By Andrea Shalal

WASHINGTON () – U.S. Treasury Secretary Janet Yellen on Wednesday mounted a robust defense of the Biden administration’s response to the COVID-19 pandemic, arguing that its stimulus spending led to robust growth and averted millions of job losses.

In her last major speech before leaving office on Monday, Yellen said the Biden administration’s stimulus checks, monthly child tax credits and enhanced unemployment benefits reduced major downside risks, and noted that inflation – which spiked around the world – fell earlier in the U.S. than in other rich countries.

The U.S. economy did “remarkably well” in the aftermath of the pandemic and outperformed other advanced economies and did better than in past recessions, Yellen told members of the New York Association of Business Economics. The pace of inflation cooled dramatically as supply disruptions eased, she said.

The Biden administration and Democrats in Congress enacted the $1.9 trillion American Rescue Plan Act in March 2021, after more than $3 trillion in pandemic spending approved during President-elect Donald Trump’s first administration in 2020.

The actions kept paychecks flowing for idled workers, paid rent and put thousands of dollars directly into Americans’ bank accounts, fueling sharp increases in consumer spending at a time when the economy was plagued by pandemic-driven shortages.   

Yellen, who last week offered a rare concession that the stimulus spending may have contributed “a little bit” to inflation, on Wednesday insisted that it “substantially” offset the income gaps faced by some 10 million people who lost their jobs or left the labor force by the end of 2020.

But she said the current higher interest-rate environment meant the country faced “dire” consequences unless the fiscal deficit was narrowed.

Pandemic-era spending averted “significant hardship” and supported demand, which allowed Americans to get back to work quickly, which in turn helped the U.S. avoid the erosion of skills and fallout of long-term unemployment, she said.

A policy aimed solely at preventing the post-pandemic surge in prices without looking at employment consequences would have resulted in far less or even a contraction in spending, she said.

Lower spending would likely have led to far lower output and employment, with potentially millions more people out of work, households without the income to meet their financial obligations, and lackluster consumer spending, she said. 

Yellen said most researchers agreed a substantial increase in the unemployment rate would have been needed to keep inflation at the Federal Reserve’s 2% target, possibly as high as 10% to 14% throughout 2021 and 2022, with an additional 9 million to 15 million people out of work.

The U.S. unemployment rate had until the spring of 2024 been below 4% for more than two years, an unparalleled streak not seen since the 1960s. The unemployment rate since 1948 has averaged about 5.7%.

“Strategies designed to fully suppress the post-pandemic inflationary surge would have required an exceptionally … , unacceptably high level of unemployment,” she said. “The Biden administration’s fiscal policy choices saved millions of jobs.”

‘MODERN SUPPLY-SIDE ECONOMICS’ 

Yellen said the U.S. economy was doing well now, with solid growth, low inflation and a strong labor market, but more work was needed to address adverse structural trends that made it difficult for many families to achieve a middle-class life.

The former Fed chief has championed what she calls “modern supply-side economics,” which rejects the idea that deregulation and tax cuts for the rich will fuel broader economic growth, and focuses instead on investments in infrastructure, the labor force and research and development.

Those ideas will be tested as President-elect Donald Trump returns to the White House for a second term on Monday, given his vow to cut taxes, impose tariffs on imports and reduce the size of government.

Yellen urged U.S. policymakers to sustain infrastructure investments and tax credits aimed at encouraging investments in clean energy, warning of threats to communities across the country and the stalling of work to tackle climate change.

Big efforts were also needed to reduce the U.S. fiscal deficit, now at a historical high of 6.4% of gross domestic product, and facing big challenges given the need for pension payments and health care for the aging population, she said.

“The projected fiscal path under current budgetary policies is simply not sustainable, and the consequences of inaction, or action that exacerbates projected deficits, could be dire,” she said, noting Congress had rejected President Joe Biden’s plans to cut the deficit by raising taxes on the wealthiest Americans.

Yellen said the Congressional Budget Office estimated that extending the provisions of the Trump-era Tax Cuts and Jobs Act that are scheduled to sunset next year would add around $4 trillion to deficits through 2034, and Treasury estimated the cost could swell to more than $5 trillion through 2035 if some proposed other measures were adopted.

“Such policies could undermine our country’s strength, from the resilience of the Treasury market to the value of the dollar, even provoking a debt crisis in the future,” she said.

In her prepared remarks, Yellen also warned the Trump administration against ending efforts to modernize the Internal Revenue Service, arguing that it would jeopardize estimated revenue of $851 billion over the next decade.

She did not comment on Trump’s plans to create a new External Revenue Service agency to collect tariffs, duties, and other revenue from foreign sources.