How Janet Yellen's agenda could transform Washington

Yellen, unlike Greenspan or a pre-2008 Bernanke, is probably the last person you’d hear repeating one of Reagan’s favorite jokes: “The nine scariest words in the English language are: ‘I’m from the government, and I’m here to help.’ ” According to more than a half-dozen longtime friends and colleagues, she has two grand passions that will require government to help in a very big way: reducing chronically high unemployment—which is the focus of her life’s work and is probably the single biggest economic problem in America today—and reining in Wall Street’s excesses. Yellen already appears to be settling the Fed’s eternal debate about the relative threats of unemployment and inflation; she declared bluntly in her testimony that joblessness is the issue of the moment. Based on her past positions, she is also likely to try to alter the discussion in Washington on issues ranging from the size and power of the big banks to the need for a higher minimum wage and extended jobless benefits. And at a time when Obama has declared that income inequality is “the defining challenge of our time,” and polls show that a majority of Americans no longer believe their country offers equal opportunity to all, Yellen brings a raft of well-thought-out—and decidedly activist—views to these issues…

Alongside inequality, chronic unemployment is America’s most pressing economic problem. The bleak backdrop to the latest positive news, the reduction in the unemployment rate to 7 percent, is that devastating numbers of people have simply dropped out of the workforce in despair. And yet Washington policymakers remain ideologically paralyzed over what to do about it. By a number of accounts, no one feels this more intensely than Yellen, who understands not just the human cost to individual lives and families but also the damage that a demoralized workforce can do to the economy as a whole. One of her most important papers, written with her husband, Nobel Prize winner George Akerlof, showed that workers who feel underpaid will be less productive. “She does see long-term unemployment, massive unemployment, as not only an economic problem or in terms of wasted resources but also as a human being,” says John Williams, president of the San Francisco Fed, who was Yellen’s research chief when she ran it. “It is very destructive to families.… This is passionate with her. Among economists, you don’t often see that human side. With her, it’s not just an abstraction, and if you try to treat it too much as an abstraction, she’ll react.”

Williams says he was “mildly chewed out” by Yellen for approaching the mortgage crisis too academically—too much like an economist. “We need to be working our hardest, thinking our best.… This country’s in a crisis. We’re on the precipice, and we need to really focus,” he recalls her saying. Yellen, he adds, is not going to be the type of Fed chief “sitting there wringing her hands and saying monetary policy can’t solve all the world’s problems.”