Guest Post: Kaleb Nygaard on Secretary Yellen's Legacy

Janet Yellen is a policy celebrity now, but her biggest accomplishments may have been her quietest ones, writes Wharton's Kaleb Nygaard

Janet Yellen is unquestionably a historic figure—heading the CEA, the Fed, and now doing a victory lap in the highest economic policy position in the land as Treasury Secretary. The Treasury Secretary has a vast policy purview and the most political visibility of any economic position.

Yet, Kaleb Nygaard—Fellow at the Wharton Initiative on Financial Policy and Regulation and essential follow on all things Fed (and, full disclosure, my good friend)—argues that we should not let this mask her quiet, behind-the-scenes accomplishments at the Fed, many of which came before her relatively uneventful time (not a bad thing!) as Chair. Not only are these accomplishments important, but, he argues, they may even have a bigger legacy than the front-page headlines she’s making today.

Here’s Kaleb:

In December, I wrote, “Janet Yellen’s time as Treasury Secretary will certainly be more consequential than her time as Fed Chair. (Though I’d argue not as consequential as her entire time at the Fed, a subtle but important caveat.)” 

I’d like to take a few paragraphs here to flesh out this caveat to Yellen’s legacy and invite comment. Fed Chair legacies are incredibly important because they play a significant role in shaping future policy decisions. Look at Volcker’s spirit gracing (and Burns’ haunting) Powell’s office today or Bernanke’s presence (and playbook) during the early pandemic days. 

The crux of my argument relies on grappling with the counterfactual of Yellen’s time at the Fed and at the Treasury. What would someone else have done in her position? What’s Yellen’s marginal contribution? Viewed through this lens, I think it becomes quite clear that her contributions at the Fed, when taken as a whole, will have a more lasting impact on the country than her time at Treasury. Let’s look at her policy focuses/accomplishments.

At the Treasury

First Woman. The 78th Treasury Secretary and first woman to hold the position.

Global Corporate Tax Minimum. Leading the OECD push for a global corporate tax rate minimum, which faces an uncertain future in the U.S. given divided government and Republican’s opposition to it.

Russian Sanctions. Managing the U.S.’s sanctions against Russia. I suspect, though don’t know, that most of the major decisions regarding these sanctions were either above or below her paygrade, meaning she either took the advice from the experts she hired/had on staff, and/or Biden’s team had the final say. Though, at a minimum, she certainly made significant contributions to the central bank restrictions.

American Rescue Plan. The $1.9 trillion American Rescue Plan, debated and passed within the first two months of Biden’s presidency, was historically large. But Yellen doesn’t appear to have played a major role in its crafting. It was mostly the result of promises made during the Georgia runoffs that gave Biden the tie-breaking majority in the Senate. One of last year’s Yellen biographies initially reported that she had advocated for a smaller total size, but she denied the reporting, and the final version of the book was updated accordingly. 

Bidenomics. Combines protectionist policies (both carryovers from the Trump administration’s Chinese trade policies and new ones inspired by the war in Ukraine and a potential invasion of Taiwan) and industrial policies (most prominently in the November 2021 infrastructure bill). Although Yellen has defended the turn, I haven’t seen any reporting that she has been an intellectual leader (in public or private) for the supply-side progressivism/abundance agenda movement. If this becomes as successful as its advocates hope in transforming the U.S.’s economy and its position in the world, I don’t think history will look back and give much credit to Yellen for bringing it about. 

At the Fed

First Inflation Target. In 1995-6, Chair Greenspan, interested in hearing thoughts on what the Fed’s inflation target should be, set up a series of debates on the topic. According to FOMC meeting transcripts and Jon Hilsenrath’s reporting for his Yellen/Akerlof biography (pp. 117-120), Yellen played a critical role in convincing not only Greenspan, but also the rest of the FOMC, that it should, as Hilsenrath notes, target “an inflation rate of 2 percent, and no lower.”

Global Financial Crisis Prediction and Apology. While giving testimony to the post-GFC Financial Crisis Inquiry Commission, members of the commission acknowledged that Yellen saw what was coming sooner than others. She responded that although she saw some aspects of the crisis coming, she hadn’t predicted its full scope or depth, “I’m sorry,” she said. “I wish I had, but I didn’t.”

