2024 Stephen C. Freidheim Symposium on Global Economics

FROMAN: Well, good afternoon, everybody, and welcome. My name is Mike Froman. I’m president of the Council on Foreign Relations.

And it’s great to be able to welcome Janet Yellen, the U.S. secretary of treasury, to be here for the Stephen C. Friedheim Symposium on Global Economics. Secretary Yellen is the 78th Treasury secretary. She’s also served as the chairman of the Federal Reserve and as the chair of the White House Council on Economic Advisers. So it’s a great honor to have you here.

We’re also honored to have Steve Friedheim here, who the symposium is supported by. Steve is a longtime member of the Council, a member of the Council board, and chair of our investment committee. And so we are very grateful to Steve, not only for support of his symposium but we’re keeping our endowment growing year on year and supporting the activities of the Council.

This is on the record. What we’re going to do is have the secretary give some remarks initially, then she and I will have a conversation for about thirty minutes or so, and then we’ll open it up to questions from people here in the audience, as well as people online. We have about 120 people here and about 250 or so who are participating virtually as well.

And with that, let me welcome the secretary of the treasury. (Applause.)

YELLEN: Thank you. And before our discussion, I’d like to speak to the Biden-Harris administration’s international economic policy, which will continue to move forward next week at the IMF and World Bank annual meetings. Our international economic policy has many objectives, including addressing critical challenges facing the entire globe, but I’d like to especially focus today on how it complements our domestic economic agenda to benefit American businesses and families.

At home, our administration has driven an historic economic recovery. U.S. GDP growth is strong. Our unemployment rate is near historic lows. And inflation has declined significantly. We’re now doing everything we can to lower costs for American families and pursuing a strategy I’ve called modern supply-side economics, which aims to expand our economy’s capacity to produce while reducing inequality.

We’ve seen record small business growth and an historic boom in factory construction led by facilities producing semiconductors and electric vehicle batteries. Productivity growth has been strong. More prime-age Americans are participating in our labor force than at any point over the past two decades and we’re reaching people in places that historically had not benefited from enough investment supporting well-paying jobs for Americans without college degrees.

America’s strong economic performance is helping power the global economy which remains resilient, though progress across economies has been uneven. And it’s not just our actions at home that are supporting the global economy but from the start of this administration President Biden and Vice President Harris have also charted a new course for America’s international economic policy.

We’re focused on stabilizing and strengthening relationships and working multilaterally including because we believe that America’s economic well-being depends on a global economy that’s growing and secure.

American businesses and families have a tremendous amount to gain from our connections to the global economy and from U.S. global economic leadership. We need to promote policies, investments, and institutions that support global growth, protect financial stability, and avoid economic instability.

This includes tackling challenges like climate change, pandemics, and conflict and fragility that threaten to hold back global growth, and it will be high on the agenda at next week’s meetings.

Calls for walling America off with high tariffs on friends and competitors alike or by treating even our closest allies as transactional partners are deeply misguided. Sweeping untargeted tariffs would raise prices for American families and make our businesses less competitive, and we cannot even hope to advance our economic and security interests such as opposing Russia’s illegal invasion of Ukraine if we go it alone.

But the issues we face today, from broken supply chains to climate change and global pandemic preparedness to China’s industrial overcapacity, also mean we cannot simply draw from an old playbook. Let me explain how our approach is delivering the benefits of global growth to Americans, tackling global challenges, and countering threats to our competitiveness and national security.

Let me start with how our work helps Americans realize the benefits of global growth including through trade and investment. Trade expands the market for our exports from services to goods like transportation equipment and electronics. It helps our producers efficiently source key inputs and enables American consumers to access more goods at lower prices.

The U.S. Chamber of Commerce estimates that more than 41 million American jobs depend on trade. American businesses also grow from investing abroad and recent research finds that over 10 percent of U.S. employment could be directly or indirectly attributable to foreign direct investment in the United States.

Trade and investment also offer crucial pathways to greater economic security. During the COVID-19 pandemic we saw American consumers and businesses pay the price of broken or over concentrated supply chains. When the chip shortage forced temporary plant closures, companies lost revenue, workers lost wages, and families faced higher prices.

Our work to reinvigorate American manufacturing, including through the CHIPS and Science Act, is necessary, but it’s not sufficient to realize the promise of trade and investment, and to confront supply chain challenges. This requires strategic global engagement.

So we led efforts to put in place a global minimum tax that will prevent a race to the bottom. It will also level the playing field for American businesses, providing us with more resources to invest at home.

We’re strengthening our supply chains through an approach I’ve called friendshoring, which aims to bolster ties with a wide range of trusted allies and partners. We and partners launched the Minerals Security Partnership to accelerate the development of critical minerals supply chains. We negotiated a critical minerals agreement with Japan and a supply chain agreement with Indo-Pacific Economic Framework for Prosperity partner countries. We’re supporting the Partnership for Resilient and Inclusive Supply Chain Enhancement, and working with the Inter-American Development Bank to find opportunities to enhance competitiveness and support key supply chains in Americas Partnership for Economic Prosperity, or APEF, countries. We’re leveraging the CHIPS and Science Act to pursue partnerships to diversify the global semiconductor ecosystem. And last May, we took another step forward by launching the Nairobi-Washington Vision to accelerate investments toward clean and resilient economies and supply chains.

I’ve seen the fruits of our engagement in my travels as treasury secretary, from American company—an American company processing lithium in Chile to a U.S.-funded job-training facility in South Africa, among many other examples. Through our global engagements we’re strengthening economies around the world, and we’re growing American businesses and creating American jobs, supporting American consumers, and increasing our country’s economic security.

America’s economic future, however, also depends on tackling challenges that cross borders to affect people and economies around the world, including the American people and the U.S. economy.

I’ll start with pandemics. No matter what we do at home, without addressing critical gaps in the global health infrastructure to strengthen global preparedness, preparation, and response, a future pandemic could negatively impact many economies with significant spillovers to ours. So in the aftermath of the COVID-19 pandemic, I worked with fellow finance and health ministers to take actions like launching the Pandemic Fund. It was set up and scaled in record time, and it’s now allocating desperately needed resources in response to its second call for proposals to support countries across the globe, in turn making Americans safer and more secure.

Climate change is another powerful example. The destruction we’ve seen this hurricane season in the United States is the latest reminder of the need for bold action. At home our actions include fueling the transition to clean energy through the Inflation Reduction Act, developing principles for net-zero financing and investment to affirm the importance of credible net-zero commitments, and addressing the risks climate change poses to U.S. financial stability. But emissions everywhere around the globe contribute to climate change, and we’re impacted by increasingly severe and frequent climate-related events wherever they occur. Damage to infrastructure abroad affects the availability and prices of energy and agricultural goods, like coffee and cacao. We suffer from smoke from wildfires in Canada and from precarious shared water resources with Mexico. And the potential risks climate change poses to global financial stability are increasingly widely recognized as well. This means that helping countries around the world mitigate and adapt, and financial institutions globally pursue transition finance, is crucial, including to protect American businesses and families.

