'Ms. Yellen, a former professor of economics at Berkeley, has openly proclaimed her views on economic policy, and those views deserve very careful scrutiny. She asks: "Will capitalist economies operate at full employment in the absence of routine intervention?" And she answers: "Certainly not."
Janet Yellen represents the Keynesian economics that once dominated economic theory and policy like a national religion -- until it encountered two things: Milton Friedman and the stagflation of the 1970s.
At the height of the Keynesian influence, it was widely believed that government policy-makers could choose a judicious trade-off between the inflation rate and the rate of unemployment. This trade-off was called the Phillips Curve, in honor of an economist at the London School of Economics.
Professor Milton Friedman of the University of Chicago attacked the Phillips Curve, both theoretically and empirically. When Professor Friedman received the Nobel Prize in economics -- the first of many to go to Chicago economists, who were the primary critics of Keynesian economics -- it seemed as if the idea of a trade-off between the inflation rate and the unemployment rate might be laid to rest.
Nevertheless, the Keynesian economists have staged a political comeback during the Obama administration. Janet Yellen's nomination to head the Federal Reserve is the crowning example of that comeback.
Ms. Yellen asks: "Do policy-makers have the knowledge and ability to improve macroeconomic outcomes rather than making matters worse?" And she answers: "Yes."
The former economics professor is certainly asking the right questions -- and giving the wrong answers.
Her first question, whether free market economies can achieve full employment without government intervention, is a purely factual question that can be answered from history. For the first 150 years of the United States, there was no policy of federal intervention when the economy turned down.
No depression during all that time was as catastrophic as the Great Depression of the 1930s, when both the Federal Reserve System and Presidents Herbert Hoover and Franklin D. Roosevelt intervened in the economy on a massive and unprecedented scale.'