Janet Yellen: A Keynesian Woman at The Fed
With Ben Bernanke’s term as chairman of the Federal Reserve up at the end of January, 2014, the speculation about the identity of his successor is starting in earnest. Two recent articles in The Economist and at the Washington Post’s Wonkblog have both made Janet Yellen, who is currently Bernanke’s number two on the Fed’s board of governors, the firm favorite for the job. Slate’s Matt Yglesias reckons her accession isn’t even in doubt, saying bluntly, “it’ll be Janet Yellen.”
Other possible candidates include Larry Summers, Tim Geithner, and Bernanke himself, although it’s been widely reported that Geithner isn’t interested and Bernanke doesn’t want to be reappointed. Given Yellen’s résumé, she’s a justifiable favorite. Before taking her current job, in 2010, she served for six years as President of the San Francisco Fed, one of the twelve regional reserve banks. She’s also got political experience and close ties to the Democratic Party. From February of 1997 until August of 1999, during Bill Clinton’s second term, she headed up the White House Council of Economic Advisers.
A couple of things make Yellen’s candidacy intriguing. One of them, obviously, is her gender. Ever since its inception, central banking has been overwhelmingly a man’s world. If you don’t count Moscow, where Vladimir Putin recently appointed one of his aides, Elvira Nabiullina, to run the Central Bank of Russia, Yellen would be the first woman to run the central bank of an advanced nation. Given the Fed’s independence, and its capacity to lend and print money at will—a capacity demonstrated to great effect in recent years—the person who runs the institution is arguably the second most powerful person in the country. (And with Hillary Clinton the bookmakers’ favorite to win the Presidency in 2016, it’s conceivable that in a few years’ time the two most powerful people in the United States could be female.)
But it isn’t just Yellen’s second X chromosome that makes her interesting. In a field noted for its conservatism and adherence to free-market orthodoxy, she has long stood out as a lively and liberal thinker who resisted the rightward shift that many of her colleagues took in the eighties and nineties. More recently, at the Fed, she has strongly supported Bernanke’s unorthodox (but very necessary) efforts to revive the economy and bring down the unemployment rate, and to expand the Fed’s thinking beyond its traditional fixation with inflation. It isn’t widely appreciated by the public at large, but this process has already produced a significant shift toward targeting low unemployment. Last December, the Fed made an explicit commitment to keeping the federal funds rate—a key interest rate—at close to zero until the unemployment rate falls to 6.5 per cent.
In central banking, people who worry primarily about inflation are often referred to as “hawks” and those who prioritize unemployment are called “doves.” If Obama does appoint Yellen to chair the Fed, she will arguably be the most dovish figure to head the central bank since Marriner Eccles, the Mormon banker whom F.D.R. appointed during the depths of the Great Depression. As recently as last month, Yellen gave a speech to the National Association for Business Economics in which she made a provisional case for sticking with an expansionary policy even after the headline unemployment rate comes down, noting, “A decline in the unemployment rate could, for example, primarily reflect the exit from the labor force of discouraged job seekers.”
Don’t get me wrong: Yellen is no radical. In many ways, she strikes me as a traditional American Keynesian—a modern representative of the breed that stretches back through Joseph Stiglitz and Paul Krugman (in his later incarnation) to James Tobin, Robert Solow, and Walter Heller, and, from the founding generation, to Paul Samuelson and Alvin Hansen. Contrary to what some of its conservative critics claim, American Keynesianism isn’t a left-wing creed: like John Maynard Keynes himself, it seeks to preserve the system rather than overthrow it. But in order to do this, it relies on a program of active management of the economy, and using economic models to aid that process.
Shaped by their experiences in the Great Depression, many early U.S. Keynesians saw economics not just as a policy science, but as a blueprint for using the state to prevent slumps and to further social progress. Seeking to remedy market failures, they championed countercyclical monetary and fiscal policies (including, when necessary, sizable stimulus programs), public investments in infrastructure and education, progressive taxation, and a strong social safety net. Simply relying on the market wouldn’t get it done—that was their message.
Yellen’s recent policy pronouncements, and her earlier academic work, are very much in this tradition. Perhaps her most famous paper, which she co-wrote in 1986 with her husband, George Akerlof, a Nobel-winning economist, was about the theory of “efficiency wages.” It argued that, contrary to the free-market model, lower wages can lead to higher unemployment. Ten years later, Yellen and Akerlof challenged the notion that generous welfare benefits were responsible for a surge in illegitimate births, especially in the minority population. The real reason there were more unwed mothers, Yellen and Akerlof argued, was a change in social attitudes, particularly the decline of “shotgun marriages.” If their theory was right, they concluded, “[C]uts in welfare benefits will have little effect on out-of-wedlock births, serving mainly to lower the standard of living of the country’s poorest children. Better family planning education, birth control advice, and requirements forcing fathers to pay child support are more promising policies to reduce out-of-wedlock births.”
Since becoming the vice-chair of the Fed in 2010, Yellen, in arguing for expansionary policies, has consistently highlighted the human costs of the recession, particularly the high levels of unemployment and underemployment. In a speech to a Washington conference in February, she said:
These are not just statistics to me. We know that long-term unemployment is devastating to workers and their families. Longer spells of unemployment raise the risk of homelessness and have been a factor contributing to the foreclosure crisis. When you’re unemployed for six months or a year, it is hard to qualify for a lease, so even the option of relocating to find a job is often off the table. The toll is simply terrible on the mental and physical health of workers, on their marriages, and on their children.
Of course, being a good economist, she doesn’t rest her case for Fed activism just on humanitarian concerns. Instead, she went on:
Long-term unemployment is also a great concern because it has the potential to itself become a headwind restraining the economy. Individuals out of work for an extended period can become less employable as they lose the specific skills acquired in their previous jobs and also lose the habits needed to hold down any job. Those out of work for a long time also tend to lose touch with former co-workers in their previous industry or occupation—contacts that can often help an unemployed worker find a job. Long-term unemployment can make any worker progressively less employable, even after the economy strengthens.
In her speech to the National Association for Business Economics last month, she returned to the same theme, noting that “prolonged economic weakness could harm the economy’s productive potential for years to come.” And she coupled this warning with a clear message for her fellow members of the policy-making Federal Open Market Committee: “[W]ith employment so far from its maximum level and with inflation running below the Committee’s two-per-cent objective, I believe it’s appropriate for progress in the labor market to take center stage in the conduct of monetary policy.”
It Yellen does take over from Bernanke next February, there’s no reason to doubt that concern for the unemployed will remain her leitmotif. And that, ultimately, is what makes the prospect of her running the Fed so interesting.
Source: The New Yorker
