Outgoing Treasury Secretary Janet Yellen warned that plans by the incoming administration to extend the 2017 Republican tax cuts risk roiling financial markets and worsening an already challenging U.S. fiscal outlook.
"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," Yellen said Wednesday in what's likely to be her final speech in office.
Policies like extending the tax cuts enacted by Donald Trump in his first term — as the incoming president plans to do — "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," Yellen said in remarks delivered at the New York Association for Business Economics.
She added that such "misguided economic policymaking" would affect the long-term economic outlook, placing a heavy burden on the next generation.
During her remarks, Yellen also fiercely defended the Biden administration's policy choices, highlighting the strength of the U.S. economy relative to its major peers, to its past performance and to gloomier economist forecasts. She also emphasized the merits of maintaining strong employment and not focusing solely on inflation.
Policy defense
"All policy choices entail tradeoffs, but the Biden administration made sound decisions that set the economy on a strong course," Yellen said.
While she acknowledged that "prices of many everyday goods soared" in the wake of the coronavirus pandemic — a key source of frustration that influenced voter preferences in November's presidential election — Yellen argued that measures like the
The strength in the labor market and a rapid drop in unemployment helped the U.S. avoid "labor market scarring" that stems from prolonged joblessness, Yellen said.
Yellen, a labor economist who has championed the importance of employment throughout her career, said avoiding such scarring was vital to avoiding the reduction in future potential output.
She has continuously defended the American Rescue Plan in the face of criticism that it was excessive given the amount of stimulus already in the works as of spring 2021, and contributed to inflation.
