Yellen’s legacy is being eroded by inflation


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

After a distinguished career as White House chief economist and chair of the Federal Reserve, Yellen, 75, ended up spending her last stint in government — the one she had to talk about — deflecting responsibility from the worst inflationary wave in four decades. An academic with a penchant for technocratic language, she was ousted from Biden’s inner circle and surprised the administration by publicly admitting she was “wrong” about inflation, according to Bloomberg News. As is often the case, the price volatility blame game oversimplifies the events of the past year and a half. His legacy will depend on his ability to bring the economy back to stable prices.

As the key midterm elections approached, Republicans predictably sought to blame the severe inflation problem on Biden’s economic handling, taking particular aim at the disaster relief package. $1.9 trillion pandemic that Democrats pushed through Congress in early 2021 with Yellen and the president’s blessing. Of course, this package extended unemployment benefits, helped get Covid shots in the arms and expanded the child tax credit, helping to keep millions of children out of poverty.

But most controversial among economists, he sent direct payments of $1,400 when the economy probably didn’t need that much ignition. Although many middle- and low-income families likely put the money aside in rainy-day funds, at least some of them ended up driving demand for limited-supply used cars, durable household goods, speculative stocks and cryptocurrencies. Economists including former Treasury Secretary Lawrence Summers warned at the time that, despite all the merits of the package, the checks were excessive and risked fueling inflation. But Yellen gave the legislative project its imprimatur. Why?

There are several plausible theories:

• She saw it as a health emergency in which the normal rules of sound fiscal policy did not apply.

• She believed, based on decades of recent history, that inflation expectations were so entrenched in the United States that the plague of volatile prices was very unlikely to return. He had been killed.

• She believed that the political ends justified the means.

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

Moreover, the negotiations took place shortly after the January 6 uprising on Capitol Hill, new details of which continue to shed light on the threat to democracy itself. Yellen may have concluded that inflationary risks seemed modest compared to the threat of letting Trump enablers take over the legislature in 2022 or having the former president return to the White House in 2024. She may have wanted to give a boost to the Democrats, and while the bill was not perfect, she would have understood the stakes of seeking legislative consensus. It was the bill that was on the table.

What is implausible is that Yellen, one of the most extraordinary economists of her time, simply missed the inflationary threat. In fact, a recent comment by her biographer, Owen Ullman, suggests that “in discussions with Treasury staff, she sought unsuccessfully to determine whether it was possible to cut ‘the package’ by about a third.” (Whatever she discussed internally at Treasury, Yellen was careful to insist that she “never asked” for a smaller package to be adopted.)

Should Yellen and Democratic lawmakers have insisted on a more parsimonious package? In hindsight, yes. Almost undoubtedly, the plan has contributed to underlying inflation, but it’s not the source of the price pressures Americans notice most (gas and food, which soared in the eve of Russia’s invasion of Ukraine), nor was the bill an inflationary grenade. as written. Due to a confluence of other factors, this ended up contributing to the problem and making it bigger. In retrospect, policymakers should have recognized that supply dynamics were different in the age of Covid and that the rumble of factories and transport could form a toxic brew with stimulated demand. But they were not alone in their error.

Meanwhile, Republican criticism of the Biden administration for stimulus checks may be patently hypocritical. Governor Ron DeSantis, a likely 2024 presidential candidate and critic of the inflationary effects of the federal stimulus, recently announced $450 per child for some 59,000 Florida families. It’s a drop in the bucket compared to the broader federal stimulus — and those families may be in dire need of the money — but the political double game is rich.

Whatever the origins of inflation, rising prices are clearly eroding Americans’ quality of life, and the administration’s actions in 2021 have played some role, however well-intentioned. Now he needs to help fix it, including working with industry to promote energy production and housing construction and bringing more workers into the economy, perhaps through greater immigration. The inflation-reduction legislation that surprisingly emerged this week will combat rising prices through deficit reduction, and it will also help Democrats regain lost momentum. It is true that many of the solutions on the table are unlikely to do much to stem the current tide of rising prices, and the country will have to rely on the Fed and its brutal interest rate tool. But the White House and Congress could prove essential in preventing a protracted inflationary regime like the 1970s, characterized by wave after wave.

Notably, it’s not entirely clear if Yellen will be there to finish the job, but whoever does will help write his legacy and the economic history of the Biden administration. Since taking the job, there has long been speculation that Yellen intended to hand it over at some point to one of several qualified successors, possibly including the Vice President of the Fed Lael Brainard, who previously held a senior position at the Treasury. It remains to be seen whether the outcome of inflation enhances or tarnishes Yellen’s storied career.

More other writers at Bloomberg Opinion:

• Reducing customs duties would help control inflation: editorial

• No, Joe Manchin, taxes don’t cause inflation: Kimberly Clausing

• The Beast of Inflation will no longer sit still: Allison Schrager

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

Jonathan Levin has worked as a Bloomberg reporter in Latin America and the United States, covering finance, markets, and mergers and acquisitions. Most recently, he served as the company’s Miami office manager. He holds the CFA charter.

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