Secretary Janet L. Yellen participates in a fireside conversation at The Atlantic Festival

Madam Secretary, so good to be with you again. Pleasure. You are also, in addition to your current role, a former chair of the Fed. The Fed yesterday made its long-awaited decision to cut interest rates. What did you make of what they did? Did they go far enough? Well, I'm not going to comment on the details of their decision, but let me just say I see this as a very positive sign for where the US economy is. It reflects confidence on the part of the Fed that inflation has come way down and is on a path back to the 2% target, and that the risks with respect to inflation have really meaningfully diminished. And at the same time, we have a job market that remains strong, and an overriding concern or motive is to try to make sure it stays strong. And monetary policy has been tight, and readjusting the stance of monetary policy to preserve the strength of the labor market when inflation has come down is what I think this decision signifies. Does that imply that this should be the first of several? Well, I think the stance of monetary policy remains restrictive. Chair Powell said yesterday that, and we saw in the projections by the FOMC participants, that if the expectation is that interest rates will come down further, but it's, of course, necessary to watch incoming data, and there can always be surprises. So last time we were on this stage in 2022, there was a great deal of apprehension about the economy, about the Biden administration's management of the economy. Well, here we are now, two years later, unemployment 4.2%, inflation under 3%, Fed finally cutting interest rates. I know Taylor Swift has been in the news a lot lately, so let me ask you, are we out of the woods? Well, there were always risks to the economy, so one has to avoid being overconfident here. But when we spoke two years ago, what I said was, I believe that there was a path to bring inflation down in the context of a strong job market. And if the Fed and the administration's policies could succeed in accomplishing that, we'd call that a soft landing, and I believe that's exactly what we're seeing in the economy. So just to button up this point, do you think we have achieved the soft landing and we will not see unemployment rise unacceptably out of a fear that the Fed waited too long? So I do believe the job market remains strong. The unemployment rate has moved up meaningfully, but from historically low levels, and it's rare to have in the United States unemployment rate with four as the first digit. This is a good, strong labor market. It looks a lot like the labor market back in 2019 before the pandemic. It's not as hot as the labor market was a year and a half or two years ago when firms were utterly struggling to hire back employees that they had laid off during the pandemic, and there had been huge shifts in demand. Wages were rising very rapidly. Now wages are going up at a good pace, faster than inflation, so workers are getting ahead in real terms. But what we're seeing is a normal, healthy labor market. We still have positive job growth in the economy, and I believe it's possible to stay on this course, and this would be an excellent outcome. Let me ask you about two immediate events in the news. One, how big a disruption to the economy So again, I'm not able to talk about the specifics of this or any transaction under very strict confidentiality rules that govern CFIUS, but let me say I do believe that trade and foreign direct investment are very beneficial for the U.S. economy. You're right that we have focused on trying to deepen our ties with trade and investment with a range of countries who are our friends to diversify our supply chains, and in particular to reduce our dependence on China for a number of key inputs and goods. And foreign direct investment supports millions and millions of jobs in the United States, and foreign firms invest, I believe, $150 billion just last year in the U.S. economy. I think it's critically important to have an open and welcoming environment encouraging foreign direct investment in the United States, but there can be, and CFIUS' job is to identify if there are any national security concerns, and that is always the focus, both in the law and in the process that CFIUS engages in to see if there are foreign, if there are national security concerns, and if so, is it possible to mitigate them? And that's what we do in every case. And for the acronym challenged in the room, CFIUS is the Committee on Foreign Investment in the United States, which the Treasury Secretary chairs. Correct. All right, let me ask you about another area. I know that you can't talk about specific policies or individual candidates in the presidential race, but as much in your kind of life as an economist, and as in your current job as Treasury Secretary, I want to ask you about the debate about tariffs, and this kind of fundamental question about tariffs. Who pays the tariff? Is it a foreign country that is really paying the tariff, or is it American? If tariffs are raised, is it American consumers who ultimately pay the bill? Well, there's been a great deal of economic research on this topic, and almost all of it suggests that the purchases of the goods, in this case, Americans, if we have tariffs, will end up paying the tariffs and seeing higher prices for the goods that they purchase. So the idea that American consumers will be held harmless and this is somehow being paid by China or Europe is... That's generally not what happens, and there have been many studies that pretty rigorously document that. Yeah. There was a study, speaking of which the other day, that calculated that undocumented migrants account for 22% of agricultural workers, 15% of construction workers, 8% of manufacturing workers, and 8% of service workers, including child care workers. In