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Under the pressure of the epidemic, how did Yellen, the first female finance minister in American history, “walk the tightrope”

Japan and the United States finance ministers held telephone talks to confirm close cooperation to get out of the crisis.

Yellen. Picture/People's Vision

December 1, when U.S. President-elect Biden nominated Janet Yellen as Secretary of the Treasury, few people doubted that she would be elected smoothly. As a Democrat, Yellen was nominated as chairman of the Federal Reserve in 2014, and passed it in the Senate by a high vote of 56 to 26. Before that, 300 economists wrote to Obama to endorse Yellen’s chairmanship of the Federal Reserve.

“First of all, the style of a finance minister is very important. Yellen is relatively gentle and rational. Compared with the Trump administration’s more extreme style, it is a return and can also repair some of his bad impressions.” Tan Yaling, president of China Foreign Exchange Investment Research Institute, told China Newsweek.

This time, Yellen will not only become the first female finance minister in U.S. history, but also the first to hold three positions: chairman of the Economic Advisory Committee, Chairman of the Federal Reserve and Finance Minister. Former Federal Reserve Chairman Bernanke once commented on Yellen, “She has more experience than me because she has been an official before.” Economist Paul Krugman warned in a column in the New York Times that not only focus on Yellen’s excellent resume in the field of public services, she is also a key figure in macroeconomics as an applied discipline.

In the 1980s, the idea that monetary and fiscal policies can be used to fight economic recessions and reduce its losses were questioned. A considerable number of economists believe that economic policy cannot play any role in the fight against economic recessions, because economic analysis always assumes that people will take care of themselves. Sexual behavior makes it difficult for economic policies to work. And Yellen was the representative of the neo-Keynesian economics that emerged at that time – believing that people are not stupid, but not always acting on the basis of reason and self-interest, which left room for active policies in the fight against recession.

At a time when the U.S. economy is hit by the coronavirus, it seems timely for a Democratic-elect to nominate a neo-Keynesian economist as the Treasury Secretary. The high overlap between Biden’s economic team and the Obama’s economic team led the Wall Street Journal to say in an editorial that this is “Obama’s economic The return of the economist is accompanied by a predictable “more spending, more regulation, higher taxes, and looser monetary policy”.

But the dilemma facing Yellen is how much room can be diverted in fiscal policy when monetary policy has become extremely loose.

November 4, a trader on the New York Stock Exchange. How to seek economic recovery under the pressure of the coronavirus epidemic is the challenge for Yellen. Figure/IC

Stimulus policy “arrow on the string”

Before his official appearance as the nominated finance minister on December 1, Yellen had called for fiscal stimulus more than once this year.” The introduction of stimulus measures itself is a Democratic tradition of big governments and small markets. Judging from Biden’s plan to increase fiscal spending, from addressing climate change to infrastructure, subsidies to state governments, or epidemic prevention and control, any combination may be trillions of dollars. Liu Ying, a researcher at the Chungyang Institute of Finance of the National People’s Congress, told China Newsweek.

In mid-July, two former Fed presidents of Yellen and Bernanke attended a congressional hearing on how to deal with the economic crisis. The testimony of the two said that the Fed’s response was strong enough, predictable and comprehensive.” But as Federal Reserve Chairman Powell said, the responsibility of the Federal Reserve is to create credit, not spending. Some families and companies need subsidies rather than credit, and the power to spend is in Congress’s hands.”

In an August 24 article published in The New York Times, Yellen said bluntly that “30 million American families lacked enough food last week, but only the Federal Reserve came up with a strong response.” The title of the article is also straightforward – “The American people are starving, but Congress is on holiday”.

Yellen’s response to the Federal Reserve was launched in March this year. On March 15, the Federal Reserve urgently cut interest rates to zero and launched $700 billion in quantitative easing (QE). On March 23, it announced that there was no upper limit on the purchase of treasury bonds and mortgaged securities (MBS), marking the formation of the Fed’s policy portfolio of “zero interest rate + unlimited QE”. The last time the Federal Reserve cut interest rates to zero was in response to the financial crisis in 2008.

“By August, Congress can still form a strong cooperation with the Federal Reserve.” Yellen believes that the U.S. economy began to rebound from the bottom in May and June after the shutdown in March and April, partly due to federal unemployment benefits of $600 a week, but the policy expired in July.

With the failure of the two parties to reach a consensus on the new fiscal stimulus policy, Yellen has since repeatedly stressed on different occasions that Congress should reach an agreement on it as soon as possible. Just before she was officially nominated as the Secretary of the Treasury, she said at an online forum held by Bloomberg in mid-November that the Federal Reserve’s remaining monetary policy tools are limited, and fiscal policy will play a very critical role.

