Michael Meeropol: Yellen Speaks Truth At Senate Hearing | WAMC

Michael Meeropol: Yellen Speaks Truth At Senate Hearing

Jan 22, 2021

I have to admit that I was quite moved by President Biden’s inaugural address.   It just seemed right that we had a “normal person” as President.   I agree that he may very well be much too optimistic about the possibility of working with Republicans to enact his policy wish list.   Much of what he wants to do as part of the nationally organized fight against the Coronavirus can be done via executive order (activating the Defense Production Act to speed the production and transportation and administration of the vaccine in sufficiently large numbers).  However, even the Coronavirus fight involves appropriating money which involves Congress.   Beyond that, there is also the need for a massive relief bill (the $1.9 trillion proposal).   And I haven’t even mentioned laws like the George Floyd Justice in Policing Act and the John Lewis Voting Rights Act, both of which are sure to meet strong Republican opposition.

In addition to the question of whether working with Republicans to get his legislative agenda passed is possible, he is faced with an even more dangerous problem.   Too many Americans have been brainwashed.

[About half of Republicans believe that Biden’s victory was based on fraud and that he should not have been inaugurated.  For details see https://www.vox.com/2021/1/11/22225531/joe-biden-trump-capitol-inauguration.]

Biden recognized this problem in his inaugural.  He stated that we as a nation have to face facts.  We cannot, he said, continue to deny the truth.

The danger of permitting falsehoods to flourish was very well illustrated the day before the inauguration, the day the Senate held some hearings on a few of President Biden’s cabinet nominees.   I was struck by two attempts to spread misinformation at the hearing for Biden’s nominee for Secretary of Treasury, Janet Yellen.  

[Dr. Yellen is a macro-economist with a long distinguished career in research, teaching and service.  She served as President of the Federal Reserve Bank of San Francisco, as a member of the Board of Governors of the Fed and finally as Fed Chair during the Obama Administration.  She had previously been Chair of the Council of Economic Advisers during the Clinton Administration.   However, she has also had a career as a Labor Economist.  For details of 17 academic papers she authored and co-authored see https://www.washingtonpost.com/news/wonk/wp/2013/10/09/seventeen-academic-papers-of-janet-yellens-that-you-need-to-read/]

Her expertise did not prevent some Republican Senators from dredging up two long discredited economic “arguments” in opposition to the Biden Administration’s $1.9 trillion COVID-19 relief bill.

The New York Times ran an article on inauguration day entitled “Yellen warns of Economic Pain as Republicans Test Her Ideas.” [p. B4]    The article noted that “[Republicans] resurrected concerns about adding to the federal budget deficit to argue against Mr. Biden’s plans and expressed continued opposition to several of his priorities, including sending more aid to states and local governments, bolstering unemployment benefits and raising the minimum wage.”

Dr. Yellen was in a perfect position to refute the attack on deficit spending and the resistance to raising the minimum wage.   According to the Times, “Ms. Yellen … made an assertive case that the greatest long term threat to the nation was not the federal budget deficit but doing too little to help workers.”  She pushed back strongly against the complaints about government spending policies, mainly that we (the United States) cannot afford to run such large deficits.  She said, “To avoid doing what we need to do now to address the pandemic and the economic damage that it’s causing would likely leave us in a worse place economically and with respect to our debt situation than doing what’s necessary.” [emphasis added.]

[This probably requires some development.  The key to her argument is that if the government fails to spend sufficient sums of money to make it possible for the unemployed to buy their food, pay the rent, keep up car payments, etc. the inability of the unemployed to sustain their current standard of living will have a cascading effect on the entire economy.  One reason so many businesses have disappeared over the past ten months is because people have not had enough money to continue consuming.  The other reason is that COVID-19 restrictions on activity have made it impossible for some businesses (like restaurants) to sustain themselves.   In that case, government money is needed to keep those businesses afloat until we put the pandemic behind us.  If the government were to fail to sustain the economy, government revenues would fall while government expenditures on unemployment insurance would go up --- automatically increasing the deficit.   Large deficits today to sustain the economy will prevent us from having significantly larger deficits in the future as the economy stays mired in deep recession.  That is what Dr. Yellen meant with the sentence quoted by the Times.]

