U.S. Treasury Secretary Janet Yellen said on Thursday that U.S. public investments that attract private capital are crucial to promote sustainable and inclusive growth over the long term, but warned that China’s model of massive state industrial subsidies were unacceptable to the world.
Yellen said in prepared remarks to the Economic Club of New York that the traditional Republican model of “supply-side economics” relies too heavily on tax cuts to spur investment and has failed to benefit enough workers.
Yellen’s speech to top business executives and Wall Street leaders marked a rebuttal of sorts to a presentation that Republican presidential candidate Donald Trump delivered on his economic vision to top U.S. CEOs in Washington, including Apple CEO Tim Cook and JP Morgan Chase CEO Jamie Dimon.
The Business Roundtable event in Washington also was expected to feature a presentation by White House Chief of Staff Jeff Zients, representing President Joe Biden, who is attending a summit of G7 leaders in Italy.
Trump’s campaign has been light on specifics about his economic plans, but his message to CEOs emphasized tax cuts for businesses and reduced business regulation, according to Trump economic adviser Stephen Moore.
Trump has pledged to continue tax cuts that he signed into law in 2017 and has said he wants to offer tax relief to the middle class, reduce regulations and expand fossil-fuel energy production while reversing Biden’s clean energy initiatives. In Nevada on Sunday, he floated a plan to stop taxing service workers’ tip income.
“We have learned through experience that heavy-handed central planning through government dictates is not a sustainable economic strategy,” Yellen said in prepared remarks. “But neither is traditional supply-side economics, which ignores the importance of public infrastructure, education and workforce training and government-supported basic research.”
Tax cuts for the wealthy and deregulation have not fueled “growth and prosperity for the nation at large,” she added.
Yellen highlighted the Biden administration’s major legislative initiatives to invest in the U.S. economy with a 2021 infrastructure law and semiconductor investments and clean energy tax credits passed in 2022.
These included provisions to train workers and have resulted in $850 billion worth of new private-sector manufacturing investments in the U.S. since Biden took office in 2021, she said.
“It’s been clear to President Biden and me that our economic strategy cannot be driven by either the public or private sector alone,” she said. The doctrine she calls “modern supply-side economics” requires public interventions to “create a supportive environment for business and fuel private sector investments.”
She said that a strong U.S. economy was helping to drive global growth, with falling inflation and high investment returns, and was optimistic that these trends would continue.
CHINESE SUBSIDIES
Yellen also sought to contrast the Biden approach with that of China, saying that excessive government subsidies for strategic industries have fueled excess manufacturing capacity far above weak domestic demand. A flood of exports resulting from this overinvestment now threatens jobs around the world and is leading to new trade barriers in the U.S. and elsewhere.
“China cannot assume that the rest of the world will rapidly absorb huge quantities of excess production to the detriment of domestic industries in other countries,” Yellen said.
“If China continues on this path, I fear that its policies may interfere significantly with our efforts to build a healthy economic relationship,” Yellen said. But she repeated her view that decoupling the world’s two largest economies would be detrimental to U.S. interests.
Asked by reporters later about the possibility the Treasury could impose secondary sanctions on a Chinese bank for violating U.S. sanctions on Russia through processing transactions that aid Moscow’s war production, Yellen said she believed the largest Chinese banks were wary of such deals.
“I’m certainly not going to say that we would not be willing to designate a large bank if we saw systematic violations,” Yellen said, adding: “The largest banks in China really, really value their correspondent banking relations.”
