WASHINGTON -- Following President Barack Obama's failed effort to install his former economic adviser Larry Summers as Federal Reserve chairman, Janet Yellen, the central bank's vice chair, has emerged as the frontrunner to succeed Ben Bernanke in the Fed's top spot. Sen. Elizabeth Warren (D-Mass.) and dozens of other Democrats in both the House and Senate have endorsed Yellen to be the next Fed Chair.
While supporting Yellen has become a cause célèbre for progressives opposed to Summers' regulatory hostilities, Yellen supported a host of economic policies during the Clinton era that have since become broadly unpopular. She backed the repeal of the landmark Glass-Steagall bank reform and she supported the 1993 North American Free Trade Agreement. She also pressured the government to develop a new statistical metric intended to lower payments to senior citizens on Social Security.
These policies all enjoyed substantial support among economists during the 1990s, although many of those who endorsed them at the time have since recanted or criticized their implementation.
Yellen's reputation as a more consumer-friendly economist than Summers rests largely on her tenure as president of the San Francisco Federal Reserve during the Bush years, when she identified the emerging housing bubble and called for deploying stronger regulation to limit its damage.
But in the 1990s, Yellen and Summers both served in the Clinton administration, and pursued many of the same policies. Yellen began serving as Chair of President Bill Clinton's Council of Economic Advisers in 1997, and publicly endorsed repealing Glass-Steagall's separation between traditional bank lending and riskier securities trading during her Senate confirmation hearing. Yellen referred to deregulating banking as a way to "modernize" the financial system, and indicated that breaking down Glass-Steagall could be the beginning of a process allowing banks to merge with other commercial and industrial firms.
"I do believe it's important to modernize the financial system at this time," Yellen said in response to a question from then-Sen. Lauch Faircloth (R-N.C.). "And on the issue of commerce and banking, I would begin by saying that I am not philosophically opposed to mixing banking and commerce. On the other hand, it seems to me that we have a lot more experience and knowledge about financial activities, and that most of the synergies are probably between banking and other lines of business that are financial in nature. I would think that that's an appropriate first step."
The Senate passed the repeal of Glass-Steagall in November 1999 by an overwhelming 90 - 8 margin. By allowing traditional banks to link up with securities firms and insurance companies, the legislation has been blamed for bringing on the too-big-to-fail era. Citibank lobbied aggressively for the repeal, and merged with the Travelers insurance giant soon after the bill passed. The resulting behemoth, Citigroup, received billions in bailout funds during 2008 and 2009.
In the years since 1997, the barrier between banking and commerce has been repeatedly perforated. This year, beer brewers have accused Goldman Sachs of deliberately manipulating the physical supply of aluminum in order to rig profitable bets on securities tied to its price. In the 1990s, banks were barred from owning physical commodities.
A full transcript of Yellen's Feb. 5, 1997 confirmation hearing is available here. At the same event, Yellen endorsed establishing a new statistical metric that would allow the federal government to reduce Social Security payments over time, by revising the consumer price index, or CPI, the government's standard measurement for inflation.
"I agree with the principle that Social Security and the tax system should be appropriately indexed to take account of movements in the cost of living. I believe we need as accurate a measure as we can possibly have of the cost of living," Yellen said. "I believe that we are now obtaining broad agreement among professionals that the CPI does overstate the actual increase, properly measured, in the cost of living."
Once in office, Yellen put that belief into action, writing a letter to the Bureau of Labor Statistics encouraging it to devise a cheaper inflation metric. BLS Commissioner Katharine Abraham responded that the agency had been testing the new measure in an experimental mode, and planned to deploy it in 1998.
At the time, this new metric, known as chained CPI, was being aggressively pursued by House Speaker Newt Gingrich (R-Ga.), following then-Fed Chair Alan Greenspan's criticism of the existing cost-of-living calculations. Greenspan and other economists had argued that the consumer price index overstated cost-of-living changes by failing to calculate the way that households substitute different goods for each other when prices rise. While BLS developed the statistic, it has not been applied to Social Security. Some economists argue that a more appropriate inflation measure for Social Security would look at price changes for elderly people, and the BLS does track an experimental metric addressing inflation for older Americans. Such a metric is not useful for politicians looking to cut Social Security spending, however, as it shows that living expenses tend to go up more for older people, driven in part by health care spending.
Chained CPI has been a major point of contention in budget negotiations between Obama and congressional Republicans, with both camps alternating between supporting the measure and decrying it. Adopting Chained CPI to cut Social Security is extremely unpopular with both the general public and senior citizens.
Before Yellen joined the Clinton administration, she was a respected economist at the University of California at Berkeley. In 1993, she joined dozens of other academics in signing a letter to Clinton advocating for the North American Free Trade Agreement. The letter was signed by prominent conservative economists including Milton Friedman, but also by many economists who are now considered progressive, including Paul Krugman and former Obama adviser Christina Romer. Krugman has since expressed disappointment with some of the trade pact's effects.
"The agreement will be a net positive for the United States, both in terms of employment creation and overall economic growth," the letter reads. "Specifically, the assertions that NAFTA will spur an exodus of U.S. jobs to Mexico are without basis. Mexican trade has resulted in net job creation in the U.S. in the past, and there is no evidence that this trend will not continue when NAFTA is enacted. Moreover, beyond employment gains, and open trade relationship directly benefits all consumers."
NAFTA became the template for all U.S. trade agreements inked outside the World Trade Organization. It has been criticized for its weak labor, consumer and environmental protections, which encourage companies to move jobs and operations to countries with lower regulatory standards. NAFTA also gave corporations the political power to directly challenge a nation's laws and regulations before an international tribunal. This marked a departure from WTO treaties, where only sovereign nations -- not corporations -- were permitted to challenge each other's regulatory regimes.