Yellen's Focus on Unemployment Adopted by Fed
Federal Reserve Vice Chairman Janet Yellen has fought for more than a decade to put attacking unemployment and boosting growth on an equal footing with fighting inflation at the heart of the Fed's policy.
After years on the periphery, she now finds herself at the center of the prevailing view at the Fed and at central banks around the world, just as the spotlight swings to her as a potential successor to Chairman Ben S. Bernanke.
"The philosophy of Janet Yellen is activism of government policy to achieve objectives," said Allen Sinai, president of Decision Economics Inc.
Speculation about the succession at the central bank intensified after the Fed said this week that Bernanke would skip the central bank's annual symposium in Jackson Hole,Wyoming, because of a personal scheduling conflict. The 59-year- old Bernanke, whose term expires in January, has been the keynote speaker every year since becoming chairman in 2006.
Yellen's writings and speeches show confidence in government's ability to offset calamities, especially in labor markets. In 2004, as president of the San Francisco Fed, she argued in a paper written with her Nobel Prize-winning husband, George Akerlof, that central bankers couldn't ignore the high costs of long-term joblessness.
"Policy makers should be compelled to take action given the serious costs of long-term unemployment when overall unemployment is already high," they wrote. "A week of unemployment is worse when it is experienced as part of a longer spell."
Bernanke, in a press conference last December, echoed some of Yellen's concern with the plight of the unemployed.
"The conditions now prevailing in the job market represent an enormous waste of human and economic potential," Bernanke said on Dec. 12, after a meeting of the Federal Open Market Committee.
"The perspective of those who studied with Tobin at Yale was that the government has an affirmative responsibility to offset the instabilities of the private economy," said James Galbraith, another Yale PhD who worked on the Humphrey Hawkins Act of 1978, which affirmed the Fed's obligation to pursue stable prices and maximum employment.
Yellen became an assistant professor at Harvard University and later took a job in the Fed's international division. There she met Akerlof, whom she married in July 1978. After a two-year stint at the London School of Economics, they settled into jobs at the University of California, Berkeley.
Together they wrote about a dozen papers on the intricacies of the labor market. Their most-cited work, according to the website Research Papers in Economics that tracks citations, demonstrated that whether workers believe they are paid fairly influences their efforts on the job and even helps explain the national unemployment rate.
David Fuller's view Ben
Bernanke was appointed Chairman of the Federal
Reserve by President George W Bush in 2006, largely because he was accredited
with being the academic expert on how to avoid a Japanese-style deflation. However,
he was no fiscal conservative and had been reappointed by President Barrick
Obama in 2010. Mitt Romney, shooting from the hip, promised to sack Bernanke
if elected - another comment which helped to ensure that he would not become
With rumours that Bernanke will retire towards the end of this year rather than stay on for a third term, Fed Vice-Chairman Janet Yellen is the favourite to succeed him, assuming that she wants the post at her current age of 66. She is a Democrat and all her comments on unemployment suggest that she would err on the side of keeping interest rates low, provided that inflation was not a problem.
Yellen's humane reputation may be necessary at the Fed if my prediction that an accelerating rate of technological innovation will ensure that jobs are replaced by robotics more quickly than a developed economy can generate new forms of employment. However, retaining a stimulative monetary policy will remain a bigger tailwind for equities than employment.