Signs of a Supply Shock off Monterrey?

The Times reports:

Humpback whales, pelicans and sea lions are all common summer sights off the Monterey coast, with its nutrient-rich waters. But never that anyone remembers have there been this many or have they stayed so long, feeding well into November.

“It’s a very strange year,” said Baldo Marinovic, a research biologist with the Institute for Marine Sciences at the University of California, Santa Cruz. 

What has drawn the animals is a late bloom of anchovies so enormous that continuous, dense blankets of the diminutive fish are visible on depth sounders. The sea lions, sea birds and humpbacks (which eat an average of two tons of fish a day) appear to have hardly made a dent in the population. Last month, so many anchovies crowded into Santa Cruz harbor that the oxygen ran out, leading to a major die-off.

I immediately thought of the Phillips curve shifting down (as in a positive 'supply shock').  I've discussed why anchovies matter for inflation previously.  I'm not sure they really do (and in the long run its only the money supply that matters of course), but its a fun example for macro students.

Stagflation: The Final Frontier?

In my twitter feed this afternoon...

It's econ, Jim, but not as we know it RT @richdhw: OMG the UK Phillips Curve is the USS Enterprise pic.twitter.com/CnvofMyMVV

— Matthew C. Klein (@M_C_Klein) November 22, 2013

The Wrath of (Mervyn) King?

The Making of the CPI

The Washington Post's Emily Wax-Thibodeaux follows Caren Gaffney, one of the BLS' "Economic Assistants" who gather the raw data for the consumer price index:

On this recent day, Gaffney will be on the road for nearly eight hours in her beat-up 2003 Honda Pilot, driving across vast stretches of Virginia, from county to county, on a mission to hunt down prices of three American staples: gas, sugar and beer.
As Gaffney demonstrates at stop after stop, there’s more to price checking than tallying up numbers.
“A good EA is face to face with the product, is picking things up, is looking at every label,” she says. “The tiniest mistake can throw off the data. You have to be on your feet mentally.”
To ensure the integrity of the information, price checkers have to make sure they’re comparing not just apples with apples but also, for instance, organic Fuji apples with organic Fuji apples.

As the story notes, the process is labor-intensive (there are 428 economic assistants roaming the country) which means that the cost of constructing the CPI should rise over time relative to goods and services subject to more efficiency gains - i.e., Baumol's cost disease applies.  But good data is undoubtedly worth it.

Germany's Turn

The US Treasury:

Within the euro area, countries with large and persistent surpluses need to take action to boost domestic demand growth and shrink their surpluses. Germany has maintained a large current account surplus throughout the euro area financial crisis, and in 2012, Germany’s nominal current account surplus was larger than that of China. Germany’s anemic pace of domestic demand growth and dependence on exports have hampered rebalancing at a time when many other euro-area countries have been under severe pressure to curb demand and compress imports in order to promote adjustment. The net result has been a deflationary bias for the euro area, as well as for the world economy. 

That is from the semi-annual "Report to Congress on International Economic and Exchange Rate Policies" (pdf).

Typically the headline from such reports is about China, as the US criticizes its policy of intervening to keep the RMB undervalued to support a trade and current account surplus, but stops short of officially declaring it a "currency manipulator" which could trigger a conflict (which some, like Paul Krugman, have said the US should be willing to start).

The shift in focus to Germany is a sign the policy discussion is catching up to reality.  Although it is still intervening in the foreign exchange market, China has allowed a significant appreciation of the RMB (and even more in real terms) over the past several years and its current account surplus has narrowed.  That said, its "rebalancing" is still far from complete - consumption remains very low as a share of GDP; the decrease in the share of net exports seems to have been made up for by an increase in investment rather than consumption (with the usual caveat that the data are less than perfect..).

The biggest threat to the world economy now is a crisis in Europe, and while the ECB has managed to calm (for now at least) fears of a dramatic collapse, the Euro-area economy is still in lousy shape, which is a tragedy for the millions unemployed there, and a drag on economic activity in the rest of the world.

