Shadow Government

Why Are They Yellin' at Yellen?

The new chair of the Federal Reserve, Janet Yellen, is far too smart to have thought the job would be easy. Yet she took office amid plentiful criticism of the U.S. central bank and calls for it to rethink its approach.

Yellen takes over the Fed as it works to extricate itself from a policy of extraordinary measures meant to boost the money supply. The Fed has gone from pumping $85 billion into the economy each month to $65 billion, with promises to reduce these purchases further (a policy known as the "taper"). Although we're well into the realm of unconventional monetary policy (quantitative easing), some of the old rules apply -- tighter monetary policy and the promise of more to come can draw money back from the far corners of the world.

That is what has happened. Markets such as Brazil, Turkey, and India all enjoyed inflows of foreign investment when global monetary policy was loose. The bout of U.S. tightening has led some investors to depart these markets, driving down their stock markets and their currencies and compelling some of them to raise interest rates to painful levels (which can have the effect of persuading those foreign investors to stay).

The renowned economist Raghuram Rajan, recently installed atop India's central bank, made a forceful case that the U.S. Fed should care more about how its policies affect emerging markets. "International monetary cooperation has broken down," he said. "The U.S. should worry about the effects of its polices on the rest of the world.… We would like to live in a world where countries take into account the effect of their policies on other countries and do what is right, broadly, rather than what is just right given the circumstances of that country."

He is not alone in this view. A Forbes contributor weighed in: "The Fed should not be 'going it alone' on monetary policy decisions of this magnitude.… It must take into account the state of the global economy. The Fed is in effect the central bank of the world. It is time it behaved like it."

Who could object to the idea of looking out for the well-being of other countries and adopting a global view?

Eswar Prasad, a professor of trade policy at Cornell University, offered a contrary view, focusing on the ability of emerging markets to look out for themselves. He also touched on the reason that Yellen will not accommodate the critics -- the Fed has its mandate set by law.

The problem she faces is a basic one: too few instruments, too many targets. The core Fed instrument is the money supply. In this time of more creative monetary policy, it can seem that the Fed has many instruments (regulation, different rates, public statements about the future, outright purchases of bonds and mortgages), but they really boil down to one -- how fast is the money supply expanding or contracting. Even if it were to remain blissfully ignorant of the world around it, the Fed would already have a potential difficulty. With this one instrument, it is supposed to meet two objectives: price stability and a reasonable level of employment. This is a bit different from many central banks tasked with only the first (also known as keeping inflation under control).

There is no tension if you have teetering prices and plunging employment. In such a case, the Fed tries to boost the money supply, since that should bolster both prices and economic activity (jobs). The problem comes if, for example, there are signs of inflation, but unemployment remains stubbornly high. Does one then cut money-supply growth to contain inflation (at the expense of jobs) or allow prices to rise to tamp down unemployment? As difficult as that balance can be, it is the one the Federal Reserve is formally required to take on.

The problem with adding international cooperation to the mix is that there are no new levers to meet the objective of prosperity in fellow countries. If the Fed committee (which Yellen chairs) determines that its U.S. objectives are best served by a $10 billion-per-month taper, then there is no legal basis for doing anything less (an adjustment which would presumably risk inflation). In practice, these calculations are not so precise, but the Fed has its hands full at home. It won't revise its solutions for concerns abroad.

In her testimony this week, Yellen promised nothing more than that she would keep an eye on global markets. This demonstrated an early mastery of the crucial Fed art of making empty statements. Tact without accommodation. Expect more of the same.

Photo: T.J. Kirkpatrick/Getty Images

Shadow Government

Defending Indefensible Political Ambassadors

America and the world were once again treated this week to the tawdry spectacle of wholly unqualified people being anointed by politicians to "serve" the country abroad, spending taxpayers' money to plump their self-importance, and denigrating American power in the eyes of the countries to which they are assigned. Some of the Obama administration's appointees have proved staggeringly ignorant in their Senate confirmation hearings, and this president has appointed more political cronies than previous administrations. The esteemed Henri Barkey rightly called out the administration for its hypocrisy that it treasures diplomacy while it appoints manifestly unqualified people to senior diplomatic posts. And I agree with him that doing so engenders anti-American sentiment.

But many critics of the practice of "selling ambassadorships" are perpetrating a fiction that our diplomats are otherwise skilled practitioners and experts. In truth, many political appointees prove better diplomats than our diplomats. The real problem is not that political leaders get to appoint a proportion of ambassadors -- it is that the State Department has no way of determining what makes an ambassador successful. There is no professionalization to the profession of being an American diplomat, and that is a far graver problem for U.S. foreign policy than the scattered cases of spectacularly ill-qualified political appointees.

