By Jon Hilsenrath and Nick Timiraos
When she led President Clinton's Council of Economic Advisers in
the late 1990s, Janet Yellen confided to her husband, economist
George Akerlof, about the challenges she faced navigating
Washington's political storms.
Those storms are about to become Ms. Yellen's headache again. As
President-elect Joe Biden's pick for Treasury Secretary, Ms. Yellen
is looking at the most political role she has had in nearly three
decades of high-profile policy making. Her job will be to formulate
and defend Mr. Biden's policies at a time when the economy is at a
crossroads and the capital is deeply polarized.
Tough debates loom about how much more the government should
borrow and spend to advance a recovery that is slowing and
vulnerable as Covid-19 spreads, but also is poised to bounce back
if vaccines are successfully and quickly distributed.
Ms. Yellen's resume was a draw for Mr. Biden. No past Treasury
secretary has served both as leader of the Federal Reserve, which
she did from 2014 to 2018, and head of the President's Council of
Economic Advisers, her job from 1997 to 1999 in the Clinton
administration.
Yet her previous experiences with Washington politics were
insulated by comparison with the task at hand. Compared with the
Treasury Department, the Fed is a cloistered and academic
institution. At Treasury, politics is often one of the first
considerations.
Progressives in the Democratic Party are pushing for aggressive
new spending programs. Republicans appear poised to push for
spending restraint. And new administrations often involve their own
factions. President Trump's team sparred over trade, and President
Obama's over spending and deficit reduction. Assuming she is
confirmed as Treasury Secretary, Ms. Yellen will be at the center
of it all.
"Treasury is designed to generate opinions on hundreds,
thousands of different questions, many of which are known and
others that arise in completely unsuspected ways," said Nathan
Sheets, a former Obama administration Treasury official and Fed
economist. "The saying is that the Treasury moves 10 times faster
than the Fed, and the White House moves 10 times faster than the
Treasury."
As Treasury secretary, Ms. Yellen would oversee a bureaucracy
that handles matters ranging from tax collection to the
implementation of international sanctions to the U.S. dollar
policy, issues she didn't publicly address in detail during her
long career at the Fed.
Ms. Yellen's relationships with congressional Republicans have
at times been strained. When she went to Capitol Hill for meetings
with lawmakers in her first year as Fed chairwoman, she tended to
focus on Democrats, a course she later corrected to address
frictions with congressional Republicans. GOP lawmakers routinely
pressed her on a range of issues, including allegations of leaks
from the central bank about interest rate decision-making.
Republicans also were rankled by her attention to matters such
as inequality and the participation of women in the workforce. It
seemed to some a diversion from issues the Fed was mandated by
Congress to address: unemployment and inflation.
"You're sticking your nose in places that you have no business
to be," then- Rep. Mick Mulvaney of South Carolina said at a 2015
hearing.
In the end it turned out there were links between unemployment,
inequality and workforce participation. As the jobless rate fell in
recent years, women were drawn into the labor force and Black
unemployment rates hit lows not seen before -- among President
Trump's signature achievements.
On the international front, Ms. Yellen is poised to play a
significant role in Mr. Biden's planned efforts to strengthen ties
to traditional U.S. allies in Europe, North America and Asia. As
Fed chairwoman and before that vice chairwoman, Ms. Yellen was one
of the central bank's point people in international finance
gatherings for nearly a decade. In the process she built a network
of connections with central bankers and finance ministers around
the world.
An exception might be China. The Trump administration has
imposed trade tariffs on imports from China that Mr. Biden doesn't
seem eager to unwind. A range of U.S. grievances with China remain
unresolved, including its subsidies to state-owned enterprises and
competition for new technologies with significant national-security
implications.
"We have very difficult issues that lie ahead" with China, Ms.
Yellen said in Hong Kong in January.
Ms. Yellen, a Democrat, likely wouldn't be in her current
position if Mr. Trump had offered her a second term as head of the
Fed. He considered her, approving of her inclination to keep
interest rates low, but chose Republican Jerome Powell instead. Mr.
Trump suggested to associates that one of his concerns was that the
roughly five-foot-tall Ms. Yellen might be too short to convey
stature, according to people familiar with the matter. The White
House declined to comment.