The Treasury is correct that Germany's current account surplus plays a role - stronger demand growth in Germany would help the suffering "periphery" of Europe (Spain, Italy, etc..) by creating more demand for their exports.  But Germany continues to be in denial, as Bloomberg reports:

Germany today reiterated its rejection of the Treasury report, saying it doesn’t merit criticism. “There are no imbalances in Germany which require a correction of our growth-friendly economic and fiscal policy,” Finance Ministry spokesman Martin Kotthaus told reporters in Berlin. 

The difficulty, in part, comes from the moralistic connotations of some of the language used to discuss international flows.  That is, Germany is running a current account "surplus" which results from a high level of "savings", and saving and having a surplus sound like the results of virtuous behavior (while having deficits and low savings connote profligacy).  So the idea that German economic policy is part of the problem is a hard sell to politicians, commentators and voters (and even some economists who should know better).  But it takes two to have an imbalance.  Or as Karl Whelan put it on Twitter:

See German politicians know that running surpluses shows they are good morally upright people. All countries should run surpluses. With Mars
— Karl Whelan (@WhelanKarl) November 1, 2013

Germany wants all countries in EZ to run surpluses. But then we also need hard money and a strong euro which makes that almost impossible.
— Karl Whelan (@WhelanKarl) November 1, 2013

One thing that is lost is that the current account surplus implies a lower standard of living for German citizens because it means they get to consume less of what they make.  In the second quarter of 2013, private consumption accounted for only 57% of Germany's GDP (via OECD), which is pretty low (in the US, which tends to be on the high side, its around 70%).  While exporting always seems to sound great to everyone, every BMW that is exported to the US is one less BMW that a German gets to drive (and the surplus implies that Germany is getting pieces of paper - not Mustangs - in return).  In the case of China, policies that led to a high share of exports could be defended as a development strategy - while this meant that the level of consumption was lower at any point in time, it may have generated a higher growth rate.  Its harder to apply such a rationale to a relatively high-income country like Germany.

However, though I don't agree with FT columnist Gideon Rachman's defense of Germany, he is correct that the Treasury's timing is poor (the report is required by law), coming on the heels of the reports that the US might have been spying on Angela Merkel, and that episodes like the debt ceiling wrangle seriously damage US economic policy credibility. 

The Economist's "Charlemagne" has a nice column this week on subject.

Update: See also Paul Krugman.

Some Econ Grad School Advice

Miles Kimball (Michigan) and Noah Smith (a recent Michigan PhD who's at Stony Brook) offer a useful "complete guide to getting into an Economics PhD program."  Michigan's Jeff Smith comments on it.  I generally concur, though like J. Smith, I have a slight disagreement with their emphasis on being a research assistant - I definitely think it can be useful, but programs aren't going to require applicants to have this experience.

My own advice is here.  I haven't updated it in a while, but I don't think much has changed.

When I next revise it, I might add some information from the NSF's survey of earned doctorates.  Of 1124 new PhDs from US institutions in 2011, 656 had definite employment, 90 were going on to postgraduate study, 218 were seeking employment and 23 were "other" (apparently not everyone completed that survey question).  I think that might give a misleadingly negative impression the job market for economists - while it may be that quite a few PhDs weren't employed when they completed the survey, economics PhDs generally are able to get jobs.  Of those with employment, 56.3% were going into academe, 14.9% to government and 16.8% to business, with the rest going to nonprofits (6.6%) and other/unknown (5.5%).  The cohort was 34.4% female and 38.2% were US citizens.  The median age of a PhD was 31.4 and the median time to completion was 7 years.

The American Economic Association also has some useful resources about Econ PhD programs.

The Publishing Game

Although I generally feel quite fortunate to be an academic economist, in my grumpier moods I might complain that the business of getting papers published in academic journals (which is the basis for how we're judged as scholars) can feel like a bit of a game (and frustrating one at that).

