Yellen Opens Debate on Giant Spending, Saying the ‘World Has Changed’
(Bloomberg) -- Janet Yellen invoked an enduring era of low interest rates in delivering the Biden administration’s opening argument to lawmakers for its $1.9 trillion Covid-19 relief proposal.
President-elect Joe Biden’s pick for Treasury secretary told the Senate Finance Committee in testimony Tuesday that the slew of spending -- from aid to small businesses and the unemployed to funding for state governments -- was needed to fight the pandemic, while playing down concerns about the debt it creates.
“The world has changed,” Yellen, a former Federal Reserve chair, said with regard to interest rates. “In a very low interest-rate environment like we’re in, what we’re seeing is that even though the amount of debt relative to the economy has gone up, the interest burden hasn’t.”
In pushing the relief proposal, and a follow-up package to be unveiled next month, Biden is hoping to avoid a repeat of the economy’s slow-motion rebound from the financial crisis a dozen years ago. Back then, when he was vice president, premature budget tightening delayed for years a full recovery in the job market.
“The most important thing we can do is to defeat the pandemic, to provide relief to American people and to make long-term investments that make the economy grow and benefit future generations,” said Yellen, who could be confirmed as soon as Thursday according to a timeline presented by the incoming Senate Finance chairman. Failure to address the crisis now “would likely leave us in a worse place fiscally,” she said.
Her argument made no immediate headway with Republicans on the panel. While Democrats are set to control the Senate after Wednesday afternoon, support from GOP senators would be needed to speed the stimulus bill forward.
“Although we do have relatively low rates today and knowing that that could change, we shouldn’t get too comfortable,” said Ohio Senator Rob Portman. He described the debt-to-gross domestic product ratio as “frightening.”
John Thune, the Senate’s No. 2 Republican, said, “the argument is that interest rates are low. It’s like free money. It’s not. It has to be paid back.” When rates “normalize,” financing costs will climb, he said.
Even if the Biden administration opts to proceed without GOP backing, it may need to trim the stimulus, former Democratic White House economic official Jason Furman said.
“Even to get 50 Democrats on board, my guess is that number has to come down,” Furman, head of the Council of Economic Advisers under President Barack Obama, said on Bloomberg TV.
Yellen, 74, assured that she would “be a voice for fiscal sanity” in Biden administration discussions on the budget, and pledged to work to put federal finances on a long-term sustainable course.
Her successor as Fed chair, Jerome Powell, noted in remarks last week that “we haven’t really incorporated the low interest-rate environment” into thinking about fiscal policy.
But Yellen indicated that’s now entering the debate. She suggested borrowing costs will help manage things beyond just the short term. “I believe the future is likely to bring low-interest rates for a long time.”
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Yellen, who will become the first woman to be Treasury chief and has a background as a labor economist, repeatedly argued for Biden’s vast spending plan, which includes a minimum-wage hike and expanded medical and family leave along with food assistance.
Covid-19 has “been particularly brutal in its impact on minorities and on women,” she said. She said spending to speed vaccinations, along with help for the unemployed and small businesses, would provide the “biggest bang for the buck.”
Yellen also suggested significant changes are coming after she takes the Treasury’s helm. She pledged to hire a diverse staff as she tackles racial inequities, and to focus on “Main Street, not Wall Street.”
She also promised to appoint a senior official to lead efforts on climate change, and to set up a “hub” at the Treasury to look at risks to the financial system and tax-policy incentives to address climate change.
But the “top priority” is the next economic rescue package, she said.
“This administration is going to put the highest priority on the near-term, going all out to stimulate the economy back to where it was -- almost regardless of its longer-run implications,” said Mickey Levy, chief economist for the U.S. and Asia at Berenberg Capital Markets.
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