The Secretary of the Treasury and the Chair of the Council of Economic Advisers are the two principal economic advisors for any president. President Biden chose Janet Yellen as Secretary of the Treasury and Jared Bernstein as the Chair of his Council of Economic Advisers.
Stephanie Kelton asked Bernstein a basic question about Biden’s monetary and fiscal policies. Bernstein responded with a shocking statement.
“The US government can’t go bankrupt because we can print our own money”
The idea that the government can print its way out of any fiscal deficit is a path to the dark side of hyperinflation. Bernstein apparently embraces Modern Monetary Theory, a crackpot theory that no serious economist embraces. Kelton then asked Bernstein to explain why any government would borrow in a currency that it can simply print; his response was either cringeworthy or hilarious, depending upon your political leanings (click link here). Bernstein had no answer, he simply babbled for a minute.
The correct answer is that governments borrow money as a supposed fiscal stimulus. Additional government spending supposedly raises aggregate demand and decreases unemployment. However, additional government borrowing raises interest rates. Higher interest rates slow private investment, decrease exports, and increase imports. Higher interest rates thus counteract fiscal stimulus. Federal Reserve officials can try hold interest rates down by printing money, but this is inflationary.
Bernstein was not educated as an economist. However, Bernstein has worked as a key economic adviser for Biden for years now. The issue which Kelton asked Bernstein about is at the center of “Bidenomics”. It seems that on the job learning doesn’t always work.
Secretary Yellen gave a speech in Kentucky recently. Yellen announced that the Biden administration will implement what she refers to as Modern Supply Side Economics. This so called modern theory is really just a rehash of what economists refer to as “industrial policy”, mixed with investment in infrastructure. The traditional industrial policy favored by the Biden administration has a dismal track record globally.
Harvard Economist Dani Rodrik has developed a more nuanced and less ambitious case for industrial policy. Rodrik admits to past failures of most industrial policies, and recommends a more limited role for government in future industrial policies. Yellen is peddling the old discredited version of industrial policy as new supply side economics. This is nonsense, and she must know it.
Yellen also claims that “trickle down tax cuts” don’t fuel economic growth and only benefit the wealthy. Yellen is attacking Supply Side Economics, which economists have embraced for centuries. Statistics prove the economists’ version of Supply Side Economics. President Obama enacted his American Recovery and Reinvestment Act (ARRA) in 2009. ARRA included spending increases (favored by Democrats) and tax cuts (favored by Republicans). Economists have performed dozens of tests on ARRA. Economist Valerie Ramey published a review article on these studies. What are the results of these tests?
According to Demand Side Economics government spending increases grow the economy and reduce total unemployment through a “multiplier effect”. What this means is that each dollar of public spending increase leads to more than a dollar of increased GDP. Studies show that the spending multiplier for ARRA was between 0.6 and 1.0. Hence the alleged spending multiplier effect is nonexistent. Each additional dollar of federal spending resulted in less than a dollar of additional GDP- a fraction not a multiple. Studies also indicate that each dollar of reduced taxes produced a two to three dollar increase in GDP. Tax cuts produce a true multiplier effect, which works at least partly through the Supply Side incentives that don’t exist according to Yellen.
All economists know that supply side effects of tax cuts really exist, we just disagree over the strength of these effects. Yellen is playing like a trick here. Some Republican politicians have exaggerated supply side effects of tax cuts, by claiming that their tax cuts will produce overnight miracles. Harvard economist Martin Feldstein pointed out the difference between statistically proven Supply Side Economics and the disproven politicized version of Supply Side Economics decades ago. Yellen surely knows all of this. Yellen is guilty of using the Strawman Fallacy to dismiss a sound alternative to Biden’s absurd industrial policies.
Jared Bernstein is the chief economic adviser to the highest elected official in the U.S., yet he doesn’t understand economics. Bernstein could be excused for his ineptitude due to his lack of education in economics. Biden’s reliance on this incompetent and uneducated man is inexcusable. Janet Yellen is highly educated in economics. Hence, there is no excuse for her peddling such nonsense to the American public. People in the political party which demands greater governmental involvement in the economy should really be concerned with this lack of competence and integrity among Biden’s key economic advisers.
[Originally published at On the Other Hand...]
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