What Yellen must do

NEW YORK — US President-elect Joe Biden’s decision to appoint Janet Yellen as the next secretary of the Treasury is good news for America and the world. The United States has survived four years under a mendacious president who has no understanding of, let alone respect for, the rule of law, the principles undergirding democracy and the market economy, or even basic human decency. Not only has Donald Trump spent the weeks since the presidential election spewing lies about non-existent voter fraud; he has also convinced a large majority of his party to embrace these lies, thus revealing the frailty of American democracy.

Undoing the damage will not be easy, especially with the COVID-19 pandemic compounding America’s problems. Fortunately, no one is better equipped, in intellect, experience, values and interpersonal skills, to deal with today’s economic challenges than Yellen, whom I first met when she was a graduate student at Yale University in the 1960s.

First on the agenda will be recovery from the pandemic. With multiple vaccines in sight, the immediate task is to build a bridge from here to the post-crisis economy. It is too late for a “V-shaped recovery”. Many businesses have gone bankrupt, and many more will do so in the coming weeks and months; household and firm balance sheets are being eviscerated. Worse, headline figures may belie the depth of the crisis. The pandemic has taken a massive toll at the bottom of the income and wealth distribution. Those who have availed themselves of policies to prevent evictions and foreclosures are nonetheless falling deeper into debt, and could soon face a reckoning.

The current outlook would have been much better if only we had had a president and Congress that recognised back in May that COVID-19 would not just disappear on its own. Strong initial support programmes that needed to be extended were not, resulting in avoidable economic damage that will now be hard to reverse.

The devastation of the restaurant and travel industries has received plenty of attention, but this may be merely the tip of the iceberg. Educational institutions, especially many colleges and universities, have been hit badly. And state and local governments constrained by balanced-budget laws now face plummeting revenues. Without federal aid, they will have to make deep cuts to employment and public programmes, which will weaken the broader economy.

The US desperately needs large rescue programmes targeted specifically at the most vulnerable households and sectors. The resulting debt from increased spending should not be viewed as a hindrance, given the enormous cost of doing too little. Besides, with interest rates near zero and likely to stay there for years to come, the costs of servicing new debt are exceedingly low.

Moreover, many of the necessary recovery programmes can be designed to serve multiple goals, by putting the economy on a more sustainable, resilient and knowledge-based footing. Much will depend on Congress, but the economic case for providing more support is clear, and Yellen is well equipped to articulate it.

Much will depend on the global recovery as well. Here, the new administration will have more room to maneuver. There is already strong global support for a massive $500 billion issuance of Special Drawing Rights, the supranational currency overseen by the International Monetary Fund, which would go a long way towards supporting many struggling economies. Trump and Indian Prime Minister Narendra Modi blocked this option. It should now be at the top of the agenda.

Moreover, with many countries soon to be unable to meet their debt obligations, a quick and deep restructuring would help enormously. To move that process forward, the Biden administration should state clearly that it is in America’s own national interest to uphold the basic principle of sovereign immunity, as endorsed by the overwhelming majority of United Nations member states in 2015. Debt restructuring is necessary for the global recovery and is the humanitarian thing to do. If there was ever a time when the principle of force majeure should apply, it is now.

Restoring multilateralism would help, too. For the past four years, innumerable conflicts between the US and everyone else has cast a pall of uncertainty over the global economy. It should go without saying that uncertainty is bad for business and bad for investment. A return to normalcy on the part of the US, rejoining the Paris climate agreement and the World Health Organisation, for example, and re-engaging with the World Trade Organisation, and allowing judges to be appointed to its Appellate Body, would thus go a long way toward restoring confidence.

But a return to normalcy must not mean a return to neoliberalism. On trade and many other aspects of the twenty-first-century economic framework, policy agendas need to be revisited and reformed. It is unclear how far Biden will go down this road. But we can at least be confident that the new administration won’t embrace the zero-sum logic that underpinned Trump’s approach to everything.

Ensuring global stability will require deep cooperation in combating climate change, pandemics and many other threats. The challenge will be to find ways to do so while remaining fully and vocally committed to our values. While Trump severely undermined the international political and economic order, its fissures were long evident before he arrived.

After all, the 2008 financial crisis discredited neoliberalism, with its belief in unfettered deregulation; and the subsequent euro crisis demonstrated that austerity under such conditions does not work. It is clear that neoliberalism has led to lower growth, higher inequality, and all of the social and political consequences that we have seen in recent years. Now, the pandemic has put the final nail in neoliberalism’s coffin, revealing an economy utterly lacking in resilience and a state left incapable of responding effectively to a crisis.

Yellen can help to provide the leadership necessary to build a better post-pandemic world. To succeed, an ideology that serves the few at the expense of the many must give way to one based on democratic values and shared prosperity.

Joseph E. Stiglitz, a Nobel laureate in economics and professor at Columbia University, is chief economist at the Roosevelt Institute and a former senior vice president and chief economist of the World Bank. His most recent book is “People, Power, and Profits: Progressive Capitalism for an Age of Discontent” (Penguin, 2020). Copyright: Project Syndicate, 2020. 

www.project-syndicate.org