your view, what would be the impact of removing all or most of them from the economy in a short time through a program of mass deportation? Well, I believe that immigrants have always made and continue to make a positive contribution to the U.S. economy. Between, I think, 2010... You know, we have an aging population withdrawing, it's pushing down labor force participation. Between 2010 and 2018, immigrants made up, I believe, 60% of all additions to the labor force. They obviously contribute to the dynamism of the U.S. economy, and we need, I believe, an orderly immigration system, and there's obviously work to do for Congress to work with the administration to accomplish that, but I think it would be devastating to simply remove this number of immigrants. Now, with that, you know, there's been a lot of debate about whether that would relieve pressure on prices or removing that many workers, particularly from agricultural and construction. What would that mean in your view for inflation? Well, I think it would raise inflation. These workers have contributed to America's ability to produce more goods, including agricultural goods, and this influx we've seen since the pandemic, and it's not only through immigration, it's also we're seeing the highest labor force participation on record for adult women. The influx of workers into the labor market is something that's helped to bring down inflation and create a lot of jobs. The biggest fiscal policy decision facing the next president, the end of next year, the Trump tax cuts passed in 2017 expire. Let's kind of walk through the different scenarios. In your view, what would be the impact of extending the entire tax cut as it was passed in 2017? So, if the entire tax cut is just extended and nothing is allowed to expire, I believe the Congressional Budget Office has estimated that over 10 years, that would be almost a $5 trillion blow to the overall budget deficit. And honestly, I really believe that's something the United States can't afford. We need to be on a sustainable fiscal path if we extend any of the tax cuts, and President Biden and Vice President Harris have suggested extending the tax cuts that benefited middle-class families, families making under $400,000, increasing the child tax credit. Ways absolutely have to be found to pay for that. And in addition, we need to lower deficits to stay on a fiscally sustainable path. Given the pressure on deficits that CBO shows, and given what you said before about an aging society, what's the case against just letting the whole thing expire? Why extend it for people up to $400,000 or $450,000? Is there a case for just letting the whole thing go away in 2025 and returning to the tax code under Obama? Well, you know, President Biden and Vice President Harris are really concerned about the ability of middle-class families to make ends meet. And they really face a variety of stresses due to the high cost of living, particularly in areas like child care, health care, housing. And they believe it's the right thing to allow middle-income families not to see their taxes increase. Now, the cost of that is only a fraction of what it would be to extend all of those tax cuts, because they mainly benefited very high-income people, wealthy people, and corporations. And they've expressed opposition to allowing that to happen. On top of that, you know, there are ways to pay for both investments that make our economy function better, more productive, and address the high cost of living that is of such concern to Americans. And you believe that if you look at the costs of the investment agenda, what the administration wants to do, the care economy, as well as the cost of an aging society, that all of that can be funded primarily by raising taxes on people at the very top, as opposed to clawing back some of the cuts that Republicans have made under Bush and under Trump among people who are kind of upper middle, when we're talking about 400,000. I mean, is it really plausible to do all the things that Democrats want to do in the long run solely by raising taxes on the very top 5% or so? Well, I believe it actually is. And we've presented a budget for 2025 that does bring back the child tax credit, the earned income tax credit, invests in our economy in ways that will boost long-run productivity, and in addition to that, achieves $3 trillion of deficit reduction. In part, the wealthiest individuals, much of their income comes from capital gains, which, until they're realized, are never taxed and often escape taxation entirely through step-up of basis when people die. And the impact of that is that some of the wealthiest Americans, the highest income Americans, are paying average taxes that are under 10%, and something like 60% of those people pay 2% or less, which is less than a school teacher or policeman pay on their income, and we need a fairer tax system. Let's turn to another issue. Let's turn to another issue that has occupied a lot of your time, China. This summer, President Biden issued an executive order limiting U.S. investments in Chinese technology companies. Last week, he finalized a series of tariffs on Chinese imports, EVs, EV batteries, solar panels, critical mineral steel, and aluminum. Are you concerned about the direction of the economic relationship between these two giant economies, particularly when the U.S. is so intertwined with China in its modern economy? So, we have an extensive trade and investment relationship with China, and I believe most of it is beneficial both to the United States and also to China, and uncontroversial. It doesn't raise national security issues and doesn't raise profound issues of unfair trade. And I think it's important, and I've worked to develop a relationship with China in which that kind of trade and investment can continue to thrive, and we, on both sides, recognize the benefits of it. That