So we’ve made a massive push as part of our multilateral development bank evolution agenda to better equip the MDBs to help countries address climate change, including through increasing climate financing. We’ve worked with partners to launch just energy transition partnerships to help countries accelerate their transitions and strengthen their economies. We’ve pursued bilateral efforts, like a partnership we launched with Brazil’s Fazenda in July. And we’re working multilaterally, such as through the G-20 Sustainable Finance Working Group. And we’ve been focused on harnessing the private sector, including through the Partnership for Global Infrastructure and Investment and the Global Agriculture and Food Security Program.

Alongside pandemics and climate change, conflict and fragility abroad, also pose risks to countries around the world and to America’s economy and national security. So we’re engaging on these challenges as well, including through the MDB evolution agenda. Nor do risks to financial stability respect national borders, making the work of the Financial Stability Board and other global collaboration critical to ensuring a safe, stable, effective financial system, and protecting the global and U.S. economy. Put simply, in engaging to support countries around the world in tackling today’s greatest challenges we also lowered the likelihood of negative spillovers to the U.S. economy, like weakened markets for our exports and increased instability. The scale and nature of these challenges mean there is no alternative but to engage.

Let me end by emphasizing a third way in which our global engagement supports Americans, bolstering our competitiveness and national security, including through our approach to China. Trade and investment with China can bring significant gains to American firms and workers and must be maintained. But we must also have a healthy economic relationship based on a level playing field. China’s barriers to market access and unfair trade practices currently cause challenges for American firms and workers, and for other businesses looking to operate in China. China’s policies are also leading to industrial overcapacity in critical industries, threatening the viability of American and other firms, and increasing the risk of overconcentrated supply chains that undermine global economic resilience.

No matter how much we invest to strengthen our manufacturing at home, we cannot support American businesses and families without also engaging to address these challenges. The United States announced strategic and targeted steps in key sectors as a result of the Section 301 review to respond to unfair trade practices by the PRC. The European Union and emerging market countries have also taken, or are exploring, actions. I’ve raised concerns about overcapacity frequently and directly with my Chinese counterparts, including on multiple trips to China, and with America’s allies and partners who share these concerns and are also responding. This growing international consensus is a powerful indication to China that it must shift its practices.

Russia’s war on Ukraine has also revealed the necessity of strategic global engagement. Russia’s invasion caused immediate economic shocks like record gas prices in June of 2022. At home, releasing barrels from the Strategic Petroleum Reserve and record domestic oil and gas production helped address our short-term needs. But this would not have been enough to keep global energy markets well-supplied nor to oppose the threat Putin’s actions pose to the rules-based international order that underlies the strength of the global economy and the international financial system. So we formed a strong coalition and put in place a novel price cap, helping keep prices lower for American and global consumers than many economists forecast following the invasion. We’ve continued to strengthen sanctions to constrict Russia’s ability to wage war. We’re working toward unlocking the value of Russian sovereign assets to support Ukraine. This sustained global action allows us to accomplish what we could not alone, delivering immediate results and sending the clear message that dictators like Putin do not operate with impunity. Failing to engage or not engaging strategically would have disastrous effects, enabling Putin to destabilize Europe and undermine our collective security and the global economy.

In the coming months, we will continue to be focused on these and other priorities, including using all the tools at our disposal in response to the ongoing conflict in the Middle East. We’ve imposed sanctions on terrorist actors, including Hamas, the Houthis, and Hezbollah. And we’re also working to increase stability in the region by ensuring that legitimate aid flows reach Gaza and pressing for measures to support the West Bank economy.

Over the past four years, the world has been through a lot—from a once-in-a-century pandemic, to the largest land war in Europe since World War II, to increasingly frequent and severe climate disasters. This is only underlined that we’re all in it together. America’s well-being depends on the world’s, and America’s economic leadership is key to global prosperity and security. American isolationism and retrenchment will leave all of us worse off. I’m convinced that there is simply no other path forward than the one we will continue pursuing next week and in the months ahead: strategic international economic policy that delivers for American families and businesses, and others around the world.

Let me stop there, and I now look forward to our discussion. (Applause.)

FROMAN: Well, thank you very much for those remarks, and it’s great—it’s great to have you here.

Let’s start—let’s start with the macroeconomy. It appears that we are still in for a soft landing, despite the predictions of some. Inflation is coming down. And yet, the concerns about the cost of living are still very much top of mind for most Americans. Some have described the Biden-Harris administration’s approach to economics as shifting from being—it was traditionally perhaps consumer-oriented, to more production-oriented. Maybe that’s consistent with your supply new—modern supply-side economics. We had Lina Khan here recently. She certainly talked about focusing less on consumer welfare, more on competitive market structures and the production side of things.

How do you address the questions of high cost of living? And where do—you warned of broad-based tariffs and the effect that they could have on consumers. How do you think about the administration’s tariff and trade policy in that context? Vice President Harris has criticized the proposal by former President Trump as being a sales tax on the American people, but the administration did not eliminate any of the tariffs that they inherited from the Trump administration, including on nonstrategic goods from China. Why not?

YELLEN: Well, do you want to start with the high cost of living and go—(laughter)—

FROMAN: Sure. You can take any of that.

YELLEN: So let me just say, American families for a very long time have faced burdens that have raised the cost of living and made aspects of it increasingly unaffordable for middle class American families. The surge in inflation we saw during the pandemic highlighted that, but this really is something that dates well before that. And I’m thinking of an inadequate housing supply, high housing costs. And, of course, we had higher interest rates and a big increase in housing prices during the pandemic that made a bad situation worse. Childcare, increasingly unaffordable, a system that isn’t workable, high health care costs, energy prices.

And so we recognize that these are—even with inflation now down almost to the Fed’s objective—these are still burdens that face American families. And so this is a key focus of the Biden administration. And we’re working in a whole variety of ways. I think we’ve had some successes capping insulin prices, bringing down and stabilizing health insurance costs, getting an agreement to allow Medicare to negotiate drug prices, which saves money for the government and for households. We have proposals. Want to work with Congress on housing. And have had a lot of success on energy that will pay off over time.

But you asked about tariffs. And so let’s talk about how tariffs fit into that. So the idea of broad-based tariffs that I criticized in my remarks, this is not something that the Biden-Harris administration is supportive of at all. And I think the evidence, from many research studies over decades, is very clear that the burden of tariffs, it does operate like a sales tax—broad-based high tariffs will raise the cost of the goods that we import and produce competing goods domestically in the United States.

This includes intermediate goods that are critical to domestic firms producing in the United States that will make them less competitive, that will raise the cost of toys and other consumer goods that we really don’t produce in meaningful quantities in the United States, and raise the cost of living particularly for low-income households. And it will diminish our competitiveness and raise inflation. And so I think these are a very bad idea. They would meaningfully raise the cost of living.

