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As Fed chief, nominee Janet Yellen would be an academic with her eye on the big picture.


New York Times


When economists Janet L. Yellen and George A. Akerlof hired a babysitter for their son in the early 1980s, they decided to pay more than the going wage. They reasoned that a happier babysitter would provide better care.

The decision not only attracted a series of excellent sitters, it also inspired the couple, both professors at the University of California at Berkeley, to develop a new theory of the labor market that remains an influential justification for the Federal Reserve's ability to stimulate job growth.

Employers, they asserted, often seek to improve morale by paying more than the minimum necessary wage, which has the effect of preventing some people from finding jobs. And during periods of high unemployment, they said, monetary stimulus can increase demand for labor - a direct rebuttal to the classical view, which left little role for the Fed in combating unemployment.

Thirty years later, Yellen and the debate about the Fed's abilities have both moved from the theoretical world of academia to the Fed itself. As the central bank's vice chairwoman since 2010, she has pressed for stronger measures to reduce unemployment, battling the doubts of other Fed officials about the value of continuing to expand the Fed's enormous stimulus campaign.

Yellen, 67, now finds herself as President Barack Obama's nominee to succeed the Fed chairman, Ben S. Bernanke, at the end of January, largely because many Democrats view Yellen as the best person to press that stimulus campaign and to strengthen financial regulation.

For Yellen, who was drawn to study economics as a path into public service and aspired as a college student to work at the Fed, the top job at the central bank would be a logical if - until only recently - unexpected culmination. Her confirmation also would reinforce the Fed's evolution from an institution run by market-wise bureaucrats focused on controlling inflation to an institution run by academics committed to a broader mission of steady growth and minimal unemployment.

Yellen's intellectual roots and leadership style both suggest that she would push somewhat more forcefully than Bernanke to extend the Fed's stimulus campaign, according to a review of her career and interviews with more than two dozen colleagues and acquaintances.

She has expressed greater concern about the economic consequences of unemployment, a stronger conviction in the Fed's ability to stimulate job growth and a greater willingness to tolerate a little more inflation in order to reduce unemployment more quickly. Until recently, her emphasis on unemployment would likely have disqualified her for the job, and it has already inspired opposition from some Senate Republicans and investors concerned that she would not be sufficiently vigilant in guarding against inflation.

Yellen is also a more assertive leader than Bernanke and appears less averse to conflict. While both encourage open debate and seek to make decisions by consensus, Yellen has been a more vocal and persistent advocate for her own views. Bernanke has allowed Fed officials to air their views freely, while Yellen has expressed concern that the cacophony undermines the Fed's effectiveness by sowing confusion about the direction of policy.

"I think she is fundamentally committed to continuity, that we still have a problem and we still need monetary policy to be doing a fair amount," said Christina D. Romer, a former chairwoman of Obama's Council of Economic Advisers and a close friend of Yellen's. "There's a toughness there, and I think there's a toughness to her that there isn't in Bernanke."

Yet it is easy to overstate the changes Yellen likely would bring. She would be the first Democrat to lead the Fed in nearly three decades, but a liberal central banker is something different from - and more conservative than - a liberal politician.

On regulatory issues, Yellen's views are closer to those of the Obama administration than to those of the left-leaning Democrats most fervently seeking her nomination. She believes markets are imperfect and require significant regulation. But she favored the emergence in the 1990s of financial giants like Citigroup and has not supported calls for their breakup.

And Yellen may find her own instincts constrained by the increasingly restive minority of Fed officials who want to start pulling back from the stimulus campaign.

Richard W. Fisher, president of the Federal Reserve Bank of Dallas, who will become a voting member of the Fed's policy-making committee next year as part of a regular rotation, is among those officials. Of Yellen, he said last week, "She's wrong on policy, but she's a darn good, decent, wonderful person."

Yellen and Akerlof spent much of the 1980s trying to understand unemployment. The couple met in 1977 in a cafeteria at the Fed, where both had taken research positions. Yellen had not secured tenure after six years as a junior professor at Harvard University; Akerlof had been denied a full professorship at Berkeley.

"We liked each other immediately and decided to get married," Akerlof wrote in a personal history after winning the Nobel Prize in 2001. "Not only did our personalities mesh perfectly, but we have also always been in all but perfect agreement about macroeconomics. Our lone disagreement is that she is a bit more supportive of free trade than I."

They were both Keynesians, believers in the view that people act irrationally, markets function imperfectly and the resulting problems are not self-correcting, and that the government must help.

"While admirers of capitalism, we also to a certain extent believe it has limitations that require government intervention in markets to make them work," Yellen said in a 2012 interview with Berkeley's business school magazine.

Friends describe Akerlof as a fountain of ideas, some brilliant, many indifferent. Yellen, they said, helped to frame a research agenda. She was a more rigorous thinker, and skilled at building and manipulating the theoretical models that are the primary tools of economic research.

In the summer of 1981, after returning to Berkeley, Akerlof and Yellen were looking simultaneously for child care and for an explanation of an old riddle: The persistence of unemployment. As it happened, they would find both in the same place.

"Faculty couple seeks child care person," read the classified ad in the July 24, 1981, edition of The Daily Californian, Berkeley's student newspaper. "Good pay."