Yellen was unsuccessful in convincing Greenspan the housing issue was worth addressing, but the degree of humility in the apology is more important. It’s this type of humility that leads to (or at least correlates with) someone more willing to listen to outside and oft-overlooked voices, which became hugely important to the Fed in the first Powell term in particular—which I’ll get to below. This humility was also part of the conversation in the 2013 debates about who would succeed Bernanke as Chair.

First Woman. Yellen was the 9th Chair of the Fed since its reorganization in 1935 and first woman to hold the position (also the first woman president of the San Francisco Fed). The economics field is even more male-dominated than STEM, which itself gets a lot of attention for its gender imbalance. I’d argue that the effect on the economics field of being the first woman Fed Chair is larger than as Treasury Secretary. A cabinet job is normally a political position, often rewarded to politician friends of the president. Therefore, although the first woman Treasury Secretary, Yellen is hardly near the top of the chart of women politicians. The Fed Chair, on the other hand, is easily the most visible policy position for an economist and arguably the most powerful economic position in the world, so its impact within the field should be much larger. 

Shift to Employment Focus. Yellen was an early and influential leader in the movement to shift the Fed’s mindset towards the employment half of the dual mandate. The only policy change in the last two decades at the Fed that can rival the importance of this one is the break-the-glass financial crisis toolkit. But in my opinion, it’s close, and they’re clearly intertwined. One of the most memorable anecdotes from Hilsenrath’s biography is when she banged her fist on a meeting table while president of the San Francisco Fed and yelled, “These are fucking people!” at her staff. Hilsenrath writes, “She didn’t want the economists reporting to her to look at the high unemployment rates they were projecting as just a bunch of statistics. The human suffering that persisted after the financial crisis was enormous, and they needed to work at that problem with the same sense of purpose and urgency that they had brought to repairing banks.” (p. xiv) 

She took this approach with her to Washington, taking multiple meetings with groups like progressive employment advocacy group FedUp. Yellen was willing to open up the conversation about issues like minority unemployment and inequality and interact directly with groups not traditionally heard at the Fed—such as labor unions, under- and unemployed individuals, and issue activists. This activity clearly influenced and laid the groundwork for the 2020 monetary policy framework review—both in the listening tour during the review as well as the results themselves. Powell was appointed by Trump, not to redirect the Fed away from where Yellen was going, but rather quite explicitly to be a Republican (and maybe tall, older male) version of Yellen. I think you can’t look at the framework review—or the 2018 pause in interest rate hikes and 2019 decreases—and not see Yellen’s fingerprints all over it.

Conclusion

Looking at each of the accomplishments in the Treasury column, I don’t imagine the list would be very different if Biden had gone with Lael Brainard (the reported runner-up) instead of Yellen. 

In the Fed column, I think it’s clear that both: (a) there are serious long-term impacts to each of these accomplishments at the Fed and therefore for the country, and (b) they largely wouldn’t have happened without Yellen herself. Powell largely continued the track Yellen laid down. And decoupling Yellen’s influence on the institution from other Fed leaders who began their leadership at the tail end of Yellen’s like Brainard, Daly (Yellen’s right hand in San Francisco), and even Kashkari is impossible. 

Yellen’s time as Fed Chair was rather quiet, but her time and contributions to the Fed writ large—when you also look at her time as Governor, San Francisco Fed President, and Vice Chair as well as the impact she left for Powell—were anything but quiet. Her time as Treasury Secretary has been more attention-grabbing, but I believe it will have less of a long-term impact on the institution, the economy, and the economics field. 

But, as I mentioned at the top, I don’t hold this view as gospel and am open to being convinced I’m underselling her work at the Treasury or overselling the impact from her time at the Fed.

Kaleb Nygaard is a Fellow at the Wharton Initiative on Financial Policy and Regulation. He also is the host of “The Reserve,” a central banking podcast focused on the Federal Reserve. He can be reached at kalebnygaard@gmail.com or on Twitter at @KalebNygaard.