Notably, another author of the article “The American People Are Starving, Congress Is on Holiday” is labor economist Jared Bernstein, who was nominated by Biden for the Economic Advisory Committee. Bernstein, who was the driver of Obama’s stimulus after the 2007 financial crisis, predicted in January 2009 that expanding spending could reduce the unemployment rate to less than 8% or even 7% in the fall of 2010.

Among Biden’s economic team, Cecilia Rouse, the chairman of the Economic Adviser Committee, is also concerned about the labor market, and Yellen’s expertise and academic interests are concentrated in “unemployment and the labor market” to a considerable extent.

Ba Shusong, the translator of Yellen’s book “Amazing Decade – Macroeconomic Experiences and Lessons of the 1990s” and executive dean of the HSBC Institute of Finance of Peking University, said that it was Yellen and her husband George Akerlof who proposed it. “Efficient wage theory” provides a certain basis for the rationality of neo-Keynesianism. In the framework of this theory, employers prefer to raise wages rather than to stimulate morale and improve efficiency, thus making real wages higher than balanced wages, resulting in unemployment.” The theory of efficiency wage has laid the foundation for the necessity of stimulus monetary policy to a certain extent. It is precisely because unemployment has its reasonable existence that it is necessary to make a difference on the policy side to solve the unemployment problem by raising aggregate demand.

“From the perspective of labor economics, full employment may be the core goal. The formulation of economic policy is a game process. We should try to find a balance while focusing on the core goal. In fact, the Federal Reserve is to find a balance between the two goals of full employment and price stability, and Yellen is a dove. Liu Ying said.

In the Federal Reserve, “hawks” and “doves” have been fighting for a long time. The difference lies in the focus on the two goals of the Federal Reserve. “hawks” are more concerned about price stability, easier to adopt tight monetary policies, and be wary of inflation, while “doves” are more worried about weak employment and weak economic growth.

Compared with some Fed officials who do not think they are born hawkish or doves, Liu Ying believes that Yellen’s doves are distinctive. “Before the last financial crisis, Greenspan raised interest rates repeatedly in a short period of time. Yellen, then chairman of the San Francisco Federal Reserve, had a confrontation with Greenspan, believing that the latter’s style of behavior was too hawkish and lacked consideration of the job market. At that time, her dove characteristics were already obvious, and the interest rate hike process after Yellen became the chairman of the Federal Reserve was always slow, which was regarded as the expression of “iron pigeons” by the outside world.

In the four years when Yellen was chairman of the Federal Reserve from 2014 to 2018, the Federal Reserve has never cut interest rates and raised them five times. Yellen’s dove characteristics show that she maintained zero interest rates until the end of 2015 before starting the process of raising interest rates. In fact, as early as August 2014, the survey unemployment rate in the United States had dropped to the level at the beginning of the financial crisis. The market had predicted that September 2014 would be the starting point for raising interest rates, but at a press conference that month, Yellen said, “There are still too many people who want to work but can’t find a job, and too many people who want to work full-time but can only do part-time jobs. While many people are not looking for jobs, if the labor market is stronger, they will go to find jobs.

For Yellen, who focuses on the labor market, the current situation in the United States must not be optimistic. As of mid-November, 3.9 million people in the United States have lost their jobs for at least six months, while only 12.4 million of the 22.2 million jobs lost in March and April have recovered.

Yellen and Bernstein said in their articles that when unemployment is abnormally high and inflation is at historically low levels, more fiscal spending is needed to support employment. They even warned the U.S. Congress not to repeat the same mistake. “At the beginning of 2011, the unemployment rate was still slightly above 9%, the Federal Reserve had cut interest rates to about zero, but Congress let fiscal support fail, and they were more worried about the deficit than about the unemployed”, which made the economic recovery at that time more fragile. .

Yellen’s reminder also seems to point out the difficulties she has faced since she became Treasury Secretary. At present, the concern about the deficit is still strong, even more than ever.

How to “walk the tightrope”?

“Unlike the Federal Reserve’s independent monetary policymaking power, fiscal expenditure needs to be passed by Congress, and the finance minister has fiscal planning power, but does not have real fiscal power.” Liu Ying said.

In early December, a bipartisan group of lawmakers announced a $908 billion coronavirus relief package, a new version of the fiscal stimulus negotiations that have been under way since the summer. Since then, Senate Majority Leader Mitch McConnell has also released a smaller plan, which has shrunk to $550 billion.

“The phenomenon of excessive fiscal deficit in the United States should be said to have reached an all-time high. At present, the two parties in the U.S. Congress have not passed the new fiscal stimulus policy, and I think Americans are weighing whether it is a $908 billion plan or a $550 billion plan that will make the U.S. fiscal deficit of $3.13 trillion worse if they invest again. So the delay in the introduction of the new fiscal stimulus policy is due to the pressure of the fiscal deficit of the United States. Tan Yaling analyzed.

