Will Past Be Prologue for Janet Yellen at Treasury? A Review of Her Career Offers Clues.

By Matthew C. Klein

Former Federal Reserve chief Janet Yellen, shown during her last news conference in office in 2017, has said the U.S. should “seriously consider taking the risk of making our economy more rewarding for more of the people.” / Alex Wong/Getty Images

Janet Yellen is about to make history in more ways than one. Aside from becoming America’s first female Treasury secretary, as the former boss of the Federal Reserve and the head of the Council of Economic Advisors, she will also be the first person ever to have held the U.S.’s top three macroeconomic policy making jobs.

This experience gives observers plenty of policy views to consider. Barron’s has pored over 25-plus years of speeches, papers, and Fed meeting transcripts to get a sense of what she thinks, particularly on the issues that will matter most in her new job.

While she’ll have important input into the Fed’s management of its pandemic-era credit facilities, most of her time probably won’t be spent on the monetary policy questions she’s focused on for much of her professional career.

Instead, she’ll probably be focused on the areas specifically relevant to the Treasury: coordinating with the White House and Congress to set the federal government’s budget and borrowing, regulating the U.S. financial system as head of the Financial Stability Oversight Council, and working with foreign counterparts as well as institutions such as the International Monetary Fund.

Here is a look at Yellen’s views on several issues:

The federal budget. The persistent problems of low interest rates, slow growth, and weak inflation are market signals that consumers, businesses, and governments aren’t borrowing enough to keep the economy on an even keel. 

Yet Yellen has argued for decades that higher taxes—and possibly cuts to Social Security and Medicare—are necessary for long-term stability. The alternative, in her view, is that public debt will rise relative to gross domestic product, which will eventually lead to higher interest rates, lower business investment, and slower growth in living standards.

In the beginning of 2009, her contribution to the ongoing debate about how to deal with the shock of the financial crisis was to warn that “responses need to be consistent with long-term fiscal discipline.” If not, “long-term real interest rates are likely to rise in response, undercutting, conceivably even overwhelming, the short-term stimulus.” 

In 2011, she was even more alarmist, warning that “failure to put in place a credible plan to address our long-run budget imbalance would expose the United States to serious economic costs and risks in the long term and possibly sooner.”

These don’t seem to be old views that she has since abandoned in light of the world’s experience with ultralow interest rates. In recent years, Yellen has said that if she “had a magic wand, I would raise taxes and cut retirement spending” and has warned that “we’re not living within our means.”

Yet there’s no evidence that government borrowing costs respond to changes in the budget balance. Indeed, inflation-adjusted yields on Treasury debt were much higher when the government ran budget surpluses in the late 1990s than in later years when politicians had supposedly become far more profligate. 

If anything, Americans have been living below their means.

Despite her consistent warnings about the deficit, Yellen has shown she believes that the government should spend more when the economy is in trouble. 

Most relevant for today, she appreciated the “substantial dose of funding for state and local projects” included in the 2009 stimulus bill because she thought it would help prevent unneeded budget tightening. 

Later, when it turned out that the initial aid package was too small—and that politicians responded to the constant warnings from her and others about the debt by curtailing spending—Yellen lamented that “discretionary fiscal policy hasn’t been much of a tailwind during this recovery.”

During the pandemic, Yellen has been a consistent advocate for spending more to support the incomes of households, businesses, and state and local governments. But investors might worry that Yellen would push Biden and Congress for a premature return to austerity—despite a career focused on the costs of joblessness for workers and their families. 

After all, she has consistently underestimated how low the unemployment rate could go without risking inflation, and while that’s normally considered a problem for the Fed more than the Treasury, when interest rates are near zero—and expected to stay there for years—her views on the subject could affect her judgment on the levels of taxes and spending needed for the economy to perform at its best.

Financial regulation. One of the Treasury secretary’s most important jobs is heading the Financial Stability Oversight Council, which brings together all the main regulators across the federal government as well as state insurance commissioners. 

When Yellen ran the San Francisco Fed from 2004-10, one of her main responsibilities was to supervise the banks in her district, which included the housing debt bubble hot spots of California, Arizona, and Nevada.

Yellen was far from alone in missing what was happening, but her failures in the precrisis period are noteworthy nevertheless. For example, she argued in 2005 that high house prices were justified because “equity held in residential real estate is a lot more accessible today than it has been in the past” thanks to the growth of home equity loans and the rise of the cash-out refinancing. 

