January 2008 Issue
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Banker's Hours

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Like scientists and doctors, economists often talk in jargon that only their colleagues can translate. No doubt Charlie Evans knows intimidating terminology and can throw it around in meetings, but he has an unusual ability to articulate economic subtleties in a lucid and easygoing way. His approach is a good omen for public understanding of monetary policy. On September 1, he became the ninth president and CEO of the Federal Reserve Bank of Chicago, one of the 12 regional banks in the Federal Reserve System that constitute the central bank of the United States.

Many people confuse the Federal Reserve with the Treasury Department, says Doug Tillett, vice president of the Chicago Fed’s Public Affairs Department. America’s currency, he explains, “is created by the Treasury Department; we put it into circulation and serve as fiscal agent for the government by managing the checkbook. In this reserve bank, and they’re all different, on any given day we may be sitting on somewhere between eight and $10 billion in cash. And some portion of the $13 trillion U.S. economy is moving in the form of electronic payments through our wires—our veins—every 24 hours.”

However necessary it may be, most of us think of banking as boring. Yet Evans manages to make it fascinating as he describes the intricate ways a nation links up through its central banking system. With his lively anecdotes and self-deprecating humor, he sounds like actor Alan Alda. He relates a conversation he had with the head of his undergraduate honors program. Evans told him (late in the spring semester of his senior year) that he had been working without guidance on his honors thesis: “He said, ‘Oh my God! What have you been doing?’ And I told him about my research, and he thought for a moment and said, ‘Well, that doesn’t sound so bad.’ After skimming through the first few pages of my draft, he added, ‘Well, this is actually pretty good.’”

It was during that college honors course when economics captured Evans’ imagination. Previously, he had experienced the field’s big picture only in a “not very interesting” course back in high school. He attended T. C. Williams High in Alexandria, Va., a few years after the school became famous for its integrated football team—a story later dramatized in the Denzel Washington movie Remember the Titans.

The “not very interesting” course gave Evans his first academic glimpse of how supply and demand influence society. Already, he had witnessed high-level finance in his father’s work as CFO of a life insurance company. “My father was quite intelligent and successful at what he did,” says Evans. But when Evans began to study abstruse details of national economics in college, his dad would ask in puzzlement, “Now, Charles, what is it you’re writing about?”

The imagination of young Charlie had been captured by a topic to which most of us give only the occasional grumble. He was drawn to macroeconomics—the study of the behavior of an entire national economy, as opposed to the microeconomics of how you balance your checkbook or how a toy store stays afloat until the Christmas season. Most scholars attribute the beginning of macroeconomics to John Maynard Keynes’ analyses of the Great Depression. Keynes was followed by Dutch economist Jan Tinbergen, who after World War II developed the first comprehensive national economic model in the Netherlands. Soon, modifications to Tinbergen’s approach were being applied internationally. From Evans’ first exposure to the field, he “found an awful lot of power in thinking about how resources are allocated through market mechanisms and prices.”

Sparks from his high school economics class caught fire when Evans signed up for the honors program as a junior at the University of Virginia. The school’s two-year honors program required no core classes and no exams until just before graduation. Evans could attend seminars and audit graduate-level courses, so he began to seriously investigate how national financial policies affect every level of society.

There was a problem, however. About the time that his friends were preparing to kick back and drink beer, Evans found himself with inadequate records of his honors-class studies, leading to the professor’s outburst. But it turned out that his senior thesis—about different models of how education contributes to productivity—passed with flying colors. He graduated with high honors. During his last year, he also met a woman named Ann Leavitt, whom he eventually married.

After college, Evans returned to Alexandria, where he spent three years working for defense consulting firms. But what he really wanted to do, he decided, was to dig more deeply into economics. So in 1983, he began graduate school for an MBA and PhD. He chose Carnegie Mellon, he says, primarily for its “very well-respected faculty.” He especially liked its focus on macroeconomics and econometrics, the application of quantitative procedures such as statistical analysis to the study of economic principles. He also liked the teacher/student ratio; there were only four people in the incoming class of his economics program.

Within macroeconomics, one of the most influential theories of recent decades has been “real business cycle,” or RBC theory, which concentrates on relatively short-term fluctuations in national income rather than more permanent income growth over time. Like every other economic model, RBC analyzes investment, unemployment, income, inflation, and international trade. When Evans was at Carnegie Mellon in the 1980s, RBC was the hot new model.

One of Evans’ professors, Finn Kydland co-wrote with his Carnegie Mellon colleague, Edward Prescott, what Evans calls “the path-breaking paper” on RBC. “We found,” notes Prescott, “that productivity variations, which depend upon changes in the stock of knowledge and upon changes in the regulatory and legal environment, were the most important factor giving rise to business cycle fluctuations in the United States in the 1954–79 period.”

“Their work,” says Evans, “was the first to begin to show that simple models along those lines went pretty far in explaining business cycles.” The idea was controversial. RBC proponents maintained that, for example, government should not intervene in a recession because occasional economic downturns are part of the system’s long-term self-balancing. Like Freudian psychology or any other attempt at a comprehensive worldview, the first incarnation of RBC proved too monolithic in its generalizations and was soon being reality-checked by other economists, including Kydland and Prescott themselves.

