When economists Janet Yellen and George Akerlof hired a baby sitter for their son in the early 1980s, they decided to pay more than the going wage. They reasoned that a happier baby sitter would provide better care.
By BINYAMIN APPELBAUM
The New York Times
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 Reserves ability to stimulate job growth.
Employers, they asserted, often seek to improve morale by paying more than the minimum necessary wage. 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 Feds abilities have both moved from the theoretical world of academia to the Fed itself. As the central banks 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 Feds enormous stimulus campaign.
And on Wednesday, President Barack Obama nominated Yellen, 67, to succeed the Fed chairman, Ben Bernanke, at the end of January. Many Democrats view Yellen as the best person to press that stimulus campaign and to strengthen financial regulation.
The president called her one of the nations foremost economists and policymakers renowned for her good judgment.
Of Bernanke, he said, I could not be more grateful for his extraordinary service.
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 culmination. Her confirmation also would reinforce the Feds 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.
She has expressed greater concern about the economic consequences of unemployment, a stronger conviction in the Feds 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 probably would 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. Though both encourage open debate and seek to make decisions by consensus, Yellen has been a more vocal and persistent advocate for her own views.
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 Romer, a former head of Obamas Council of Economic Advisers and a close friend of Yellen. Theres a toughness there, and I think theres a toughness to her that isnt in Bernanke.
On regulatory issues, Yellens 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 such as Citigroup and has not supported calls for their breakup.
• Deciding when to slow the Feds economic stimulus, especially its $85 billion-a-month bond buying, of which Janet Yellen was a key architect.
• Forging consensus from a fractious policy committee. She is known for helping draw up the current stimulus policy, and some members think even more should be done. But others, including KC Fed president Esther George, want to put on the brakes sooner rather than later.
• Calculating the effects of any economic slowdown from Washingtons budget fight, a task made even tougher because federal reports on the economy arent being made during the shutdown.
• Facing volatile financial markets. Besides the turmoil caused by House Republicans blocking normal government workings, the global economy is challenged by Europes continuing malaise and slowing growth in China and other emerging economies.
• Absorbing new members as the Fed undergoes unusually high turnover. Besides Ben Bernanke, four other members have either left or could be leaving soon.