How Janet Yellen Can Save the Economy

The nominee to lead the Federal Reserve is an old-school progressive economist with two guiding passions: reducing unemployment and reining in Wall Street.
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Every Federal Reserve Board chairman comes into office with a secret agenda, a hidden passion. It's the sort of thing you don't hear about at the confirmation hearings, and yet it is often this grand passion—suddenly given voice in the world's bulliest economic pulpit—that shapes the nation's future in unexpected ways. Alan Greenspan, the erstwhile "maestro" of the Fed, wanted to turn finance into the kind of laissez-faire market that his mentor Ayn Rand, the uber-libertarian author, had always envisioned. The result was the across-the-board deregulation of banking. When Ben Bernanke took over Greenspan's job, he appeared to be just another conservative economist in the mold of his predecessor (who had endorsed him). But his great passion was applying his life's work as a scholar of the Great Depression to stop another one. Only people who really knew Bernanke were aware of how the balding, mild-mannered man with the slightly quavery voice was committed, body and soul, to ensuring that the 2010s did not turn out like the 1930s. Thus, the startling spectacle of a Republican-appointed activist chief exploding the Fed's balance sheet by trillions of dollars to keep the economy going.

What is Janet Yellen's secret passion? By the accounts of her friends and colleagues, the 67-year-old Yale-trained economist doesn't have many secrets. She's served nearly 10 years in the Federal Reserve system, first as a governor, then as head of the San Francisco Fed, and now as vice chairwoman. Before that she ran the Council of Economic Advisers under Bill Clinton. "If you were dreaming up a training school for Fed chairmen, it would be her life story," jokes Princeton economist Alan Blinder, her former colleague at the Fed. "I don't think anybody in the Fed's history has come in with such a full résumé of Federal Reserve experience." As a result, she's probably as open a book as any nominee for chief in history. Yellen is considered a non-ideologue who will relentlessly follow the facts, whether they lead her toward solutions on the left or the right. "She is truly a scientist, in that she is an observer," says Jim Adams, a University of Michigan economist who has known Yellen since the 1970s. In her actions on the Federal Reserve Board and in her agonizingly deliberate, Brooklyn-accented testimony before Congress, Yellen has resolutely toed the traditionalist middle line on the Fed's "twin" mandates to manage inflation and unemployment. And with her ready smile, pixie haircut, and diminutive size (5 feet), she doesn't look like much of a bomb-thrower.

But that is the public Janet Yellen. Disciplined, determined, and brilliant, Yellen is also the product of an old progressive tradition of activist, pro-government economics. Above all, according to colleagues, she takes the nation's worst problems, especially unemployment, as a deeply personal challenge. Yellen, who is all but certain to be confirmed, represents a strain of interventionist thinking that has not found expression at such a high level in Washington in decades—at least since Ronald Reagan and his Milton Friedman-inspired attempt to shrink the size of government. That philosophy still dictates the agenda; even the last two Democratic presidents, Clinton and Barack Obama, have advanced (or bowed to) get-government-out-of-the-way policies, and the GOP's no-new-tax religion prevents any concessions for a broader budget deal.

Yellen, unlike Greenspan or a pre-2008 Bernanke, is probably the last person you'd hear repeating one of Reagan's favorite jokes: "The nine scariest words in the English language are: 'I'm from the government, and I'm here to help.' " According to more than a half-dozen longtime friends and colleagues, she has two grand passions that will require government to help in a very big way: reducing chronically high unemployment—which is the focus of her life's work and is probably the single biggest economic problem in America today—and reining in Wall Street's excesses. Yellen already appears to be settling the Fed's eternal debate about the relative threats of unemployment and inflation; she declared bluntly in her testimony that joblessness is the issue of the moment. Based on her past positions, she is also likely to try to alter the discussion in Washington on issues ranging from the size and power of the big banks to the need for a higher minimum wage and extended jobless benefits. And at a time when Obama has declared that income inequality is "the defining challenge of our time," and polls show that a majority of Americans no longer believe their country offers equal opportunity to all, Yellen brings a raft of well-thought-out—and decidedly activist—views to these issues.

She has devoted much of her career to showing why markets fail so often and therefore government intervention is needed, says Nobel Prize-winning economist Joseph Stig­litz, her former teacher at Yale and a longtime friend. Far more than previous Fed chiefs, Yellen also embraces the young field of behavioral economics, which posits that people often don't act rationally the way economic models say they should. Yellen knows that the Fed's traditional powers are limited now because the economy may be caught in a "liquidity trap," with interest rates already so low that additional injections of cash by the central bank will do little or nothing to stimulate the economy. But she is constantly on the hunt for novel interventionist solutions; "out of the box" is one of her favorite phrases. "She knows that labor markets don't work perfectly; capital markets don't work perfectly," Stig­litz says. He adds that Yellen understands that monetary policy is itself the best proof of this thesis—because it wouldn't be needed at all if markets always worked correctly.

Those who have known Yellen the longest also hail her empathy. They say she feels the pain of the jobless on a gut level and has even scolded her fellow economists for treating the unemployment rate as a mere number rather than a tragic encapsulation of the misery of millions. "How deeply you care about the unemployed comes in part from your viscera rather than your intellect. And with Janet Yellen, it's very strong," Blinder says. "She spent a good part of her career studying why unemployment stays high. I can remember a conversation between the two of us at the Fed in the '90s—I was vice chairman and she was a governor. One day, we tried holding back [the Federal Open Market Committee, the Fed's chief decision-making body] from going overboard on raising interest rates. She said, 'Maybe we saved 500,000 people their jobs.' "

Now she gets her chance to save more. Alongside inequality, chronic unemployment is America's most pressing economic problem. The bleak backdrop to the latest positive news, the reduction in the unemployment rate to 7 percent, is that devastating numbers of people have simply dropped out of the workforce in despair. And yet Washington policymakers remain ideologically paralyzed over what to do about it. By a number of accounts, no one feels this more intensely than Yellen, who understands not just the human cost to individual lives and families but also the damage that a demoralized workforce can do to the economy as a whole. One of her most important papers, written with her husband, Nobel Prize winner George Akerlof, showed that workers who feel underpaid will be less productive. "She does see long-term unemployment, massive unemployment, as not only an economic problem or in terms of wasted resources but also as a human being," says John Williams, president of the San Francisco Fed, who was Yellen's research chief when she ran it. "It is very destructive to families.… This is passionate with her. Among economists, you don't often see that human side. With her, it's not just an abstraction, and if you try to treat it too much as an abstraction, she'll react."

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Michael Hirsh is chief correspondent for National Journal.

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