Streetwise Professor

October 30, 2021

Janet Yellen: From Elf to Clown

Filed under: Economics,Politics — cpirrong @ 6:57 pm

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:

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.

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  1. Doctor Craig, billionaires do not need to cheat on their taxes. They employ accountants to make the most of the loopholes they pay politicians to write into the laws.

    Comment by Peewhit — October 31, 2021 @ 12:03 am

  2. But why? Why does a ” a respected and respectable economist” become an absurd liar? Surely she could leave the federal government and earn a comfortable living elsewhere? But she prefers to earn the contempt of millions of people. It’s a mystery.

    Comment by dearieme — October 31, 2021 @ 5:31 am

  3. I don’t suppose she hopes President Harris will make her Vice President as a move to appoint a woman but avoid appointing Hillary. Because appointing Hillary VP would be tempting fate a little, would it not?

    Comment by dearieme — October 31, 2021 @ 5:34 am

  4. Professor, this article about Janet Yellen reminds me of your old post about Christina Romer where you concluded that academic economists who receive political posts often sacrifice their credibility.

    Comment by mmt — October 31, 2021 @ 6:08 am

  5. You know what you get when you floor the accelerator and slam on the brake? It’s called a ‘bootlegger turn’. Remember ‘Dukes of Hazzard’? Not Daisy with her short shorts, the General Lee.

    Comment by JC Collins — October 31, 2021 @ 11:21 am

  6. Empty pantsuit Granholm, Canada’s worst export since Justin Bieber, is blaming OPEC for rising energy prices, Right , nothing the DC clown show did bad anything to do with it

    Comment by The Pilot — November 1, 2021 @ 9:43 am

  7. @JC Collins. Especially General Lee.

    Comment by cpirrong — November 1, 2021 @ 1:51 pm

  8. @dearieme. Implicit in your question is the assumption that income is the main motivator/incentive. But power is another, and a major one. Yes, she earns contempt from some, but I am sure that she has more contempt for them than they do of her, so their contempt doesn’t matter.

    Re earning power, moreover, after she left the Fed she made millions giving speeches on Wall Street. No doubt she’ll be able to do the same after her current gig. This is largely monetizing power. So in some respects, it’s impossible to separate money and power as motivators.

    @mmt–Yes, this is another example of a sad old phenomenon.

    As a general aside. Back in the day there was a shuttle between Cambridge MA and Washington DC. (Perhaps I shouldn’t limit it in time, because it continues.). Harvard and MIT economists had a symbiotic relationship with the bureaucracies and administrations, especially Democratic administrations. In contrast, University of Chicago economists were notorious for their avoidance of and aversion to such compromising entanglements. (George Schultz is an exception, but he never became a Janet Yellen.) They preferred to lob intellectual thunderbolts from afar rather than descend into the swamp. From conversations with several of them, I learned that they believed that such engagements were inherently compromising and contrary to academic and intellectual integrity.

    With the rise of prominence of the Bay Area universities, namely Stanford and Cal, those have forged symbiotic relationships similar to the Cambridge gang.

    Comment by cpirrong — November 1, 2021 @ 2:10 pm

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