WASHINGTON – As the Federal Reserve’s new leader, Janet Yellen won’t have to go far to bounce ideas off a fellow economist. The kitchen table will do just fine.
Yellen is the first Fed leader in the central bank’s 100 years to be married to an equally renowned economist — a Nobel laureate, no less. In 35 years of marriage, Yellen and George Akerlof have partnered on groundbreaking research on everything from the collapse of East Germany to out-of-wedlock births to the way generous pay for a baby sitter shows how wages motivate workers.
Colleagues say that as economic thinkers, the two complement each other. And they say their partnership reflects a philosophy of consensus and collaboration that’s likely to surface in Yellen’s leadership beginning with this week’s meeting of the Fed’s policy committee — the first since Yellen succeeded Ben Bernanke as chair on Feb. 3.
The committee includes critics of the Fed’s policymaking whose views Yellen doesn’t tend to share. They include, for example, Richard Fisher, head of the Federal Reserve Bank of Dallas, who recently said the central bank is “distorting financial markets” by acting to depress short- and long-term interest rates.
As Akerlof’s collaborator, as a professor and as the Fed’s vice chair, Yellen has been known for forging consensus. When she worked with Akerlof, the two drew upon each other’s differing strengths, according to colleagues and former students.
“Janet is very balanced and grounded. She thinks clearly and has a lot of common sense,” said Andrew Rose, an economist who collaborated with them at the University of California, Berkeley. “George is much more artistic and has these leaps of brilliance.”
Rose described Yellen as a mother who was devoted to helping her son with his pinewood derby car in the evenings. She would sit at favourite restaurants while drafting economic papers. In debating ideas with her husband, seemingly any assumption of how the economy functioned was ripe for debate.
“As far as I could tell, they did almost everything together,” said Michael Ash, a student of Akerlof’s and now an economics professor at the University of Massachusetts, Amherst.
The two might chew on problems separately, but the “degree of communication, respect and a willingness to be playful in thinking” distinguished them, Ash said.
Akerlof, of course, can no longer afford to be as outspoken as he once was. He declined to comment for this article, mindful of how his words would be weighed for insights into what Yellen might be thinking.
The 73-year old economist recently stepped down from an unpaid advisory position at the University of Zurich backed by the Swiss bank UBS “to avoid the appearance of a conflict,” he wrote in an email.
Since officially becoming Fed chair, Yellen has declined to speak publicly to reporters. On Wednesday, she will hold a news conference after the Fed meeting ends.
Akerlof has been critical in the past of the institution his wife leads and of other central banks. He’s argued that there’s a painful price to pay when a central bank focuses too much on avoiding higher inflation: sluggish hiring and meagre pay.
His suggestion that the Fed should put more emphasis on job growth and accept the risk of higher inflation is among the most divisive issues Fed officials are debating.
Unemployment remains at a still-high 6.7 per cent nearly a half-decade into the economic recovery. The Fed’s investment portfolio has roughly quadrupled to more than $4 trillion since the recession began in late 2007. That’s because the Fed has tried to spur growth by buying Treasury and mortgage bonds to keep long-term loan rates low.
Super-low borrowing rates are intended to drive spending, growth and hiring. But rates kept too low for too long risk causing sharp price spikes that could disrupt the economy. So far, inflation hasn’t become a threat. In fact, it’s running below the Fed’s 2 per cent target.
The Fed has recently lowered the pace of its monthly bond buying from $85 billion to $65 billion, a figure that could fall further after this week’s meeting. Yet the Fed continues to maintain that short-term rates will stay near zero.
Yellen told members of Congress that extremely low inflation “gives us ample scope to continue to try to promote a return to full employment.”
Her husband has been blunter about the possible trade-offs between inflation and job growth.
“Most of us think of central bankers as cautious, conservative and safe,” Akerlof said in his 2001 Nobel Prize lecture. “But I consider many to be dangerous drivers: To avoid the oncoming traffic of inflation, they drive on the far edge of the road, keeping inflation too low and unemployment too high.”
His speech suggested that higher inflation would spur workers to demand pay raises because higher prices would squeeze their existing income.
Fed watchers usually classify this perspective as “dovish” — a willingness to keep pumping cash into the economy at a pace that could alarm inflation “hawks.” Still, Akerlof’s former students said this classification underplays the depth and independence of his analysis.
“To call Akerlof ‘dovish’ is to vastly underrate the seriousness of his thought,” said John Cochrane, a finance professor at the University of Chicago who studied under Akerlof at Berkeley. “He’s a brilliant economist and unmotivated by ideology or partisanship.”
Yellen, too, has been classified as dovish. In the past, she has suggested that inflation above 2 per cent would be temporarily acceptable if it sped the pace of hiring.
The couple first met at a Fed cafeteria in 1977. He had already achieved some measure of fame for his 1970 paper “The Market for Lemons.” In it, Akerlof demonstrated through used cars the economic problems caused when a seller has more information than a would-be buyer does. It was an insight, in part, that led to his sharing a Nobel prize decades later.
While Yellen and Akerlof were teaching at Berkeley in the 1980s, their search for a baby sitter for their son, Robert, now an economist teaching in Britain, inspired a 1990 research paper about wages. The couple willingly paid a premium for baby sitters, figuring it would attract superior talent.
Their research found that employees tend to slack off once their pay falls below a “fair wage.” This trend, in turn, contributes to unemployment because many people don’t want to work for pay they deem unfairly low, they found.
Yellen’s multiple periods in Washington influenced each other’s career paths. When she first joined the Fed’s board nearly 20 years ago, Yellen feared that Berkeley might let her go and her colleagues might forget her. So she gave her colleague Andrew Rose a photo, which other professors turned into a shrine with a votive candle, a few sculptures and even rosary beads, Rose said.
Akerlof took a leave from his professorship at Berkeley to join his wife in Washington. He accepted positions at the Brookings Institution and, now, as a scholar in residence at the International Monetary Fund.
Statements from the two about the plight of the long-term unemployed since the Great Recession have noticeably overlapped. At a Brookings panel in April 2011, Akerlof said he’d “never seen anything like” the more than 45 per cent of the unemployed who had been jobless for more than six months, a share that has since slipped to a still-high 37 per cent.
“It makes life hell for the people who are unemployed,” Akerlof bluntly declared.
Likewise, in her first congressional hearing as Fed chair last month, Yellen repeated her fears that the recovery had been too weak to help many of the recession’s victims.
“The fact that we have very long spells of unemployment,” she told a House committee, “suggests that the job market is not strong enough to be able to provide people with jobs who want to work.”