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posted on 22 July 2017

Should PhDs In Economics Lead The Federal Reserve?

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Recently Dallas Fed President Robert Kaplan said that any Federal Reserve Chair must be an:

... expert person that can analyze the economy and have views on monetary policy that are respected .... The reason that’s so critical is the second part of the job -- which is they’ve got to be able to mobilize a consensus, forge a consensus among presidents and governors ...


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The question is "Does the Fed Chairman need to have a PhD in economics" to lead the Federal Reserve? This is a current issue as rumors abound that current Fed Chair Janet Yellen will be replaced when her term expires early next year. Chair Yellen has a PhD - and here is the recent history of the Federal Reserve Chairs:

Federal Reserve ChairDate InstalledPhD?
Paul VolckerAugust 6, 1979no
Alan GreenspanAugust 11, 1987yes
Ben BernankeFebruary 1, 2006yes
Janet YellenFebruary 1, 2014yes

According to the Harvard Business Review, there is an obvious trend towards PhD's on the Federal Open Market Committee (FOMC):

Let's Step Back

What skills does it take to manage an organization - any organization? And the bigger question is where a PhD is necessary to run any organization? The Federal Reserve System employs roughly 22,000, and has operating expenses of over $4 billion and annual revenue around $100 billion. This is big enough to place the Federal Reserve in the top 25 of the Fortune 500 list. In the table below are some of the companies with revenues smaller than the Fed.

Company

Revenue

(millions)

Company

Size

Agilent Technologies

$4,20212,500
Cabela's$4,12919,100
Advanced Micro Devices$4,2728,200
Sonoco$4,78320,000
Yahoo (now )$5,1698,500
Blackstone$5,1262,240
Alaska Air$5,93119,112
Boeing$94,571150,540
Microsoft$85,320114,000
Intel$59,387106,000
Disney$55,632195,000

It is interesting to note the educational background of the Fortune 500 CEO's. The overwhelming majority are not PhD's.

The largest component of CEO's have an MBA. This is logical as an MBA prepares one to run a business - coupled with a Bachelor's or higher degree. How many believe that being a University professor is a preparation to run a major organization?

There is certainly no record that the academic domination of the Fed has resulted in any great insight into the economy. For example, the graphic below from The Washington Post in 2013 shows the shortcomings of near-term GDP forecasts. (More recent GDP forecasts have been better, but still consistently too optimistic.)

There is more to running the Federal Reserve system than arguing about monetary policy. Not only is proven leadership skills necessary, but the Fed has many administrative duties, which include overseeing the Fed's broad range of regulatory duties over the banking system. The Fed seems more akin to being a business then a university.

Other Economic News this Week:

The Econintersect Economic Index for July 2017 continues to forecast strengthening economic fundamentals - with the index showing normal growth for the third month in a row. Six-month employment growth forecast indicates modest improvement in the rate of growth.

Bankruptcies this Week from bankruptcydata.com: Privately-held Beaulieu Group

Weekly Economic Release Scorecard:

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