Yellen defends pandemic spending

16/1/2025 6:16

U.S. Treasury Secretary

Janet Yellen on Wednesday mounted a robust defense of the Biden

administration's response to the COVID-19 pandemic, arguing that

its stimulus spending led to robust growth and averted millions

of job losses.

In her last major speech before leaving office on Monday, Yellen

said the Biden administration's stimulus checks, monthly child

tax credits and enhanced unemployment benefits reduced major

downside risks, and noted that inflation - which spiked around

the world - fell earlier in the U.S. than in other rich

countries.



The U.S. economy did "remarkably well" in the aftermath of

the pandemic and outperformed other advanced economies and did

better than in past recessions, Yellen told members of the New

York Association of Business Economics. The pace of inflation

cooled dramatically as supply disruptions eased, she said.



The Biden administration and Democrats in Congress enacted

the $1.9 trillion American Rescue Plan Act in March 2021, after

more than $3 trillion in pandemic spending approved during

President-elect Donald Trump's first administration in 2020.



The actions kept paychecks flowing for idled workers, paid

rent and put thousands of dollars directly into Americans' bank

accounts, fueling sharp increases in consumer spending at a time

when the economy was plagued by pandemic-driven shortages.

Yellen, who last week offered a rare concession that the

stimulus spending may have contributed "a little bit" to

inflation, on Wednesday insisted that it "substantially" offset

the income gaps faced by some 10 million people who lost their

jobs or left the labor force by the end of 2020.

But she said the current higher interest-rate environment meant

the country faced "dire" consequences unless the fiscal deficit

was narrowed.



Pandemic-era spending averted "significant hardship" and

supported demand, which allowed Americans to get back to work

quickly, which in turn helped the U.S. avoid the erosion of

skills and fallout of long-term unemployment, she said.

A policy aimed solely at preventing the post-pandemic surge in

prices without looking at employment consequences would have

resulted in far less or even a contraction in spending, she

said.



Lower spending would likely have led to far lower output

and employment, with potentially millions more people out of

work, households without the income to meet their financial

obligations, and lackluster consumer spending, she said.



Yellen said most researchers agreed a substantial increase

in the unemployment rate would have been needed to keep

inflation at the Federal Reserve's 2% target, possibly as high

as 10% to 14% throughout 2021 and 2022, with an additional 9

million to 15 million people out of work.

The U.S. unemployment rate had until the spring of 2024 been

below 4% for more than two years, an unparalleled streak not

seen since the 1960s. The unemployment rate since 1948 has

averaged about 5.7%.



"Strategies designed to fully suppress the post-pandemic

inflationary surge would have required an exceptionally ... ,

unacceptably high level of unemployment," she said. "The Biden

administration's fiscal policy choices saved millions of jobs."







'MODERN SUPPLY-SIDE ECONOMICS'

Yellen said the U.S. economy was doing well now, with solid

growth, low inflation and a strong labor market, but more work

was needed to address adverse structural trends that made it

difficult for many families to achieve a middle-class life.

The former Fed chief has championed what she calls "modern

supply-side economics," which rejects the idea that deregulation

and tax cuts for the rich will fuel broader economic growth, and

focuses instead on investments in infrastructure, the labor

force and research and development.



Those ideas will be tested as President-elect



Donald Trump



returns to the White House for a second term on Monday,

given his vow to cut taxes, impose tariffs on imports and reduce

the size of government.



Yellen urged U.S. policymakers to sustain infrastructure

investments and tax credits aimed at encouraging investments in

clean energy, warning of threats to communities across the

country and the stalling of work to tackle climate change.



Big efforts were also needed to reduce the U.S. fiscal

deficit, now at a historical high of 6.4% of gross domestic

product, and facing big challenges given the need for pension

payments and health care for the aging population, she said.



"The projected fiscal path under current budgetary policies

is simply not sustainable, and the consequences of inaction, or

action that exacerbates projected deficits, could be dire," she

said, noting Congress had rejected President Joe Biden's plans

to cut the deficit by raising taxes on the wealthiest Americans.



Yellen said the Congressional Budget Office estimated that

extending the provisions of the Trump-era Tax Cuts and Jobs Act

that are scheduled to sunset next year would add around $4

trillion to deficits through 2034, and Treasury estimated the

cost could swell to more than $5 trillion through 2035 if some

proposed other measures were adopted.



"Such policies could undermine our country's strength, from

the resilience of the Treasury market to the value of the

dollar, even provoking a debt crisis in the future," she said.



In her prepared remarks, Yellen also warned the Trump

administration against ending efforts to modernize the Internal

Revenue Service, arguing that it would jeopardize estimated

revenue of $851 billion over the next decade.



She did not comment on Trump's plans to create a new



External Revenue Service



agency to collect tariffs, duties, and other revenue from

foreign sources.