Janet Yellin Scores a D Minus

Ignorance and enthusiasm make a dangerous combination. It’s even worse when people who should know better nevertheless agree to make wildly implausible sales pitches designed to justify foolish policy proposals. In the end a once respectable reputation gets dented and maybe shattered. 

Enter Janet Yellin, PhD. Ms Yellin earned her undergraduate degree in economics at Brown University; she earned her MA and PhD degrees in economics from Yale University. Before serving as Chair of the Fed, and then as Treasury Secretary, she worked as a professor at UC Berkeley, one of the nation’s top schools. 

Janet Yellin

At Berkeley she had a joint appointment at the Haas School of Business and the Economics Department. She was the second woman at Berkeley to receive tenure (1982) and the rank of full professor (1985).  She has also served as a member of the National Science Foundation’s panel in economics and as a fellow at the Brookings Institution. 

And yet, in promoting the Biden Administration’s “Build Back Better” proposal she came up with this doozy:

“It will boost the economy’s potential to grow, the economy’s supply potential, which tends to push inflation down, not up,” she said. “For many American families experiencing inflation, seeing the prices of gas and other things that they buy rise, what this package will do is lower some of the most important costs, what they pay for health care, for child care. It’s anti-inflationary in that sense as well.”

Let’s unpack this remarkable series of assertions, provided without evidence, as the Washington Post used to say (correctly) about Trumpian policy claims. First: the Biden package will “boost the economy’s potential to grow…which tends to push inflation down”. Second, the package will subsidize consumption of health care and child care, which she claims is anti-inflationary in that it reduces consumer costs.

I would be willing to bet that a student at Berkeley who made those preposterous arguments in a class taught by Professor Yellin would earn a solid D-. Consider: The entire thrust of the Biden proposal is to raise the tax burden on the most productive people in the country in order to stimulate consumption by the least productive segment of the population.  

After all, raising taxes on high income earners reduces the savings pool and therefore investment. That reduces the potential supply of goods and services. Moreover, even if it were true (which it manifestly is not) that the supply of goods and services would be increased by the plan, that eventuality is years down the road. The inflation problem is here now.  

Let’s take a look at the demand side. How in the world does subsidizing the consumption of child care and health care services  bring down costs for those services? If I subsidize Mary thus lowering her costs, I have to charge somebody else thereby raising those costs. All else equal, I have not lowered costs, I have merely shifted them. Consequently prices will not accurately reflect production costs and capital will be misallocated. Capital  misallocation reduces efficiency; as a result prices tend to be higher than they would otherwise be.

Leaving aside theory, there is history here. When the Affordable Care Act (ObamaCare) was passed in 2010, the average employer cost for family health insurance coverage was $9,773. By 2020 it had risen to $15,754; an increase of more than 60%. Average insurance costs per worker rose from $3,997 to $5,558; an increase of just under 40%. According to Kaiser Permanente, as of July 2020 the average cost for health care insurance is $21,342. About 75% of that is paid for by the employer, which is another way of saying that the worker’s cash wages are reduced by that amount. 

Some statistics on health care costs can be found here, here and here.

To be fair, there is still a vigorous debate over the true impact of ObamaCare on insurance premiums. Some premiums went up, some went down—after accounting for subsidies. Actually the system is not really insurance at all. Instead it is an after-the-fact payment system coupled with income transfers and increased taxes.  That said, ObamaCare was marketed as a way to reduce premiums, and that  it did not do by any stretch of imagination. 

So there is no reason for anybody to take seriously Ms. Yellin’s assertion that throwing more federal subsidies at health care will lower costs. It will just redistribute them, and probably in an inefficient way. 

Similarly, subsidizing child care will not lower costs, it will simply transfer those costs. There is no reason to suppose that federal subsidies for baby sitters (which is what we are really talking about here) will increase economic productivity, much less reduce inflation. 

Ms. Yellin certainly knows that what she is arguing is transparent nonsense. She is probably just repeating talking points dreamed up by some communications flak in the White House.  But she is doing President Biden no favors. The country and Mr Biden would actually be much better off if she were to talk some sense into him. But that, unfortunately, does not look like it’s going to happen. Apparently it is Bernie Sanders and Elizabeth Warren et. al. who have the President’s ear.


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