard University began.

 

Who knows why Geithner, one of Summers’ lieutenants for several years in the ’90s when both served under Treasury Secretary Robert Rubin, got the nod instead?  Perhaps the administration didn’t want to risk delay over Senate confirmation of Summers, who is famously prickly and somewhat encumbered by past controversies. Perhaps the president simply wanted to get to know him better; for until Hillary Rodham Clinton dropped her presidential candidacy last spring, Summers remained on the sidelines. Or perhaps the president-elect had a more important job for him in mind.

 

The next day Obama named Summers to the National Economic Council (NEC), which requires no Senate consent.  He also appointed Christina Romer to chair the three-person Council of Economic Advisers, and campaign economist Goolsbee to serve as a second member of the panel.

 

And the day after that, to emphasize his determination to cast his net widely, Obama created an Economic Recovery Advisory Board (ERAB), and named Volcker to head it for the two years until it disbands, with members from business, labor and academia to be named later. Ronald Reagan did something similar at the beginning of his first term, naming a President’s Economic Policy Advisory Board (PEPAB) that included Milton Friedman, Alan Greenspan, Arthur Burns, Herbert Stein, Arthur Laffer and others, with George Shultz as chairman.

 

An irony of the situation is that the NEC is widely believed to have been created to put some distance between the White House and the various often-contending professional economic advisors whom the president employs.

 

President Bill Clinton created the office by executive order in 1993, soon after public quarrels between rival factions of economic counselors helped cost George H. W. Bush the 1992 election. Eight years earlier, CEA chair Martin Feldstein differed publicly with various officials of the Reagan cabinet over the economic significance of large budget deficits. Feldstein was widely praised at the time by his fellow economists, and later won the argument in the court of public opinion. But he was never again appointed to government office by either of the Presidents Bush.

 

So the expectation has evolved that the NEC chief will serve as an “honest broker” of others’ views, tolerant of the differences among them, not himself a manufacturer of plans. Robert Rubin, a civilian who had aided the Clinton campaign from Goldman Sachs, was its first director. He was followed in turn by a series of low-keyed managers including Laura D’Andrea Tyson, Gene Sperling, Lawrence Lindsey, Stephen Friedman, Allan Hubbard and the present director, Keith Hennessey.

 

Summers, on the other hand, is the brightest and most ambitious star on the administration team, conditioned both by temperament and experience to be chief architect of its economic policies, presenting a silhouette not unlike that of Henry Kissinger (whose career was launched by a stint as National Security Adviser to President Richard Nixon). Summers made his reputation in the months before Bill Clinton took office, canvassing bond dealers, macroeconomists and central bankers in order to craft a deficit reduction package designed to inspire confidence and permit monetary easing. As Treasury undersecretary for international affairs, he played leading roles in resolving the Mexican and Asian financial crises and in the Long Term Capital Management affair. And as Deputy Secretary and Secretary, he was influential in persuading Congress to further deregulate of the banking and investment banking industry.

 

Geithner may be more level-headed, but Summers is clearly a man who wants the ball. Even before Geithner was named Treasury Secretary last week, Summers’ seconds were intimating to reporters his availability to replace Federal Reserve Board chair Ben Bernanke when his term expires in January 2010. About that possibility it is necessary to keep an open mind. It may be that Beranke has little appetite for a second term.

  

But this much is clear already. President-elect Obama will bring a first-class economic team to Washington next month. Already they are hard at work. Whether they can work together is another question.

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