It may seem obvious that many people without jobs would rather be working, but it is not so easy to explain why they cannot find work simply by reducing the price of their labor until companies find it profitable to hire them. In other words, during periods of high unemployment, why don't companies cut wages rather than lay off workers?

The answer put forward by Yellen and Akerlof sprang from their observation that people often overpaid babysitters. They argued in a series of papers that many employers chose to pay workers more than the cost of replacements because higher morale results in higher productivity. During recessions, when the market price of labor is falling, employers similarly refrain from cutting wages, because lower morale would diminish productivity. Employers do not save money if output falls, too.

"Firms don't just try to pay as little as possible to get the needed bodies on board; when there is unemployment, they ask themselves how wage cuts would affect the behavior of the employees," Yellen said in a 1995 interview. "Would they quit or feel dissatisfied and work less hard on the firm's behalf if they feel that wage policies are unfair?"

This reluctance to adjust wages, in turn, helps to explain why monetary policy works. When the Fed tries to stimulate the economy by increasing the availability of money, it is clear that spending increases. But economists have long debated whether the result is that people buy more goods and services or simply pay higher prices for the same things. In other words, does monetary stimulus just cause inflation, or can it also produce economic growth?

The argument hinged on whether prices adjusted quickly. Defenders of monetary stimulus argued that the price of labor, in particular, was "sticky" - that wages often did not adjust quickly. People were spending 10 percent more money, companies were earning 10 percent more, but wages remained the same. As a result, companies could afford more workers.

Yellen and Akerlof saw their theory as an explanation for the stickiness of wages. Perceptions of fairness, they said, might not be immediately affected by changes in the money supply. At least some employers would not adjust wages. As a result, stimulus could increase growth.

Yellen's first term on the Fed's board of governors, for three years beginning in 1994, foreshadowed the positions she has taken in recent years.

President Bill Clinton nominated her alongside another liberal academic, the Princeton University economist Alan S. Blinder, to temper the market-oriented conservatism of the Fed's chairman, Alan Greenspan. Appointing academics was an unusual step at the time. When Yellen met Treasury Secretary Lloyd Bentsen at his home outside San Diego, she came armed with examples of the research insights she could bring to policymaking.

Yellen was the rare Fed official to challenge Greenspan and succeed. In 1996, she marshaled academic research, including a paper she had encouraged Akerlof to write, to argue that the Fed should seek to moderate inflation rather than eliminate it. The research showed that a little inflation helped to minimize unemployment. Employers that were reluctant to impose wage cuts could instead allow inflation to erode the real value of wages, allowing them to reduce labor costs.

"I think she's just entirely too easy money," Julian Robertson, the noted investor, said Monday on CNBC, arguing that Yellen's tolerance of inflation could lead to excesses like the run-up in house prices that led to the financial crisis. "I think we've got to remember that we're not very far from the last bubble bursting."

Yellen was less successful in influencing fiscal policy during a two-year stint as the head of Clinton's Council of Economic Advisers. A careful thinker who likes to consider issues from many sides, she was not well matched to the work of an internal think tank expected to offer quick commentary on a wide range of economic issues. She also found herself outside the circle of the president's closest advisers.

Yellen returned to the Fed in 2004 as president of the Federal Reserve Bank of San Francisco, one of the 12 branches that conduct research, supervise local banks and participate in setting monetary policy.

Yellen demonstrated considerable economic insight over the next several years. She was the first Fed official, in 2005, to describe the rise in housing prices as a bubble that might damage the economy. She was also the first, in 2008, to say that the economy had fallen into recession. In early 2009, she warned of an "extended period of stagnation," dismissing concerns about imminent inflation. Her warnings before the crisis, however, were tentative and inconsistent. "I never said for sure there was a bubble, but that it was a possibility," Yellen said in September 2006. Moreover, she did not advocate for a change in Fed policy.

Although Yellen had no formal role in financial supervision, she requested monthly briefings and sought to raise alarms in Washington. She did not, however, try to constrain lenders unilaterally. "I honestly don't know if we could have done that," she told the Financial Crisis Inquiry Commission in 2010.

Yellen's views have prevailed so far. She is not personally close with Bernanke, but they respect each other and have broadly agreed about monetary policy, according to people familiar with the relationship. Together with a number of allies, they forged a consensus in the fall of 2012 for the Fed to expand both of its principal campaigns to spur job creation: more asset purchases, and an extended commitment to low interest rates.

Yellen has largely avoided public comment since June, seeking to avoid any impression that she is campaigning for Bernanke's job. But her views have held remarkably steady over the last three decades: When unemployment is high, the Fed has an obligation to try.

Returning to Yale in 1999, Yellen summarized the lesson she had learned from Tobin and carried with her into public service.

"Will capitalist economies operate at full employment in the absence of routine intervention? Certainly not," she said. "Do policymakers have the knowledge and ability to improve macroeconomic outcomes rather than make matters worse? Yes."


Born in Brooklyn, N.Y.


Bachelor's degree in economics from Brown University, 1967; doctorate in economics from Yale University, 1971.


Husband, George A. Akerlof, Nobel laureate in economics (2001) and Berkeley professor; a son, Robert Akerlof.


"I hope and trust that the days of 'never explain, never excuse' are gone for good, and that the Federal Reserve continues to reap the benefits of clearly explaining its actions to the public."

- Speech to Society of American Business Editors and Writers, April 4, 2013.