Written by Michael S. Derby and David Lowder
NEW YORK/WASHINGTON (Reuters) – U.S. Treasury Secretary Janet Yellen said on Thursday that U.S. public investments that attract private capital are essential to promoting long-term sustainable and inclusive growth, but she warned that the Chinese model of massive state industrial subsidies was not acceptable to the world.
Yellen said in prepared remarks to the Economic Club of New York that the traditional Republican model of “supply-side economics” relied too heavily on tax cuts to stimulate investment and failed to benefit enough workers.
Yellen’s speech to top business and Wall Street leaders was a rebuttal of sorts to Republican presidential candidate Donald Trump’s presentation of his economic vision to top US executives in Washington, including Apple CEO Tim Cook and JPMorgan Chase CEO Jamie Dimon. .
The Business Roundtable event in Washington is also expected to include a presentation by White House Chief of Staff Jeff Zients, who represents President Joe Biden, who is attending the G7 leaders’ summit in Italy.
Trump’s campaign did not go into specifics about his economic plans, but his message to CEOs focused on corporate tax cuts and less business regulation, according to Trump economic adviser Stephen Moore.
Trump has pledged to continue the tax cuts he signed into law in 2017, and has said he wants to provide middle-class tax relief, reduce regulations and expand fossil fuel energy production while mirroring Biden’s clean energy initiatives. In Nevada, on Sunday, he introduced a plan to stop taxing tip income from service workers.
“We have learned through experience that strict central planning through government dictates is not a sustainable economic strategy,” Yellen said in prepared remarks. “But this does not apply to traditional supply-side economics, which ignores the importance of public infrastructure, education, workforce training, and government-supported basic research.”
She added that tax cuts for the wealthy and deregulation have not fueled “growth and prosperity for the nation as a whole.”
Yellen highlighted the Biden administration’s key legislative initiatives to invest in the US economy through the Infrastructure Act of 2021 and the semiconductor investments and clean energy tax credits passed in 2022.
These include allocations for worker training and have resulted in $850 billion in new industrial investments in the private sector in the United States since Biden took office in 2021, she said.
“It has been clear to President Biden and me that our economic strategy cannot be led by the public or private sector alone,” she said. The principle, which she calls “modern supply-side economics,” requires public interventions “to create a supportive environment for business and fuel private sector investment.”
She said that the strong US economy is helping to drive global growth, with low inflation and high investment returns, and she expressed optimism that these trends will continue.
Chinese support
Yellen also sought to contrast Biden’s approach with China’s, saying excessive government support for strategic industries has created excess manufacturing capacity far above weak domestic demand. Now the flood of exports resulting from this overinvestment threatens jobs around the world and creates new trade barriers in the United States and elsewhere.
“China cannot assume that the rest of the world will quickly absorb massive amounts of surplus production at the expense of domestic industries in other countries,” Yellen said.
“If China continues on this path, I fear that its policies may significantly interfere with our efforts to build a healthy economic relationship,” Yellen said. But she reiterated her view that decoupling the world’s two largest economies would harm US interests.
When asked by reporters later about the possibility of the Treasury Department imposing secondary sanctions on a Chinese bank for violating US sanctions on Russia by processing transactions that aid Moscow’s war production, Yellen said she believed China’s largest banks were wary of such deals.
“I certainly wouldn’t say we wouldn’t be willing to designate a large bank if we saw systemic violations,” Yellen said, adding: “The largest banks in China really value their correspondent banking relationships.”
(Reporting by Michael Derby in New York and David Lauder in Washington; Writing by David Lauder; Editing by Andrea Ritchie)