Now, it is a game.  The folks at Research Papers in Eonomics (RePEc) propose to bring us a "fantasy league" for armchair department chairs:

The IDEAS fantasy league allows you to pretend you are at the helm of an economics department. Your goal is to improve its ranking relative to other departments in the league. You can do this by trading economists and by choosing which ones to activate in your roster. 

In a blog post, Christian Zimmerman explains that it started as an April fools' joke.  At this point, it is still a proposal.

I would think that those who would play this game would be well-advised that their time might be better spent working on their research papers.  Of course, the same might be said of blogging.

On the Yellen Bandwagon

The quasi-campaign for the next Federal Reserve chair continues... Heidi Hartmann and Joyce Jacobsen (my office neighbor) have organized an open letter from economists in support of Janet Yellen, which concludes:

[W]e believe that Janet Yellen is an extremely effective leader who has demonstrated her capacity to work with the other FRB governors and to bring important perspectives of the American people to her leadership and decisions.  In our opinion, she is the best possible leader for the Federal Reserve Board at this critical time in our nation’s history.

The whole thing can be read here, and there is a link for economists who wish to add their names.

The letter has already been successful in attracting quite a few signatories, including some big names, like Michael Woodford (who Richard Clarida called "the leading monetary theorist on the planet right now" in this Bloomberg profile), Alan Blinder, Christina Romer, David Romer, Robert Shiller, Maurice Obstfeld, James Hamilton (who endorsed Yellen at Econbrowser), Mark Gertler, Menzie Chinn and Charles Engel.

In addition to having the support of economists, Yellen has also been endorsed by The Economist.

There has been quite an outpouring of commentary on this, though I don't think any of it has fundamentally changed the preference for Yellen over Summers I expressed in July after Ezra Klein's initial report that Summers was the front-runner (was that the worst trial balloon ever?).  However, Jared Bernstein, who worked with him in the White House, did argue persuasively that some of the vilification of Summers as a Wall Street stooge is off-base.  This story by Zachary Goldfarb details how and why President Obama became so enamored of Summers.  But as Steven Pearlstein argued (and so did Felix Salmon) that very closeness to the President is problematic from the standpoint of central bank independence.

One of the things I like about Yellen is that she appears to represent stylistic continuity with Bernanke, who has tried to de-personalize the making of monetary policy.  However, I think an argument could be made for a regime change in substance - a shift to a new monetary rule, like nominal GDP targeting as Christina Romer called for (and Scott Sumner persistently evangelizes for), or Laurence Ball's suggestion of a higher inflation target (which I also raised back in 2008), or Ken Rogoff's "sustained burst of moderate inflation."  A Fed chair openly advocating such a fundamental policy shift does not appear to be in the cards - certainly it would be problematic in the confirmation process, and there is no guarantee that the FOMC could be brought along anyway.  Of the options that are on the table now, Janet Yellen clearly seems the best to me.

Coming Soon: "Gung Ho 2"?

Reading stories like this in the Detroit papers in the 1980s may have planted a seed in the mind of a young man who would grow up to be an economist specializing in exchange rates:

Bill Ford, executive chairman, put it this way when I talked with him Tuesday:

“It’s all about fairness, really,” he said. “I think what this country went through to re-establish our manufacturing base when we almost lost it. … For us now to give that away in a bad trade agreement makes no sense to me.

“I think manufacturing in this country matters a lot,” Ford continued. “It matters to this area. We’re not only just getting back on our feet, but as you know, really hitting on all cylinders. We’re hiring lots of Americans for both blue-collar and white-collar jobs. But a bad trade agreement could jeopardize that, and we will not let that happen.”

Ford executives are rightly proud that their company — without a federal bailout — took steps to right-size itself, boost productivity, rebuild its credit rating and revamp its product lineup to be competitive with the world’s top automakers.

But then, since last November, they’ve watched as their company’s Japanese rivals got a huge boost from a drop of nearly 20% in the value of the Japanese yen compared to the U.S. dollar.

Oh, wait, that's not from the 1980s - its from last week.  What is going on?

