Janet Yellen: An Economist Who Explains It All
When Janet L. Yellen was a graduate student in economics at Yale University, classmates quickly figured out that the best way to decipher Professor James Tobin's lectures was to borrow her notes. And long after Yellen received her PhD in 1971, the Yellen Notes--as they became known--served as the unofficial textbook for generations of graduate students. "She has a genius for expressing complicated arguments simply and clearly," says Nobel winner Tobin.
Yellen's talent for penetrating arcane issues has served her well--as an economics professor at the University of California at Berkeley and as a Federal Reserve Board governor. Now, those synthesizing skills will be tested in her biggest assignment yet: chair of the White House Council of Economic Advisers. And Yellen brings another resource to the job as well, her Berkeley economist husband, George A. Akerlof, a former CEA staffer who is widely perceived as a future Nobel laureate.
In academic circles, Yellen and Aker-lof--who met in 1977 as young Fed economists and were married the next year--have won acclaim for the originality of their research, to say nothing of their clout. "It will be a very powerful wife-husband team," predicts David Vogel, a professor at Berkeley's Haas School of Business. Such colleagues say Akerlof often comes up with breakthrough ideas, but it is Yellen who supplies the academic rigor. Akerlof "is more interested in the inspiration than the hard work of putting it together in a professionally plausible form--he's off to the next idea," says Tobin. "She provides the discipline that makes them go."
The couple has been collaborating professionally for more than a decade. At Berkeley, they conducted groundbreaking research that refuted prevailing wisdom about how the economy functions (table). In the 1970s, economists such as Robert E. Lucas Jr. of the University of Chicago had argued that using monetary and fiscal policy to move the economy was futile, since people adjust their behavior in ways that negate the policy changes. This "rational expectations" theory gained widespread acceptance at the expense of the Keynesian school, which held that the government could act to smooth out business cycles.
But in a landmark 1985 paper, Yellen and Akerlof argued that individuals lacked the time and resources to conduct the intensive research. Such a deviation from Lucas' assumptions, when magnified, might mean that an interest-rate cut could have a major impact on the economy. Former Fed Vice-Chairman Alan S. Blinder says the couple's research "has given theoretical economic underpinnings to the New Keynesian school," which explains why government intervention in the economy is sometimes justified.
RELUCTANT AT FIRST. Yellen, who was sworn in to the CEA job on Feb. 13, has quietly emerged as a forceful figure on her own. As a Fed governor since 1994, she helped convince fellow governors that downsizing and foreign outsourcing was enabling the economy to run with lower unemployment and less inflation than was thought possible. Last fall, Yellen and Fed Chairman Alan Greenspan joined in arguing that the strong economy wouldn't trigger an inflationary spike--a call that appears shrewd today. "Janet pushed for more conceptual analysis within the Fed," says one central bank colleague. "She wanted the Fed to ask less `What's the Chicago Purchasing Managers Index?' and more `What are the broader forces affecting the economy?"'
In choosing Yellen to succeed Joseph E. Stiglitz, who is leaving to become the World Bank's chief economist, Administration officials passed over others with greater marquee value. But Treasury Secretary Robert E. Rubin says the White House talked Yellen into the job because "we wanted someone who could bring a rigorous analytic approach to the issues and who could work well with others." So great was the Clintonites' respect for her thinking that while at the Fed, Yellen periodically briefed CEA officials on such topics as the labor markets and welfare reform. Moreover, in the Clinton Administration, loyalty has been a big requisite for the job: CEA chairs have been expected to sell policies, even if they disagreed, or at least remain silent.
BATTLES AHEAD. For now, Yellen says she's in synch with the Administration's thinking: She favors balancing the budget but opposes a constitutional amendment. She hints she's skeptical of calls to invest part of the Social Security Trust Fund in stocks. And she backs Clinton's plan to provide tax incentives for education and training. "I'm concerned about rising inequality of earnings and its long-term social implications," she says. "Education is the answer."
Above all, Yellen wants to focus on rewriting last year's sweeping welfare reforms, which she fears may exact a huge toll on children without a safety net during the transition. "I am anxious to fix welfare," she says. "There has to be more training and child care." Based on research with Akerlof, Yellen doubts that slashing benefits will deter poor single women from having babies. The couple believes instead that the answer may lie in providing easier access to birth control and in punishing men who don't support their children.
Despite her strongly held views, Administration insiders question whether Yellen has the steel to prevail in internal battles over economic policy, which have been increasingly decided by Rubin and Deputy Treasury Secretary Lawrence H. Summers. If the new CEA chair intends to shape as well as sell economic policy for the Administration, she may have to produce another impressive set of Yellen Notes--this time for the man in the Oval Office.