said, we do have concerns, and we have national security concerns. The United States is not going to compromise when it comes to threats to our national security impact. We do have export controls. We have controlled the exports of goods that we think can boost China's military in ways that will be damaging to U.S. national security. And in addition to that, we have extreme supply chain dependence, and I would say over-dependence in many areas in China. In some cases, these are areas where China is heavily engaged in building capacity through enormous subsidies to their industry. And those are areas where we do have concerns. We feel trade should be on a level playing field, and we want to make sure that we have resilient and diverse supply chains. The tariffs that you mentioned that we put on electric vehicles and on battery components, aluminum and steel, these are areas where China has enormous excess capacity. We've made a conscious decision that in the area of clean energy, we want to develop this as an industry in the United States. That's not to say we want to do everything entirely ourselves. We believe in friend-sharing. We've built and deepened ties with many countries in Latin America and Asia that can be part of those supply chains, but we really want to reduce our dependence on China. The tariffs that you mentioned that we put on those goods, you're talking about $18 billion worth of imports at the moment. So, these are very targeted interventions in areas where we feel we have a legitimate concern. It isn't just supply chain, though, right? I mean, as you point out, the administration has put enormous effort into accelerating the development of the clean energy industries in the U.S., which Treasury has been involved in tracking all of the construction spending that's going on. Are you concerned that without these tariffs, Chinese imports would simply overwhelm those nascent industries that we are trying to develop in the U.S.? Is this fundamentally about protecting the new clean energy industries domestically? That is an important motive. At the moment, in areas like solar panels, wind turbines, electric vehicles, electric batteries, China's prices and costs are extremely low. All of these are areas that China has engaged in enormous investment in over the last decade, and in many cases, there is just utter overcapacity in China. So, China's production of solar panels exceeds total global demand. The Chinese government at all levels has been throwing money to develop these industries, and yes, I would say without some protection, our industry is not going to get off the ground. And this is a conscious decision that, well, we're certainly willing to engage in trade and clean energy with friends. We do want to have some presence in the United States in these industries of the future that are important in supplying jobs to good jobs, especially to people who don't have a college education. Let me ask you one more question about this, which goes back into the past. You served in the Bill Clinton administration as the chair of the Council of Economic Advisers. You're the only person who has the triple crown of CEA, Fed, and Treasury Secretary, quite an accomplishment. But, you know, in the Clinton era, there was, and certainly that he believed, that integrating China into the global economy was a way not only of providing economic opportunity around, you know, for the developed world, but also moderating its behavior and that there was a value in kind of building economic ties and lowering trade barriers around the world. I would say if there's one area of convergence between Kamala Harris, Tim Walz, J.D. Vance, and Donald Trump, it is kind of, and Joe Biden in many ways, it is the rejection of that view. Has the pendulum swung too far in the other direction in your view? Are we missing an opportunity as countries really around the world become more focused on nurturing these domestic industries and building barriers to more economic integration? So I think what we saw, so first of all, I think some of the hopes and aspirations we've had for the development of China, growing democracy hopefully in China, along with economic development, we've been disappointed that that hasn't come to pass. And I think the impact of China, our burgeoning trade with China in the aftermath of China's joining the WTO, it really imposed, along with other factors, harm on especially workers in America who lacked a college education. And we experienced something that's referred to as the China shock. And we saw several million manufacturing jobs in parts of the country that truly needed these jobs. They disappeared. And, you know, trade is good and it can enhance overall the welfare of a country. But if the gains are not sufficiently widespread, it's something that is not sustainable over the longer run. And I think we saw that while there may have been gains, there were a significant group of Americans that were losers. This is not to say that we should shut down trade and investment with China. We gained from much of it. But I think the attitude about what impact does it have on the United States has become more realistic over time. And this shift in temperature toward China, do you see it reversing anytime soon? Or is this now the new policy consensus in the US that's going to endure? Well, there does seem to be bipartisan agreement. And my concern, I understand the rationale for it and agree with it. But I do think that much of we have a deep trade and investment relationship with China. And much of it is beneficial to America. It supports our export industries. We gain new technology from it. It's a benefit to America. And I would not want to see this backlash proceed to the point where we really interfere with those benefits. Secretary Yellen, we're going to have to leave it there. Thank you so much for joining us this morning. My pleasure.