Economic Statecraft, Women, and the Federal Reserve

By Simon Johnson. 

This post draws on issues discussed in class #6 of Entrepreneurship without Borders, a course at MIT Sloan.  The syllabus and other materials are available here.

The US has a long and generally successful track record of using “economic statecraft” to advance its positions and values in the world.  We helped rebuild Europe and Japan after World War II, with a judicious mixture of aid and access to the US market.  Similarly, as the Iron Curtain fell after 1989, the US stepped in with targeted financial support and general encouragement to converge on the European Union’s political and economic institutions.  The International Monetary Fund (IMF) and the World Bank, where the US has a big voice, have also played positive roles in many instances over the past 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 some commerce, but also a lot of coercion.)  But can we continue to apply the same economics-first approach to the next frontier for economic development – women’s rights?  Whether Janet Yellen becomes the next Chair of the Federal Reserve will provide some insight into the answer to that question.

Analysts of economic development often point to “human capital” – meaning 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 locate and build their companies.  And there is no question that technological change has increased the advantages, in the US and around the world, to people who are skilled at working with computers (see this recent piece by David Autor and David Dorn; Professor Autor is my colleague at MIT).

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 in fact 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. But the bigger issue is whether women have access to all available opportunities, including in the schooling system – as emphasized by Heidi Crebo-Rediker, former chief economist at the State Department (see my write-up of her June speech here).

Telling a country to suddenly find jobs for a lot more people obviously would 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 boost medium-term growth; it is also completely sensible and long overdue economic policy.  See this recent report from the Global Entrepreneurship Monitor on where female entrepreneurship is already strong – and where a boost could make a difference over the next 10-20 years; the numbers for the Middle East and North Africa are striking.

Under the leadership of Christine Lagarde, the IMF 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 childcare often makes a great deal of sense also – and this has been embraced, at least on paper, by the current government in Japan.  If female labor force participation increases – and if these women get good jobs at good ways – this will greatly help with the fiscal costs associated with a declining and ageing population in Japan.

Perhaps the IMF can develop and regularly publish a set of indicators, along the lines of the World Bank’s Doing Business reports, but focused 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 on 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 both 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 – including with the role models we create.  (Of course, our tax code also needs to be addressed; see my June column 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 was appointed Governor, in 1978, and Martha R. Seger was the second, serving from 1984 to 1991.  There have been 89 Governors to date, of whom a total of 8 have been women.

There has been a shift towards more female participation in the past two decades, when another six women have become Governors: Susan M. Philips (1991-98); Janet L. Yellen (1994-97 and again, as Vice Chair, from October 2010); Alice M. Rivlin (1996-99); Susan S. Bies (2001-07); 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.

President Obama should nominate Janet Yellen as Fed Chair.  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 also throw their weight behind Ms. Yellen.

We can talk all we want about what others around the world should do.  Ultimately, people assess the United States – and follow our leadership or not – based on what we actually do.

An edited version of this post appeared on the’s Economix blog last week; it is used here with permission.  If you would like to reproduce this material, please ask the New York Times.

4 thoughts on “Economic Statecraft, Women, and the Federal Reserve

  1. I am glad I am not a/the female who has to make the important decisions like either raising a family, or pursuing a successful career. In the long run, you really can’t do both well, but you can grow old trying, to pass it down to the kids.

  2. Hi, it’s an interesting thing to try and help countries through economics, but I’m not sure I agree that the analogy is appropriate. For example, tackling economic growth is like trying to give a family work, trying to tackle women’s economic status like trying to change the wife’s role. One is a wage isssue, the other is a cultural issue. I think trying to change culture through economic intervention that isn’t aimed directly at cultural influence seems unlikely to work.

  3. “If one take a look at the data, can see that the share of the US government debt held by the “Federal” Reserve reached record levels in 2011, reaching 11.2% of GDP, the highest since 1940 onwards, and possibly the historically higher. In 2012, this rate was also high at 10.6% of GDP. Only once this figure reached such levels, in 1946, i.e. shortly after the end of WWII, when it reached 10.7% of GDP.”

  4. Yellin is now nominated. But the reason for her nomination should NOT have been that she is female. Her success/failure should be judged independent of her gender. You column is surprisingly old-school. It is strikingly clear that countries that do not give women reasonably equal rights are supremely troubled. There is not one country, regardless of natural resources or other economic capabilities, that is highly competent if women don’t have reasonably equal rights. In fact, the single best indicator of a country’s likelihood of contemporary economic and social success is how women are viewed and women’s rights are advanced/protected. How have you, an otherwise contemporary thoughtful economist, missed this? Your column is amazingly patronizing.

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