Biden and Yellen brush aside inflation warnings in pursuing $1.9 trillion plan for full employment.

The Biden administration is fighting hard for a historically ambitious fiscal package in the name of lowering unemployment, disregarding warnings from Democratic-aligned economists that their plans would risk runaway inflation.

President Biden is seeking a $1.9 trillion coronavirus relief package to add to the $900 billion measure enacted in December.

If Biden’s full proposal were passed, the aid would double the shortfall in economic output due to the pandemic, as estimated by the Congressional Budget Office, for the next three years.

Treasury Secretary Janet Yellen has defended the size of the measure on the grounds that it is needed for unemployment to return to pre-pandemic levels quickly. She has set the goal of getting the United States to “full employment” by next year.

The task is a daunting one. Employment is roughly 10 million lower than it was on the eve of the pandemic. Federal Reserve Chairman Jerome Powell said Tuesday that the unemployment rate, currently at 6.3%, would be 10% if all the people forced out of jobs by the pandemic were counted.

Still, the scale of Biden’s American Rescue Plan has led outside economists, most notably former Obama adviser and Clinton Treasury Secretary Larry Summers, to warn that it could result in too much federal spending, thereby overheating the economy and generating inflation.

That the plan is being promoted by Yellen is especially notable. As Federal Reserve chairwoman from 2014 to 2018, she developed a reputation as a cautious policymaker. In particular, she oversaw a cycle of interest rate hikes intended to keep inflation in check. In 2017, the Fed raised rates three times, as the unemployment rate dipped near 4%, betting that unemployment was dipping low enough that faster inflation would surely follow.

The American Enterprise Institute’s Stan Veuger said he would be “surprised if [Yellen] believes that by the end of 2022,” the U.S. would be at full employment, suggesting instead that she was fulfilling the functions of a more overtly political role.

“She wants the Biden economic relief plan passed. … That’s something to keep in mind in the background,” Veuger told the Washington Examiner. “She’s now in a role that’s very different from an outside analyst and even very different from the Fed chair, right? It is a more political position now that she’s treasury secretary, and I think she wants to say, ‘Look: If we pass this package, then good things will happen.'”

The Fed, though, has changed along with Yellen. Powell, appointed by former President Donald Trump, has become much more willing to experiment with looser money and budgets to pursue low unemployment. He has said that the lessons of the years following the financial crisis are that joblessness can go much lower than previously thought without sparking inflation.

Powell said in a Wednesday speech that the Federal Reserve would “now explicitly seek to achieve inflation that averages 2% over time.” He said that the Fed would not raise rates merely in response to lower unemployment.

Lydia Boussour, a lead U.S. economist at Oxford Economics, called Yellen’s projection “a little optimistic” but said there was “no doubt that the large fiscal shock from the American Rescue Plan will speed up the progress toward full employment,” noting that Yellen’s target for full employment was likely back around 4%.

Yet some high-profile economists think the Biden plan goes too far, even when taking the lessons of the past few years into consideration. Summers warned the size of Biden’s economic recovery plan would unleash “inflationary pressures of a kind we have not seen in a generation.”

Those fears are driven primarily by concerns that the amount of money being pumped into the economy between the CARES Act, Biden’s $1.9 trillion recovery package, and a dramatic increase in savings will create a potential surplus demand that is roughly 4 times the size of the economic hole created by the pandemic.

But other economists remain unconvinced. Boussour said that the evidence from the last recovery and economic expansion suggests that even with Biden’s proposal, inflation will likely not be an issue.

“Traditionally, an economy running beyond full employment would typically experience an acceleration in inflation through a wage-price spiral,” Boussour said. “However, what is clear from the prior economic expansion is that the economy can sustain a very low level of unemployment without stoking high inflation. … Inflation worries are premature.”

A report from Oxford Economics suggests that fears of inflation aren’t entirely overblown, however, but that the increased inflation will be a far cry from the rampant overheating feared by Summers and others.

The report projects that inflation will jump to roughly 2.7% year-on-year in the second quarter of 2021 but that elevated inflation will be “rather transitory.”

“Inflation should remain at 2% or above for about two years, which hasn’t happened since the Global Financial Crisis,” the report read. “With GDP growth returning to a more moderate pace of around 2.7% in 2022, inflation should slow to around 2%.”

The report noted, however, that “this stimulus-led boost to growth and inflation should be rather transitory,” likely dropping back below the Federal Reserve’s target by 2023.

The Washington Examiner reached out to the Treasury for further comment.