When President Barack Obama reluctantly nominated Janet Yellen to the most powerful economic post on the planet in October 2013, Republican Party leaders, backed by much of the economics establishment, warned of looming economic ruin. As Federal Reserve chair, Yellen would lead the country into a hyperinflation calamity on par with Weimar Germany or, at least, a return to the misery and malaise of the Jimmy Carter years.
Senate Majority Leader Mitch McConnell (R-Ky.) said he had “serious concerns” about Yellen’s interest in “maintaining the purchasing power of the dollar.” Sen. John Cornyn (R-Texas) declared Yellen “thought that the best way to handle to our nation’s fiscal challenges is to throw more money at them.” Sen. Richard Shelby (R-Ala.) envisioned “massive price increases on every single product that Americans buy.” Sen. Chuck Grassley (R-Iowa): “For an example of what Main Street could be in store for, one need look no further than the late 1970s.” Economist Kevin Hassett, now serving in the Trump administration: “Inflation could spin out of control.”
And yet these predictions of horror (generously compiled by Sam Bell, an adviser to the progressive economic advocacy group Fed Up) never materialized. Consumer prices rose by just 1.9 percent a year during Yellen’s tenure ― and only 1.3 percent if you include fuel and food in the calculations. The overall economy, meanwhile, has grown by nearly 9 percent since Yellen took office four years ago (adjusted for that barely existent inflation), while the unemployment rate has steadily declined from 6.6 percent to 4.1 percent and the interest rate on government debt is about where it was when Yellen was confirmed. The man President Donald Trump has selected to succeed her, Jerome Powell, has stated that he plans to continue her policymaking legacy, which of course makes one wonder why, exactly, the president felt compelled to replace her.
“Republicans have spent all year trying to take credit for the condition of the economy, as if a roaring stock market and low unemployment were all happening without any central bank activity at all.”
By any conventional metric of central bank success, Yellen’s tenure at the Fed has been a smash hit. Indeed, Republicans have spent all year trying to take credit for the condition of the economy, as if a roaring stock market and low unemployment were all happening without any central bank activity at all.
And that’s the problem. Because the current economy isn’t a smash hit. It is, at best, a mess. In important respects, it is in crisis. Inequality remains at or near record highs, an ongoing disaster that can’t be captured by monetary statistics ― American life expectancy has declined for two consecutive years. Our bridges collapse, our airports black out and our trains derail ― though we have both the financial means and the technological know-how to prevent all of these debacles.
Even the reality surrounding money and prices is more complicated than the stubbornly low inflation figures suggest. Food might be fine, but the crazy price of Bitcoin ― something with literally no intrinsic value ― suggests that at least some people have too much money on their hands and not enough productive economic activities to invest in. The stock market seems disconnected from the economic world most people experience day to day. The S&P 500 has rocketed up 55 percent since Yellen took over at the Fed ― six times the rate of improvement for the overall economy. At least some of that has to be the result of irrational overvaluation resulting from Fed policy.
Yellen didn’t miss any of this. The Fed has been raising interest rates in a deliberate attempt to arrest the increase of financial asset prices and fend off any serious asset bubbles. This may well be the responsible thing for a Fed chief to do at the moment. But if so, the implications are rather grim. Because a predictable consequence of raising interest rates ― increasing the cost of credit and restricting its availability ― is higher unemployment.
Congress, working with a different set of priorities, has decided to boost stock prices by providing a massive corporate tax cut, and accompanied this with much more modest short-term tax cuts for (most) working people, hoping to keep downward pressure on unemployment.
Yellen didn’t like the tax cut and said as much. She was particularly upset over the fact that it creates bigger deficits for the federal government in the face of a significant existing debt load. “I am personally concerned about the U.S. debt situation,” Yellen said at her final press conference, warning that “as population continues to age and the baby boomers retire” government debt “will continue to rise in an unsustainable fashion. ... And I think it does suggest that in some future downturn, which could occur for whatever reason, the amount of fiscal space that could exist for fiscal policy to play an active role will be limited.”
This was an extraordinary statement. It implied that economic conditions, at present, are about as good as we can ever hope for them to be. The Fed is already aiming for higher unemployment by raising interest rates, and any deficit-financed counter-measures, by Yellen’s logic, would just create more supposedly dangerous government debt.
Yellen is surely wrong to suggest that any additional deficits today will inevitably make things worse tomorrow. With interest rates and consumer price inflation near historic lows, now would be a great time to borrow money to rebuild American infrastructure or tackle poverty head-on. It wasn’t the price tag that made the Republican tax cut a bad idea ― putting a great deal of money in the hands of people who are already playing with Bitcoin by the billions, without directly addressing other pressing needs, just isn’t very smart. It offers timid economic expansion, but only by generating still higher inequality and creating greater financial market instability.
And this is the central dilemma of Yellen’s tenure at the Fed. Everything central bankers traditionally rely on to combat economic problems are much more likely to fuel dangerous asset bubbles under conditions of severe inequality. Yellen’s quantitative easing agenda was never going to create the hyperinflationary calamity Republicans predicted ― but giving stock prices a lift, whatever its other benefits, padded the portfolios of the already wealthy. You can’t use it to fix everything.
It is not obvious what exactly Yellen was supposed to do amid the steadfast refusal of a Republican Congress ― and, at times, President Obama ― to address inequality. Ben Bernanke and Alan Greenspan can attest that other Fed chairs have performed far, far worse.
But our deepest economic problems are concerned not merely with creating wealth, but its distribution. Absent direct action on inequality, no Fed chair can hope to perform better.