Now, you mentioned the Biden administration’s tariffs. And it is true that President Trump put in place significant tariffs against a pretty wide range of imports from China. And the Biden administration didn’t get rid of them. And I think the main reason for that is that we look to China to address the practices that were emphasized in the 301 action, which went to issues of unfair competition. And China really did not address any of those issues. And until China made a meaningful attempt to respond to the 301 unfair trade practices, President Biden felt we should not—we should not reward China by lowering the tariffs.

So we have put in place some additional tariffs, but it’s on a narrow range of goods where we’ve decided that we want the United States consciously—sectors like semiconductors, renewables, clean energy, electric vehicles—where we really think it’s important for the United States to have some production capacity, partly for supply chain resilience that we don’t want to be completely dependent on China and partly because these are dynamic sectors where over time production leads to technological changes that reduce costs.

We’ve certainly seen that with renewables, with solar power, with wind. We’ll see technological changes. These industries will promote that over time and we want to have a presence in it.

That doesn’t mean that—I mentioned friend shoring. It doesn’t mean that we’re trying to dominate these industries globally or not to work with partners. We have strong partnerships with many countries around the world and are looking to work with them to enhance supply chain resilience.

And in line with this idea of modern supply side economics, the way I see that is over the medium term to promote growth medium and longer term one needs to be focused on the supply side of the economy, and traditional supply side economics that I would contrast my modern supply side economics with as an approach is always focused on kind of trickledown economics. Let’s give tax breaks to corporations and to the richest individuals and try to stimulate their private investment with the hope it will trickle down through the economy.

And I would contrast that with modern supply side economics, which really focuses on a much wider range of investments, infrastructure which—public infrastructure which was all but ignored in the United States for way too long. To have a competitive economy we have to promote our infrastructure.

Boosting labor supply and creating conditions that enable people to work, this would include something like childcare to boost labor force participation. Training—workforce training is really critical to be able to fill the jobs that are going to be created by these investments in research and development.

And the focus has been on this wider range of investments and trying to make them in ways that will bring opportunity to parts of the country that really have been suffering and really places that lost jobs, I’d say, between 1980 and the 2010s, partly because of China’s entry into the WTO and our massive imports from China but also broader forces including technological change.

We want to make sure that the investments that are being promoted go in an equitable way to parts of the country that haven’t had the opportunities they should have, and what we’re seeing in terms of the early returns on the hundreds of billions of dollars in investment that’s been promoted by the CHIPS and Science Act, the Inflation Reduction Act in clean energy, the investments are going disproportionately to counties with lower than average education, lower than average wages and incomes, and places that really need the good jobs and opportunity.

FROMAN: Embedded in the Biden administration’s approach, particularly the supply chains and China, is the recognition that while efficiency has been sort of the watchword of economics and international economics for a long time now issues like redundancy and diversification, national security, these are also important values.

But everything we do to reduce our dependence on China, on strategic or nonstrategic goods, does raise the cost in some way or another and I guess my question is you cross the street and go over to the Oval Office and have these conversations.

How do you weigh the tradeoffs between efficiency and redundancy and national security? How much should we be willing to pay more in order to have peace of mind that we’re not overly dependent on China?

YELLEN: So I think that’s a—that’s a great question.

FROMAN: I finally had a good question in, huh? (Laughter.)

YELLEN: No, all your questions have been good. (Laughs.) But I think that’s a really critical question. And I’d say I agree with you that there are tradeoffs. I mean, if you just take, for example, the Inflation Reduction Act, certainly it is the most important piece of climate legislation ever enacted in the United States, and arguably anywhere in the world. And reduction of greenhouse gas emissions is a key objective. But it’s not the only objective. And another objective is, as I said, to promote domestic industry supply chain resilience to reduce our dependence on China. I mean, right now China is producing, at extremely low cost, probably enough solar panels to supply China, the United States, the entire globe, and for a long time to come. This is an industry where there is huge overcapacity.

And if we simply only cared about efficiency—at least in the short run because this kind of dependence is dangerous, and later we could face higher prices and other problems and be vulnerable to cutoffs—we would buy a lot more from China and reduce costs and make faster progress on emissions reductions. So it is a balancing act. But the other goals are important too and can have substantial payoffs over time. So I can’t—

FROMAN: That’s a trick one, though, because you’re absolutely right. Take chips, for example. We want to have a domestic chip industry so we’re not overly dependent on one supplier. But climate change, there’s also an issue of urgency. And us putting higher costs on will make it less likely the people will adopt green technology, or buy a cheap electric vehicle from China, or deploy a cheap solar panel array from China. There, there’s an urgency issue, not just an efficiency issue. Are we willing to trade off climate change for that?

YELLEN: Well, we have a rich program of tax credits that go to—start with households that invest in energy efficiency equipment, in putting solar panels on their roof, for investing in a heat pump for their home. Tax credits to buy an electric vehicle. A significant array of tax incentives for firms. So perhaps we could lower the cost of some of the inputs somewhat, but we are counteracting that through subsidies to promote adoption. So, you know, it focuses on both things. I can’t give you a mathematical formula to tell you exactly how goals are being managed and tradeoffs are being called. But I think the administration is very aware of the tradeoffs, and has multiple goals in mind here, including supply chain resilience.

FROMAN: And when it comes to industrial policy, which used to be sort of, you know, a pejorative or a bad word, now it’s become very much part of—central to our economic approach, the administration’s been pretty targeted. Chips, electric vehicles, other clean energy technologies. How do you make sure that it’s not a slippery slope for whatever the squeakiest wheel is in Washington? That whatever other industry wants to come forward and say, we’re strategic, we need a $600 billion program too? This administration has been targeted, but how do you make sure that it doesn’t open a Pandora’s box to future administrations that may be less disciplined?

YELLEN: Well, I think you’re pointing to what is a danger. It’s always a danger, even outside of industrial policy. But, look, the chips and semiconductor act was passed with a bipartisan majority. This is something that many in Congress on both sides of the aisle have recognized has become a U.S. vulnerability. You know, we have always been the dominant country in semiconductors, in terms of designing semiconductors and the intellectual input involved in doing that, software to design them. But gradually, and I think mainly allowed subsidies from other countries to erode our manufacturing ability.

But there, there is a long-term cost. It’s not only supply chain resilience; it’s that technological change and advance comes in the process of manufacturing. And if you give up manufacturing entirely, you can lose the technological lead in what is a critical both economic sector and area that’s critical to national security. So there is a supply chain resilience, but I think it’s also important to our technological leadership and innovation in this sector.

FROMAN: Let’s shift the focus to China, if we can, for a moment.

YELLEN: Sure.

FROMAN: You have been deeply and personally engaged in managing the U.S. relationship with China. What do you see—well, first of all, how do you assess what’s going on there economically and this new stimulus plan that President Xi recently announced? And what do you see as the potential and the limits of cooperation with China when it comes to economics?

YELLEN: Well, I’d say we’ve tried to strengthen our relationship to create a dialogue in which we can honestly and frankly discuss our differences and grievances with one another, but also at the same time to find areas where we need to cooperate and can cooperate. And I think we’re on a better footing with China because of the work the Treasury and other parts of the administration have done to promote greater dialogue in these areas.

