Streetwise Professor

Once upon a time Janet Yellen was a respected and respectable economist. That time is long past. She is now the lead singer for a Say Anything cover band. It’s sad to witness.

Janet is currently saying anything–and everything–to justify the monstrosity that is the Biden “reconciliation package,” AKA Build Back Better. Perhaps I should call it the Incredible Shrinking Reconciliation Package, because apparently it has shriveled from $3.5 trillion to a mere $1.75 trillion. But even at half the size, it is a monstrosity.

One indefensible thing that Yellen defended that has subsequently been modified, and may disappear, is the requirement that banks report to the IRS the gross annual flows on bank accounts when those flows exceed $600/annum. Yellen said oh no no no no–this is NOT aimed at the little guy. It’s to prevent billionaires from cheating on their taxes:

“There’s a lot of tax fraud and cheating that’s going on.” Treasury @SecYellen tells @NorahODonnell the proposed $600 IRS reporting requirement for banks is “absolutely not” a way for the government to peek into American’s pocketbooks but to hold billionaires accountable. pic.twitter.com/M3VKOhdtSu

— CBS Evening News (@CBSEveningNews) October 12, 2021

This is so patently ludicrous it requires little comment. Indeed, it is an insult to everyone’s intelligence because it so so outrageously and transparently false: everyone with a few functioning synapses understands reporting on the account of everybody with a bank account (and surely, a $600 filter would catch virtually every account holder) will do F-all to prevent billionaires from cheating on their taxes.

Yellen’s latest outrage is her claim that no no no no a massive increase in government spending will NOT add to the mounting inflationary pressures. Indeed, it will reduce these pressures. Yes, you read this right: she said that the reconciliation bill will reduce inflation, despite its size.

Why? Well, according to Yellen, it will shift out the aggregate supply curve. Why? The one specific thing that she said is that the child care subsidy in the bill will free up women to work. Well, even granting that–what about the rest of the huge bill?

Casey Mulligan has taken one for the team, and tortured himself by reading the entire bill. (God bless you, Casey.) He finds it chock full of disincentives to work. Here’s one of this posts that focuses on that, but I recommend that you scroll through all of Casey’s recent posts to get the full effect.

In a nutshell, as in most welfare and subsidy programs, there are huge implicit marginal tax rates embedded in “Build Back Better.” Your benefits go away, or are reduced substantially, if you earn too much. That is a disincentive to work.

These various features shift back the supply curve, thereby exacerbating the inflationary effects of an increase in spending.

And as Mulligan notes, even the vaunted child care provisions are an economic nightmare, with many disincentives to work, and burdens on those who do work in childcare. This is a classic example of the government simultaneously stepping on the gas (subsidizing child care) and slamming the brakes (imposing mandates that dramatically increase the cost of child care). Among the costs are wage floors for child care workers and requirements that said workers obtain particular college degrees. Yeah, those are really great ways to juice productivity, right Janet?

There’s also how the bill is to be paid for, mainly with explicit or implicit taxes on capital. Those will–duh–discourage investment and capital accumulation, further reducing productivity growth. Another adverse shift in the supply curve.

But Yellen claims that the “investments” in Build Back Better will enhance productivity. Say Anything, indeed.

Yellen even defended the utterly insane idea to tax unrealized capital gains, something the desperate Dems seized on to replace the capital and wealth taxes that Krysten Sinema rejected. There aren’t enough hours in my day to explain all the ways in which this idea is insane, unworkable, inefficient, and a threat to freedom.

I’ll just say one thing: if you believe that this tax, if implemented, would be limited to billionaires in perpetuity, you have not been paying attention to the history of federal taxation since the passage of the 16th Amendment in 1913.

In sum, Yellen has not just defended, but advocated every bad idea in BBB. Shamelessly.

In 2009, Yellen was one of the Obama administration’s main justifiers of the stimulus bill. She did so on strictly Keynesian multiplier grounds. I disagreed with her on that, but that was a serious intellectual disagreement: I’m an anti-Keynesian, and she argued on traditional Keynesian grounds. At least there was a serious intellectual foundation for her view, although no doubt she was carrying administration water in advancing it.

Now, however, she is just spouting absolute garbage that has no foundation in any solid economic theory, and which is indeed contrary to good economics, but which happens to be propaganda for administration policy. She is as bad, or worse, than Jen Psaki. A flack and a hack.

I met Janet Yellen once, when I gave a presentation on clearing to the Board of Governors of the Fed when she was Vice Chair. She sat right next to me. She was very nice to me. She is quite small, and at this meeting she was dressed in a green velvet outfit with red trim. I couldn’t help thinking that she looked like an extra from Elf.

But alas, Janet Yellen is no longer an elf. She has become a clown, honking a horn to promote the clown show that is Biden administration economic policy.

As someone might say: Sad!

Coda. The subject of childcare reminded me of some work done by the late, great Sherwin Rosen on child care subsidies in Sweden. He drolly asked: ” If Swedish women take care of each other’s parents in exchange for taking care of each other’s children, how much additional real output comes of it?” More substantively, he said:

The most important finding is that the welfare state encourages excessive production of household goods and discourages production of material goods. Too many people provide paid household (family) services for other
people in the subsidized state sector and not enough are employed in the production of material goods.

Doesn’t sound like a shift out in the supply curve to me–especially for goods and non-household services.