Barack Obama's administration has made political appointments in about 30 percent of cases. That is up from about 25 percent in previous recent administrations, but it's not up by much. The president has been more overtly rewarding campaign contributors, but he has also made some genuinely fantastic political appointments, like Russia scholar and democracy activist Mike McFaul to Moscow (full disclosure: Mike is a colleague of mine at the Hoover Institution). Even someone as qualified as Mike had a rough time in his ambassadorship. Some of the failure can be ascribed to his not being a trained diplomat, some to his pushing forward new practices in diplomacy, as with his Twitter account, which most diplomats wouldn't venture. But most of the reason McFaul wasn't more successful in advancing American interests in Russia is because of Russia. The degree of difficulty in dealing with Vladimir Putin's authoritarian retrenchment, as well as the seeming placidity of so many Russians in the face of it, makes the Moscow posting as difficult as it is important.

Most of the egregious crony appointments don't go to important countries; they go to places where their incompetence can do little harm (the Bahamas, Belgium, Luxembourg). The ones who do go to important countries (a horse breeder to London in George W. Bush's administration) tend to go to countries with strong direct ties into the U.S. government (Japan currently burdened with Caroline Kennedy) and are therefore less dependent on the expertise of our embassy. And the State Department does a terrific job of ensuring that less qualified political appointees are compensated for by very strong professional staffs.

So the main problem is actually not the George Tsunises and Colleen Bradley Bells, as Barkey acknowledges. The main problem is not the outlier -- the catastrophic storm -- but the routine performance -- the regular climate. 

The foreign service is almost as guilty as its political masters in appointing people without experience to senior positions. What, exactly, did Ambassador Chris Hill, a career diplomat, know about Iraq when he was appointed as ambassador there? Nothing. He didn't speak the language. He hadn't lived in the region. He didn't know the political leaders. He wasn't a huge success, it must be admitted, but the foreign service has no compunction about justifying his appointment.

What the foreign service would say in its defense is that Hill was a skilled negotiator, a proven deal-maker, someone who knew how Washington worked and was able to get things done. Why is that not also the description of people who could talk their fellow citizens into voluntarily doling out money to help elect political candidates whose priorities they support? And why isn't the ability to articulate and support the administration's priorities a central element of being a successful American ambassador?

Even the best of American diplomats, for example, Anne Patterson, are appointed to countries where they aren't steeped in local knowledge of the politics and culture; she got appointed to the U.S. Embassy in Pakistan because she is considered to have excellent "dealing with crisis states" skills. It's not immediately clear that a successful business person lacks those skills. Most businesspeople could give a better description of the drivers of American prosperity, the nature of U.S. bankruptcy laws and how they incentivize the risk-taking that powers innovation, how the immigration system works, and the banking crisis than can U.S. diplomats. That's not to knock our diplomats (though they do need much better education in economics and entrepreneurialism); it's just to say that the prima facie case for the superiority of professional diplomats isn't persuasive.

Especially since the foreign service does so little to educate and train its professionals (the Stimson Center and the American Academy of Diplomacy have done superb studies of the deficiencies). What is needed to improve the appointments system is a construct for determining what makes an ambassador successful, metrics for grading performance, training in those areas for political and career ambassadors, collection of data, a transparent assessment processes, performance reviews for individuals and units (embassies, directorates within the State Department), and consequences -- both positive and negative -- that incentivize improvement. It will be difficult to develop criteria to judge performance, and there are many factors that go into a complex mix. But that is no less true for judging the performance of combat commanders and business leaders and even politicians. As no less an authority than Bismarck said, "Politics is not a science … but an art."

The State Department is going in exactly the other direction, no longer pursuing or publishing inspector general assessments of embassies after a few celebrated humiliations. It merits contrasting that choice with the Defense Department's wire brushing of its own failings: The department publishes an Encyclopedia of Ethical Failure and is currently agonizing over whether there is an ethics crisis in the profession. Wouldn't it be wonderful if our diplomats took their professionalism seriously enough to hold themselves to such account?

Our professional diplomats sometimes come across as believing they know better than the people elected to run the country what the country's priorities should be. That by no means makes our diplomats exceptional -- most Americans believe we know better than our government. But our diplomats represent our country outside it and therefore have greater responsibility. That a third of those diplomats are ardent supporters of the person elected to run the country is no bad thing. Especially when our professional diplomats haven't bothered to establish the standards and practices to ensure their own performance is better than that of amateurs.

Photo: KAZUHIRO NOGI/AFP/Getty Images