I mean, you—and I would say there are areas where we clearly are cooperating. In my remarks, I mentioned financial stability and global financial stability risk. This is an area where we have an overlap of interest. We’ve formed a financial working group, and the group has conducted exercises. What would happen if there is, for example, a problem with a globally systemically important bank operating in both of our countries? How would we work together to try to address and stabilize the situation? This is the kind of thing the United States has done with the United Kingdom, with Europe ever since the financial crisis. It’s important to work with China, as well, in similar things. We are cooperating in a number of areas.

But you asked about China’s economy. And I guess the way—the way I’d describe the Chinese economy and the fundamental problem, to me, is that we have an economy where the savings rate is over 40 percent. You really can’t find other economies at this stage of development with a national saving rate that is over 40 percent of GDP. Another way of saying that is that domestic spending is just an unusually small fraction of GDP. In the United States, consumer spending is two-thirds of GDP; in China, it is just a fraction of that.

Now, having a high savings rate like that is very valuable at an early stage of development when there are a huge range of investments with high returns. And it—you know, investment in infrastructure produced decades of really rapid growth in China. The returns from that began to peter out, and then real estate began to replace that; huge amount of investment in property. Well, that created a bubble and all the problems that are associated with problems in the real-estate and property sector. So that isn’t an area where those savings can go.

So what about those savings, and where are they going to go? And the decision that Xi has made is to try to channel that—those savings into investment in a set of advanced manufacturing sectors, and that includes clean energy, semiconductors, and other advanced manufacturing. And the level of subsidies has been utterly enormous, and every province in China competes to try to do more to invest in these sectors. So the level of subsidization is utterly enormous. There are many profit-losing firms that are kept in existence. And so there is a gigantic amount of overcapacity that is threatening our own attempts to build in these areas. And not just the United States, but Europe has the same concern. Mexico, Brazil, India. There are developing countries that are also seeing global markets just flooded with goods that none of us can compete with on normal commercial terms. And so this is a concern, discussions we’ve had with our partners. There is a great deal of concern about this around the world.

The natural strategy—and this is what economists have said for a very long time about China—is they need to boost consumer spending. And not by having one-time rebate checks, but by having a larger share of Chinese income go to households or reducing household saving by building a stronger safety net. These are things on which there are sort of global consensus. But it’s not what China is doing or says that they will do. So it’s the China sort of macro situation, with a decision to target certain sectors and subsidize investment to the point of global overcapacity, that’s really of concern to us. You know, you mentioned the announcements. We haven’t really seen meaningful figures yet. I think we have to wait to see what this is going to amount to.

FROMAN: I have a lot more questions, but I want to be able to open it up to the audience here. But I want to ask one last question that I know is on everyone’s mind. You have been the chairman of the Council of Economic Advisers, the chairman of the Federal Reserve, and the secretary of the treasury. Which is the most important economic job? (Laughter.) And which have you enjoyed the most?

YELLEN: (Laughs.) They’re all very important. And it’s been a tremendous honor and privilege to have—

FROMAN: You are a diplomat. You should be secretary of state as well, how about that? (Laughter.) Let’s open it up to two questions. Yes, this gentleman here in the third row. Wait for a microphone that’s coming your way.

Q: Madam Secretary, thank you for joining us today.

Vice President Harris last week said that Iran was the primary enemy of the United States. Last week you also announced sanctions on Iran. Yet, in the last three years, as you know, they’ve generated around $150 billion of oil revenues. Was it a mistake to relax the Iran oil sanctions? And what impact do you think the sanctions you’ve announced, which I’m very grateful that you did, are going to have on the Iran oil revenues going forward?

YELLEN: So I wouldn’t say that we have relaxed sanctions on Iran. But Iran has found ways to evade the sanctions that we put in place. And certainly, their oil revenues did go up. Over the last several years, we have put in place hundreds and hundreds of sanctions on an ongoing basis against Iran. But it is true that we have recently ramped up our sanctions significantly. I signed an action that allows us to target Iran’s energy sector broadly. And that could be a prelude to a set of steps that would really curtail Iran’s ability to gain revenue from exports. And Iran, I believe, is a significant sponsor of all the terrorist groups—Houthis, Hezbollah, Hamas—and is really a significant problem with respect to the Middle East.

FROMAN: Next question. Let’s go somewhere in the back. Yes, the last row.

Q: Thanks. Hi, Secretary Yellen. I’m Matt Peterson from Barron’s.

I’ve spoken to a lot of people on Wall Street who are concerned that if President Trump wins there may be an immediate bond riot because of concerns—a bond riot, a spike in long-term Treasury yields because of concerns about the deficit and tariffs that you’re talking about. Is that something you’re concerned about, too? (Laughter.)

YELLEN: Well—

FROMAN: I thought my questions were tough. (Laughter.)

YELLEN: Well, look, I believe it’s important for our nation to have a responsible fiscal policy and to be on a sustainable fiscal path, and some of the proposals that have been put forward on the Republican side—and I should say I’m covered by the Hatch Act and want to be careful not to comment on electoral politics. But for example, the proposal to simply extend all of the tax breaks that were in JCTA, the 2017 tax act, many of which will be expiring at the end of next year, CBO has said that that would result in $5 trillion of additional deficits over the next ten years. And I believe unless that’s paid for in some way, that’s something that we just can’t afford.

President Biden’s most recent budget proposes $3 trillion of deficit reduction over the next ten years in addition to the trillion that’s already been put in place. And we think that’s what’s necessary to keep American fiscal policy on a stable and sustainable path. So it would—it would be a problem, and eventually markets might look at plans like that and respond. That’s certainly a possibility.

FROMAN: Yes, this woman here on the fourth row.

Q: Hi. Donna Redel of Fordham Law.

I’d like to ask a different kind of question. Could you talk a little bit about central bank digital currency? We know that China has one and they don’t have privacy. We also know that stablecoins in the United States are now becoming quickly one of the largest holders of U.S. Treasurys, and that’s very beneficial for our country in terms of being able to have a global dollar as the reserve currency. Could you talk a little bit about the Treasury and both of those issues, and whether you see them—they can live side by side? Thank you.

YELLEN: OK. So, I mean, in terms of a central bank digital currency, that’s something that many countries, including the United States, are exploring. You know, what we want is a fast, safe payments system. There are innovations that are taking place that are not a central bank digital currency but nevertheless very significant payments innovations like the Fed’s introduction of FedNow that will lead to 24/7 real-time settlement, which is an important innovation. And so there’s a lot going on beyond central bank digital currency. But it is something that we’re examining and there is a lot of interest in worldwide.

You asked about stablecoins. I am concerned about stablecoins. They could play a positive role in our financial system, although at this point stablecoins are mainly used to engage in trading on crypto platforms. But a stablecoin is very similar to a bank deposit in that it promises that you can have a dollar for the equivalent stablecoin with certainty any time that you want. And in order to make good on such a pledge, it needs to be backed by absolutely safe assets. I don’t think all stablecoins at this point do have that kind of backing. We have proposed regulations and have been working with Congress to try to put in effect a regulatory framework that, among other things, would require that any stablecoin issuer hold absolutely safe liquid assets a hundred percent to back stablecoins.