Raised in a Brooklyn brownstone by a mother who kept meticulous
records of the family's stock portfolio and a physician father who
made house calls, Ms. Yellen was an A student known for prodigious
note-taking.
As a Ph.D. student at Yale in the 1970s, she was a devotee of
James Tobin, a Nobel-winning economist who followed the traditions
of John Maynard Keynes, a believer in a strong role for government
in economic downturns. One of her small failures in life was
starting a textbook that she didn't finish based on her notes of
Mr. Tobin's classes. The notes themselves became popular with other
graduate students.
Ms. Yellen would spend her academic career focused on labor
markets and questions such as: How come in a recession companies
lay off workers instead of just cutting their salaries? What's the
government's role in addressing the dislocations that come with
these layoffs?
By the time she came to Washington in the mid-1990s to serve as
a Federal Reserve governor, Ms. Yellen had been molded as a
textbook left-of-center economist. She saw unemployment as deeply
damaging to workers and believed in a muscular role for the
government to address it. However, she also saw practical limits:
If unemployment got too low it could spark inflation, and if the
government's debt got too big it could drive inflation higher, push
up interest rates and slow growth.
Ms. Yellen prepares for tasks meticulously and doesn't
particularly like surprises or risks. She tends to arrive hours
early for flights to avoid mishaps and to ensure choice space in
overhead compartments. When she was a guest at a White House
Correspondents' Association dinner in 2014, she was the first
person to arrive at a ballroom that seats thousands.
"When Janet was at the Fed, I supported her as much as possible
by taking over household duties," said her husband, Mr. Akerlof, in
a bio for the Nobel prize in economics he received in 2001. "Later
when she was at the White House my role in providing psychological
support in the daily political storms was yet more important." He
added that they agreed on most issues, though he was more skeptical
than she was on the merits of free trade.
Ms. Yellen's main test at Treasury will involve spending and
debt.
The experience of the past couple of decades has called into
question a central premise of economics: that rising government
debt-loads push up interest rates and crimp private investment.
Debt has been soaring, but interest rates have fallen and inflation
has remained low, with no obvious negative effects on private
investment.
The question for Ms. Yellen is how far to push U.S. borrowing.
As Treasury Secretary one of her main jobs is to raise the money
that funds the government. That comes mainly through changes in tax
policy or increased borrowing.
The federal budget deficit tripled to $3.1 trillion in the
fiscal year ended Sept. 30. Republicans pushed back against a big
price tag for more Covid-19 rescue programs during the summer. They
seem poised to resist even harder with a Democrat in the White
House.
Mr. Biden has expressed support for the $2.2 trillion measure
passed by the House, led by Speaker Nancy Pelosi (D., Calif.), on
Oct. 1. He has also endorsed many of the provisions included in the
$3.4 trillion Heroes Act the House passed in May. Moreover, he
proposes $2 trillion in spending on climate programs.
Many economists today say a bipartisan impulse to curb spending
over debt concerns in the years following the 2008 financial crisis
hampered the last recovery. Democrats aim to avoid a repeat of
that.
"This is not a good time to have fiscal policy switch from being
accommodative to creating a drag," Ms. Yellen said in a September
interview with The Wall Street Journal. "That's what happened [last
decade], and it retarded the recovery."
She said low inflation has increased the need for and lowered
the risks of aggressive monetary and fiscal policy. "There is a
huge amount of suffering out there. The economy needs the
spending," Ms. Yellen said.
Another conclusion she has drawn from years of study as a labor
economist and then years more as a policy maker: High unemployment
imposes large and lasting costs on American households. As
chairwoman and in other positions at the Fed, she often pushed the
central bank to hold interest rates down to spur growth and hiring.
Low rates encourage borrowing, spending and investment.
She also saw limits to how far the Fed could go to stimulate
growth. Ms. Yellen urged Alan Greenspan to raise rates in the 1990s
to stave off inflation, advice the Fed's then-chairman ignored. As
head of the central bank herself in 2015, she raised interest rates
that had been held at near zero for years.
At the Treasury, her lever won't be interest rates, it will be
borrowing. Ms. Yellen has argued strongly for more deficit-financed
government spending since the pandemic and related restrictions
triggered a severe economic downturn.
