1.) Real stories, and a new tone.

It’s hard to imagine Bernanke or Greenspan giving a speech that cites the real experiences of three Americans whose lives have been severely impacted by the 2007-2009 recession and the slow recovery since then.

From Yellen’s speech:

That is what Dorine Poole learned, after she lost her job processing medical insurance claims, just as the recession was getting started. Like many others, she could not find any job, despite clerical skills and experience acquired over 15 years of steady employment. When employers started hiring again, two years of unemployment became a disqualification. Even those needing her skills and experience preferred less qualified workers without a long spell of unemployment. That career, that part of Dorine’s life, had ended.

For Dorine and others, we know that workers displaced by layoffs and plant closures who manage to find work suffer long-lasting and often permanent wage reductions. Jermaine Brownlee was an apprentice plumber and skilled construction worker when the recession hit, and he saw his wages drop sharply as he scrambled for odd jobs and temporary work. He is doing better now, but still working for a lower wage than he earned before the recession.

Vicki Lira lost her full-time job of 20 years when the printing plant she worked in shut down in 2006. Then she lost a job processing mortgage applications when the housing market crashed. Vicki faced some very difficult years. At times she was homeless. Today she enjoys her part-time job serving food samples to customers at a grocery store but wishes she could get more hours.

Vicki Lira is one of many Americans who lost a full-time job in the recession and seem stuck working part time. The unemployment rate is down, but not included in that rate are more than seven million people who are working part time but want a full-time job. As a share of the workforce, that number is very high historically.

Now, I don’t necessarily even want this kind of personal touch from a Fed chair. It’s too easy to pick individual examples that can’t be generalized to convey broader truths, and the last thing the Fed needs to do is give the general public a sense that they’re making decisions based on anecdotes.

On the other hand, these examples do seem to reflect broader truths for workers of a certain age and certain skill sets.

2. Did we really need such a lengthy rationale for believing that there is still slack in the economy?

Yellen’s speech today was about 3,800 words. About 1,100 of those words were devoted to explaining why Yellen believes there is “slack” in the labor market. But that word count doesn’t even include the anecdotes above, which are part of the same lengthy passage.

That’s an awful lot of words simply to justify the pretty obvious fact that cyclical unemployment is still having a profound impact on the U.S. economy.

Here’s just one point in Yellen’s litany of reasons why we should believe there is slack in the labor market:

One form of evidence for slack is found in other labor market data, beyond the unemployment rate or payrolls, some of which I have touched on already. For example, the seven million people who are working part time but would like a full-time job. This number is much larger than we would expect at 6.7 percent unemployment, based on past experience, and the existence of such a large pool of “partly unemployed” workers is a sign that labor conditions are worse than indicated by the unemployment rate. Statistics on job turnover also point to considerable slack in the labor market. Although firms are now laying off fewer workers, they have been reluctant to increase the pace of hiring. Likewise, the number of people who voluntarily quit their jobs is noticeably below levels before the recession; that is an indicator that people are reluctant to risk leaving their jobs because they worry that it will be hard to find another. It is also a sign that firms may not be recruiting very aggressively to hire workers away from their competitors.

3. The markets liked the speech, but is it “dovish”?

The markets jumped today, and the well-received speech was described as “dovish” in a post at the WSJ’s MoneyBeat.

Indeed, Yellen made it clear that the Fed will continue to take steps to keep interest rates low to buoy investment and employment:

Earlier this month, the Fed reiterated its overall commitment to maintain extraordinary support for the recovery for some time to come.

This commitment is strong, and I believe the Fed’s policies will continue to help sustain progress in the job market.

But hold on there a second. Yellen mentions inflation risks, but never clearly says that the inflation rate has been running consistently below the Fed’s target.

So while Yellen talks about “extraordinary” support for the economy, it looks to me like the Fed is making very conservative choices. If the Fed really wanted to boost the economy quickly, there’s room to do so without risking overly high inflation.

At the current rate of improvement, we’ll likely be into 2016 before the unemployment rate is in the 5.2 to 5.6 percent range that Yellen suggests would represent something close to full employment. Even that number seems high, frankly — it represents I think a cynical view of the American workforce.

Despite Yellen’s attempt to show compassion for individual Americans, she did not today advocate — or even hint at — taking bolder steps to strengthen the labor markets.

Not much here for Dorine, Jermaine, and Vicki — and all the other Dorines, Jermaines, and Vickis out there — to latch onto.

Yellen would have been and still would one day be a viable option to take over the chair from Ben Bernanke. None of the Federal Reserve members were ahead of the game in understanding the housing bust, but Yellen at least had a good sense of what was happening in real time. We know that from the recently released minutes of the Fed Open Market Committee’s minutes from 2007.

From the NYT’s Days Before Housing Bust, Fed Doubted Need to Act (with emphasis added):

More than five years later, the Fed continues to prop up the financial system, and the transcripts of the 2007 meetings, released after a standard five-year delay, provide fresh insight into the decisions made at the outset of its great intervention.

They show that Mr. Bernanke and his colleagues continued to wrestle with misgivings about the need for action, because at the time there was little evidence of a broader economic downturn. Several officials worried that the economy would instead overheat, causing inflation to rise. By December, as the Fed began to act with consistent force, the economy was already in recession.

