A Dove Takes Wing At The Fed

When Republicans and Democrats on Capitol Hill finally put down the meat cleavers they have been swinging at one another, Janet Yellen is going to be confirmed to head the Federal Reserve with relatively little fuss.

Yellen, currently the Fed’s vice chair behind the departing Ben Bernanke, will be the first Democrat at the helm of the nation’s central bank since Paul Volcker stepped down in 1987. She is widely respected as an economist, and she might be the best-credentialed Fed chief in the 100-year history of the institution. Republican opposition to her appointment, while inevitable, will be strictly of the token variety. This nomination is as close to a layup as anything gets in Washington these days.

Yellen certainly offers continuity in the Fed’s hyper-easy-money policies, including the $85 billion monthly purchases of Treasury-backed debt instruments known as quantitative easing, or QE. Though the long-awaited “taper” of those purchases is likely to begin soon, possibly even before Yellen assumes her new post, Yellen is likely to push to keep the ultra-low interest rate environment in place longer than almost anyone else might. Critics will accuse her of risking a catastrophic meltdown of the dollar’s value, since the Fed is essentially printing money to finance the U.S. Treasury’s chronic deficit spending. But Yellen and her backers will respond that the dollar has been fairly stable, inflation has been quiet and unemployment has stayed stubbornly high for the five years since the financial crisis, making joblessness the Fed’s obvious top priority.

It all comes down to a question of philosophy regarding what money is and what monetary policy is supposed to do.

Conservatives would argue that money’s classical definition is to be a store of value and a medium of exchange. These two functions allow lenders to put idle capital to work by making it available, at a reasonable fee, to borrowers who are in a better position to deploy it for higher returns. The borrowers’ activities in turn produce greater wealth and more capital for society to employ in the interest of further progress. Full employment would occur as a byproduct, not a source, of prosperity.

Yellen does not appear to embrace this view, to put it mildly. She is one of the strongest advocates of quantitative easing, through which the central bank lends vast sums to the government at artificially low rates. Her critics say QE risks cheapening the currency and stoking inflation - destroying the wealth that money is supposed to store. But she supports the policy in the hope that government spending and cheap, freely available loans will foster employment in the short term, thus stimulating further demand. She is essentially advocating the position that prosperity can come from providing government-financed jobs, with little regard for whether those jobs increase society’s productive capacity. In this view of the world, prosperity is a byproduct of full employment, rather than the reverse.

My own view puts me squarely in the conservative camp. I ought to be among those who are unhappy with the Yellen appointment, but my true reaction is more complicated.

After all, there was no chance that President Obama was going to nominate the sort of Fed “hawk” (someone whose anti-inflation bias mirrors mine) that would have made Republicans cheer.

Moreover, there is a possibility, though not a particularly strong one, that someone like Yellen - someone whose appointment is wildly popular with Democrats - could be a voice of economic reason within that party. It will be hard for Obama and other Democrats to ignore Yellen if she argues that the federal budget must be brought under control with long-term entitlement reform. She could also make the case, which Democrats ignore when Republicans present it, that higher taxes and higher minimum wage laws ultimately hurt employment. She might note that it is counterproductive for the Fed, as a banking regulator, to engage in so much second-guessing that banks are afraid to lend to anyone other than the Treasury.

Yellen could argue for free trade and for sensible economic and labor regulation that keeps costs commensurate with benefits. She might point out that U.S. tax policy is trapping vast amounts of corporate money offshore, keeping it from being invested here, and encouraging fast-growing companies to establish headquarters elsewhere. She might even push for sensible immigration laws to attract human, as well as financial, capital.

She is certainly a good enough economist to know how important these things could be for the future prosperity of this country. If she makes these points, it will be hard for Democrats who lobbied hard for her appointment to disregard her - though I imagine some will just label her a Wall Street sellout, since name-calling is much easier than listening.

I am not especially optimistic that Yellen will do these things. I simply know that, as Fed chairperson, she could. And I know how much the nation would benefit if she does.

So the optimistic side of me says let’s go ahead and confirm her. At least it will mean setting aside the meat cleavers for a while.

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