☷Remarks by Secretary of the Treasury Janet L Yellen on Economic Lessons and Principles in Relief and Recovery
U.S. Department of the Treasury ( By Press Release office)
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WASHINGTON - Secretary of the Treasury Janet L . Yellen delivered remarks at the Brooking’s Hamilton and Hutchins Center event Recession Remedies: Lessons Learned from the US Economic Policy Response to COVID - 19 . As Prepared for DeliveryI’d like to thank the Hamilton Project and the Hutchins Center for hosting this important conference . I am especially honored to participate in today’s event with former Treasury Secretary Bob Rubin . And I congratulate the authors of the volume on recession remedies for assembling a thoughtful collection of essays . This book is a useful guide for policymakers preparing to address future economic challenges . Like many of the scholars engaged in this two - day event , I am no stranger to business cycles . My career has spanned three years at the Council of Economic Advisers and almost two decades in the Federal Reserve . Over this period , the U . S . has experienced seven recessions—varying in origin from a financial crisis to the bursting of the tech bubble to a global pandemic . Beginning in the mid - 1980s , economists observed what they called the “Great Moderation . ” Many hypothesized that a combination of structural economic changes coupled with monetary policy innovations had permanently dampened the business cycle . Unfortunately , the financial crisis of 2008 and the ensuing Great Recession dashed that hope . Recessions exact heavy tolls . For example , the average output loss during the last seven recessions is roughly 3 . 2% of GDP . Excess unemployment—unemployment in excess of the estimated natural rate—during the ensuing recoveries averaged about 4 . 5 percentage points . Moreover , deep and long - lasting recessions appear to permanently lower the path of potential output . Thus , entirely appropriately , policymakers typically seek to mitigate these costs by implementing policies designed to ignite a quick and strong recovery . That is one of the most important responsibilities of policymakers , and has been a central focus of the Biden Administration since the outset . Accordingly , my remarks today will focus on the current recovery . And I will highlight some “lessons learned” for recovering from future recessions . A first observation is that , conditional on the inevitability of large negative shocks , countries will fare better if their economies are more resilient and less fragile . Research that improves our understanding of the transmission channels of disruptive shocks can improve our resilience . Improved understanding of breaks in supply chains , increases in commodity prices , bursting of asset bubbles , and labor and productivity shocks can help policymakers implement reforms that bolster our economic resilience . To take one example , a wealth of research preceding the financial crisis of 2008 , but not sufficiently appreciated at that time , has now given policymakers a much better understanding of the linkages between financial markets and the real economy . It explains how risks to financial stability emerge and how policymakers can monitor the economy to detect growing threats in real time . Importantly , it explores financial regulations that are needed to diminish financial stability risks . In the aftermath of the 2008 financial crisis , the Dodd - Frank Act mandated new regulations intended to diminish financial sector fragility . Far more stringent capital and liquidity standards were imposed on America’s largest and most systemic banks . The effectiveness of these measures was tested during the pandemic . They enabled America’s banks to weather the pandemic shock while meeting the credit needs of a recovering economy . But the crisis also revealed that significant vulnerabilities in the nonbank financial sector had not been addressed , and consequently , the Financial Stability Oversight Council and the Biden Administration are working to mitigate these remaining threats . In recent weeks energy price movements have been another significant source of global economic shocks . The Biden Administration’s proposed energy agenda is designed to diminish our reliance on fossil fuels and help achieve greater energy independence . These shifts will mitigate our future vulnerability to oil price shocks . At the same time , they will abet the transition to cleaner energy sources which will , in due course , lessen the risks tied to natural disasters and climate change . Over the long run , such measures will reduce volatility while also lessen the depth of future recessions . In addition to improving the resilience of the economy to shocks , it is imperative to build and maintain an effective and efficient set of recession remedies—recovery policies that shorten the duration of recessions and mitigate economic pain . The construction of these recovery policies must be informed by lived experience and rigorous evaluation of prior approaches , including those employed to address the economic devastation of 2020 and the beginning of 2021—which is of course the central focus of this