Making sense of Yellen's rescue plan kerfuffle
In a strange series of events over the last few days, Bloomberg reported that a forthcoming book claims that during the early days of the Biden administration, Treasury Secretary Janet Yellen pushed for a smaller pandemic rescue package, based on inflation fears — but Yellen denied it.
Why it matters: To understand this seemingly obscure dispute is to understand a central fault line between the Biden administration and economists outside the administration who are sympathetic to its goals.
The backstory: When Biden was elected and Democrats won the narrowest of majorities in Congress, all the political momentum was to go big and go fast on a pandemic response plan.
- At the time, many centrist and left-of-center economists — a group of which Yellen is a very prominent member — started sweating about the risks associated with pumping $1.9 trillion into an economy that was only cranking a few hundred billion below its potential.
- A few voiced these concerns publicly, most visibly Larry Summers, but many more confined their hand-wringing to private emails and text messages.
For Biden's economists, a central problem was that the least well-targeted part of the plan, $1,400 stimulus payments to most Americans, was also among the most politically necessary. That's because it was a promise that enabled Democrats to win the Senate, thanks to Georgia Senate runoffs in early January 2021.
In her statement over the weekend, Yellen said, "I never urged adoption of a smaller American Rescue Plan package, and I believe that ARP played a central role in driving strong growth throughout 2021 and afterward."
- Owen Ullmann, author of the book, said in a statement that reporting on the book exaggerated his claims, and that he was reporting only that Yellen "had concerns that the cost was on the high side and would have preferred something closer to $1.3 trillion, according to colleagues."
In conversations with numerous sources involved with the rescue plan, none have suggested Yellen was fighting for a smaller package internally.
Yes, but: There is a way to thread the needle as to what happened. Yellen truly did embrace the go-big approach, as justified by the need to mitigate the risk of a sluggish recovery.
- But it also would make sense if she privately shared some of the worries that were common among members of her intellectual tribe about the risk of inflation, even if she ultimately judged that going big was the best policy strategy — and the only politically viable one.
The bottom line: Recriminations over the scale of the pandemic rescue, and its contributions to inflation, are unlikely to end anytime soon — and are sure to color the debate the next time the economy is in need of stimulus.