She didn’t believe that “creative financing” was having much of an impact on the housing market, arguing as late as 2007 that the problems in subprime weren’t significant for the broader economy and claiming in early 2008 that “the banking system entered this difficult period in a strong position.” 

But this sanguine assessment underestimated both the banks’ fragile capital structures as well as the outsized importance of rising home prices and falling credit standards for sustaining consumer spending.

The good news is that she seems to have learned from this experience, acknowledging in 2010 that she and her colleagues had been “lulled into complacency.” In her view, “we need macroprudential policy makers ready to take away the punch bowl when the party is getting out of hand” by imposing limits on borrowing and even by altering “compensation policies that control incentives for excessive pro-cyclical risk-taking.” 

Her subsequent years at the Fed—culminating in the asset cap imposed on Wells Fargo for the fake accounts scandal—suggests she is willing and able to do that job.

International economics. The Treasury secretary is the lead official in the U.S. government on international economic and financial issues. Yellen has consistently been a champion of free trade and “free capital mobility,” although she has come to appreciate that free trade works best when everyone plays by the same rules. 

If some countries close their markets to Americans, or manipulate their exchange rates, the arguments for openness are less compelling.

In 2011, for example, she urged China, South Korea, and other countries to spend more to address the world’s “dearth of aggregate demand” and compensate for the austerity in the rich countries, where “the scope for fiscal stimulus is limited by concerns about sizable budget deficits and longer-term sustainability.” 

She noted that “the Asian economies continue to add more to global supply than to global demand” and that this was because household spending there was so low.

This has been a perennial problem, particularly in China, and is becoming even more of an issue in the recovery from the pandemic. As Treasury secretary, she could potentially bring this macroeconomic perspective—which the Trump administration ignored with its focus on bilateral deals—to trade negotiations with other countries.

Yellen has also obliquely criticized governments that she believes take advantage of America’s openness by manipulating their exchange rates, noting that “countries with current account surpluses and restricted capital flows have been able to resist currency appreciation for prolonged periods,” which has “served to inhibit the global rebalancing process” and create “adverse consequences for the global economy.”

More recently, Yellen has criticized the Chinese government’s subsidies for its companies and support of intellectual property theft, although she also warned against efforts to “decouple” the U.S. and Chinese tech industries because of the potential impact on global innovation. 

That could have an impact on how she would manage her responsibilities as the head of the Committee on Foreign Investment in the United States, which under the Trump Administration had been trying to limit the Chinese military’s access to advanced American technology such as microchips and AI.

Inequality, the role of government, and student debt. Yellen has a long record of caring about issues that have just begun to get more attention, most notably the increase in income inequality and income insecurity. Back in 2006, she pointed to polls showing rising dissatisfaction and greater fear for the future.

Years before protestors chanted about the 99%, Yellen noted that “much of the gain from excellent macroeconomic performance has gone to just a small segment of the population.” Making matters worse, she said, the apparently low levels of unemployment masked a sharp increase in “involuntary displacement from permanent jobs, due to layoffs or downsizing,” even among Americans with college educations. 

That, in turn, had large effects on household budgets both by leading to big drops in pay and by threatening access to health insurance. In a prescient warning, Yellen feared that these developments were building “resistance to globalization, impairing social cohesion, and could, ultimately, undermine American democracy.”

While her preferred approach was to increase education spending, she also noted that the U.S. had a particularly ungenerous system of unemployment benefits, family leave, and other forms of welfare, while also mandating a low minimum wage. While “improvements in the social safety net entail costs,” she believed the U.S. should “seriously consider taking the risk of making our economy more rewarding for more of the people.”

Yellen didn’t discuss the topic again in her public remarks for some time, but in 2014 she kicked off a series of conversations about inequality from her perch as Fed chief, noting the contrast between “significant income and wealth gains for those at the very top and stagnant living standards for the majority.” She questioned whether that was “compatible with values rooted in our nation’s history.”

Much of her concern was focused on access to educational opportunities and the distribution of public school funding, but she also noted that “the relative burden of education debt has long been higher for families with lower net worth, and that this disparity has grown much wider in the past couple decades.” 

Yellen, in other words, could be sympathetic to “canceling” some of this debt by administrative fiat—a plan that Biden is considering and that is backed by many Democrats.

Past is often prologue, and Yellen has demonstrated some consistent beliefs over a long career, but she’s also demonstrated she can change her mind in response to big events, especially on the crucial issues of financial regulation and international capital flows. 

The question for investors is whether she—or anyone—will be up to the challenges presented by this moment.

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