convening . I will offer some reactions to the newly released volume . And I will suggest some further guiding principles for recovery policy . But let me first pause to reflect on the current recovery and the progress that has been made over the past year and a half . From a historical perspective , it is important to emphasize that we have already witnessed a rapid recovery buoyed by a substantial government response—beginning with the CARES Act at the start of the pandemic , and continuing with the Consolidated Appropriations Act in late 2020 , and the American Rescue Plan enacted in early 2021 . These federal fiscal actions were complemented by an unprecedented response by the Federal Reserve along with relief instituted by national and subnational governments and central banks abroad . These responses played major roles in igniting a robust recovery . Notably , the American Rescue Plan played a central role in driving strong growth throughout 2021 , with the United States real GDP growth generally outpacing other advanced economies and our labor market recovering faster relative to historical experience . This has meant diminished scarring and less human suffering . Even through Delta and Omicron—and now a global supply shock due to Putin’s unprovoked actions in Ukraine—the Rescue Plan has allowed our economy to face unknown risks from a position of strength . As we retrospectively evaluate the merits of this approach , it is important to keep in mind two key factors that influenced the chosen response . First , these policies were adopted under conditions of substantial uncertainty . Throughout 2020 , and into 2021 , the path of the pandemic , including its severity and the role of future viral strains could not be predicted . Given this uncertainty , the recovery packages sought to protect against tail risk . They were not just tailored to address the median outcome . Let me be clear: the tail risk in 2020 and 2021 was a downturn that could match the Great Depression . It is fairly easy to evaluate policies ex post . But it is important to remember the dire economic projections prevailed throughout the early days of the pandemic . In a survey conducted in the spring of 2020 , 37 percent of small business owners expected to be closed by year’s end . Zillow’s baseline scenario for the housing market was a 60 percent decline in sales with no price appreciation across 2020 and most of 2021 . In mid - 2020 the Congressional Budget Office projected that the unemployment rate would average 9 . 3 percent over 2021 . And even in early 2021 , the labor market recovery had stalled and the Blue Chip consensus projected years of elevated unemployment . These were not worst - case scenarios , but rather baseline projections . Tail risk scenarios were much worse . Second , the scars from the Great Recession were still quite fresh . Less than a decade earlier the United States had lived through an extended , and oftentimes slow , economic recovery in which Americans became detached from the labor market , lost homes en masse , entered bankruptcy and debt collection at alarming rates , and endured scarring that would last a lifetime . Policymakers understood the imperative of exiting the downturn as quickly as possible and ensuring that support reached those workers and households at greatest risk of that scarring . These factors influenced the design of the policies that were implemented . Moreover , as has occurred in times of crisis , it is evident that some policy approaches presented significant implementation challenges throughout the pandemic . These factors highlight the need for reform of our recovery infrastructure . In this vein , the Hamilton and Hutchins volume seeks to learn from recent experience and identify key lessons for policymakers . It is an important effort , and there are many critical lessons to be gleaned from these studies . I’d like to highlight a handful of points that I consider particularly salient . Ganong , Greig , Pascal , Sullivan , and Vavra argue that unemployment insurance modernization is critical . I strongly agree . In their words: “The trade - off between speed and accuracy does not have to exist . ” In that regard , recent actions taken by the Labor Department to modernize unemployment insurance by preventing fraud , improving access , and reducing backlogs represent meaningful progress and are key steps . Gelman and Stephens helpfully explain that stimulus payments can be an effective mechanism for injecting cash into the economy quickly , but we must also continue to study the interplay between cash support and the social safety net . The authors note , for example , that with long delays in the receipt of unemployment insurance and significant earnings losses even for workers who retained employment , rapid receipt of cash assistance served to as a partial offset . But better understanding of these interactions will help us pinpoint when and how cash assistance should be delivered . Willen , Gerardi , and Lambie - Hansen rightly assess that mortgage forbearance relief was a successful element of the relief effort and a promising approach in future recovery packages although it was neither costless nor a panacea . Throughout the