Just over four years ago, when Janet Yellen was still chair of the US Federal Reserve, she gave an address at the central bank’s Boston arm.
Fed chairs normally give only two kinds of conference speeches: brief invocations that say nothing, or carefully timed guidance to financial markets about policy. In Boston, however, Ms Yellen pulled on a different lever of power. She told America’s macroeconomists what she was curious about.
This week Joe Biden, the US president-elect, indicated that he would nominate Ms Yellen as his Treasury secretary. She will advise him on spending but decisions are ultimately up to Congress and the White House. Instead, Ms Yellen will have economic sanctions and some financial services supervision in her portfolio. She will be able to enforce tax laws and financial regulation. She will serve as a diplomat, talking to finance ministers she knows from her time at the Fed.
She has already shown, though, that she commands an under-appreciated source of soft power in America. Ms Yellen knows how to get other economists to think the way she does.
It is impossible to make policy in Washington without first consulting a macroeconomist. They are scattered around the capital like priests in the Holy See. They sit on the president’s two economic councils, in the White House’s budget office, on the staff of the joint economic committee in Congress. When out of power, they retreat to think-tanks in the city — the monasteries of their respective orders — or to the bishopric of an academic chair in Massachusetts, California or Illinois.
They do not just offer advice. They make predictions. Macroeconomists at the Congressional Budget Office model the effects of legislation on economic growth and tax revenue. The answers those models supply can kill a spending bill before it ever gets to a vote. At the Fed and the regional Fed banks, staff macroeconomists generate predictions that inform policy. Some of their analysis is published for investors to interpret. There are macroeconomists making predictions at the departments of commerce, at labour and at agriculture.
They all report up, through their agencies. But they also report out, to each other. They trained together. They publish papers together. They referee those papers. They talk to their own mentors. They eat dry chicken together every January at the huge conference of the American Economic Association, where, as president this year, Ms Yellen has been pushing for more diversity in the profession.
Macroeconomics is not just a social science. It’s a culture. You could argue that sociologists and historians should also have this much access to power, but they don’t, and they won’t anytime soon. You could argue that sociologists and historians should also have this much access to power, but they don’t. If you can shift the entire culture of macroeconomists, just a little — and get them to change their models — then you can alter how they make predictions and give advice. And that will change the conversation at every agency in Washington.
That is exactly what Ms Yellen was doing in Boston in 2016. She suggested that macroeconomists thought about whether a collapse in demand — when people suddenly stop spending money — might discourage companies over the long term from building more capacity to supply products. She asked whether it therefore made sense to act “aggressively” to keep Americans spending after a shock. She suggested looking at how different groups of people behave differently during a recession — whether the poor pull back while the rich spend. And she asked whether economists really understood what created inflation.
None of these were new questions. Macroeconomists had already been publishing and debating at conferences about how their models had failed during the global financial crisis, and the slow recovery that followed it. But Ms Yellen defined the questions clearly for the profession, said Maurice Obstfeld, a former chief economist at the IMF, now at the University of California at Berkeley.
Raghuram Rajan, who ran the Indian central bank and is now at the University of Chicago, added: “The ability to ask the right questions is extremely important.
“There are a lot of people in the system who can then work to give you the answers.”
Ms Yellen, who previously ran the Council of Economic Advisers under Bill Clinton, has been in Washington long enough to know that to change policy over the long term, you do not push the other senior economists around. Instead, you signal to the new PhDs where they might want to run out ahead and gather new research. She was known for this at the Fed, as well.
Now, eight months into a pandemic, following a collapse in demand, there is new academic work to point to on the importance of generating demand after a shock, and keeping it high into the recovery. As the rich and poor respond differently, there is a wider acceptance of economic models that accommodate those differences. The Fed has shifted its focus away from fighting inflation. As Ms Yellen prepares for another new job, she has already helped write the catechism the entire city will follow.