Thursday, October 31, 2013

Yellen and Yale
Fed Vice Chair Janet Yellen has become the fairy godmother of the bull market. When she speaks, stock prices tend to rise, especially since late 2011. She took office for a four-year term on October 4, 2010. Odds are she will be the next Fed Chair. Yellen and I both received our PhDs from Yale and studied under Professor James Tobin. She graduated in 1971. I graduated in 1976. She’s a liberal. I’m a conservative. She is powerful and can move markets. I write about her power to move the stock market higher.

Rich Miller posted a very interesting article today about Yellen and Yale on Bloomberg. He noted, “As a teaching assistant, Yellen was so meticulous in taking notes during Tobin’s macroeconomic class that they ended up as the unofficial textbook for future graduate students.” I studied from those notes. He also refers to a very interesting speech she presented to a reunion of the economics department in April 1999. It was titled, “Yale Economics in Washington,” and is worth reading.

In the speech, she declared that the liberal Keynesian orthodoxy preached by Tobin had conquered Washington. At the time, she was chair of the President’s Council of Economic Advisers, the post held by Tobin during the Kennedy administration. Here, in brief, is the gospel according to Yellen:

(1) “I will try to make the case that the lessons that we learned here at Yale remain the right and relevant ones for improving economic performance, that Yale-trained economists in Washington are succeeding in making their voices heard, and, where Yale economics has been applied, it is working. … I have noticed that Yalies often have a sharper eye for identifying market failures and greater concern for policies to remedy them than economists from institutions I will leave nameless.”

(2) "The Yale macroeconomic paradigm provides clear answers to key questions dividing macroeconomists along with policy prescriptions. Will capitalist economies operate at full employment in the absence of routine intervention? Certainly not. … On the question of whether monetary and fiscal policy can succeed in moving the economy toward full-employment Yale answers yes in both cases except in exceptional circumstances such as a liquidity trap. … Do policymakers have the knowledge and ability to improve macroeconomic outcomes rather than make matters worse? Yes, although there are lags and additive and multiplier uncertainty with which to contend.”

(3) “Although most Americans apparently loathe inflation, Yale economists have argued that a little inflation may be necessary to grease the wheels of the labor market and enable efficiency enhancing changes in relative pay to occur without requiring nominal wage cuts by workers. The attempt to push inflation too low could permanently raise unemployment and reduce the scope for monetary policy.”

(4) “Having described the key elements of the Yale approach to macroeconomics let me go on to claim that the Yale paradigm is alive, well and succeeding in Washington.”

Yellen and Yale will soon be running the Fed.

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