However, she is also wary of federal budget deficits in the long
run. In one speech last year to a housing trade group, she said
that Social Security and Medicare might not get on a path to a
solid footing even if taxes are raised to help fund the programs,
and warned of painful tradeoffs. "This is root canal economics,"
she said.
Some former colleagues say Ms. Yellen's political strengths are
underrated. "People underestimate the internal politics of the
Fed," said Daniel Tarullo, who was a Fed governor from 2009 to
2017. Fed leaders need to manage a large committee to reach
consensus on interest-rate decisions. Mr. Tarullo said Ms. Yellen
was "persistent and persuasive" in managing dissent at the central
bank.
She briefed Mr. Biden and Sen. Kamala Harris, now vice
president-elect, by videoconference in August, and encouraged more
spending to boost growth by highlighting the prospect for interest
rates to stay low for a long time. She wrote an opinion piece
around the same time with Jared Bernstein, a member of Mr. Biden's
economic inner circle, in the New York Times that made the same
appeal for continued stimulus.
Some economists expect inflation to pick up as the economy
recovers, but Ms. Yellen said this summer she saw a bigger risk
that policymakers wouldn't do enough to spur a stronger recovery.
"With inflation as low as it is, servicing the debt required by the
one-two punch of aggressive monetary and fiscal policies is
relatively inexpensive," she wrote in the op-ed.
"Yellen is a clever choice. She will be able to argue for larger
stimulus with an intellectual heft that has eluded Democrats so
far," said Marc Sumerlin, a former economic adviser to former
President George W. Bush. She might seek ways "to delegate on the
late-night horse-trading and partisan rhetoric," Mr. Sumerlin
said.
Depending on the outcome of two January runoff elections in
Georgia, Republicans could maintain control of the Senate, leaving
Majority Leader Mitch McConnell (R.,Ky.) as the Senate gatekeeper
for legislation and nominations.
Jacob Lew, Treasury secretary from 2013 until 2017, said Ms.
Yellen might find allies in moderate Republicans in the Senate. If
she wins over three or four Republicans, he said, that could tilt
the balance in Mr. Biden's favor in looming debates.
"If the question is who can force Mitch McConnell's hand, that's
not a fair test," said Mr. Lew. "The real question is what does it
take to persuade a majority in the Senate, and Janet Yellen has
enormous capability" to achieve that.
Mr. Biden has calculated that Ms. Yellen can bridge a range of
divides that will confront his administration. She enjoys
credibility in global financial markets and foreign capitals. She
also has alliances among Democratic Party moderates as well as
progressives, due in part to her friendship with Sen. Elizabeth
Warren (D., Mass.), who endorsed her expected nomination.
One of her first tasks will be deciding whether to push for a
restart of emergency lending programs launched by the Fed this year
directing low-interest loans to small and midsize businesses
affected by Covid-19 shutdowns. Though managed by the Fed, the
programs depend on collaboration with the Treasury, which provides
some of the money.
Last week, Treasury Secretary Steven Mnuchin declined a request
by the Fed to extend the programs when they expire on Dec. 31. He
said that he lacked the authority to provide an extension, a legal
opinion not shared by the Fed, and also that money used to backstop
Fed loans would be better used on grants for the unemployed and
businesses.
In a possible sign of what's to come, Sen. Pat Toomey (R., Pa.)
signaled resistance if Ms. Yellen tries to restart the programs. In
a statement Monday night, Mr. Toomey, who is set to head the Senate
Banking Committee if Republicans maintain control of the Senate,
said he wanted to make sure Ms. Yellen would abide by his
interpretation of the March funding law that keeps the Fed's
lending programs "shut down absent further congressional
action."
He added he has nothing against Ms. Yellen herself. "While Dr.
Yellen and I had our fair share of disagreements during her tenure
as chair of the Federal Reserve, I have no doubts about her
integrity or technical expertise," Mr. Toomey said.
Write to Jon Hilsenrath at jon.hilsenrath@wsj.com and Nick
Timiraos at nick.timiraos@wsj.com
(END) Dow Jones Newswires
November 24, 2020 21:18 ET (02:18 GMT)
Copyright (c) 2020 Dow Jones & Company, Inc.