Yellen, speaking at a business incubator in the Washington, D.C. area's Dulles technology corridor, said that the U.S. lead in technology innovation has increasingly come under threat from China and other competitors.

"We had failed to make adequate investments in science and technology. Federal R&D as a percent of GDP had dropped to a third of 1960s levels," she said in the latest of a series of campaign-style speeches touting President Joe Biden's economic initiatives.

She said the CHIPS and Science Act, which will invest $52 billion in subsidies for semiconductors and research, would help reverse a decline in the U.S. share of global semiconductor output, which has fallen to 12% from 37% three decades ago. Investments in infrastructure and clean energy will also help.

"Our government's failure to invest in innovation has had wide-ranging impacts on our long-term economic well-being. At the most fundamental level, it impacted our productive capacity. That's the ceiling for what our economy can produce," Yellen said.

By one measure, the chips shortage of 2021 shaved about a full percentage point off of economic growth, as production of cars and other goods was constrained, Yellen said, adding that there is little U.S. capacity for the most advanced semiconductors.

Building a semiconductor ecosystem at home will help mitigate the risks of a severe chip shortage," she said.

Mobilizing capital toward semiconductors and clean energy, through a recently enacted climate and drugs package and boosting research and development will raise the U.S. economy's aggregate production capacity.

"And in turn, we are raising America's long-term economic outlook," Yellen said.