By David Lawder

WASHINGTON (Reuters) -U.S. Treasury Secretary Janet Yellen said on Friday the Biden administration’s economic agenda will not only expand the productive capacity of the U.S. economy, but can propel faster growth by reducing economic and racial disparities.

In remarks to a Stanford University economics conference, Yellen provided more details on the approach she has branded “modern supply-side economics,” which incorporates the key elements from the Biden administration’s “Build Back Better” agenda: investments in child care, education, job training, infrastructure and healthcare.

Despite a strong recovery from the COVID-19 pandemic, Yellen said sluggish growth forecasts in coming decades due to an aging population mean that a model is needed.

“These facts suggest the need for a policy approach that fosters greater equity across places and races while, at the same time, propelling faster aggregate growth,” Yellen said.

She said her modern supply-side economics concept – a new twist on the Reagan-era term associated with “trickle-down” economics driven by tax cuts – aims to expand U.S. growth potential through investments in boosting productivity, such as more research funding, coupled with an expanded workforce, through better education and child care funding to draw more women into the labor force.

Yellen introduced the concept in January during the World Economic Forum.

But instead of having those benefits flow to a limited number of booming cities and wealthy communities, she said the Biden administration’s plans would ensure that “disadvantaged communities and racial groups receive an adequate share of investments in both physical and human capital.”

“Such an approach yields larger aggregate gains under the basic economic premise that returns to investment exhibit diminishing returns,” Yellen said. “In the context of investments in people, directing public resources to children and to workers who have received less education and training can yield the largest bang for the buck — and a return that can last decades.”

Key Biden proposals that can help achieve greater equity include child care subsidies that can draw more women into the workforce, and an expanded Earned Income Tax Credit, Yellen said.

Defending her thesis in a scholarly manner during the Stanford conference, Yellen cited research https://www.brookings.edu/wp-content/uploads/2021/09/The-Economic-Gains-from-Equity_Conf-Draft.pdf co-authored by San Francisco Federal Reserve President Mary Daly showing that more equitable access to labor markets over the past 30 years would add $790 billion to the U.S. economy annually.

She also cited a paper http://klenow.com/HHJK.pdf from Stanford and University of Chicago researchers that concludes that 20% to 40% of the growth in U.S. economic output per person from 1960 to 2010 can be explained by the inclusion of women and racial minorities in highly skilled occupations, such as the rising share of non-white doctors and female lawyers.

In a question-and-answer session, Yellen said that Friday’s jobs report showing 675,000 jobs added to the economy in February was a sign of underlying strength in the U.S. economy..

She said that the Federal Reserve was working to bring down inflation without causing a recession.

“This is something that is not unheard of,” she said, noting that strong growth followed Fed rate hikes in the 1990s.

(Reporting by David Lawder in WashingtonEditing by Jonathan Oatis and Matthew Lewis)

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