Sellin’ Yellen

Peter Drucker taught that the most effective people stay ruthlessly focused and do “one thing at a time.” But by legal mandate, officials at the Federal Reserve must do two: pursue maximum employment and keep prices stable.

The question on many minds is how well Janet Yellen, chosen this week by President Barack Obama to be the next leader of the Fed, will perform this difficult balancing act.

Yellen’s nomination has, by and large, been greeted enthusiastically. The markets like Yellen, as do many in the media.

The belief among Yellen supporters is that the Fed under her watch will continue maintaining low interest rates in order to, in her words, allow “progress in attaining maximum employment to take center stage.”

“Those policies, which she has helped to create and sustain, have undeniably boosted the flagging economy,” the New York Times editorial page declared. An elated Dylan Matthews of the Washington Post called Yellen, currently the Fed’s vice chair, “perhaps the most qualified Fed chair in history.”

Still, not everyone is so pleased. Inflation hawks, in particular, are skeptical of the president’s pick.

“Janet Yellen, like Ben Bernanke before her, seems completely unaware of the importance of honest prices,” Hunter Lewis asserted in Forbes. “How can we expect the economy to recover under her stewardship?”

Drucker saw enough of inflation, deflation and unemployment to understand the dilemmas of a central banker. In the 1920s, he watched as hyperinflation took hold in Austria, when it was “considered impossible to stop the printing press and thereby increase already catastrophic unemployment.” In the 1930s, he witnessed a worldwide deflationary depression. And in the 1970s he observed unemployment combined with inflation—a wicked combination known as “stagflation.”

Though highly skeptical of economists to set the right policies (a topic we’ve explored before), Drucker did believe that the Fed had an important role to play. “The economy needs a central bank that is a specific organ for the creation and management of money and credit,” he wrote in The Age of Discontinuity.

But Drucker recognized that the Fed often has much less control over outcomes than it likes to believe. For instance, in the year 1966, the Fed tried to put the breaks on an industrial boom while protecting housing construction, but it wound up heating up the boom and stopping housing construction. “In retrospect, it is easy to see what went wrong,” Drucker wrote. “But then everything is obvious to hindsight.”

Drucker also worried that central bankers had a tendency to condone inflation, which he considered to be poisonous. In fact, he declared in The Pension Fund Revolution that “there is not the slightest evidence for the belief, popular among ‘liberal economists’ these last 30 years, that a ‘little inflation’ means good times and economic growth.”

And he anticipated tensions over this question: “What is the lesser cost: unemployment, even at a fairly high level, or inflation?”

What do you think of the nomination of Janet Yellen to be chair of the Federal Reserve?