So they could be a significant demander of Treasuries. I think with the proper regulatory environment, you know, I think we’re—there is bipartisan legislation that’s been considered in past Financial Services Committee that I think comes close to what we would want to see.

You know, they could play a positive role in our financial system, but without adequate regulation they can suffer from runs akin to a bank run that can create a panic, and we’ve seen that with a number of stablecoins that have failed and sort of broken the buck, so to speak.

And, fortunately, the connections between stablecoins and our banking system are—there are some—and some have been problematic, but they’re not very extensive at this point so the problems haven’t really spilled over to the broader banking system but without proper regulation they could one day.

FROMAN: Let’s take our next question from our virtual audience.

OPERATOR: We’ll take our next question from Mahesh Kotecha.

Q: Thank you very much.

Madam Secretary, it is a great honor to ask—

FROMAN: Can you speak up, Mahesh?

YELLEN: I can’t hear you.

Q: Can you hear me? Can you hear me OK?

YELLEN: It’s too low.

Q: Can you hear me all right?

YELLEN: No, it’s too—it’s not loud—

Q: Sorry. Is it—can you hear me now? Hello? Hello? Can you hear me?

Hello. Can you hear me?

FROMAN: Yell at us, Mahesh. I’ll move on. Is there another—

Q: Hello. Can you hear me? Can you hear me now?

FROMAN: Yeah, there you go. There you go.

Q: OK. Thank you very much.

Madam Secretary, you talked about the World Bank meetings next week. I’ll be attending, and last year in Marrakesh there was a major focus on climate and also a focus on reform of the MDBs that you have talked about and have asked for acceleration on.

One of the challenges is attracting capital to carry out climate reforms in mitigation and adaptation and the big problem has been lack of funding from the public sector, which is not enough, and the need for private sector funding. But the private sector funding is very difficult to get because of risk.

So I would like to ask you what you will be recommending to the World Bank and the others that are attending the meetings next week about facilitating private investment in climate to mitigate and adapt more effectively for the long run problems that we face in a major way today.

FROMAN: Thank you.

YELLEN: Well, thanks for that question, and for the last couple of years very high on my agenda has been what we call MDB—multilateral development bank—evolution, starting with the World Bank.

We are looking to the World Bank and the other multilateral development banks to focus much more than they have in the past on global public goods and climate change is key among them.

I also mentioned pandemics and the consequences of fragility and conflict, and so there needs to be more investment by the MDBs for their part in climate investments. The World Bank and the other MDBs have put in place recommendations from a report done on capital adequacy that suggested ways in which the existing capital base of the World Bank could support a great deal more lending, and we’ve freed up over the next decade something like $200 billion of additional capacity to lend by putting in place some of the reforms that were recommended by the CAF).

The IMF has created a resiliency and sustainability trust that can provide fiscal—backing for fiscal policies that are focused on climate, and the IMF and World Bank are now working together with countries to try to coordinate their financing. And we’ve seen a very substantial increase in World Bank and MDB funding for climate finance, I think on the order of around 45 percent over the last couple of years. And there’s more that can be done, and we’re urging be done.

We’re also working with the MDBs to try to enhance their mobilization of private capital. And we’re seeing some success in that front as well. The Inter-American Development Bank has innovated something they call—something, like, originate to distribute, that they’re originating loans and then packaging them together, and raising funds by selling these in the private market. The World Bank is engaging in experimentation with ways to create something similar. But a substantial increase in mobilization of private capital. So really, this is an area we’re all over. It is very important. And we’ve already seen a lot happening, and there’s more to come.

FROMAN: I’m going to give our last question to Matt Goodman, who’s director of our Reimagining American Economic Leadership Initiative, of which this symposium is a part.

Q: Thanks, Mike. Thank you, Madam Secretary. Fantastic speech, which is very helpful to our initiative on Reimagining American Economic Leadership.

Most of the discussion about trade policy, including in your speech today, is about tariffs these days. But is there a role for affirmative trade policy, of the kind that the gentleman to your left used to work on, where we sought lower tariffs in other countries and changes—regulatory changes, and we were willing to offer more access to our market, or something, to our trading partners to get them to do the things that would help give us more opportunities? Is there a place for that still in the United States today?

YELLEN: Well, I think there should be a place for it. And I would say, although the focus has not been so much on lowering tariffs, certainly deepening our ties, working together on supply chains to deepen investment and engagement—President Biden created a group I referred to called APEP, America’s Partnership for Economic Prosperity, the Indo-Pacific Framework, which I guess is a successor to the TPP effort, where we do have groupings where the objective really is to strengthen trade and investment ties.

FROMAN: Just I was so grateful to have not only one of the great economic thinkers of our generation, but also a public servant who has served across all the great institutions. Thank you for joining us.

YELLEN: Thank you so much. (Applause.)

(END)

This is an uncorrected transcript.

PATTERSON: Hi, everybody. Thank you so much for joining us here in New York and another 200-250 CFR members who are joining us today on Zoom. 

I’m delighted to be presiding over the Council on Foreign Relations Freidheim Symposium second session, following Treasury Secretary Yellen, where we’re going to be trying to define economic security. And I feel like Treasury Secretary Yellen touched on this concept in a number of ways, and I’m really happy to have some wonderful panelists to go a little bit more into the weeds on this topic. We’re going to spend about thirty-five minutes or so having a conversation amongst ourselves, and then we’ll make sure we open it up to you in the room and on Zoom for questions and answers. 

So you have biographies in the books that were given out to you, but let me just very quickly introduce our panelists and then we will get into the conversation. So we do have a group in person and on Zoom here too. 

Dr. Emily Blanchard is the associate professor of economics in the Tuck School at Dartmouth University and former chief economist at the Department of State from 2022 to 2023. Welcome, Dr. Blanchard. 

We have Elizabeth Rosenberg, who is now at Bank of America. She’s a managing director focusing on global financial crime public policy—mouthful. And before that, she was assistant secretary for terrorist financing and financial crimes at the Treasury Department from 2021 to ’24. 

Of course we’re delighted to have David Malpass with us today, former president of the World Bank Group and former undersecretary for international affairs at Treasury from 2017 to 2019. 

And last but certainly not least, next to me today, Matt Goodman, distinguished fellow, director of the Greenberg Center for Geoeconomic Studies, and director—you’re a busy man—director of RealEcon Initiative at the Council on Foreign Relations. 

And I’m Rebecca Patterson. I’m a CFR member. For the last twenty-five years or so, I have dedicated my waking hours to understanding the intersection of policy with the economy and financial markets globally. And most recently I was the chief strategist at Bridgewater Associates. 

So let’s get into it, economic security. You know, when I think about the concept of economic security, my mental map goes very broad. We heard Secretary Yellen talk about things like labor supply and climate, and you could almost argue that almost an infinite number of variables combine to create America’s economic security, but I don’t think that’s necessarily what we mean on this panel. 