“It was an exciting time to be in graduate school,” recalls Evans, “and it was an exciting field that had really just begun to emerge.” Advised by professors Martin Eichenbaum (who later became his collaborator in Chicago) and Bennett McCallum (now H. J. Heinz Professor of Economics at Carnegie Mellon’s Tepper School of Business), Evans began work on his dissertation by performing statistical tests on various data sets. If RBC was correct, he reasoned, policy variables should have no forecasting ability for technology advancement.

“But,” he adds dramatically, “I found that things like money growth and taxes and fiscal policy did have some explanatory power.” After surveying much of the RBC data, Evans went to McCallum and said, “I think I found something interesting.”

What Evans had found, recalls McCallum, “was actually counter to the real-business- cycle argument.” This was not the outcome that either Evans or McCallum expected. Although Evans’ work didn’t invalidate RBC theory, it demonstrated that modifications needed to be made. “Charles’ work, and his work with Eichenbaum,” says McCallum, “has certainly pushed things much farther in that direction.”

“Subsequently,” Prescott points out, “the profession learned that taxes are the second most important contributor [to business cycle fluctuations] and that the Fed is a minor contributor to fluctuations.” Prescott and Kydland would ultimately share the 2004 Nobel Prize in economics for their work.

Evans earned his MBA from Carnegie Mellon in 1985 and his PhD in 1989—an excerpt from his thesis was published in the field’s esteemed Journal of Monetary Economics. Then a Carnegie Mellon connection drew him to Chicago. After a couple years of teaching at the University of South Carolina, he received a call from one of his former advisors, Eichenbaum. He had been working with the research department at the Federal Reserve Bank of Chicago. He told Evans that the bank had changed the composition of its research department and was working toward a more academic approach. It might be a good fit for Evans, he suggested.

Although he enjoyed teaching, Evans found the new opportunity irresistible. For someone fascinated with economic policy, the FRB is the center of the universe. The banks conduct regional and national research, formulate monetary policy, supervise and regulate banks and bank holding companies, and promote a smooth and efficient system of national payments, including cash, check, and large-value electronic transfers between financial institutions.

Evans went to work there in 1991 as an economist in the research department. Not long after his arrival, he teamed up with Eichenbaum and another of his former Carnegie Mellon professors, Larry Christiano. They began to explore how monetary policy has historically affected the U.S. economy. Employing statistical methods, they traced the effects of unusual policy decisions on the rest of the economy. They examined different episodes in history, trying to decipher how during periods of recession a particular economic policy influenced the real world of income, unemployment, and gross domestic product. Their collaboration has produced many noteworthy publications, including articles in the Journal of Political Economy and the Handbook of Macroeconomics.

Meanwhile, Evans was experiencing a series of promotions from senior researcher to assistant VP to head of the macroeconomic team to director of research. In September, he received the ultimate promotion—he became president and CEO. Communication is a key part of his new job. During his 16 years with the Fed, he has learned how to explain the workings of the national economy to corporate leaders and foreign government officials. He regularly meets with central banks and regulatory agencies from around the world. A recent Chicago conference on globalization and financial markets was co-sponsored by the International Monetary Fund.

His responsibilities are local and regional as well as national and international. As set up by Congress in 1913, each bank in the Federal Reserve System is actually a private corporation chartered by the government, with its own board of directors. Each regional bank covers a geographical district rather than a group of states. The Seventh District, headquartered in Chicago, includes most counties in northern Illinois and Indiana, the state of Iowa, as well as most of southern Michigan and Wisconsin. Besides dealing with national issues like access to credit and sub-prime mortgages, each area has its unique concerns. The Chicago Fed’s region includes, for example, Detroit’s ailing auto industry.

In his new position, as before, Evans points out, he finds himself asking questions as often as giving answers. For him, the work is still about intellectual excitement as much as anything else. “My research background has prepared me and made me curious about a lot of different topics as they relate to monetary policy,” he says simply.

Since Evans left Carnegie Mellon, McCallum has been watching his former student’s ascent through the ranks. “He has developed tremendously since he went to Chicago,” says McCallum. “He’s just blossomed.” Nobelist Prescott agrees. “A president of a bank, to be informed, has to have people around doing research,” he says. “Otherwise, you’re going to be out of it. You’ve got to know whether what people say makes sense. There are a lot of snake oil salesmen out there. You have to cut through that.”

Prescott, who today serves as a senior monetary advisor for the FRB of Minneapolis, believes Evans is fully prepared, citing his strong combination of acumen and experience. “I think his position is an important one, and I think he’ll handle it well.

Michael Sims is a freelance journalist, author, and regular contributor to this magazine. His latest nonfiction book, Apollo’s Fire (Viking), was released nationally this fall.

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Paul Little

I majored in economics in college(only a bachelor's) That was thirty years ago. I still count on J.M. Keynes as a hero! But boy the info. here has really make me feel inadequate! But my real focus and comment is selfish in nature. I have a son who is an architectural major. Harvard and the other Ivies are lowering tuition or no tuition for students whose parents income is under 50K. Why can't CMU with obviously economically smart alumni such as Mr. Prescott find a way? Paul Little