Is Biden using Janet Yellen to appease the Progressive Left?

Is Yellen a move to appease the Progressive Left?

A much wiser economist uttered a crucial idea a few months ago that essentially predicted today’s situation: If Biden wins but the Republicans still control the Senate, it would be easy for Biden to push for establishment Democrats for political appointments. 

A Republican Senate will be significantly easier for Biden to justify compromises and appease the progressive base. “Look I want to do something very progressive, but I can’t do anything since McConnell has the Senate…”It would be easier for Biden to implement a “repair the damage” tone, rather than being forced to advocate for dramatically more progressive policies that he’s personally not comfortable with. 

Yellen is a centrist, safe, non-controversial choice applauded widely across the political spectrum. Even some of my "Leftist partisan hack” friends who really disliked Biden’s other cabinet picks didn’t roast her – today, not having the progressive wing of Democrats revolt is very, very important. I would thus argue that Biden appointed Yellen partly because he genuinely wants someone who aligns with his centrist policy stance, but he specifically picked Yellen and not any centrist because she has a star track record so that his progressive wing cannot revolt against her. 

Many people choose to interpret Yellen’s nomination as a nod to the Senate Republicans, but this implies that Biden would’ve picked someone much more progressive had Dems had Senate majority, which I highly doubt. I think the Senate Republican majority saved Biden in some ways because now he has an excuse (and opportunity) to truly enact the centrist policies he believes in. 

Deutsche Bank recently wrote that "Yellen will complement Biden’s centrist tendencies and maximize the president-elect’s ability to reach-across-the aisle to possibly find common ground with Republicans.” Yep, but not just Republicans. 

Yellen’s (non-existent) mistake in 2016: 

Yellen is a choice that anyone would have a hard time to criticize. 

Matt Yglesias wrote a somewhat contrarian piece last week titled “Janet Yellen’s mistake,” in which he argues that Yellen mistakenly raised the interest rate in 2016 when she was the Fed Chair. Usually the Fed would only raise interest rates because they believe the economy is “overheating,” namely with high inflation or at maximum employment. Inflation wasn’t high in 2016, and Yellen raised rates because they wanted to reduce the possibility of hypothetical future inflation. 

Well, in hindsight this conventional understanding of the economy was proven to be wrong. What we saw in the past 4 years is that the Fed continued to struggle to meet the 2% inflation target (thus they had to switch to the new Average Inflation Targeting regime this fall). And before Covid hit, even with historically low interest rates, the country’s unemployment just kept going down. 

I would not blame any of this on Yellen per se, though. As I’ve previously written in my email "The dramatic turn of economic orthodoxy…" (no hyperlink but can send you if you need to read), it is extremely puzzling why the conventional relation between inflation, interest rate, and unemployment has largely stopped working. Monetary policy simply isn’t achieving its intended effects in today’s economy, and it’s really not Yellen’s mistake that she couldn’t predict this back in 2016. 

If even Yglesias, someone deeply skilled in economic policy blogging, has a hard time finding a real mistake that Yellen made, then you know she’s good. 

Yellen’s stance on Covid relief – speed more important than size:  

Senate Republicans are likely to remain opposed to a fiscal package significantly above $500bn, while Bernie announced his opposition to the $908bn relief package this Friday (he would like something much bigger like $2 trillion). The highly polarized political environment will likely lead to a compromise at around $900bn or even less, and Yellen will get it done. 

Yellen wrote a NYTimes op-ed this summer with fellow Biden economic advisor Jared Bernstein that “Congress… cannot expect the Fed to keep everything together on its own. When unemployment is exceptionally high and inflation is historically low… the economy needs more fiscal spending to support hiring.” She does want more fiscal relief. 

However, Bernstein’s recent comments indicate that speed should take a priority over size in passing fiscal legislation in the near-term, a pragmatic point that Yellen would likely agree with. Indeed, Yellen will be the perfect choice to break the political gridlock by not just reaching across the aisle, but most importantly convincing Progressive Democrats to reduce their asking price for the fiscal package size in order to deliver quicker relief. Now, whether you agree size matters more than speed is a different debate, but that seems to be the consensus for now. 

Is Progressive Left the problem for political gridlock today? 

Thus far, I’ve written about the speculation (not definitive conclusion) that part of Yellen’s function is to appease the Progressive Left and get a deal done. You may think that I’m implying that the Progressive Left is the problem causing our political gridlock today – that they're the reason why we're not getting a relief package, that they're causing Biden so much headache that he has to use Senate Republicans as an excuse to get away from them... I’m NOT saying that. 

What I’m merely trying to convey is that the overton window for economic policy has shifted dramatically over the past few years. Fewer are deficit hawks; more are advocating for large-scale fiscal spending, especially in face of Covid’s damages. 

There is a reason why many on the Progressive Left criticized Biden’s cabinet picks as the “swamp” – because it almost seems to them that any centrist policy is a return to the neoliberal, free-marketeer economic policy that is hugely inadequate to address the grave economic challenges today. In other words, “if you’re a moderate Democrat who thinks $900bn is enough to bring us out of this recession, you might as well call yourself a Republican…” 

Well, Obama struggled to get an $800bn package through the House after 2008, and now it seems widely accepted that we should have at least a $900bn package, while progressives even argue for $2 trillion and more. These are unthinkable proposals 10 years ago. I will not personally weigh in on the debate of what is the adequate amount today, but you get the idea of the shifting discourse that I’m trying to convey. 

Yes, Yellen is a wonderful pick; her integrity and experience will restore the healthy interaction between Treasury and the Fed; her political competence will hopefully break the gridlock and steer us through the economic recovery. But, the nomination of Yellen should not be naively seen as merely some kind of “return to normalcy” because the discourse for politics and economic policy has shifted dramatically over the years, and the symbolic and practical meaning of her appointment goes beyond what is commonly perceived to be. 

Tiger GaoComment