So I’d like to just start the conversation by level setting. When we say “economic security,” what’s the definition? And then, secondly, how has it changed for you now versus five, ten years ago? And, Matt, I’d love to start with you on this one. 

GOODMAN: Sure. Well, thank you, Rebecca, and delighted to have everyone here. And thanks to Steve Freidheim for supporting this symposium. 

And let me, if I can, just make a quick shameless advertisement for RealEcon, or Reimagining American Economic Leadership, this initiative that’s really Mike Froman’s baby but I’m the implementer of it. And we’re trying to have a conversation on topics like this that get to the role of the United States in the global economy, why that matters to U.S. interests, why it matters to the American people—to the rest of the world, for that matter. It’s a long-term conversation. We are looking at trade, development assistance, and economic security, and so that’s very much central to what we’re doing in this initiative. 

And you know, I think economic security is a relatively new term as such in Washington and other capitals. Actually, to the average person, I think economic security really means having a good job with good wages, and money for retirement and your kids’ education, and so forth. But in Washington and other capitals these days, it really means—well, for a long time there has been a relationship between economics and national security. Secretary Yellen’s been responsible—and her predecessors for many years—for implementing sanctions, CFIUS—the investment screen mechanism that Treasury oversees. So national—it’s been—Treasury’s been a national security agency for a long time. 

I think what has changed is that governments are now more aware of a set of risks that threaten either our national security or even the foundations of our economy. She mentioned—Secretary Yellen mentioned a few of them, like pandemics, climate change, obviously global financial instability; things that have really put a new focus on the connection between risk generally and our—the fundamentals of our economy and our national security. 

What I worry about and why I think we need to try to define this term in some sense—or, rather than define it in a dictionary sense, put some definition on it, meaning, or around it so that it doesn’t become an excuse for protectionism, on the one hand, in the name of national security; or on the other hand, sort of weaponizing every benign commercial transaction by saying, oh, this is something that we have to not do with China or something, because it could be a theoretical risk. So I think that’s what we’re trying to do in the RealEcon Initiative, is put a little bit of greater definition on this topic. 

PATTERSON: And I don’t know—Emily, Liz, David—if any of you wanted to chime in on this. When you think about economic security, is there a definition that comes to mind? Or are there are things that you think should be included or not included? 

ROSENBERG: I can jump in here. I liked what you said, Matt. That was great. By the way, thank you, Rebecca, and thanks CFR for the opportunity to be part of this. I think the only thing that I want to add here is a specific callout to the concept of scarcity or vulnerability, particularly when we’re thinking about dependencies that that we, Americans, may have on items or supply chains that require goods, inputs, material, services, that don’t come from the United States or where we have less control over them. So there’s some political and economic anxiety associated with that kind of—the vulnerability of an import dependence.  

And that’s—it is a little bit of a callout back to some of the energy security parlance that really characterized—to the extent we were talking about economic security ten, fifteen more years ago, I feel like the focus was on energy security, and focused very heavily on that concept and what that meant for pain in the pocketbook for American consumers when the price of gasoline increased. That was one sort of big theme, if we thought about energy or economic security a number of years ago so just to call that last one out. 

And to come back to what Secretary Yellen had said just previously when she was talking about—she mentioned friendshoring. So that, I think, is maybe one of the ways that people can, as a contemporary matter, refer to that, the vulnerability or the dependency from foreign-sourced manufactured goods or components.  

So that’s the only thing I wanted to add in this context. 

PATTERSON: Great. Thank you. 

And, Emily, let’s hit you first and then we’ll get to you, David, please.  

BLANCHARD: Sure. This is great. Again, thank you so much for moderating us, Rebecca, and for everybody for being here.  

Matt did a brilliant job outlining security and so I don’t have a lot to add, and Elizabeth’s points—Liz, I agree with you, of course.  

But there are a couple distinctions that might be useful to think about. As I think about economic security it’s all about risk. It’s about exposure to risk, and here I think it’s worth defining two kinds of risk.  

One is idiosyncratic shocks, the risk of losing access to a critical market for, you know, to sell or more often to buy or to import because of something like, you know, the low water levels in the Panama Canal or shipping disruptions in the Suez Canal or the pandemic, of course, brought risk top of mind.  

But also and I think increasingly in global capitals we’re talking about intentional use of leverage by adversarial regimes and that’s a little bit different. Economic security is both exposure to idiosyncratic risk but it’s also exposure to that deliberate risk or the exercise of leverage by those with market power and that market power, as Liz alluded to, comes often from global market concentration in the production of either critical technologies or critical resources.  

And so the way that one would protect against those risks I think are quite different. So as we define it is useful to make that distinction. The only other thing I would add to the definition is I’m not sure how useful it is to spend a huge amount of time defining what is economic security.  

I would spend more time—given the urgency of the problems and the challenges we face, spend more time articulating specifically what we’re afraid of because I think our policy responses need to be really targeted to what’s keeping us up at night, and if it’s just sort of security it’s very hard to come up with a strategy to respond to that.  

But if we’re very specific, if we say, for example, there are data flows connected to bio technologies that could be used in a certain way by certain actors, like, then it is much easier to get to credible, concrete policy strategy.  

So I’ll stop there. 

PATTERSON: Great. Thank you.  

And, David, I saw you come off mute. Would you like to jump in on this?  

MALPASS: Yeah. And so it’s very nice to see the people that are registered and I think it’s great—a useful conversation and topic. 

You framed it a little bit, Rebecca, of what has changed over the last ten years. So I’ve got a list of those, and I think it’s worth thinking about the topic within this context of what’s changed.  

So one is, of course, the supply chain has gotten more complicated and technology has changed a lot over the last ten years. Another one that I’ll mention that keeps me awake at night is global growth is substantially slower and interest rates are substantially higher than ten years ago. So it puts massive pressure on—certain parts of the world on everyone, really, but especially concentrated on poorer people around the world because of that change.  

And it doesn’t look like it’s changing. The World Bank’s forecasts that we see right now are for 2.6 percent global growth this year. So if you think about some countries are growing faster than that that means a lot of countries are growing much slower than that, which is simply not enough, and the interest rates look like the policy is going to be high for long, which adds to the pressure.  

Another change is the big run-up in debt in poorer countries. That’s this intractable issue of the lack of restructuring—of meaningful restructuring of developing country debt. 

Another one is China’s size and their resistance to change. Secretary Yellen mentioned the idea that the Trade Act—the 301 sanctions that are on China, they’re not responding to that, and so that should explain—was the justification for keeping the tariffs on China. But that that is a substantial change in the way the world works. And I’m—you know, there are more. The sanctions have been expanded massively but aren’t working. There’s a story in Politico today that shows that the oil sanctions aren’t working. So one of the—one of the learning experiences over these ten years is the effectiveness of—or, ineffectiveness of different kinds of sanctions, whether on Iran or on oil. So my bottom line on it is the current path really is not working, so we need to look for other paths that may protect our economic security more than the current one. 

