Yellen says US economic performance ‘vindicates’ pandemic-era spending

WASHINGTON, Jan 17 (Reuters) – The U.S. Treasury Secretary Janet Yellen said on Wednesday the economy’s strong performance is evidence that the $1.9 trillion American Rescue Plan Act was the right approach in 2021 to avoid a slow and painful recovery from the COVID-19 pandemic.

Yellen said in remarks to the U.S. Conference of Mayors in Washington that the U.S. faced a potential crisis on the scale of the 1930s Great Depression in 2020 and 2021. She said she and President Joe Biden “believed that the most dangerous risk was in going too small” with recovery spending.

“Many had argued that this Rescue Plan wasn’t needed. But I believe seeing where we are today vindicates the approach we took,” Yellen said. “GDP growth is strong and inflation has declined significantly. Unemployment is near historic lows.”

The U.S. unemployment rate has remained below 4% for the longest period in 50 years and wage gains have been broadly shared, including by younger and less-educated workers, she added.

Republicans have blamed the massive relief spending during the COVID-19 crisis for fueling high inflation over the past two years by creating excess demand at a time when supply chains were slowly recovering from pandemic-related disruptions.

The higher federal debt taken on to fund the programs – the national debt is now above $34 trillion – has prompted Republicans in Congress to demand spending cuts as lawmakers scramble to avoid a partial government shutdown ahead of a deadline on Friday.

Yellen urged lawmakers to pass a bipartisan stop-gap funding measure to avoid a shutdown that would hurt American families and businesses.

Defending the Biden administration’s pandemic-related spending, Yellen drew comparisons to the slow and painful U.S. recovery from the global financial crisis more than 15 years ago, which was hamstrung by lower spending and fiscal constraints that kept unemployment higher for much longer.

“Workers and families faced unemployment and economic hardship for too long, and it created scarring for a generation of American workers,” Yellen said.

At the heart of that slow recovery were state and local governments, which contribute nearly 8% of U.S. economic output but received no federal aid during the 2007-2009 recession. It took nearly nine years for their employment rolls to recover to pre-crisis levels as budgets were slashed.

The Biden administration’s American Rescue Plan provided $350 billion to state local, tribal and territorial governments – funds that plugged revenue declines and allowed for investments in affordable housing, job training, water and internet projects.

Without those funds the outcome for state and local governments could have been similar to the 2007-2009 recession, Yellen argued.

“Instead, as of last month, state and local government employment has fully recovered – in less than half the time it took in the Great Recession,” she said. “And state and local government real output growth recovered within only six quarters- also less than half the time.”