Obama made a mistake when he said ‘Mr. Yellen.’ But Mr. Yellen is in fact awesome!

August 9, 2013

Akerlof! (IMF)

President Obama may or may not have been subconsciously tipping his hand on the race to be the next Fed chair when he referred to Fed vice chair Janet Yellen — widely considered a leading contender for the top job — as "Mr. Yellen." But this is as good an occasion as any to point out that the real Mr. Yellen — Ms. Yellen's husband, George Akerlof — is actually a pretty interesting guy, and a very accomplished academic economist in his own right.

• He's most famous for his work on "asymmetric information," or markets where some participants know more than others. His famous 1970 paper, "The Market for Lemons," describes how this works in the market for used cars. In that market, unskilled consumers don't know enough to know which cars work well ("cherries") and which are duds ("lemons"). Thus, they figure that each car they look at is of average quality and offer an average price. That means that it isn't worth it for owners of cherries to put their cars on the market, since they won't get enough for them; they'll only get the amount someone's willing to pay for an average-quality car. That in turn reduces the average quality of cars, and buyers revise down the amount they're willing to pay accordingly. This process continues until you have a market composed entirely of crappy cars —  a "market for lemons."

• Only five years after "The Market for Lemons" came out, Congress passed the Magnuson-Moss Warranty Act, a so-called "lemon law" meant to protect buyers in markets like the one Akerlof described. Akerlof's paper is credited with helping that law pass.

• In 2001, Akerlof shared the Nobel Prize with two other publicly known economists famous for work on imperfect information: Joseph Stiglitz and Michael Spence.

• When in college at Yale, Akerlof was buddies on the school paper with longtime Post editor Robert Kaiser and former senator Joe Lieberman.

• Akerlof wrote a book after the housing crisis, called "Animal Spirits", with Yale economist Robert Shiller, arguing that swings in the collective views of markets are unpredictable yet have huge economic consequences, and the only way to manage them is through steady government intervention. The term is borrowed from Keynes, who had similar views about macroeconomic swings.

• He and Paul Romer wrote a journal article called "Looting" describing cases in which "poor accounting, lax regulation or low penalties for abuse give owners an incentive to pay themselves more than their firms are worth and then default on their debt obligations." Paul Krugman and others have suggested that these dynamics may have helped drive the 2008-9 financial crisis; indeed, Akerlof and Romer were originally trying to describe how certain 1980s financial crises came to be.

• Akerlof and Yellen have collaborated on work on "efficiency wages," or the theory that it may make sense for employers to pay workers more than the market rate so as to improve productivity. Larry Summers, interestingly, has worked on this topic extensively as well, sometimes collaborating with former CEA chair Alan Krueger.

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