Excellent long Janet Yellen article in the New Yorker (excerpt below.) She is proud to be a liberal Keynesian. She wants to prove she is right. She wants to help the poor by Quantitative Easing and keeping interest rates low, a “dove” on policy. But this policy has helped the rich get richer by giving banks more cash that finances stock market bubbles, real estate bubbles, gold bubbles, oil bubbles, commodity bubbles, etc. Not much trickle down. I don’t see that she understands the contradiction (nor did liberal Bernanke). Already a failed liberal?
I reminded of Keynes’s quote: “Practical men who believe themselves to be quite exempt from any intellectual influence, are usually the slaves of some defunct economist. Madmen in authority, who hear voices in the air, are distilling their frenzy from some academic scribbler of a few years back”
In this case madwoman Yellen implementing Keynesianism badly, postponing the day of reckoning while the rich get richer.
in 1967, the year Yellen graduated from college, Milton Friedman, a professor in the University of Chicago economics department, in a speech at an annual economists’ convention in Washington, signalled an end to the unquestioned primacy of Keynesian economics. Friedman declared that the government cannot affect the rate of unemployment for more than very short periods, which contradicted most economists’ view that government could prevent very high unemployment permanently. Friedman also later argued that inflation and unemployment could rise in tandem—something Keynesians saw as conceptually impossible, because they believed that higher inflation caused lower unemployment, and vice versa, and it was government’s job to strike the perfect balance between these two conflicting forces.
Friedman did not propose dispensing with Keynes. He’s usually credited with inventing the phrase, which Richard Nixon adopted, “We are all Keynesians now.”
But in 1976 Robert Lucas, another professor in the market-oriented, government-skeptical University of Chicago economics department, launched a frontal assault on Keynesian economics, in the form of a formula-filled article titled “Econometric Policy Evaluation: A Critique.” Lucas declared that government economic policy could not control the rates of inflation and unemployment for any length of time. Prices and wages would always set their own levels in the marketplace. In this view, which gathered a flock of adherents, Keynes became a figure of merely historic interest; the whole idea of wise liberal economists steering the economy away from disaster was seen as a fantasy. It didn’t help the Keynesians that both inflation and unemployment were rising, so the government’s ability to manage the economy effectively wasn’t immediately obvious. New classical economics had arrived, and it began to gain primacy in government, in economics departments, and in textbooks.
A decades-long battle was joined, between “freshwater economists,” at inland departments like Chicago’s, and “saltwater economists,” at Berkeley, Yale, and M.I.T. Yellen deplored the caricature of Keynesian economics, and it’s not too much to say that she has devoted her career, in universities and in government, to setting things right. New classical economics, she told me, “was the starting point for a rightward shift in economics that went against the idea that monetary policy can improve macroeconomic outcomes.” Lucas and his followers, she said, believe that markets function well on their own and that the effect of Keynesian economic policy can only be harmful. “In this framework, monetary policy is not even benign—it’s perverse. This reasoning takes Keynesian economics and completely stands it on its head. It suggests that all monetary policy does is affect the economy—adversely—by fooling people. This is as radical a shift as can be imagined.”
Back in the nineteen-thirties, Keynes blew apart the classical economic tradition, which held that unemployment was a self-correcting problem, because firms would simply cut their workers’ wages to the point that there would be more jobs, at lower pay. In the Depression, that did not happen—because high unemployment kept demand for employers’ goods low, and because companies tend to lay people off rather than save money by cutting everyone’s pay. Yellen proposed the case of a factory owner, when the unemployment rate is ten per cent, who sees a line of job applicants outside his factory gates: “O.K., so what does standard new classical economics say? You should cut the wages of everybody who works for you. Because there are all the people standing outside the factory gates, and they have the same skill set as the people who work for you. You should at least be willing, according to this view, if not to hire them, to say to your own workers, ‘If you don’t take a pay cut, I’m going to replace you with them.’ But one goes around, actually talks to firms, and you’ll find that no firm would do that.”
Yellen, who prides herself on being more in touch with the real world of the economy than most economists are, and Akerlof have published a series of papers on why labor markets don’t automatically work according to the laws of supply and demand. They believe that people’s economic behavior is not mechanically rational, and that government—specifically the Fed—can often manage the economy in ways that produce happier results than the markets would achieve on their own. As Ben Bernanke, who unhesitatingly called himself a “neo-Keynesian,” put it when I spoke with him, “Because wages and prices do not adjust quickly enough to keep the economy at full employment all the time, sometimes monetary and fiscal policies are needed to avoid long periods of unemployment.”