Liu Ying also believes that the fiscal policy of the United States has been used to some extent. “The current Treasury Secretary Mnuchin has launched a fiscal stimulus plan of about $3 trillion in March this year, and the debt of the United States government has quickly approached $30 trillion.”

“The monetary policy of the United States has not got out of control. Even though the current monetary policy of the Federal Reserve is extremely loose, the money supply in the United States is still between $16 trillion and $17 trillion. The Federal Reserve has a constant rule that the supply of money cannot exceed 70% of the total economy, even if the Federal Reserve’s “scarce up money in a helicopter” does not exceed the standard.” But Tan Yaling believes that the fiscal policy of the United States has lost control.” Fiscal policy must be matched with monetary policy. Yellen has worked for the Federal Reserve for many years and knows how fiscal policy should cater to and coordinate the monetary policy of the Federal Reserve. The current Fed officials will also respect some of the policy orientations put forward by Yellen as the Secretary of the Treasury, and she will be the central figure in ensuring good communication between the Treasury and the Federal Reserve.

In fact, after leaving the chairmanship of the Federal Reserve in 2018, Yellen warned of the deficit pressure that Trump’s tax cuts may bring to the United States. She jointly released a report with several former White House Economic Advisers Committees that year, “In this strong economic period, the United States needs to reduce the deficit to offset the deficit increase in demand and avoid deeper crises during the recession, but last year’s tax cuts and jobs bill (2017) changed this logic. ” It was also cautioned that in order to pay off the growing debt, the tax revenue required will have an increasing impact on certain capabilities of the government, such as the government’s ability to provide services to the people and its ability to cope with recessions and emergencies.

In other words, Yellen argued that it was necessary to reduce the deficit in the economic boom years, so as to retain enough “ammunition” for possible future crises, but the U.S. government acted in the opposite direction at that time.” The Trump administration apparently hasn’t created an easy-to-take-over environment for Yellen, and a key question to put in place stimulus now is where does the money come from?” Liu Ying said.

“One possibility is to issue bonds and then be purchased by the Federal Reserve, which requires the support of the Treasury Department and the Federal Reserve, which is already the largest ‘takeover’ of U.S. debt.” Liu Ying analyzed, “The other is to raise taxes. The Democratic Party’s so-called support for moderate tax rates is to put it a tax increase. Biden wants Yellen to collect taxes from the rich to spend. But the economic downturn and income have plummeted, and there is greater resistance to tax collection from the rich, not to mention the decision to raise taxes rests with Congress than the Finance Minister.

Tan Yaling reminded that rather than paying attention to the total amount of fiscal stimulus policies launched by Yellen, we should pay more attention to its structure. “It is important for Yellen to change the path and method of fiscal stimulus in the future, and it is important to invest money.” Liu Ying also believes that Yellen should launch some measures of four or two thousand catties to compare fiscal stimulus.

Yellen is naturally aware of the deficit pressure caused by further fiscal stimulus, and she believes that national resources should be used wisely through carefully designed and effective solutions. Perhaps a hint of her possible direction of fiscal stimulus policy can be found in her testimony at a congressional hearing in July, when she gave three fiscal policy recommendations:

First, Congress should have a comprehensive plan to support medical research, strengthen testing, contact tracing and hospital capabilities, etc., “investment in this area may be rewarded several times.” This investment is in line with Yellen’s basic judgment that if the coronavirus epidemic is well controlled, the economic recovery will follow.

Secondly, while the unemployment rate is still high, unemployment insurance should be strengthened and projects such as food stamps should be adequately funded. Yellen suggested that unemployment insurance could be redesigned to address the incentive issues pointed out by some, for example, that Congress should not make a lump-sum payment, but rather create an automatic stabilizer by bundling supplementary unemployment insurance and other relief programs with national unemployment or state unemployment. In this way, if the situation deteriorates and there is no need to pass through Congress, such a mechanism will automatically provide supplementary assistance.

Thirdly, Congress should provide substantive support to state and local governments. Yellen believes that the lesson left by the financial crisis is that fiscal austerity at the state and local levels will drag down the national economy and offset the benefits of federal government policies. In order to avoid the recessionary effect of drastic spending cuts by state and local governments, the federal government should provide substantial support and not impose excessive restrictions on aid.

“At some point, we will have to think about how to ensure the long-term sustainability of the federal government’s finances. However, the priority now should be to protect the American people from the pandemic and to seek a strong and equitable economic recovery.” Yellen said. Liu Ying described Yellen as “walking the tightrope” in the situation that Yellen needs to face.

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