The Case for Janet Yellen for Fed Chair

There is a powerful case to be made for Yellen for head of the Federal Reserve based strictly on how she's done her job.

Washington, D.C., is a generous and forgiving place. It's full of people who have had successful careers and made lots of money in spite of having been tragically wrong on the great issues of the day. But one sin warrants no mercy: being right.

That's the problem faced by Janet Yellen, the vice chairman of the Federal Reserve, who is a leading candidate to replace Chairman Ben Bernanke when he steps down next year. Her chief competition is Larry Summers, who was Bill Clinton's Treasury secretary and director of Barack Obama's National Economic Council.

Underlying the debate is the dispute over how the Fed has done its job.

Conservatives think it has been reckless in expanding the money supply. Liberals say it deserves credit for keeping a severe recession from being much worse.

Liberals prefer Yellen, who has been tabbed a "dove" on inflation, favoring easy money. Conservatives are apt to prefer Summers, who leans the opposite way. Bentley University economist Scott Sumner says he has been "unable to turn up a single instance of Summers criticizing policy as being too tight over the past five years."

Also playing a role are attitudes about the desirability of giving this powerful job to a woman for the first time. The New York Times reports that Christina Romer, who served on Obama's Council of Economic Advisers, views "the choice of the next leader of the Fed as a test of the administration's commitment to inclusiveness."

A Wall Street Journal editorial, meanwhile, dismissed Yellen as the darling of "the Democratic Party's gender liberals." Summers, a white male, appeals to those who resent preferences based on race or sex. He wins bonus points for daring, as president of Harvard, to suggest that females are less likely than men to be exceptionally good at math.

It's an article of faith among conservatives that efforts to promote diversity are at war with the principles of meritocracy. But the alleged conflict is absent this time. There is a powerful case to be made for Yellen strictly on how she's done her job.

Her notable achievement has been to assess the dangers faced by the Fed and to distinguish the real from the bogus. Since the financial meltdown of 2008, Bernanke's critics have been haunted by the specter of inflation. Yellen has seen it for the illusion it is.

By 2009, conservative economists were warning that an explosion in prices was on the way. Last year GOP presidential candidates agreed that Bernanke was, in Newt Gingrich's words, "the most inflationary" Fed chairman ever. But the claims have proved baseless again and again.

Since Bernanke took over in 2006, the Consumer Price Index has risen at an average annual rate of 2.3 percent—which, according to economist Mark Perry of the conservative American Enterprise Institute, gives him the best anti-inflation record of any Fed chairman in the past 40 years. In May, prices were up just 1.8 percent from a year before.

The problem with the U.S. economy in recent years has not been inflation but persistent weakness and unemployment. Nominal GDP, Sumner notes, has grown at the worst pace since Herbert Hoover was president.

Not everyone saw what was coming. This week, a news story in The Wall Street Journal compared hundreds of predictions made since 2009 by Fed officials. "The most accurate forecasts overall came from Yellen," the Journal found. "The least accurate forecasts came from central bank 'hawks,' those who feared Fed policies would trigger rising inflation."

One of the former hawks admits being wrong. Narayana Kocherlakota, head of the Federal Reserve Bank of Minneapolis, said last year, "Inflation is not coming in as hot as I expected. You have to learn from the data."

As every investor knows, past performance is no guarantee of future results. Just because Yellen had the foresight to push monetary expansion doesn't mean she's the person to rein it in when conditions change. But her ability to grasp realities that baffled other experts suggests she has a deeper comprehension of how the modern economy works.

What became clear last fall, as Republicans mocked polls that showed Mitt Romney trailing, is that the important divide in modern debates is not between the right and the left. It's between the people who follow dogma and the people who follow evidence. Yellen is one of the latter, but I'm willing to forgive her.