What Biden’s Pick of Yellen Means for the Economy and Stimulus

By Yuval Rosenberg

What Biden’s Pick of Yellen Means for the Economy and
Stimulus

Janet Yellen has had a long and distinguished career as an
economist, from the halls of academia to the White House to the
Federal Reserve. Her next job, as Neil Irwin suggests at
The Upshot, may be her toughest one yet. Yellen is
reported to be President-elect Joe Biden’s pick for Treasury
secretary, meaning she will have a key role in helping the incoming
administration fight the economic devastation wrought by the
coronavirus pandemic.

“As Treasury secretary, Ms Yellen will be forced to enter the
political fray more than in her previous roles,” James Politi and
Colby Smith write in the
Financial Times. “Although she faced frequent grillings
from Congress as a Fed official, including her own confirmation
hearing, she will now have to negotiate with recalcitrant
Republicans measures to boost the economy, and defend them to a
deeply polarised American electorate.”

A pioneering pick: Yellen, 74, is currently an economist
at the Brookings Institution. A
pioneer throughout her career, she would be the
first woman to head the Treasury Department since it was created in
1789. She was the chair of the Federal Reserve from 2014 to 2018 —
the first woman ever to hold that job, too — and served as head of
President Bill Clinton’s Council of Economic Advisers in the late
1990s. Yellen would be the first person ever to serve in the top
posts at the White House Council of Economic Advisers, the Federal
Reserve and Treasury.

“If confirmed by the Senate as Treasury secretary, Janet Yellen
will be among the most accomplished people to take over the big
office at 1500 Pennsylvania Avenue in the 231-year history of the
department,” Irwin writes. “Few people in any era have served at
the highest levels of economic policymaking for as long, and with
as much distinction.”

Yellen’s resume is somewhat unusual for a Treasury chief. “Her
pre-government background came largely as an academic economist and
monetary policy expert. The top Treasury slot often goes to people
— until now all men — with extensive corporate backgrounds and
high-profile international experience,” Politico’s Ben White

notes. As Treasury secretary, Yellen will be
thrust into the middle of political battles that she could sidestep
as Fed chief.

But her expected selection was met with widespread praise, with
former Trump economic adviser Gary Cohn and Democratic Sen.
Elizabeth Warren of Massachusetts among those voicing their
approval. Yellen’s selection is seen as an effort by Biden to

bridge differences within the Democratic Party,
even as some on the left have criticized Yellen for starting to
raise interest rates while at the Fed. The president-elect last
week said his Treasury pick was “someone who will be accepted by
all elements of the Democratic Party, from the progressive to the
moderate coalitions.”

Markets also cheered the selection. Biden’s choice “was seen as
a win for markets, since the former Federal Reserve chair should
focus on fixing the economy rather than the progressive Democratic
agenda feared by some investors,” CNBC’s Patti Domm
says.

Pushing for more stimulus: It’s not clear yet what role
Yellen might take in negotiations with Congress over additional
coronavirus relief efforts, but she has become a leading advocate
urging lawmakers to provide more stimulus to address the pandemic
and its economic fallout.

“In her time in the Clinton administration, Yellen was
supportive of efforts to balance the federal budget, but she has
become an advocate of spending more money now that interest rates
are at historic lows, making it cheap for the U.S. government to
borrow money,” The Washington Post’s Jeff Stein and Rachel Siegel

report.

A
New York Times piece she co-authored in August
month called on lawmakers to step up: “When unemployment is
exceptionally high and inflation is historically low, as they both
are now, the economy needs more fiscal spending to support
hiring.”

The Financial Times reports that Yellen delivered the
same message in a conversation with Biden and his running mate,
Kamala Harris, that month, telling the Democratic candidates that
there was enough fiscal space for additional investment. She has
since reiterated her call for
more stimulus spending. “This is not a good time
to have fiscal policy switch from being accommodative to creating a
drag,” Yellen told the Journal in October. “That’s what happened
[last decade], and it retarded the recovery.”

Yellen may try to undo Mnuchin’s latest move: Analysts
expect that Yellen’s long history at the Fed will lead to close
collaboration with Fed chief Jerome Powell and other monetary
policymakers.

“The pandemic response has been organized as a joint effort
between the Treasury, which is putting up billions of dollars in
capital to support debt markets, and the Fed, which administers the
programs and lends billions more from its own limitless balance
sheet to make them more powerful,” Irwin writes at The Upshot. “But
there have been clear schisms thus far. The Fed has been more
inclined to structure the programs to help the economy more but
with greater risk that the Treasury will lose money, while the
Trump Treasury has been more cautious.”

Yellen may be open to acting more aggressively. “Given Yellen’s
background at the Fed,” Eric Stein, chief investment officer for
fixed income at Eaton Vance, told the FT, “her views will be very
much in line with the Fed and she will want the Fed to be able to
provide as much credit to various sectors of the economy as
possible.” (Her nomination, we should note, is already leading some
to question the future of the
Fed’s independence from the Treasury.)

Yellen may also look to reverse Treasury Secretary Steven
Mnuchin’s decision to let certain Fed emergency lending programs
expire at the end of the year, a decision that Powell and others
objected to, with some criticizing it as a political maneuver meant
to
hamstring the incoming Biden administration.
“Though Yellen, if confirmed, could at least partially reopen them,
the terms of the CARES Act — the massive spending program approved
by Congress at the onset of the pandemic in March — potentially
limit the secretary’s authority to send more funds to cover losses
from Fed loans after the end of the year,” Politico’s Victoria
Guida
writes.

Sen. Pat Toomey (R-PA), likely to become chairman of the Senate
Banking Committee, signaled in a
tweet Tuesday that Yellen should be cautious about
looking to restart the emergency lending programs without
congressional action.

The bottom line: Yellen is widely respected, but her
calls for more stimulus are still likely to be met with Republican
resistance that tests her ability to navigate heated political
negotiations.

Quote of the Day

"He basically just conceded. That's as close to a concession
as you will probably get."

– An unnamed senior Trump campaign adviser
quoted in
The Washington Post on President Trump’s
announcement Monday that he had authorized the federal government
to initiate the transition to a Biden administration.

Column of the Day: The CARES Act Was a Big
Success, but Congress' Job Isn't Finished

Michael R. Strain, director of economic policy studies at the
right-leaning American Enterprise Institute, writes at Bloomberg
that the CARES Act passed by Congress in March was even more
successful than people think — but that Congress now has to build
on that initial bipartisan success:

“With the benefit of hindsight, the Cares Act’s impact is
remarkable. The economy was producing over $2 trillion less in the
second quarter than its underlying fundamentals suggest it should,
but that gap fell to less than $1 trillion in the third quarter.
Economic output shrank by 9% in the second quarter relative to the
first quarter. But over the same period, as the economy was
violently contracting, disposable household income increased by
10%. The personal savings rate shot up to 34% in April, creating a
cushion for households that is paying dividends today.
“There are signs that the cushion is losing air. The pace of
monthly job gains has slowed considerably since the spring. This
fall, consumers pulled back on spending, and their confidence in
the economy fell in November to a three-month low. The savings rate
has fallen by 20 percentage points as households burn through their
reserves. Lines at food banks are growing as nutritional insecurity
worsens.
“The economy can be likened to a car, and the Cares Act to a
half-built bridge. If the bridge is complete, the car can get to
the other side in one piece — if Congress passes extensions to
unemployment benefits, aid to state and local governments and
another round of small-business relief, then the economy can make
it to the other side of the pandemic without incurring the kind of
deeper problems that leave an economy weakened for years.”


Read the full piece at Bloomberg.

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