When Senators raised the old saw that increasing the minimum wage would harm small businesses and lead to increases in unemployment, she was in a perfect position to answer.  Dr. Yellen, was able to refer to lots of research that shows that there is little evidence of large-scale job loss when minimum wages are increased.  There have been a number of “natural experiments” on this issue.   When there are neighboring states in which one raised its minimum wage and the other didn’t, there is virtually no increase in unemployment in the state that did raise its minimum wage.

[For a summary of the findings of a number of competing papers, see John Wihbey “Minimum wage: Updated research roundup on the effects of increasing pay” available at https://journalistsresource.org/studies/economics/inequality/the-effects-of-raising-the-minimum-wage/.]         

Both of these “memes” in the field of economic policy – the demonization of federal budget deficits and the knee-jerk argument that raising the minimum wage reduces employment opportunities for unskilled workers (often teenagers) --- are economic nonsense.   They are not quite at the level of the lying engaged in by members of Congress about the fraud in the recent Presidential Election but they are close to it.

The demonization of deficits is a slimy way for politicians who are too afraid to argue directly against a particular proposal --- say, the $2000 per family grant to tide low income people over until the pandemic ends --- (which might on its merits be very popular) to oppose it by saying, “we can’t afford it.”  That is the dishonesty.   Luckily, since the members of Congress who challenged Dr. Yellen had no such deficit concerns when they gleefully gave a $2 trillion tax giveaway (in 2017) mostly to the rich, their new discovery of the danger of deficit spending will not pass the laugh test.

The minimum wage debate has echoed through the halls of Congress almost every time there is a fight to raise it --- and luckily, some of the research referenced by Dr. Yellen has begun to have an impact, even at the Principles of Economics level.

So the liars are up to their old tricks – what else is new?

But in addition to reminding us all that we have to be very vigilant in the face of either outright lies or economic nonsense masquerading as “expertise,” I also want to highlight an extremely important element within the Biden Administration’s $1.9 trillion proposed COVID-19 relief bill. I am talking about the proposal to raise the child tax credit from $2000 to $3000 ($3600 for children under six). The most significant thing about this proposal is that it will be refundable. Normally, a tax credit only works if you have a tax assessment for the credit to offset. Say your taxable burden after all the calculations is $4000.  If you have a $3000 tax credit the tax burden will be reduced dollar for dollar.   But what if your tax burden is zero (many low income people pay lots of Payroll Taxes for social security but no federal income tax) or lower than the credit?  (Say you have two kids under six and thus entitled to a $7200 tax credit but your tax burden is $3000).  In that case the word “refundable” kicks in – the part of the tax credit that is higher than your tax assessment (in this case $4200) would be “refunded” to you as a direct payment.  According to research, expanding the Child Tax Credit and making it refundable would reduce child poverty by over 40%.   That is a really big deal!

[For more information, see BloombergTax.com “Biden Low-Income Tax Proposal Follows Path to Becoming Permanent,” Jan. 18, 2021, available at  https://news.bloombergtax.com/daily-tax-report/biden-low-income-tax-proposal-follows-path-to-becoming-permanent.   For information on how the refundable credit will reduce child poverty, see https://spotlightonpoverty.org/spotlight-exclusives/expansion-of-child-tax-credit-gains-bipartisan-momentum/]

I urge everyone --- keep your eyes on this package as it wends its way through Congress ---- make sure this very important part of the proposal stays in it.   Refundable tax credits which routinely translate into direct payments to low income people are among our most successful anti-poverty programs.  I applaud the Biden Administdration for including this very effective policy idea in the overall bill.

Michael Meeropol is professor emeritus of Economics at Western New England University. He is the author with Howard and Paul Sherman of the recently published second edition of Principles of Macroeconomics: Activist vs. Austerity Policies

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