From The Wall Street Journal:
Janet Yellen, a Backer of Pushing the Fed’s Policy BoundariesBy Victoria McGrane and Jon Hilsenrath
Expected Nominee for Central-Bank Chief Has Easy-Money Leanings
Janet Yellen’s computer screen saver on a neat desk in her office at the Federal Reserve is a photo of the garden at her home in Berkeley, Calif. If the Senate confirms her to be the central bank’s next leader, the colorful patch of ground will remain a distant memory for much of the next four years.
These days Ms. Yellen is more focused on helping other things grow, such as consumer spending, investment and most of all jobs—all reasons President Barack Obama plans to announce Wednesday he will nominate the methodical and meticulous economist to run the Fed.
As the Fed’s vice chairwoman since 2010, Ms. Yellen, 67 years old, has been at the forefront of pushing the Fed to use new and risky policies to nurse the crisis-damaged economy back to health. These policies include buying trillions of dollars of bonds to hold down long-term rates in hopes of lowering unemployment, a program known as quantitative easing, or QE.
While the easy-money leaning aligns her with current Fed Chairman Ben Bernanke, it puts her at odds with a minority of Fed policy makers. They say the extraordinary policies have done little to help the economy and risk triggering higher inflation and financial instability.
More at the link. The authors go on to note Dr Yellen’s intellectual background in Keynesian economics, the ideas that using increased government spending to stimulate the economy during bad economics times helps end recessions, and supports the use of government to combat poverty and high unemployment. It all sounds so nice and so great.President Obama and his team of economic experts accepted those great ideas, and put them into government policy, to combat the recession in 2009. The chart at the right is a combination of the presented by the Administration to sell the stimulus plan, with the actual results appended.
The JOURNAL article noted that Dr Yellen supported and would (probably) continue the current “quantitative easing” program of the Federal Reserve initiated under outgoing Chairman Ben Bernanke. Under QE, the Fed has been purchasing $85 billion of bonds ever month, about half of which have been mortgage-backed securities, to help stimulate the economy, since the traditional means the Fed uses of trying to influence interest rates lower has already been maximized; interest rates are, and have been, extremely low.
So, with all of the government activity, why hasn’t it been working, why have the results been so poor? Could it be that Keynesian economics itself is unsound?
Well, perhaps not. Keynesian economics holds that governments should increase spending and run deficits when the economy is performing poorly, to increase demand for goods and services and stimulate the economy. But there’s another part to that; Keynesian economics also holds that governments should balance their budgets and pay down the debts incurred during the stimulus period, and that is something we haven’t been trying to do in the slightest. We have continued deficit spending in good times as well as bad, and have, in effect, changed Keynesian stimulus into the normal spending pattern.
And we have added another factor as well. At the end of World War II, 99% of our national debt, which had skyrocketed to pay for the expenses of the war, was owed to our own citizens; as that debt was serviced, those payments went right back into the American economy. The huge stimulus of World War II was, in effect, all American spending.
That has changed. Now, much of our deficit spending is financed by foreign governments, corporations and individuals buying United States Treasury Bills. The effect is that we have been importing money from abroad, and our “new normal” is spending more not only than we take in in taxes, but spending more than our entire economy produces. That has become something which cannot be sustained forever, and is looking like something which cannot be sustained for much longer.
If we have imported money, the other side of that coin is that, as we service the debt, through interest payments and matured bond redemption, we wind up exporting part of the fruits of our production, removing it from our economy, and having a depressing effect.
As much as I would like to say that the current economic performance has demonstrated the invalidity of Keynesian theories, I cannot, because we have not carried through with the back side of that theory, balancing the budget and paying down our debts when times are good. But I can say one thing: our continued economic stimulation through the importation of money, for quite literally decades, has inoculated our economy to Keynesian stimulation, because that is now the current norm.
Dr Yellen’s nomination will almost certainly be approved by the Senate, and even if it were not, President Obama would simply nominate another like-thinker. But there’s no reason to believe that continuing the economic policies of the past five years will produce any better results than they have before.