PATTERSON: Thank you for that. And, David, I want to stay with you. I’m looking at him on my screen down here. I’m not staring at my shoes, although they’re cute. (Laughter.) So I want to stay with you, David. You mentioned sanctions, how you think they’re not as effective as we’d like for economic security. You know, we’ve seen economic statecraft, or these macro tools, being used in the name of economic security and national security now for several years. This isn’t new. But they definitely have ramped up a lot in the current administration and in the former President Trump’s administration, where you served.  

And I—you know, with the benefit of hindsight, when you think about those tools, you mentioned sanctions, we heard earlier today about tariffs. We have export controls. We have import restrictions, foreign investment reviews. I mean, the list goes on. When you think about those tools, David, are there any in your mind that you think tend to work more effectively than others? Is it really just a case-by-case situational basis? When you reflect back on your time in the administration, do you think I wish we had done more of X and less of Y? 

MALPASS: Well, I’m sure academics write, you know, histories on this. I’ve been involved in quite a bit of it. If you remember, in the 1980s there was the South Africa sanctions that worked because the globe was in it. And so there was a unified work to stop the Apartheid regime. Then there were sanctions used in Haiti that didn’t work very well. And so I think the history of those is instructive. And we can think about the oil sanctions on Russia now as being one of the key ones that do not seem to be working. And so that was discussed as they were being considered for implementation, how would you actually make this work? And I don’t think that one’s worked very well. 

But that’s—I think very important is that we look ahead and say, how do we want to effectively use tools? One that I was heavily involved in is CFIUS, so I’ll go through that. In 1986 and ’87, there was the feeling of foreign investment—this is the Committee on Foreign Investment into the U.S., into the United States. And so France and Japan were buying companies that people felt created a national security issue. And so Secretary Baker was very forceful in saying, Treasury should chair the CFIUS, because it would—it could be a broker within the national security interest that joined the need for foreign investment, but then also the need for national security protection. So in 2017 and ’18, we updated CFIUS with the FIRRMA legislation, with that experience in mind.  

So I guess my point is that U.S. has these strong tools. They’re put—they have to be used very thoughtfully. And we have to learn from experience in how to use those, and which ones—which ones seem to work, and which ones are not really seeming to work. And then as was said, I guess Emily said, let’s be very specific in the risk that we perceive now, and then identify tools. So I don’t want to forget my opening point, which is global growth is too slow. And we have the advanced economies draining global capital in a way that simply does not work for poorer countries around the world. So I don’t want to lose sight of that. One of the things causing instability is that imbalance going on. Thanks.  

PATTERSON: That’s a great point. Thank you, David. 

And you know, when I—when I listen to you and everyone on our panel, and thinking about the broadening and the increasing usage of these tools to secure both national and economic security, it, obviously, comes with greater and greater complexity. And this affects government officials who are trying to coordinate policy, but it certainly affects the private sector as well, and we could argue that U.S. economic security needs a resilient, growing, healthy private sector. 

And in that vein, I’d like to go to Liz. You know, you’ve spent time in government and now you’re at one of the largest banks, Bank of America, and so you’ve been able to look at this issue from both perspectives. And I’d love to get your thoughts on, you know, do you think the private sector understands the goals? Do they—is it translating well from Washington or wherever these tools are being implemented originally or announced originally to the private sector? Where are the frictions? And do you think those frictions actually make some of these tools less effective in ensuring our economic security? 

ROSENBERG: I love this question. I think about it all the time. I’ve come at this—as you point out, I have come at this question from the public sector and from the private sector. So from the public sector, thinking about how to try and communicate the intent of a policy, how to communicate expectations for compliance, how to communicate about when—in an instance where there’s an enforcement, what is the intended takeaway for the target, for others in industry, for fellow governments. And then from the private sector thinking about what it looks like to comply or to try and read the signals. 

And the view I’d like to introduce to this conversation is part of the—notwithstanding what David was saying about looking broadly internationally at growth, as we’ve been talking nevertheless about economic security, we’ve spent a lot of time, I think, implying a discourse or a set of policies in the United States. But in fact, even as you say, Rebecca, this growth in the use of these various tools you’ve enumerated, the United States is not alone. Other economies have also proliferated the use of these tools. The United States has actively encouraged and provided technical assistance for the growth of a parallel investment security screening set of rules and regulations in other countries. The same is true for the elaboration of trade control restrictions, the same with sanctions. Lots of careful—David, to your point earlier, lots of coordinated discussion also around new frameworks for lending and new agreements or understandings. So that’s on the positive side of the ledger, if you will. 

In this environment for the private sector, where you have companies—and it’s not just big multinational companies; there are many—of course, many small and medium-sized enterprises who use—who have an international reach, whether it’s because of sourcing or the supply that they offer of a good or a service, they have to navigate the different set of economic instruments across these jurisdictions and deal with what is definitely a(n) increasingly challenging landscape of operating within different jurisdictions that have different orientations. And it’s not just the laws. So it’s not just—doesn’t just come down to conflict of law problems, which are abundant, but also the politics of this and navigating those politics, to say nothing of where I think you began your question, which is the telegraphing. You know, what is the intent of the policy put in place? What is the intent of the enforcement? And how do you plan for that when you have disruptive political change across different democracies? 

And so there’s plenty of thinking around that in the G-7 economies, where big multinational companies have big footprints—not just financial services, but across others. So that is a profound challenge, and planning around that is among the foremost of challenges to—in operating these days. 

PATTERSON: Thank you. And I think you made a really good point there on, you know, some of the tools that have been listed—whether sanctions, tariffs, controls—are punitive. There’s also tools towards economic security that you said are very positive. And this gets to David’s point earlier. You know, if—as Secretary Yellen said earlier today, the United States benefits from a strong global economy. So if we have a slowing global economy, it’s in the U.S.’ interest to do what it can to change that trajectory, because we’ll benefit from it. Everyone benefits from it. So then how do we play that positive role, not just the punitive role, in ensuring our own security? And, David, you talked about some of the things that can be done, especially to help some of the developing countries with higher debt levels.  

It is interesting to think about the question, though, because one of the most important slowing economies right now is China. You know, the consensus forecast on Bloomberg has its GDP slowing to 4.2 percent in two years, unless the stimulus that’s being dripped out right now turns out to be a game changer. We don’t know. But the trajectory looks slower for China, based on a lot of structural factors. And the U.S. is not necessarily bending over to help China grow faster right now. So how do we square that circle? We want a stronger global growth. We can use positive measures for our own economic security. But we want to do it with some countries more than others. 

Matt, you have any response to that? I’ll give you that one.  

GOODMAN: Yeah. Well, I think this is an important point because—and it sort of links to a couple of things that Emily and David have also pointed to that I wanted to sort of double down on. Which is that I think we need to keep all of this in perspective, and realize that we need to do what, as David said, Jim Baker was thinking of when CFIUS was originally legislated as a formal body chaired by Treasury. That we have some specific risks, targeted risks, that we have to be worried about.  

