Elizabeth Warren's Economic Proposals Would Not Make a Recession More Likely, Says Ex-Fed Chair Janet Yellen

A former chair of the Federal Reserve said the economic policies of Senator Elizabeth Warren, a leading candidate for the Democratic Party's 2020 nomination, would not increase the odds of a recession.

Warren's comprehensive and detailed economic platform includes plans to raise taxes on the wealthiest households, break up the banks, tighten Wall Street regulation, and increase federal spending by trillions on health care, higher education, and clean energy, among other areas.

But critics of the Massachusetts senator, who is a former Harvard law professor specializing in bankruptcy, argue that her proposals would harm the American economy by curbing investment, send the markets tumbling, and even bring about a recession.

"I see no reason why her proposals would make a recession more likely," Janet Yellen, who chaired the Federal Reserve from 2014 to 2018 and is now a distinguished economics fellow at the think tank Brookings, told Newsweek.

"She proposes various taxes to pay for high priority spending initiatives. On balance, tax-financed spending should boost, not restrain, demand. She also proposes tough regulation of the financial system, which diminishes the odds of a future financial crisis."

Treasury Secretary Steve Mnuchin claimed in September that Warren's plans for the economy would lead to a recession or a worse economic crisis. "I think if you listen to the Elizabeth Warren plan, it is 100 percent recession, if not worse," Mnuchin told reporters.

"It is perfectly clear that there are two different approaches to the economy. I think it's clear what our approach has been, and it's worked, whether it's our tax cuts, regulatory relief, or trade."

The Trump administration's Tax Cuts and Jobs Act 2017 slashed taxes by $1.5 trillion, mostly benefiting those with larger incomes and greater wealth, arguing that it would lead to a surge in economic growth and therefore be self-funding.

Instead, the federal deficit has bloated to near $1 trillion and the evidence suggests there has been little impact on economic growth. "On the whole, the growth effects tend to show a relatively small (if any) first-year effect on the economy," found a recent report on the tax changes by the Congressional Research Service (CRS).

Leon Cooperman, a billionaire former Goldman Sachs executive who now runs the investment firm Omega Advisors, believes the election of Warren as president would send markets down by 25 percent.

"What is wrong with billionaires?" Cooperman told Politico. "You can become a billionaire by developing products and services that people will pay for. I believe in a progressive income tax and the rich paying more. But this is the f**king American Dream she is s**tting on."

Warren recently announced that she would, on day one of her presidency if elected, put in place a "total moratorium on all new fossil fuel leases for drilling offshore and on public lands. And I will ban fracking—everywhere." The plan is to shift investment to renewables.

According to the Wall Street Journal, energy market investors were spooked and predicted a large spike in natural gas prices and that it would kill off some oil-related companies. The share prices of exposed energy companies would also likely take a hit.

A head U.S. economist at an economic consultancy, who declined to comment publicly because of its political sensitivity, told Newsweek they view Warren's plans as fiscally neutral, but that her proposals for the banks, as well as to break up the tech giants, were bad for the stock markets.

They also said the big question for voters, on which they would have to make a value judgement, is whether this should all be done anyway, regardless of the impact on stocks.

Elizabeth Warren 2020 recession economic plans policy
Democratic Presidential Candidate Sen. Elizabeth Warren (D-MA) speaks during a town hall event on October 18, 2019 in Norfolk, Virginia. Warren is pledging to overhaul the American economy. Zach Gibson/Getty Images