One of Hercules’ more difficult tasks was that of cleaning the Augean stables. The bad news for Janet Yellen is that fixing the U.S. economy will be no easier for her than cleaning the stables was for Hercules. The good news for us is that Joe Biden has had the wisdom to nominate as his Treasury Secretary Janet Yellen, who is probably the most qualified and experienced person available to do the job.
If confirmed as Treasury Secretary, Janet Yellen will face a myriad of economic challenges both on the domestic and the international front. Her task will be made no easier by the great likelihood that the Senate will still be controlled by the Republicans, who are likely to resist another round of bold fiscal stimulus. Her task will also not be made easy by the fact that she will face strong pressures from the Democratic Party’s progressive wing to follow economic policies that could prove to be economically very damaging to the country.
Among the more immediate and difficult of her domestic economic challenges will be to extricate the U.S. economy from its worst economic recession in the past ninety years. This task is likely to be made all the more complicated by the current surge in the coronavirus pandemic, which is causing many states to roll back the earlier easing in the lockdown. According to JP Morgan, this tightening of restrictions is likely to lead to another downturn in the U.S. economy in the first quarter of 2021.
Even if vaccine relief to the U.S. economy were to occur by the spring of next year, Yellen will still have to address problems from the pandemic’s serious scarring to the U.S. economy. This scarring is likely to include a wave of household and corporate bankruptcies and defaults that could pose serious challenges to the financial system. Those bankruptcies, in turn, are likely to be the result of continued economic weakness and the accelerated trend toward a digitalized economy in which more companies have their workers work remotely.
No less difficult a domestic economic challenge will be to restore long-run order to the country’s battered public finances and to avoid a U.S. dollar crisis. Underlying the difficulty of this challenge is the fact that the U.S. public debt to GDP ratio is already at a higher level now than it was after the conclusion of the Second World War. It also hardly helps matters that the country is now running its largest peacetime budget deficit on record.
As if her plate of domestic economic challenges were not sufficiently full, Yellen will also likely have to deal with a number of serious international economic issues. Among these might be an emerging market debt crisis that could have serious implications for the world financial system. According to the World Bank, it is all too likely that we will have a wave of emerging market debt defaults and restructurings next year as a result of the perfect economic storm that the coronavirus pandemic has caused for those economies.
No less serious an international economic challenge will be that of reasserting the U.S. traditional leadership role in the international economy and repairing the considerable damage done to the world trade system from four years of an America First policy. To do that, Yellen will have to find some way to roll back the steel and aluminum tariffs that we have imposed on our allies as well as to find an acceptable resolution of America’s trade war with China.
It, of course, remains to be seen how successful a U.S. Treasury Secretary Janet Yellen will prove to be in dealing with the daunting domestic and international challenges that await her. However, for now at least, it is comforting to know that Joe Biden has gone with a highly respected and experienced economist with a well-deserved domestic and international reputation. It also is reassuring that Mr. Biden has chosen for this role one who has served before at the highest levels of government and at the Federal Reserve and who knows her way around Washington as well as around the corridors of power abroad.
Desmond Lachman is a resident fellow at the American Enterprise Institute. He was formerly a deputy director in the International Monetary Fund’s Policy Development and Review Department and the chief emerging market economic strategist at Salomon Smith Barney.