Thursday’s Senate hearing on her nomination to lead the Federal Reserve may finally be the day that Janet Yellen’s views are scrutinized – no, debunked – in a pubic forum. Forget about Rand Paul’s audit, a takedown of Yellenomics is just what we need to start fixing the Fed.
Yellen spent part of the mid-nineties as a Fed governor on the Federal Open Market Committee (FOMC), where she tussled with Alan Greenspan and others who favored price stability as the optimum monetary policy goal. The Yale-trained economist led a revival of the Phillips curve – the idea that more inflation can lead to job growth – within the central bank and fiercely opposed Greenspan and those in Congress who wanted to deemphasize or drop altogether the Fed’s second mandate to focus on maximum employment. Since her return in 2010 to the FOMC as its Vice Chair, Yellen has persuaded the committee to adopt a 2 percent inflation rate goal, which she says may not even be high enough at times.
As if Richard Nixon were still president, the Obama-era Fed is back in the business of using money creation to try and boost growth and employment. The results of the experiment have been dismal – a 7.3 percent unemployment rate and deathly slow recovery that has prompted a new America-in-decline meme (see the cover story in the October 26th edition of Barron’s, “The Snail Economy,” previewing our next twenty years). Yet Yellen presses on, pledging to sustain zero interest rates well into the future. Like the Fed leaders of yesteryear, she’s the last person in the room to recognize the costs.
Expect Yellen to get a question like this Thursday morning: When inflation is rising and wages are stagnant, how is the average American affected? Short answer, in non-Fedspeak: their standard of living declines. During President Obama’s first term, inflation increased 7 percent while the nominal median weekly wage rose just 3.9 percent. Yellenomics doesn’t consider the scenario of modest inflation hurting workers and families by outpacing their wages, yet that’s been the story of the last four years. No wonder voters in the 2012 election exit polls ranked rising prices a close second to unemployment as their top economic concern.
Yet Janet Yellen can be sure to make the esoteric argument that inflation helps the economy, even if the people living in it plead otherwise. Surely the Senators sitting before her will want to hear actual experiences of this working out, and won’t take the last four years as proof. Yellen, like Bernanke before her, will probably cite the boogeyman of deflation as her ace card to continue printing money. Yet experiences of mild deflation long ago (late 19th century U.S.) and recently (Japan) show better economic performance than under mild inflation. Rising real wages and gently falling prices is a happy outcome after all.
If the American worker has fallen behind, families are squeezed by rising costs, and it still feels like we’re living in a recession, who has made out well under Yellenomics? Congress and money managers, in that order.
Zero interest rates have driven federal borrowing costs to historically low levels as the debt has skyrocketed. The Senate Banking, Housing, and Urban Affairs Committee should pause Thursday so Elizabeth Warren can thank Janet Yellen for doing the only thing that can make big government financially possible. Warren’s villains on Wall Street may then offer their own gratitude to her for continually juicing the markets with cheap money, and reaffirming its commitment to do so at any sign of a downturn. The new jobs that Yellen must have dreamed about as the payoff for zero interest rates are really happy faces on CNBC, grinning at each new bull market milestone.
“Who if not Yellen?” is the question lazily put to her opponents, as if Larry Summers had been the only possible alternative to guide the Fed. The road away from Yellenomics – a return to market-based interest rates, the end of monetary stimulus – is so clear that any accomplished banker could do it. Some of the senators who choose to stand by Yellen and her approach at the Fed may in fact find themselves at a town hall somewhere having to explain to voters why inflation is good for them. And they thought Obamacare was hard to defend.
Rich Danker is economics director of American Principles in Action, a Washington advocacy organization behind NoOnYellen.com