Economic Statecraft, Women and the Fed

Simon Johnson, former chief economist of the International Monetary Fund, is the Ronald A. Kurtz Professor of Entrepreneurship at the M.I.T. Sloan School of Management and co-author of “White House Burning: The Founding Fathers, Our National Debt, and Why It Matters to You.”

The United States has a long and generally successful track record of using “economic statecraft” to advance its positions and values in the world. It helped rebuild Europe and Japan after World War II, with a judicious mixture of aid and access to the United States markets. Similarly, as the Iron Curtain fell after 1989, the United States stepped in with targeted financial support and general encouragement to converge on the European Union’s political and economic institutions. The International Monetary Fund and the World Bank, where the United States has a big voice, have also played positive roles in many instances over the last 70 years.

No policy is perfect or without controversy. But surely this approach is better than relying primarily on military power in the way preferred by former dominant powers - think of Rome, the Ottomans or even the British Empire (where there was commerce but also a lot of coercion).

Can the United States continue to apply the same economics-first approach to the next frontier in economic development - women’s rights? Whether Janet Yellen becomes the chairwoman of the Federal Reserve will provide some insight into the answer.

Analysts of economic development often point to “human capital” - education, skills and abilities - as a key determinant of which countries become rich. Similarly, entrepreneurs typically stress the importance of skilled labor in determining where they situate and build their companies. And there is no question that technological change has increased the advantages, in the United States and around the world, of people skilled at working with computers (see this recent commentary by David Autor, my colleague at the Massachusetts Institute of Technology, and David Dorn).

With skills at such a premium, we should perhaps expect countries to put as many resources as possible into bringing everyone as much education as possible. But this is not what we see, particularly with regard to girls and women in many places.

Women work hard everywhere. One question is whether this work is remunerated and picked up in official gross domestic product statistics. The bigger issue is whether women have access to all available opportunities, including in the school system - as emphasized by Heidi Crebo-Rediker, former chief economist at the State Department (see my column about her June speech).

Telling a country it must suddenly find jobs for a lot more people would obviously not make sense, and that is not what this policy is about. But increasing the ability to women to become entrepreneurs and create jobs is not just a smart way to promote medium-term growth, it is also completely sensible and long overdue economic policy. This recent report from the Global Entrepreneurship Monitor shows where female entrepreneurship is already strong and where a boost could make a difference over the next 10 to 20 years. The numbers for the Middle East and North Africa are striking.

Under the leadership of Christine Lagarde, the I.M.F. has taken this issue on board and is working with governments to make sure fiscal and social support systems are more balanced across the sexes - for example, flagging and discouraging penalties in the tax system when spouses work. Public investment in child care often makes a great deal of sense also, and this has been embraced, at least on paper, by the current government in Japan. If women’s participation in the labor force grows, and if these women get good jobs at good wages, this will greatly help with the fiscal costs associated with a declining and aging population in Japan.

Perhaps the I.M.F. can develop and regularly publish a set of indicators, along the lines of the World Bank’s Doing Business reports, which focus on the varieties of fiscal discrimination that all kinds of groups face (including but not limited to women).

I subscribe to Daron Acemoglu’s view that the “root causes” of economic growth include creating opportunities for meaningful participation - with property rights and a fair legal system - by a broad cross-section of society (Professor Acemoglu and I are co-authors of a number of papers that make this point). In this context, it makes complete sense to bring transparency and pressure on all parts of the tax code that discourage women from working.

The State Department says economic statecraft “means harnessing global economic forces to advance America’s foreign policy and employing the tools of foreign policy to shore up our economic strength.”

But any sensible economic policy begins at home, with steps including the creation of role models. (Of course, the tax code also needs to be addressed; see my post in June for more details)

As one very specific but topical example, consider the Federal Reserve System. Beginning in 1913, the first 55 people appointed as Federal Reserve governors were men. Nancy H. Teeters was the first woman appointed governor, in 1978, and Martha R. Seger was the second, serving from 1984 to 1991. There have been 89 governors, of whom just eight have been women.

There has been a shift toward more female participation in the last two decades, when six women (of the eight total) have become governors: Susan M. Phillips (1991-98); Janet L. Yellen (1994-97 and again, as vice chairwoman, from October 2010); Alice M. Rivlin (1996-99); Susan S. Bies (2001-7); Elizabeth A. Duke (2008-13), and Sarah B. Raskin (from 2010). Because three of the seven governors have been women until recently, it would be a surprise if President Obama allows female participation on the board to drop sharply. (Ms. Duke left the board at the end of August; Ms. Raskin is the nominee to become deputy Treasury secretary - a brilliant appointment but one that creates a definite gap in Fed leadership.)

President Obama should nominate Ms. Yellen as chairwoman of the Fed. She is the most qualified candidate ever, in my view. As well as overwhelming support from Democratic senators, leading Republicans may heed Sheila Bair’s advice and throw their weight behind Ms. Yellen.

Americans can talk all they want about what others around the world should do. Ultimately, people assess the United States - and follow its leadership or not - based on what they see done here.