Certainly the fall in the Yen is helpful for Japanese exporters.  According to the Washington Post's Neil Irwin:

It’s been a good year so far for automakers. And it’s been an even better year for Toyota. The company reported its second-quarter earnings Friday, which included this whopping number: Sales were up 14 percent over a year earlier. The company hiked its estimate for 2013 earnings by 8 percent. And operating profit rose 88 percent.

The results were enough to spark a 6 percent rise in Toyota’s U.S.-listed shares, and surely to strike fear in the hearts of Toyota’s competitors. As Bloomberg news points out, while Toyota was edged out by General Motors in number of cars and trucks sold, it recorded more than three times the profit....

Of the 272 billion yen in higher earnings that Toyota reported Friday, 260 billion are attributable to foreign exchange swings, according to Toyota’s own estimates. Toyota has taken advantage of costs that are now 25 percent lower on the global marketplace (at least for those cars and parts built in Japan, rather than in satellite plants elsewhere).

The yen has depreciated about 25% relative to the dollar in the past year:

(Note: the graph shows the yen price of a dollar, so a rise is a yen depreciation/dollar appreciation.)

Is this "currency manipulation" as some in Detroit and Washington would have it?  The most straightforward explanation of the yen's decline would be a more expansionary monetary policy under the new Bank of Japan Governor, Haruhiko Kuroda (appointed by the new government of Shinzo Abe).  One of the effects of expanding the quantity of money is to reduce the value of it, both domestically (inflation) and relative to others (depreciation), and since currencies are traded in financial markets, the effects of expansionary policies can show up quickly in exchange rates (indeed, markets are forward-looking, so only a change in expectations is needed).  In the case of Japan, which has suffered from deflationary sluggishness for a couple of decades now, a shift to a more expansionary policy regime seems appropriate.

Taking a longer view, the recent decline is partly retracing the yen's appreciation during the financial crisis (when, even more than the dollar, it was seen as a "safe haven") and afterwards, when the dollar was falling due to the Fed's "quantitative easing" expansionary policies.

"Manipulation" is a loaded term, and determining when it occurs is subjective (I think the term could reasonably be applied when governments intervene in foreign exchange markets - the evidence of this would be in official holdings of currency reserves).  But its common for trading partners to grumble when your currency falls, even if the depreciation results from a monetary policy appropriate for domestic conditions.  The US was on the other side of this type of criticism a few years ago when the Fed was being accused of stoking "currency wars."

Of course, even if one takes the view Japan is (unfairly) "manipulating" its currency, there isn't really a mechanism to do anything about it.  Mirroring the divide in the economics profession where "international trade" is studied by microeconomists and exchange rates ("international finance") is the province of macroeconomists, the world has separate institutions for dealing with "trade" problems and "monetary" ones.  If a country attempts to boost net exports with a tariff, its trading partners have recourse to the WTO (and, in many cases, provisions of preferential trading agreements as well).  Doing the same thing through currency depreciation, well... the institution that has purview over exchange rates, the IMF, doesn't really have any mechanisms to settle grievances, so government officials are left to hector each other, and, on rare occasion, agree to coordinated policies.

In the case of the relative lack of US presence in the Japanese auto market, which has been consistent throughout the ups and downs of the yen-dollar exchange rate, the culprit (to the extent its driven by policy, not consumer preferences) is more likely in "non-tariff barriers" (NTBs).  While tariffs are easy to see, analyze and bargain over, imports can be impeded in more subtle ways that are more difficult to identify and deal with.  Often, what some see as a non-tariff barrier can be defended as a safety or environmental regulation.  In his "proposal to level the playing field" this is how Sander Levin (D-MI; my old congressman) characterizes Japan's auto sector NTBs:

These barriers have included: a discriminatory system of taxes; onerous and costly vehicle certification procedures for imported automobiles; a complex and changing set of safety, noise, and pollution standards, many of which do not conform to international standards and add significant development and production costs for automobiles exported to Japan; an unwillingness by Japanese dealerships to carry foreign automobiles and insufficient enforcement of competition laws to address anti-competitive practices; zoning restrictions that make it difficult, if not impossible, to establish new dealerships in important markets; and exclusionary consumer preferences shaped by decades of government policies directed at promoting the national car companies. 

Of course, that's not exactly an unbiased source (methinks "exclusionary consumer preferences" a bit of a stretch).  The occasion for Levin's proposal is Japan's entry into the negotiations over the "Trans Pacific Partnership" (TPP) trade agreement.  Overall, these preferential trade agreements are somewhat of a mixed bag.  They represent a "deeper" form of integration than the WTO and, as such, tend to extend further into areas typically thought of as "domestic" policy and may include such things as harmonization of regulations.  Whatever else one may think of it, the TPP negotiations may therefore be a good vehicle for addressing NTBs.  The US Trade Representative's office is promising to work on it, and already claiming some progress:

On April 12th, Japan announced its unilateral decision to more than double the number of motor vehicles eligible for import under its Preferential Handling Procedure (PHP), a simpler and faster certification method often used by U.S. auto manufacturers to export to Japan. In the near term, U.S. auto producers will be allowed to export up to 5,000 vehicles annually of each vehicle “type” under the PHP program, compared with the current annual ceiling of 2,000 vehicles per vehicle type. The United States and Japan have agreed to address a broad range of non-tariff measures in Japan’s automotive sector –including those related to transparency in regulations, standards, certification, “green” and new technology vehicles, and distribution – in a bilateral negotiation parallel to the TPP talks. In addition, they agreed to negotiate a special motor vehicle safeguard provision, as well as a mechanism to “snap back” tariffs as a remedy in dispute settlement cases.

Moreover, it appears that the Abe government plans to use the TPP as a cudgel to overcome domestic resistance to various domestic "reforms" that it wants to achieve as part of the "third arrow" of Abenomics.

Nonetheless, I don't think the US automakers should expect a big increase in the number their products cruising the roads of Japan anytime soon.  Issues of "currency manipulation" and non-tarriff barriers are invariably sticky ones - separating currency manipulation from valid monetary policy is subjective, and distinguishing legitimate regulations from disguised trade barriers is often very tricky.  Voluntary export restraints, anyone?

The post title is a reference to this, from the 80s.

GDP: TNG

According to the BEA's first version (the "advance estimate") of the second-quarter GDP numbers, which were released this past week, the US economy grew at a lackluster 1.7% annual rate in April-June.  That's an acceleration from the first quarter (1.1%) and the last quarter of 2012 (0.1%). But its still pretty disappointing - a treading-water-ish growth rate at best when we need faster-than-normal growth to make meaningful progress towards something resembling "full employment".

Although the unemployment rate has been falling, other measures like the employment-population ratio highlight how the labor market is far from fully recovered from the 2008-09 recession, and a 1.7% growth rate isn't nearly fast enough to really help.

Second-quarter growth was boosted by investment, which increased at a 9% rate (including 13.4% growth rate in residential investment; inventory accumulation also contributed).  Net exports were a minus, with imports growing faster than exports (9.8% versus 5.4%).  Government expenditures were a small drag, falling 0.4% (the federal government was at -1.5%, while state and local grew 0.3%).  It was the third consecutive quarter that the federal government has made a negative contribution (though less so than in the previous two).

The interesting thing in the release was not the second-quarter numbers, but rather the "comprehensive revision" of all the past data that came with it.  The BEA does this about every 5 years to incorporate changes in definitions and methodology.  By its new reckoning, US GDP is about $550 billion (3.4%) larger.

This shows how much the revisions have added to GDP over time (the percent difference between the new and previous versions of the series, constructed using vintage data from Alfred):

The main changes are to treat research and development as well as the creation of movies, TV programs, books and music (which the BEA is calling "entertainment, literary and artistic originals") as forms of investment.  These appear in the tables as a new subcategory of investment called "intellectual property products" which also includes software (formerly part of "equipment and software"; now there's a separate "equipment" subcategory).

