Former Treasury Secretary Janet Yellen expressed hope for future bipartisan cooperation on federal budget deficits and also expressed concern about the Federal Reserve’s continuing independence at the Clinton Presidential Center Monday (Sept. 29).

Yellen, who served as treasury secretary under President Joe Biden and chair of the Council of Economic Advisers under President Bill Clinton, made the remarks during a bipartisan “Bringing Balance Back” question-and-answer session.

She said President Trump’s efforts to replace Federal Reserve Governor Lisa Cook based on his charge that she earlier had committed mortgage fraud threatened the Fed’s independence. If the Supreme Court rules in favor of Trump, the president will be able to replace Fed board members with individuals agreeable to his policies, she said.

She said central banks that aren’t independent can result in political business cycles where politicians stimulate the economy before an election, with inflationary consequences coming afterwards. Governments in countries with uncontrollable deficits pressure the central bank to lower interest rates. She noted that President Trump has pressured the Federal Reserve to do so.

“Really, this is the road to becoming a banana republic, and I worry about that for the United States,” she said.

Also speaking was Douglas Holtz-Eakin. He served as director of the Congressional Budget Office and, prior to that, as chief economist of the President’s Council of Economic Advisers in the George W. Bush administration. He said the situation with the Federal Reserve is “extraordinarily dangerous.”

Maya MacGuineas, president of the Committee for a Responsible Federal Budget, a Washington-based advocacy group, moderated the event.

The Clinton administration was the last one where lawmakers and the president passed a balanced budget.

Now, the federal government’s fiscal health is “very bad,” MacGuineas said. The $37.5 trillion national debt is the largest it has been as a percentage of gross domestic product since shortly after World War II. Federal budget deficits are higher than they have been outside of a national emergency. Interest payments are the fastest growing part of the federal budget and now rank second only to Social Security.

“I don’t think there’s a single bit of good news on the fiscal dashboard,” MacGuineas said.

Yellen said she feared that, unless the deficits are brought under control, markets will lose confidence and interest rates will rise to the point where they crowd out other government investments as well as private investment.

Holtz-Eakin noted that from 1960-2000, deficits averaged about 2% of gross domestic product, and Americans’ standard of living doubled every 29 years. In the 21st century, deficits have been well over 5% of GDP, and the standard of living is doubling every 56 years.

“And you see in newspaper stories all the time, and you see polling all the time that says that people now feel like they don’t have the same chance to get ahead as their parents did,” he said. “It’s true. And that’s why we should care.”

He said that during the 20th century, policymakers addressed crises and still left budgetary room to address other needs. That has not happened this century. Presidential leadership on the issue since Clinton has been lacking.

“We haven’t had in the 21st century the most important public educator, the most important leader, stand up and say to the American people, the federal budget is a problem, and it is a problem for you and your families, and we need to do something about it,” he said. “That’s just been missing, and that’s got to change.”

Asked for a show of hands, most audience members along with Yellen predicted a government shutdown at the end of the fiscal year Sept. 30. MacGuineas and Holtz-Eaken predicted there would not be one.

Yellen said that a bipartisan effort led to the 1997 budget agreement during the Clinton administration after years of rancor between Republicans and Democrats. Furthermore, she noted that in 2023, the federal government was facing a debt ceiling crisis. Democrats and Republicans compromised to make a deal.

Future cooperation could occur because of market pressures and because of the deadline pressure caused by the expected insolvencies in 2032 of the Social Security trust fund and Medicare Part A hospital trust fund. Social Security faces across-the board benefit cuts of 24% in seven years.

Yellen said all three credit agencies have downgraded U.S. debt. Spikes have occurred in interest rates, suggesting markets are nervous about the United States’ ability to deal with the debt.

“I think when there are market pressures, it will concentrate minds very powerfully, and there will be a meaningful response,” she said.

Holtz-Eakin said politics makes creating solutions difficult. But the political environment could change. Presidential candidates in 2028 will have to address the trust fund insolvencies because they will happen during their term.

“If you’re a congressman, and you go back to the town hall, and say, ‘You know, I’d really like to do Social Security reform,’ you’re working at the Tastee Freez in about two weeks,” he said. “I mean, it’s over.

“But right now, if you’re 55 and you want to retire at 65, you don’t know what your Social Security benefits are going to be because we’re going to do Social Security reform in the next seven years. And so increasingly, people are going to go to that same town hall and say, ‘Hey, what’s the deal? What am I going to get? When are you going to fix this?’”

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