Officials lacked clear information, relying on anecdotes like a reported conversation with a Wal-Mart executive who said Mexican immigrants were sending less money home. They were also limited by economic models that could not simulate the problems that seemed to be unfolding. […]

“Thereâ€s no guarantee whatsoever that this thing will do what weâ€re trying to do,” Donald Kohn, then the Fedâ€s vice chairman, said at a meeting later in August. As the Fed debated a strategy to encourage bank lending, he said, “I just think itâ€s worth giving it a try under the circumstances.”

But eventually, Mr. Bernanke and his colleagues concluded that they could see the future, that they did not like what they saw and that it was time to act.

“At the time of our last meeting, I held out hope that the financial turmoil would gradually ebb and the economy might escape without serious damage,” Janet L. Yellen, then president of the Federal Reserve Bank of San Francisco, said in December. “Subsequent developments have severely shaken that belief. The possibilities of a credit crunch developing and of the economy slipping into a recession seem all too real.”

That was the month later dated as the beginning of the recession.

In today’s speech, Yellen outlined the current economic woes in clear terms that began by explaining the reasons for the slow recovery. Nothing new here to regular readers, but still worth a look.

Yellen talks of the usual tailwinds that help the economy out of recession:

• fiscal policy (government spending),
• the lack of new residential investment,
• and confidence.

All of those were hampered by conditions this time. A few excerpts:

The first tailwind I’ll mention is fiscal policy. History shows that fiscal policy often helps to support an economic recovery. […]

However, discretionary fiscal policy hasn’t been much of a tailwind during this recovery. In the year following the end of the recession, discretionary fiscal policy at the federal, state, and local levels boosted growth at roughly the same pace as in past recoveries, as exhibit 3 indicates. But instead of contributing to growth thereafter, discretionary fiscal policy this time has actually acted to restrain the recovery. State and local governments were cutting spending and, in some cases, raising taxes for much of this period to deal with revenue shortfalls. At the federal level, policymakers have reduced purchases of goods and services, allowed stimulus-related spending to decline, and have put in place further policy actions to reduce deficits. I was relieved that the Congress and the Administration were able to reach agreement on avoiding the full force of the “fiscal cliff” that was due to take effect on January 1. While a long-term plan is needed to reduce deficits and slow the growth of federal debt, the tax increases and spending cuts that would have occurred last month, absent action by the Congress and the President, likely would have been a headwind strong enough to blow the United States back into recession. Negotiations continue over the extent of spending cuts now due to take effect beginning in March, and I expect that discretionary fiscal policy will continue to be a headwind for the recovery for some time, instead of the tailwind it has been in the past.

A second tailwind in most recoveries is housing. Residential investment creates jobs in construction and related industries. Before the Great Recession, housing investment added an average of 1/2 percentage point to real GDP growth in the two years after each of the previous four recessions, considerably more than its contribution to growth at other times.

During this recovery, in contrast, residential investment, on net, has contributed very little to growth since the recession ended. The reasons are easy to understand, given the central role that housing played in the Great Recession. […]

Beyond the direct effects on residential investment, the extraordinary collapse in house prices resulted in a huge loss of household wealth–at last count, net home equity is still down 40 percent, or about $5 trillion, from 2005.7 […]

Another important tailwind in most economic recoveries is one that tends to be taken for granted–the faith most of us have, based on history and personal experience, that recessions are temporary and that the economy will soon get back to normal. Even during recessions, households’ expectations for income growth tend to be reasonably stable, which provides support for overall spending. In the most recent recession, however, surveys suggest that consumers sharply revised down their prospects for future income growth and have only partially adjusted up their expectations since then.

In addition to noting these weak tailwinds that usually get us out of recession, Yellen also details a few headwinds:

The fiscal and financial crisis in Europe has resulted in a euro-area recession and contributed to slower global growth. Europe’s difficulties have blunted what had been strong growth in U.S. exports earlier in the recovery by sapping demand worldwide. […]

Long-term unemployment is also a great concern because it has the potential to itself become a headwind restraining the economy. Individuals out of work for an extended period can become less employable as they lose the specific skills acquired in their previous jobs and also lose the habits needed to hold down any job. Those out of work for a long time also tend to lose touch with former co-workers in their previous industry or occupation–contacts that can often help an unemployed worker find a job. Long-term unemployment can make any worker progressively less employable, even after the economy strengthens.

Yellen believes that our current high unemployment is cyclical, not structural. In other words, she thinks that an increase in aggregate demand will allow unemployment to come back to historical norms.

She details why she thinks Fed actions have been effective — even if not nearly as powerful as necessary to drive us toward a faster recovery.

Her conclusion:

It will be a long road back to a healthy job market. It will be years before many workers feel like they have regained the ground lost since 2007. Longer-term trends, such as globalization and technological change, will continue to pose challenges to workers in many industries.

Let me close with some words of encouragement. The job market is improving. The progress has been too slow, but there is progress. My colleagues and I at the Federal Reserve are well aware of the difficulties faced by workers in this slow recovery, and we’re actively engaged in continuing efforts to promote a stronger economy, more jobs, and better conditions for all workers.

And a few of the graphs from her talk: