The author is a former Chairman of the FDIC and a former Assistant Secretary of the US Treasury.
In today’s society, finger pointing has replaced accountability. Instead of acknowledging our shortcomings, we increasingly want to blame others. So it was refreshing that Janet Yellen, the first female US Treasury Secretary, said in a recent CNN interview that she was wrong in her early predictions that inflation would be temporary.
With welcome frankness, she admitted that she was, well, human and could not have foreseen Russia’s invasion of Ukraine, successive COVID variants, and China’s extreme lockdown policies, all of which have exacerbated supply shortages and contributed to skyrocketing prices . Instead of being applauded for her honesty, she was pilloried by partisans and pundits eager to make her the fall girl for our inflation problems, including during this week’s congressional hearings.
But let’s be clear. The main driver of inflation has been a protracted period of extremely accommodative monetary policy, which both parties have exploited through outsized deficits. Democrats have pushed for more spending while Republicans have pushed for tax cuts. Indeed, as Chair of the Federal Reserve Board from 2014 to 2018, Yellen led a strategy to tighten monetary policy, raising interest rates five times during her tenure.
Her Trump-appointed successor, Jay Powell, continued the tightening for a while, then reversed course in early 2019 in the first “Powell pivot” to deal with large spending to combat the pandemic.
As President Biden’s new Treasury Secretary, Yellen also championed generous spending programs to help our economy, which was stagnant and plagued by high unemployment when she took office in early 2021. This was the President’s agenda, not just theirs. Their goal was to help our economy recover quickly from the damage caused by the pandemic, in contrast to the moribund recovery that followed the Great Financial Crisis of 2008-2009.
And the economy roared back, although with hindsight it is obvious that we exceeded stimulus. But Yellen can hardly concede that misjudgment – pretty much everyone wanted to spend more money; Remember Donald Trump’s support of $2,000 per family stimulus checks in late 2020.
Certainly no one predicted that Putin would invade Ukraine, jeopardizing vital oil and food supplies. No one imagined that China would enter an extended COVID lockdown policy affecting exports of goods essential to US supply chains. Nor did they anticipate that myriad COVID variants would continue to constrain domestic production while increasing spending by homebound consumers on goods that are becoming increasingly scarce.
The problem and solution to inflation lies primarily with the Fed. Along with the President, Yellen has thrown her full support behind the Fed doing whatever it takes to fight inflation, even at the risk of short-term political damage from a slowing economy. She has also creatively used the tools at her disposal to increase the effort. She has worked with others in administration to address supply chain bottlenecks. She has lobbied for legislation to increase domestic production of semiconductors, clean energy investments and reforms to reduce prescription drug costs. She has also credited trade barriers – many imposed during the Trump administration – as contributing to price hikes.
She led a strong economic recovery that generates additional tax revenue and reduces deficits. It has accomplished the once unimaginable feat of achieving a global tax treaty that includes a minimum corporate tax. This should stem, and hopefully reverse, the decades-long bleed of jobs and tax revenues from US companies moving operations overseas and low-tax jurisdictions. While I don’t agree with the government’s desire to raise corporate tax rates (it penalizes companies that already pay their taxes), I do support the global minimum tax to ensure that companies that are not paying their fair share do so. This is the kind of tax reform that’s generating revenue fiscal conservatives should embrace, along with Yellen’s push to increase funding for the IRS, a severely understaffed organization struggling with outdated technology.
She was a highly effective economic fighter against Putin’s invasion of Ukraine, and used her strong relationships with world finance ministers to secure a consensus for unprecedented financial sanctions – including a freeze on Russian reserves at central banks around the world. These measures have caused real damage to the Russian economy.
Finally, Yellen has put financial stability back on the Treasury’s agenda. She reinvigorated the Financial Stability Oversight Council with a particular focus on the growing risks in the unregulated non-banking sector. With asset prices elevated and market conditions volatile, this renewed emphasis on financial stability is not premature.
Yellen was never partisan. She is a respected, highly respected economist who views politics through the lens of good economics. With her non-political, no-nonsense professionalism, she is exactly the person we need in government today. Their humble admission that inflationary risks were underestimated with hindsight should be applauded. Do we want honesty and openness from our officials? Or do we want buck-passing blowhards who never admit their mistakes – let alone learn from them?
The core problem of today’s inflation – loose monetary policy – did not start with the Biden administration. Both parties have been all too eager to feed off the bottom of cheap finance and huge deficits. This era is coming to an end as interest rate hikes will drive up government funding costs. Both parties need to confront this reality and focus on restoring greater fiscal restraint.
In this effort it will be good to have an impartial person like Janet Yellen to help lead the way.