The U.S. needs to focus on increasing its productive potential, Treasury Secretary Janet Yellen told world leaders Friday, calling for what she terms "modern supply side economics."
Why it matters: She co-opted a phrase traditionally used by political conservatives to describe low-tax and deregulatory policies — and framed the Biden administration's initiatives as the best path forward to achieve greater national prosperity.
- With inflation running sky-high and Biden's domestic agenda faltering on Capitol Hill, Yellen is seeking to reframe the administration's economic agenda in a more expansive, optimistic way.
The big picture: In a speech at virtual Davos — the online version of the World Economic Forum being held due to the pandemic — Yellen sought to re-set an economic framework that has dominated for decades.
In that traditional thinking, conservative economists have argued for tax and regulatory policies that they say will unleash greater supply, while liberals focus on using Keynesian tax and spending policies to stabilize demand. Yellen aimed to turn that on its head.
- "Our new approach is far more promising than the old supply side economics, which I see as having been a failed strategy for increasing growth," Yellen said, arguing that tax cuts on capital have failed to produce promised gains and deregulation has been environmentally damaging.
- By contrast, she said, "modern supply side economics seeks to spur economic growth by both boosting labor supply and raising productivity, while reducing inequality and environmental damage."
Between the lines: Yellen has spent much of her career as a policymaker focused on the solving the problem of insufficient demand in the economy. With her new comments, she acknowledged that America has the opposite problem now.
- It builds on years of work by economic researchers showing long term economic gains from policies like subsidized early childhood education — that children who begin kindergarten earlier go on to become more productive, higher-earning adults.
Yes, but: The Biden team has argued for months that its Building Back Better legislation will decrease inflationary pressures and increase long-term potential growth — but it hasn't persuaded Sen. Joe Manchin (D-W.V.), the decisive senate vote. Some new terminology from the Treasury Secretary probably won't change his mind.
The bottom line: Yellen's speech doesn't change the political realities on the ground. But it does signal a sea change in how Democratic economic policymakers try to sell their policies.
