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Yellen’s Legacy Is Being Eroded by Inflation

WASHINGTON, DC - JUNE 07: U.S. Secretary of the Treasury Janet Yellen testifies during a hearing before Senate Finance Committee at Dirksen Senate Office Building on Capitol Hill June 7, 2022 in Washington, DC. The committee held a hearing to examine the Biden Administration’s budget request for fiscal year 2023 for the Treasury Department. (Photo by Alex Wong/Getty Images)
WASHINGTON, DC - JUNE 07: U.S. Secretary of the Treasury Janet Yellen testifies during a hearing before Senate Finance Committee at Dirksen Senate Office Building on Capitol Hill June 7, 2022 in Washington, DC. The committee held a hearing to examine the Biden Administration’s budget request for fiscal year 2023 for the Treasury Department. (Photo by Alex Wong/Getty Images) (Photographer: Alex Wong/Getty Images North America)

Inflation and White House infighting may end up shortening Treasury Secretary Janet Yellen’s tenure, but don’t forget how much she has had to contend with.

After a remarkable career as chief White House economist and Federal Reserve chair, Yellen, 75, has ended up spending her final stint in government — one she had to be talked into — deflecting responsibility for the worst inflationary wave in four decades. An academic with a penchant for technocrat-speak, she has been elbowed out of Biden’s inner circle and surprised the administration by publicly admitting she “was wrong” about inflation, according to Bloomberg News reporting. As is often the case, the blame game over volatile prices oversimplifies the events of the past year and a half. Her legacy will hinge on whether she can help steer the economy back to stable prices. 

Heading into key midterm elections, Republicans have predictably sought to attribute the serious inflation problem to Biden’s economic stewardship, taking particular aim at the $1.9 trillion pandemic-relief package that Democrats pushed through Congress in early 2021 with Yellen and the president’s blessings. Of course, that package extended unemployment benefits, helped get Covid shots in arms and expanded the child tax credit, helping keep millions of kids out of poverty. 

But most controversially among economists, it sent out $1,400 direct payments when the economy probably didn’t need that much kindling. Although many middle and lower-income families probably put the money away in rainy-day funds, at least some of them ended up boosting demand for supply-constrained used cars, durable home goods and speculative stocks and cryptocurrencies. Economists including former Treasury Secretary Lawrence Summers warned at the time that, for all the merits of the package, the checks were excessive and risked stoking inflation. But Yellen gave the legislative project her imprimatur. Why? 

There are several plausible theories:

• She saw it as a health emergency in which the normal rules of sound fiscal policy didn’t apply.

• She thought, based on decades of recent history, that inflation expectations were so well anchored in the US that the plague of volatile prices was highly unlikely to return. It had been slayed.

• She thought the political ends justified the means.

• All of the above.

The humanitarian argument made a lot of sense — and frankly, so did the political one. The measures were negotiated not long after reported Covid deaths hit an all-time high in January 2021 and as the jobless rate was running nearly twice as high as it is today. Even the controversial stimulus checks were justifiable if you thought they would play some role in keeping people safe at home, giving them a financial buffer to forgo risky options when vaccines still weren’t widely available to the public.

What’s more, the negotiations came soon after the Jan. 6 insurrection at the Capitol, new details of which continue to shed light on the threat to democracy itself. Yellen may well have concluded that inflationary risks seemed modest compared with the threat of letting Trump’s enablers take the legislature in 2022 or have the former president return to the White House in 2024. She conceivably wanted to give Democrats a boost, and although the bill wasn’t perfect, she would have understood the challenges of legislative consensus building. That was the bill that was on the table.

What’s not plausible is that Yellen, one of the most extraordinary economists of her time, simply missed the inflationary threat altogether. In fact, recent commentary by her biographer, Owen Ullman, suggests that “in discussions with Treasury staff, she sought without success to determine if it was possible to scale” the package back “by roughly a third.” (Whatever she discussed internally at Treasury, Yellen has been careful to insist she “never urged” adoption of a smaller package.) 

Should Yellen and Democratic lawmakers have insisted on a more parsimonious package? With the benefit of hindsight, yes. Almost undoubtedly, the plan has contributed to core inflation, but it’s not the source of the price pressures that Americans most notice (gas and food, which spiked in the run-up to Russia’s invasion of Ukraine), nor was the bill an inflationary grenade as written. Because of a confluence of other factors, it ended up contributing to the problem and making it broader, though. In retrospect, policy makers should have recognized that supply-side dynamics were different in the Covid era and that factory and transportation snarls could form a toxic brew with stimulated demand. But they weren’t alone in their error.

Meanwhile, Republicans’ criticism of the Biden administration for stimulus checks can be nakedly hypocritical. Governor Ron DeSantis, a likely presidential candidate in 2024 and a critic of the inflationary impacts of the federal stimulus, recently announced $450 per child for some 59,000 Florida families. That’s a drop in the bucket compared with the broader federal stimulus — and those families may sorely need the money — but the political double-dealing is rich.

No matter the origins of inflation, rising prices are clearly eroding Americans’ quality of life, and the administration’s moves in 2021 played some role, however well-intentioned. Now, it needs to help fix it, including by working with industry to promote energy production and housing construction and bringing more workers into the economy, perhaps through more immigration. The Inflation Reduction Act legislation that surprisingly emerged this week will fight rising prices through deficit reduction, and it also helps Democrats regain lost momentum. It’s true that many of the solutions on the table probably won’t do much to stem the current wave of rising prices, and the country will have to rely on the Fed and its blunt interest-rate tool. But the White House and Congress could prove critical in preventing a protracted inflationary regime like the 1970s, characterized by wave after wave.

Notably, it’s not entirely clear whether Yellen will be there to finish the job, but whoever does will help write her legacy and the economic history of the Biden administration. Since she took the post, there has long been speculation that Yellen aimed to hand it off at some stage to one of several qualified successors, including perhaps Fed Vice Chair Lael Brainard, who previously held a senior post at Treasury. It remains to be seen whether the inflation outcome burnishes or tarnishes Yellen’s storied career.

More From Other Writers at Bloomberg Opinion:

• Rolling Back Tariffs Would Help Tame Inflation: Editorial

• No, Joe Manchin, Taxes Don’t Cause Inflation: Kimberly Clausing

• Inflation Beast Won’t Lie Quietly Again: Allison Schrager

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Jonathan Levin has worked as a Bloomberg journalist in Latin America and the U.S., covering finance, markets and M&A. Most recently, he has served as the company’s Miami bureau chief. He is a CFA charterholder.

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