Slate's Matthew Yglesias had a nice explanation of rationale for the changes:

Government statisticians draw a distinction between money a company spends as the cost of doing business and money a company spends on investing for the future. When a moving company buys a new truck, that’s an investment. You expect the truck to last for years and generate an ongoing stream of income. The truck purchase is part of GDP. Each year the truck depreciates in value, with the depreciation subtracting from GDP as what’s known as “consumption of fixed capital.” When a moving company buys gasoline to fuel the truck, that’s just the cost of doing business. The expense incurred is subtracted from the company’s income when calculating how profitable it was in any given year.

Right now we treat filming a season of Game of Thrones or having researchers work on a new pharmaceutical as being similar to filling up the truck’s gas tank. The new method is to treat them as similar to buying the truck.

Conceptually, the new way is clearly correct. Game of Thrones is to HBO as a truck is to a moving company: part of its stock of capital. Accounting for artistic originals in that way will add about half a percentage point to the size of America’s overall economy. Doing the same for research and development spending will add slightly more than two percentage points. And here, too, the new system is more sound in theory. A drug company is going to own plenty of physical capital goods, but its most important investments are the ones it makes in researching new products.

At Econbrowser, James Hamilton used a "Robinson Crusoe" story to explain the changes, Dean Baker and Jared Bernstein used the occasion to consider some of the other limitations of GDP in a NYT op-ed.

Overall, the revisions do not significantly change the "macro" picture of the behavior of the US economy.  With the new series, the average growth rate is slightly faster: 3.16% versus 3.11% since 1947 (when the quarterly data begins) and 2.50% versus 2.42% since 1993.  The standard deviation of growth is a tiny bit lower in the new series, and inflation, measured by the GDP deflator, is reduced a smidge by the revisions.  The "extra" output added in the revision is acyclical for the 1947-2013 period as a whole - the correlation of the addition to GDP with the growth rate is -0.04 - but slightly pro-cyclical over the last 20 years, with a correlation between growth and the addition of 0.19.

The new series makes the 2008-09 recession look slightly less bad, and the subsequent expansion a little bit better, as can be seen looking at both series normalized to 100 at the previous business cycle peak of fourth-quarter 2007:

At his FT blog, Gavyn Davies puts the new numbers in the context of economic policy.

Another change was to treat traditional, defined-benefit pensions on an "accrual" basis, which means they will be counted as income as the obligations to workers rise, rather than when employers put money in their pension funds.  This boosts the measured saving rate, which the Washington Post's Jim Tankersley thinks is problematic:

That money isn’t necessarily real. The Bureau of Economic Analysis didn’t find hundreds of billions of dollars stuffed in Americans’ mattresses. It decided to start counting all pension promises as savings in the bank....

The promises that aren’t backed by an income stream are called unfunded liabilities, and by changing how it counts them, the government added almost $200 billion to the nation’s personal savings for 2012.

The catch is, what if those promises don’t come true? The accounting change was made shortly after Detroit became the largest U.S. city to file for bankruptcy, in part due to the unfunded liabilities in its pension plan, raising questions over whether pensioners will actually receive the benefits they’ve been promised. Signs point to more strains on state and local government pension funds down the road.

(It's worth noting that some, including Paul Krugman, argue that the hand-wringing about under-funded pensions is overblown).

Another change is that some expenses associated with property transfers like attorney's fees and title insurance are also going to be treated as investments (the idea is that when you pay for these, you're not consuming a service, but rather paying for something that generates a flow of services - keeping the rain off your head - over a period of time).

The BEA also moved the "base year" to 2009 - i.e., real GDP is now expressed at 2009 prices (before it was 2005).

The BEA has more information about the comprehensive revision here; I found this article from the March Survey of Current Business (pdf) particularly helpful.

The revised "second estimate" of second-quarter GDP is due on Aug. 29.

Of Summers, Discontent

Based on conversations with "plugged-in sources", Ezra Klein reports:

The word among Federal Reserve watchers right now is that the choice is down to Janet Yellen or Larry Summers as Ben Bernanke’s replacement. I can’t find anyone who really thinks it’ll be Roger Ferguson, Tim Geithner, Alan Blinder, or some other dark horse.

