By Reihan Salam
Right now, it looks as though Larry Summers has the inside track to be named the next chairman of the Federal Reserve. This is despite the fact that many on the left, from Democratic lawmakers like Oregon Senator Jeff Merkley to influential activists like Mike Konczal of the Roosevelt Institute, are deeply skeptical of Summers, owing to his ties to the financial sector, his impolitic reputation, and the fear that he might be more concerned about the dormant threat of inflation than the very real scourge of long-term unemployment. The discouraging job growth numbers released by the Bureau of Labor Statistics earlier today can't help his case. But Summers, the former chairman of President Obama's National Economic Council, seems to have the trust and respect of his former boss, and that may be all he really needs to secure the most powerful economic policy-making job in the country.
So it is worth thinking through what Summers' priorities might be as Fed chairman. Though the Federal Reserve is responsible for setting monetary policy, it also has a great deal of influence over the larger workings of the U.S. financial system. Zachary Goldfarb, a reporter for the Washington Post, reports that Summers hopes to use the Fed's influence to restructure the financial system to better serve the interests of low- and middle-income households. This could be a ploy on the part of Summers' allies, who understand that his reputation as a friend of Wall Street is his greatest political liability. If it's more than that, however, Summers could use his bully pulpit to great effect.
One of the greatest challenges facing poor families is a lack of savings. Households that are "liquid-asset poor" are two to three times more likely to experience material hardship after a job loss, health emergency, or other moment of crisis than those with liquid assets. These moments of crisis are when many families are forced to turn to public assistance. In an ideal world, we'd want to find some way to prevent families from falling into crisis in the first place. The trouble is that merely transferring financial assets to households is not likely to yield the same benefits as cultivating the opportunities and habits that lead families to accumulate assets independently. The financial crisis profoundly damaged the balance sheets of U.S. households, which is one of the leading causes of stagnant growth. Addressing the underlying drivers behind weak balance sheets has the potential to yield significant benefits for the broader economy as well as for poor families.
The most obvious, and most controversial, step the Federal Reserve can take to strengthen weak balance sheets is to allow for a somewhat higher level of inflation during periods of sluggish economic growth. The Johns Hopkins University economist Laurence Ball has called for a 4 percent inflation target, considerably higher than the 2 percent inflation target now viewed as de rigueur. If nothing else, higher inflation would help erode household debt, as the value of assets increases and the cost of debt remains the same. The challenge, of course, is striking the right balance — Americans who lived through earlier inflationary spirals are reluctant to unleash another one.
The Federal Reserve chairman has no real sway over fiscal policy, but Summers could press for a tax overhaul that would help low-income households accumulate assets. In 2008, months before the financial crisis, the Pew Economic Mobility Project released a report on what it called the "federal mobility budget," i.e., it identified tax expenditures and programs designed to facilitate upward mobility, including incentives for savings and investment, subsidies for home ownership and education, and much else. As of 2006, the federal government devoted 1.6 percent of GDP in direct spending, and another 4.1 percent in tax expenditures, to promoting mobility. In contrast, 9.9 percent of GDP was devoted to income maintenance programs. Of the total federal mobility budget, 72 percent came in the form of employer-provided work subsidies and savings incentives directed primarily towards middle- and higher-income households.
This in turn helps account for why employers are the second-most important capital-transmitting institution. Many large employers, aided by government subsidies, offer retirement programs that include matching grants, auto-enrollment, and other benefits that greatly facilitate savings. But 70 million other workers do not have access to an employer-provided IRA. Ray Boshara, a senior adviser at the Federal Reserve Bank of St. Louis, observes that this creates an interesting inequality: low-wage employees who work for an employer that does provide IRAs, matching incentives, and other benefits are much more likely to accumulate assets than low-wage employees who do not. This result is intuitive, yet it is a reminder that being embedded in the right kind of institution can be a great help to poor families.
The area where Summers could have the greatest impact is in the regulation of financial service providers. With as many as 30 percent of Americans adults falling in the "unbanked" or "underbanked" category, reliance on high-cost payday lenders and check-cashers greatly undermines the ability of poor households to improve their economic position. For-profit businesses are increasingly looking to provide the "unbanked" and "underbanked" population with high-quality financial services at reasonable prices as a significant economic opportunity, encouraged by non-profit thought leaders like Jennifer Tescher of the Center for Financial Services Innovation. The key is to be sure that these new services are regulated responsibly.
Another strategy for tackling the large number of "unbanked" and "underbanked" Americans is to create a "public option" for banking, an idea championed by the London-based financial services entrepreneur Ashwin Parameswaran. Individuals would be allowed to make deposits in Treasury accounts that would be backed by short-term Treasury debt. These public deposit accounts could be used to make payments, much like ordinary bank accounts, and they would be ultra-safe and ultra-simple. Summers has given us no reason to believe he'd push for anything quite this ambitious. But if he did, he'd certainly silence his most vociferous critics.
(Reihan Salam is a Reuters columnist. Opinions are his own.)