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Why Janet Yellen will probably be the new head of the fed

The Federal Reserve System (often just called “the fed”), the central bank in the U.S., controls the nation’s money supply.  The money supply has a strong impact on prices and inflation, interest rates, and in the short term, employment.  Ben Bernanke, former economics department chairman at Princeton, was appointed by George W. Bush to head up the Federal Reserve in 2006, was reappointed in 2010 by President Obama, and his term will next year. President Obama will nominate someone to replace him soon.  Until recently, the leading candidates seemed to be Janet Yellen, an economist at U.C. Berkeley and Larry Summers, former adviser to Presidents Clinton and Obama.  I previously looked at this choice between Summers and Yellen here.

Larry Summers, who is widely believed to be favored by President Obama, has since withdrawn his name for consideration because of the trouble he anticipated in getting through the nomination process in the Senate.  The trouble is anticipated, not from the Republicans, but from the more “progressive” (liberal) senators.  The trouble surely stems from a statement he made some years ago while president of Harvard.

Summers, who specializes in labor economics, gave this talk at a conference on the lack of women in research positions in the sciences and engineering at the top universities.  While he noted that sex discrimination might be a reason for this, it seemed unlikely, given the push for diversity hiring in these universities.  Instead, he offered 2 other hypotheses: 1) women seem to value family to career relatively more than men, and so, women are less likely to make the same effort as men, meaning the pool of qualified women researchers will be smaller than the pool of qualified men applicants. In other words, when young men and women are making first career choices while in college, which group, young women or young men, do you think are more likely to say, “gee, I want to go after a job that will take 80 hours or more per week?” Sometimes this hypothesis about women’s career choices is called the “high-powered job hypothesis.”

What got Summers in trouble, though, was when he offered a hypothesis based on differences in abilities in math and science.  What he noted was that there was research in math aptitude that suggested that while the average scores in math aptitude were the same for women and men, the variance, or the spread in those scores were wider for men than for women.  The result is that there is a greater percent of men than women with very low math aptitude, but at the same time, there is a greater percent of men with with super high math aptitude.  Since math aptitude is extremely important in the top research in the sciences and engineering.

Economics is also a field requiring a high aptitude in math, and both Summers and Yellen are highly accomplished economists (when I teach our graduate economics course, I always discuss Janet Yellen’s paper on why firms bundle goods and sell the bundle at a lower price than the combination of the separate components).  Now, I think it is a bit ironic that this high-powered job,  Chairman of the Federal Reserve System, is likely to go to a woman.



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