In Yellen’s professional partnership with Akerlof, she has been the one more drawn to government. “When I started studying economics, I always had an aspiration to be involved in public policy,” she said. “I come from an intellectual tradition where public policy is important, it can make a positive contribution, it’s our social obligation to do this. We can help to make the world a better place. That’s where I was coming from. And so the notion of having the opportunity to serve in a high-level public-policy position, especially the Fed—this was really very attractive to me. It was something I couldn’t say no to, as long as my family was willing to support me.” After her Clinton Administration jobs as a Fed governor and as chair of the Council of Economic Advisers, she returned to the Berkeley faculty. In 2004, she became president of the Fed’s San Francisco bank, and then, in 2010, vice-chair of the Board of Governors, in Washington.
I asked Akerlof why he had never held a government job. Gesturing at his ancient sweater, his unruly hair, and his battered hiking boots, he said, “Isn’t it obvious?” In his academic work, he has written papers with provocative titles such as “The Market for Lemons” and “Looting: The Economic Underworld of Bankruptcy for Profit.” When they wrote together, one Berkeley colleague told me, “one of Janet’s roles was to be the reality check.” In 2003, Akerlof gave an interview to Der Spiegel, in which he said of the Bush Administration, “I think this is the worst government the U.S. has ever had in its more than 200 years of history. It has engaged in extraordinarily irresponsible policies not only in foreign and economic but also in social and environmental policy. This is not normal government policy. Now is the time for people to engage in civil disobedience.” (Bush had cut taxes and created big government deficits, an unpardonable sin to a Keynesian, because those are powerful tools that need to be kept honed and ready for use during recessions, to stimulate demand.) Yellen would never be so impolitic, but she is no less passionate about the liberal tradition in economics. Now she has the chance to prove that her side has been right all along. For that to happen, of course, her policies have to work.
freshwater economists, with their abiding faith in markets, were less inclined to regulate the financial industry than the saltwater economists were. When the crisis made it obvious that finance has been severely underregulated, it was the anti-Keynesians who were discredited. The Keynesians were accidental beneficiaries.
when Yellen was in the White House, she was neither a strong voice in favor of late-Clintonian financial deregulation nor a strong voice against it. Other federal officials, such as Brooksley Born, the head of the Commodity Futures Trading Commission, earned prophetic status by issuing warnings about deregulation, but Yellen did not.
the Government Accountability Office* confirmed that the very biggest banks got significantly more special help from the Fed during the crisis than other banks did. All this amounted to a subsidy, conferred in order to keep the big banks from going under. Senator David Vitter, a Republican from Louisiana, who requested the report, told me that he estimates the total amount of the Fed’s subsidy to big banks during the crisis at eighty-three billion dollars. This money is not recoverable, because the subsidy was in the form of low interest rates
Goldman Sachs and Morgan Stanley, had operated without the Fed’s supervision, but in the heat of the crisis their capital-markets funding dried up, and they had no choice but to convert—“at the point of a sword,” as one former Fed official put it to me—into bank holding companies to get access to the Fed’s especially favorable loans. This meant that the Fed had supervisory power over all six of the largest surviving American financial institutions: Morgan, Goldman, Chase, Citi, Bank of America, and Wells Fargo.
As a result of the Fed’s decision to give the largest firms special help rather than to let them fail, these firms are now more dominant in the financial system than they were before. Dodd-Frank
The crisis placed financial power in the United States in fewer hands, and gave a government institution (The Fed) that stands at a remove from democratic politics more power to supervise those giant organizations.
In 2010, thirty senators, mainly Republicans, voted against Bernanke’s reappointment as chair—the most votes against a chair’s nomination in the history of the Fed. Yellen got almost as many negative votes, all from Republicans.
president of the Dallas Fed and a political conservative told me, “My concern is are we helping the middle-income groups or are we just helping the rich and the quick? The wealth effect of our policies has been highly concentrated. I’m a bit of a populist on this. We’ve seen job destruction in the middle two quartiles of the income distribution. That’s the backbone of America!”
The Fed, not the Treasury or the White House or Congress, is now the primary economic policymaker in the United States, and therefore the world. Everybody is watching. During the next year, Yellen has to decide how quickly to wind down the asset purchases that began five years ago; when to begin notching interest rates higher to forestall inflation; and how aggressively to supervise the big financial institutions so as to prevent another wave of expensive and unpopular government bailouts