The Biden administration has become proficient at deflecting responsibility for high inflation. Coming off an election in which the left lost control of the House of Representatives, Treasury Secretary Janet Yellen released an op-ed where she takes readers to an alternate reality that bears little resemblance to the actual events and facts of the past three years. One can forgive revisionist legacy-making, but the danger is that these same arguments are being used to further bad policy during the lame-duck session and beyond. Thus, it is essential to correct the record.
Ms. Yellen conjures up images of dark days in January 2021 when President Biden took office. While COVID-19 deaths were indeed running high, the Biden administration inherited two rigorously tested vaccines that were 95% and 94% effective, according to December 2020 press releases from the Food and Drug Administration. Not only was Operation Warp Speed a resounding success for COVID-19, which President-elect Biden recognized when he got his first shot in December 2020, but it also has the potential to revolutionize vaccine development and production going forward. For Ms. Yellen to speak out of both sides of her mouth by calling it "untested" while then taking credit for mandating its use is audacious.
The falsity of her economic arguments runs even deeper. January 2021 looked nothing like the bleak picture Ms. Yellen painted. The economy was eight months into rapidly falling unemployment, strong GDP growth, and low, stable inflation. She is right that the rapid rebound was not a coincidence and was far from a guarantee, as demonstrated by the Obama-Biden administration's slow economic recovery following the 2007-09 financial crisis. Unlike then, the Trump administration acted with stern resolve and a keen sense that the private sector, not the government, was going to be the ultimate engine of recovery. The CARES Act prioritized strengthening the connective tissue between employees and employers through the Paycheck Protection Program and delivered unprecedented assistance to households, preventing the widespread bread lines and unemployment lines Ms. Yellen claims to have occurred.
Central to the Trump administration's approach was an awareness that people would quickly need to return to work. That is why the enhanced unemployment benefits expired in July 2020 instead of becoming an open-ended entitlement. The fruits of this approach were manifest in the data. After real GDP posted a nearly 32% annualized decline in the second quarter of 2020 – the worst in post-WWII history – the economy realized a "V-shape" recovery by posting a 33% annualized increase in the third quarter. Moreover, GDP growth in the fourth quarter was nearly 4% and rose to 6.3% in the first quarter of 2021 before any of the Biden administration's policies took effect.
Unemployment had fallen from 14.7% to 6.4% in just nine months – and was still falling. Consumers were enjoying stable prices, with inflation in the fourth quarter of 2020 running at just 2.1% on an annualized basis. The economy had already returned to strong growth, exceptionally fast job recovery, and strong household balance sheets, all with low inflation.
In short, no further economic rescue was needed. But that was never the goal of the American Rescue Plan Act. Rather, it was a stalking horse for a left-wing agenda of more government spending, advancing a vision where people's livelihoods are separated from the virtues of work and where domestic energy production is vilified. The fruit of this unnecessary demand-side stimulus has been consumer prices rising 13.8% since Mr. Biden, Ms. Yellen and their team took office, a historic labor shortage, and now the most rapid rise in interest rates in decades, coinciding with minimal economic growth.
The administration has become proficient at deflecting responsibility for high inflation, blaming the "Putin price hike" and referring to supply chain disruptions as if somehow labor shortages are outside the influence of policy. It is rather straightforward to connect the dots between the ongoing labor shortage and exclusionary vaccine mandates that pushed people out of jobs while paying people more to play video games than to work. While the worst of these policies have now expired, their scars remain. High household liquidity, declining real wages, and generous government benefits are resulting in labor force participation rates still below pre-pandemic levels.
Ms. Yellen is right that the American people are resilient. But the government should not keep inflicting inflationary fiscal policies and stagnation-inducing tax increases on the American economy. The biggest threat on the immediate horizon is the lame-duck Congress reviving the anti-work Biden child tax credit and letting provisions of the successful 2017 Tax Cuts and Jobs Act expire. The American people need a return to pro-growth policies that encourage work, encourage investment, and boost energy production, with the private sector once again leading the way in generating abundant prosperity for all Americans.
• Michael Faulkender is the chief economist at the America First Policy Institute and former assistant secretary for economic policy at the Department of the Treasury. Aaron Hedlund is the director of research at the America First Policy Institute and formerly served as the chief domestic economist and senior adviser at the White House Council of Economic Advisers.