pandemic , the combination of forbearance relief and the support from Treasury’s Homeownership Assistance Fund has provided an important tool to preserve housing stability for American homeowners at risk . Following Goodman and Wachter , the crisis has exposed the need for a more permanent rental safety net . Housing stability is a foremost concern not just in downturns , but in recoveries as well . During this crisis , Treasury was at the forefront of establishing—for the first time—a national effort at scale for rental assistance . Emergency Rental Assistance has not only helped to keep evictions below their pre - pandemic levels , it also enabled states and localities to build an infrastructure for rental assistance going forward . Finally , Aizer and Persico surmise that the rapid and sizable policy response will have long - term payoffs in terms of childhood outcomes including nutrition , health , and academic achievement . Indeed , I predict that researchers will establish that the Biden Administration’s expanded Child Tax Credit increased childhood wellbeing during this crisis . The preceding lessons come from interventions associated with the 2020 recession . There are also general lessons from the pandemic experience and from past recessions . First , it is imperative to address the specific source of crises . In 2008 , recovery would have been impossible without recapitalizing and restoring confidence in the banking system . In 2020 , in contrast , recovery was tied to the progress of the pandemic . Vaccine dissemination has been the most important element of the response . Other crises will have different origins . It will be critical to address their root cause . Second , we must consider equity . Downturns are often most destructive for the most vulnerable neighborhoods and populations , and especially communities of color . The American Rescue Plan made sure that funds reached those communities with the most serious damage . That included , for example: flexible rental assistance programs that did not exclude the neediest renters because of overly stringent documentation requirements; targeted outreach in a range of languages; and state and local funds used for investments targeted on communities especially vulnerable to the pandemic . Third , effective automatic stabilizers—called “workhorse antirecession programs” in the 2019 book Recession Ready—are perhaps the most important policy tool , which is why President Biden proposed them in his original Rescue Plan proposal . Every recession in recent decades has reinforced the need for a flexible , automatic response . Well - designed automatic stabilizers are the best remedy . Preparing for the next recession means not only improving existing stabilizers but expanding their reach to other forms of social support and building the “pipes” to distribute relief in a timely manner . Fourth , it is necessary to preserve attachment to the labor force in an economic downturn . As a hangover from the Great Recession , the long - term unemployed and those out of the labor force continue to suffer its scars . While we need more work to best target our policy response , in recent years we’ve worked with multiple new policy levers to keep workers on payroll and off on long - term unemployment . And the strength of the American Rescue Plan has no doubt contributed to the record fall in long - term unemployment—a strong and positive contrast to the lingering high numbers of long - term unemployed that we saw after the Great Recession . Fifth , policymakers must support basic human needs , including housing , health care , and nutrition . Denial of access not only results in immediate suffering , but also has long - term consequences as well . Programs like the Biden Administration’s expanded Child Tax Credit and Economic Impact Payments provided umbrella support for these needs , but more targeted in - kind relief can also be an effective tool . Lastly , we need to invest in measurement , oversight , and accountability to improve impact . Economists and other researchers need high - quality , high - frequency data to assess the depth of recession in real time and to adequately evaluate the success of policy interventions . The rapid onset of the pandemic recession dramatically highlighted the need for better data . And despite admirable creativity by researchers in 2020 to assess the state of the economy , we must invest now in better tools for monitoring . Similarly , comprehensive oversight and accountability safeguards—designed in advance—are necessary to ensure that public resources are appropriately deployed . In conclusion , I commend the Hamilton Project , the Hutchins Center , and the contributing authors for this important volume . Legislation over the past two years , unprecedented in size and scope , was informed by a rich literature directed at improving recovery policies . The pandemic’s toll would have been much worse if not for policy response informed by careful study . The research and insight presented in this volume will help guide America through future recessions . On behalf of the millions of Americans whose lives will be affected , I thank you .
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