Yellen defends Biden's stimulus in face of inflation criticism

US Treasury Secretary Janet Yellen mounted a full-throated defence of the Biden administration's 2021 spending package on Thursday (Apr 28) in the face of criticism that it helped to fuel the highest inflation in 40 years.

Yellen helped champion the US$1.9 trillion American Rescue Plan, which came on the heels of 2 major packages in 2020 totalling almost US$3 trillion under President Donald Trump.

The ARP pumped money to households, businesses and local governments to weather fallout from the Covid-19 crisis, just as vaccinations were ramping up.

"These responses played major roles in igniting a robust recovery" and reducing the human toll caused by the pandemic, Yellen said in the text of a speech she's scheduled to deliver on Thursday in Washington. The plan "played a central role in driving strong growth throughout 2021" that outpaced other advanced economies and triggered a faster labour market recovery than is typical after a recession, she said.

Yellen contrasted the pace of the recovery, as measured by the labour market, with the aftermath of the global financial crisis. While it took more than 8 years for unemployment in the US to fall below 4 per cent after hitting 10 per cent in 2009, the jobless rate this time plunged from nearly 15 per cent in April 2020 to back below 4 per cent in just 20 months.

But the Treasury chief made no reference in the prepared remarks to the dynamic that, for many Americans, is souring the recovery: inflation. The soaring cost of living is now posing a powerful threat to the Biden administration in the November mid-term elections, where Democrats risk losing control of one or both houses of Congress.

Consumer prices leapt by 8.5 per cent in the year through March, the most since 1981. That's been propelled, economists say, by a combination of the coronavirus's effect on supply chains, the unprecedented pace of government spending and, most recently, higher energy costs stemming from Russia's invasion of Ukraine.

Inflation has gnawed away at the real value of what's been the biggest wage gains in years, and forced many Americans to cut back on spending. Republicans have seized on the issue in the election campaign.

But it's not just Republicans blaming the Biden administration for helping to fuel inflation. Lawrence Summers, Treasury secretary under President Bill Clinton, and Jason Furman, head of the Council of Economic Advisers for President Barack Obama, have both said the ARP contributed unnecessarily to the ongoing surge in prices.

Yellen took on critics only obliquely. While it was easy to evaluate the performance of the rescue plan after the fact, she said, it's important to recall that it was crafted during a time of extreme uncertainty and with lessons from the Great Recession of 2007-09 still fresh.

"Throughout 2020, and into 2021, the path of the pandemic, including its severity and the role of future viral strains could not be predicted," Yellen said.

That uncertainty, she added, meant policy makers had to guard against an extreme potential outcome -- what economists refer to as a "tail risk."

"Let me be clear," she said. "The tail risk in 2020 and 2021 was a downturn that could match the Great Depression."

Yellen's speech was delivered at an event hosted by the Brookings Institution, and was dedicated to examining the US government's economic policy response to the Covid-19 pandemic.

In her remarks, the Treasury secretary said the US could better prepare for future recessions by stepping up so-called automatic stabilisers -- policies that automatically add and subtract stimulative spending based on economic data points -- and by responding in ways that consider the impact on vulnerable populations, especially people of colour. BLOOMBERG