People dismissed Summers’s chances a month or two ago, but he’s increasingly viewed as the leading candidate today — and opinions on this, for reasons I don’t fully understand (though I suspect have to do with a bunch of elite trial balloons going up at the same time), have really hardened in the last 72 hours.

I'd thought the persistent reports that Summers was a leading candidate represented some wishful thinking among writers in need of a more interesting story; like Matt Yglesias, I thought Yellen over Summers a no-brainer.  Yellen's qualifications are beyond doubt - she has strong academic credentials and experience at high levels of the Fed.  From a political perspective, Summers seems to have obvious drawbacks - supposedly one of the reasons Obama appointed him CEA chair rather than Treasury Secretary at the beginning of his administration was to avoid a messy confirmation fight (the CEA position does not require Senate approval).

Moreover, as Bill McBride details, "Yellen has a much better track record of correctly analyzing the economic situation, while Summers has frequently been wrong (but never in doubt)" and Cardiff Garcia's endorsement of Yellen provides further evidence on that point.  Scott Sumner is also unimpressed with Summers' views (or lack thereof) on monetary policy.

Also, as Paul Krugman notes:

[Y]ou need someone who can be effective at bringing the rest of the Fed along — but that’s a bit of a mysterious quality. Ben Bernanke has been far better at that than one might have expected from an academic. Looking forward, which is better: someone who has already demonstrated an ability to get along with her Fed colleagues, or someone who has a reputation as a tough guy but also a reputation for raising hackles? 

As Richard Grossman explains, one of Bernanke's big achievements has been to move away from the "cult of personality" style of central banking that was one of the worst aspects of the Greenspan era.  In that respect, appointing someone with a reputation for being obnoxious "strong personality" like Summers would likely be a step backward.

Up to this point, I've refrained from mentioning the fact that an appointment of Yellen would be historic because she would be the first woman to lead the Fed.  Even without taking that into consideration, its clear that she is a strong candidate, and Summers a highly problematic one.  But breaking the "glass ceiling" that still seems to exist in the monetary policy world would be no small thing.

Ezra Klein recently argued in a column that there was an undercurrent of sexism in some of the arguments being made against Yellen (e.g., "She lacks 'toughness.' She’s short on 'gravitas.' Too 'soft-spoken' or 'passive.'").  He pointed out that

An interesting wrinkle is that the current chairman of the Federal Reserve doesn’t fit the default masculine leadership model himself. Bernanke is soft-spoken and conciliatory. He doesn’t pound the table in meetings or preen at conferences. When he took the job, there were concerns about his gravitas. He’s not a social or political force around Washington in the way his predecessor, Alan Greenspan, was. He leads by consensus, with none of the high-stakes showdowns that burnished the legend of former Fed chairman Paul Volcker. Yet Bernanke has managed to pull the Federal Reserve through an extraordinarily turbulent period.

Yellen’s background bears similarities to Bernanke’s, though she’s got more Washington and Fed experience than he did at the time of his appointment. 

Klein generally seems to know what he's talking about, and I believe him when he says his reporting is well-sourced.  His story lays out the reasons Obama is apparently leaning towards Summers, none of which I find very persuasive.  I hope he's wrong on this one.

See also: Noam Scheiber, who asks "can we at least talk it over first?"

Update (8/1): There has been quite an outpouring of commentary on this in the last week.  While much of it focuses on the perceived drawbacks of Summers (e.g., Paul Krugman), James Hamilton makes a case for Yellen.  The New York Times has editorialized in favor of Yellen, and President Obama defended Summers at a meeting with congressional Democrats (he also mentioned Don Kohn as a possibility for the Fed position).  This widespread, almost campaign-like debate is little uncomfortable for those who subscribe to the view that the Fed should be somewhat removed from politics.

Ezra Klein dug further into the administration's arguments for Summers, and Brad DeLong makes a (somewhat lonely) pro-Summers case (see also his blog post).