Janet Yellen’s Fantasy Economy

She defends Bidenomics by ignoring inflation and falling real wages

WSJ editorial.

"Janet Yellen is a distinguished economist, but her tenure as Treasury Secretary hasn’t enhanced her reputation. Her lack of influence with President Biden has meant she couldn’t stop bad policy (student-loan cancellation), and now the White House is rolling her out in election season to portray the U.S. economy as a Valhalla of growth, fairness and optimism. It’s not believable even if you drive a Tesla and live in Montecito.

Ms. Yellen spoke at the Ford Rouge Electric Vehicle Center in Dearborn, Mich., and you know why. Ford is getting a gusher of new subsidies and regulatory favors under the Biden Administration’s new industrial policy. If you’re in a green business the White House likes, you’re in clover. If not, you’ll endure the costs of more regulation and taxes. In the Biden era, big government and big business are in political business together.

We lack the space to cover all of Ms. Yellen’s whoppers, but a couple of them give you a flavor of her fantasy economy. Start with inflation, which she dismissed in three quick sentences, including a claim that “the causes of inflation are largely global.”

Well, sure, Russia’s Ukraine invasion has contributed to higher energy prices. But U.S. inflation had already hit 7.9% on an annual basis before the invasion began in February. It was climbing fast in the autumn of 2021 when the Administration was still calling price increases “transitory.”

U.S. inflation has been substantially home-grown. Trillions of dollars in federal spending hit an economy that was already recovering strongly from the pandemic with a tight labor market. This goosed demand while supply was constricted. The Federal Reserve kept the money spigots open for too long, in part to finance the borrowing needed for all of the spending.

Even conventional Keynesians like Larry Summers concede the inflationary role of excessive spending, and a new study for the Brookings Institution by economists who concede they were wrong about inflation points to supply-demand factors. Ms. Yellen credits the $1.9 trillion in the March 2021 American Rescue Plan for saving the economy without mentioning that it was the gasoline that fueled inflation.

Ms. Yellen is also at pains to stress how much fairer the economy is since Mr. Biden took office. “Prior to the pandemic, higher inequality was accompanied by slower growth,” she says. The opposite is true. Before the pandemic, inequality was falling as wages rose faster for low-income workers than they did for the affluent amid healthy growth.

She fails to mention that the U.S. economy contracted by about 1% of GDP in the first six months of this year, even as real wages were falling. Real average hourly earnings declined 3% over the 12 months through July, and average weekly earnings by 3.6%. They’ve fallen 4.2% since Mr. Biden took office. This has made inequality worse.

Inflation hurts the poor and middle class more than the rich because they pay a larger share of their income for the basics of food and energy. To put it another way, the average American has seen his living standard fall sharply under the Biden-Pelosi-Schumer policy mix of unprecedented spending, easy money, more regulation and higher taxes.

Somehow none of this made it into Ms. Yellen’s list of economic achievements. Politics has its embarrassing demands, especially in an election year. But it takes a special kind of brass to describe the stagflation of the Biden era as an economic success. Voters will have to ignore what they see each day to believe it."