Janet Yellen: The Economist’s Economist

I’ve been remiss in not writing anything about Janet Yellen’s nomination to head the Federal Reserve; partly that was because I wasn’t sure exactly what to say, or how to explain why I and so many other economists are really happy with her selection. But Noam Scheiber at The New Republic hits the nail on the head, writing in a recent article that what’s so encouraging about Ms. Yellen is not just her track record but who she hangs out with. She is very definitely the economists’ candidate here.

Everyone else floated for the job has, in one way or another, been close to Wall Street – even Larry Summers, who has a formidable record as a research economist but also a formidable record of making money consulting for financial firms. And while you can make the case in normal times that a deep knowledge of finance, the markets and all that is good, there are two fundamental truths here: Wall Street is largely responsible for the mess we’re in, and financial types have been consistently wrong – not just failing to see the risks before the crisis, but in diagnosing what would come next.

Above all, they took the position that bailing out the banks would pave the way to recovery more broadly, and it hasn’t. Meanwhile, sensible academic macroeconomics has, as I often point out, performed very well – and Ms. Yellen is very much in that camp. So Ms. Yellen is, if you like, a member of my tribe here, and I think that’s a very good thing in today’s economy. The fact that her appointment also makes history – she’d be the first woman to lead the Fed – is just gravy.

Thoughts on the 2013 Nobel

It’s an old jibe against economics that it’s the only field where two people can win the Nobel for saying opposite things; even the people making that jibe, however, probably didn’t envisage those two guys sharing the same prize, which is kind of what happened this year. But I am actually fine with the prize.

Eugene Fama’s work on efficient markets was essential in setting up the benchmark against which alternatives could be tested; Robert Shiller did more than anyone else to codify the ways in which the efficient market hypothesis fails in practice. If Mr. Fama has said some foolish things in recent years, no matter; he did earn this honor, as did Mr. Shiller.

As for Lars Peter Hansen, his work involves econometric methods on which I have no expertise at all, but I’ll trust the experts who consider it great work. So, all good – and you actually have to admire the prize committee for finding a way to give Mr. Fama the long-expected honor without seeming as if they are completely out of touch with everything going on around them.