Janet Yellen: The Dove we Need

On Monday November 30, Biden's campaign announced Janet Yellen as its pick for Treasury Secretary. Unlike other cabinet picks, Yellen's appointment was largely welcomed by progressives. Left-Democrats lauded Yellen's emphasis on unemployment at the Federal Reserve and her Keynesian approach to the macroeconomy. Meanwhile, Republicans seemed impressed by her credentials and favorable toward her nomination.

By appointing Yellen, Biden signaled his desire to unite Democrats and his belief in expansive government investment in the economy. 

In October, when CARES Act funding was dwindling, Yellen implored congress to approve additional spending to "continue extraordinary fiscal support" as long as the coronavirus posed an economic threat. She praised Jerome Powell's approach to monetary policy and emphasized the role of fiscal policy to bolster it. 

During Yellen's tenure as Fed Chair after the 2008 financial crisis, inflation was persistently low and unemployment stubbornly high. To counteract the latter, Yellen held interest rates down, even as the economy began to grow. Monetary hawks warned that inflation would tick up again as more people had money to spend. Yellen did not budge. As it turned out, inflation remained low and cheap lending paved the way for the longest period of growth in American economic history.

This dove-ish approach to monetary policy indicates Yellen's (and Biden's) willingness to prioritize human interests over the threat of inflation. They are not alone. Jerome Powell will likely remain Federal Reserve Chair under Biden (as is tradition). Powell has been historically lax on inflation and has signaled his willingness to keep lending cheap in tandem with higher levels of government spending. As Treasury Secretary then, Yellen could couple her fiscal policy with Powell's loose monetary policy to ensure a more robust recovery.

All of this is not to say Yellen is fiscally irresponsible. She has castigated the federal government's inability to rein-in debts. In a December speech at the Committee for Economic Development in 2010, Yellen said, "the problem is that, in the absence of significant policy changes ... federal spending will rise significantly faster than federal tax revenues in coming years. As a result, if current policy settings are maintained, the budget will be on an unsustainable path". She continued, "A high and rising level of government debt relative to national income is likely to eventually put upward pressure on interest rates, thereby restraining capital formation, productivity, and economic growth".

Yellen's concern is warranted. As the federal government increases deficit spending, Treasury bills become riskier assets, thus debt-holders demand higher returns. Interest rates will increase and the economy will slow: meaning less money to invest in new technology, innovation, machines, etc.-- which is what Yellen means by "restraining capital formation". Indeed, a recent report from the Congressional Budget Office found that "an increase in the debt-to-GDP ratio of 1 percentage point" can increase interest rates by ".02 to .03 percentage points"-- confirming the relationship.

It is important that Yellen, while presently pushing for expansionary fiscal policy, is aware of the risks attendant to excessive public debt. Her credentials in this area will help stave off attacks that she is fiscally irresponsible-- or a socialist, as has become a popular attack among Republicans.

In the end, Yellen is the dove we need. She is serious about pandemic relief whilst wary of extreme government debt. She will advocate for progressive causes while retaining her reputation as an expert economist. She will work well with Jerome Powell, who mirrors her ideas on monetary policy, and she will help prevent the accumulation of structural weaknesses like those of the financial crisis.

With Yellen as Treasury Secretary, the US can begin its recovery.