And as a citizen, I want my government to protect us against, you know, real national security threats. And—but I also want growth and opportunity. And, in fact, I think that’s what should be mostly what government is working on, is trying to promote growth and opportunity. And the targeted part—and I think Emily said something similar—you know, we need to focus on what really worried about, find the tools that we need to really target those risks, and then just let everything else go. (Laughs.) And then, you know, do some positive things to encourage. 

I think that should be the spirit, the mindset, that we bring to these endeavors. And I worry that in Washington we’re—frankly, for twenty years, since 9/11 we’ve been kind of afraid. And we’ve started a lot of these conversations with how do we protect ourselves against various risks? And we’ve sort of lost a little sight on the importance of growth, opportunity, engagement with other countries broadly. And we certainly in this area—that was another point I wanted to emphasize—I think we definitely need to—actually, we need to coordinate across three vectors if we’re going to make economic security work.  

One is with our trading partners and others, because no dam holds water if it isn’t complete, right? So if there’s a—we put a stone in the river, the water’s going to get around it. That’s not going to be good enough. We’re going to have to work with others to build on those things that we’re really worried about, a solid sort of dam, as it were. So we do definitely need to coordinate with our partners. We need to coordinate with the private sector, because they’re the ones, as you say, who are going to be affected by this, are going to have to implement a lot of this, And where we want to still promote growth and opportunity. And so we don’t want to unduly constrain them. And so working with the private sector is really hard in this stuff. And others here could comment on that, I’m sure. 

And then there’s the coordination within the U.S. government. And, frankly, that’s a big problem too, because you have a lot of these tools that are implemented by different agencies. You know, the Commerce Department’s responsible for export controls, the Treasury Department’s responsible for investment screening, State Department has various roles on sanctions and export controls of a different kind. And so—and, frankly, the government is not that coordinated in how it implements all of this. And I’ve worked, you know, in a couple of White Houses. And we tried to coordinate some things like this. And it’s very difficult. So I think there’s a huge job of coordination with allies, with the private sector, with government, or this isn’t going to work. But starting with the mindset that we’re targeting some very specific risks, and we’re otherwise trying to, you know, keep things open and promote growth and opportunity. 

PATTERSON: And it’s great that we have Emily here with us today, because, to your point on needing to coordinate within the government, I couldn’t agree more. When we’re using more and diverse sets of tools, and they’re coming from different parts in the government, people have to be talking together, right?  

And Emily earlier this year with Brookings published a paper that was actually called a “Sanctions Guidebook for Policymakers.” I thought that was a great title, and it draws on the time in government and looks at the time in government.  

What are the lessons learned? How can we make this intergovernment effort more effective so the tools that we do use serve the purpose and get us the economic security that we’re aiming for?  

And, Emily, I’d love to have you share maybe some of what you think are highlights from that effort, the sanctions guidebook, so to speak, for policymakers. You talked about historical lessons learned and things that you think we could do within government today that could make all of this work better and I think it would be great to share some of that in the context of this conversation.  

BLANCHARD: Sure. Thank you, and thanks for the shout out. Free publicity always exciting for those of us who have to publish or perish.  

So yeah, a couple of points from that piece and that was a really valuable exercise. Ben Harris, who was the chief economist at Treasury—assistant secretary when I was in office as well, we overlapped for a bit—and he encouraged me to write this. It was a great exercise to think about what did I learn and what did we learn—what have we learned in government over the course of the last couple years?  

So I would say many of these echo the themes that others have raised, especially Matt’s points just a minute ago. Thing number one, a big observation—number one for me was identifying the objectives of sanctions and export controls and investment screening mechanisms and other market interventions.  

Let’s think of those organized not around the tool—the tool set and the department or agency that’s typically deployed those but let’s think about organizing them clearly around the problem we’re trying to solve. So, again, it goes back to my first comment. Very simple, but let’s figure out what’s the risk that we’re worried about and then how are we trying to solve that. 

So, number one, we organize ourselves around the objectives that we’re trying to meet. Number two, we then need to be crystal clear about those objectives using whatever tools are appropriate to the task at hand, and sometimes that’ll be suites of policy tools. So, for example, the October 2022 export controls on semiconductor sales and equipment sales to China. Those are incomplete without something like a commensurate investment—outbound investment screening mechanism because the idea is the technology can transmit through multiple channels and so we’re starting to think very much in terms of these suites of policy tools organized around objectives.  

But the other reason we have to be crystal clear and, I think, very transparent messaging our objectives, what are we trying to do, is because it’s easier to get buy-in. It’s easier to get buy-in from partner countries and allies who say, yes, that’s a legitimate risk. We agree with you and we share that objective and so maybe we’ll do this hard thing.  

I think it’s also much easier to get buy-in from the private sector. So, for example, with sanctions on Russia if one looks at some of the sanctions packages by the U.S. and the broader sort of G-7+ coalition that were implemented over the course of the last two years, if you think that the objective was to make the ruble rubble, right—cause the ruble to turn to rubble or to collapse the Russian economy—number one, a lot of market participants are going to say, well, I don’t know that that’s going to work, right. They’re going to—Russia’s got twin surpluses—current account surplus, fiscal surplus, at least going into this war. Unlikely that’s going to work. It’s hard to get buy-in if folks think you’re on a fool’s errand.  

But let’s be clear, that was not the objective of these sanctions. The objective of the sanctions was to cripple as much as possible, slow down, make more expensive, make more difficult Putin’s execution of his brutal war against Ukraine, and in that capacity the sanctions have been far more effective.  

It’s a lot easier to go to firms and say, hey, can you make sure—you need to do a little bit more due diligence, make sure that your products are not being sold, probably to market intermediaries to market intermediaries, to folks who are selling to Russian procurement networks.  

So I think that clarity is really helpful in making sanctions, export controls, and as we go down the line maybe investment screening inbound and outbound, making those more effective.  

And then the last thing I’ll say, and then I’ll just stop talking but I get very excited about this stuff, and Matt already said it—the importance of working within and across U.S. departments of agencies just couldn’t be higher because the problems we’re trying to solve take tools that are rightly sort of controlled by or owned by different departments of agencies but they have to work in coordination or they just won’t be effective.  

Most of these are also national security tools that traditionally would be applied to fairly narrow entities or actors if we think in terms of most of the sanctions or entities on the Entity List or very narrow classes of goods.  

But as we expand the aperture and we start thinking about much more appropriately ambitious sets of trade, investment, market controls, we’ve got to have economists in the room working hand in glove with national security experts.  

We’ve got a lot to learn from each other and that’s just not—again, I’m pretty new to Washington but that doesn’t seem to be the muscle memory in Washington. So we have to build that muscle strength quickly.  

I’ll stop there. Thanks.  

PATTERSON: Oh, thank you. Thank you.  

And I want to pick up on a point you, Matt—I think all of you have touched on, which when we talk about coordination within the government but also coordination among allies, with countries, and just as an observer of this it definitely feels like that is an ongoing challenge.  

You know, if—Russia, as an example, India is buying Russian oil. India desperately needs oil imports. We want India to be a resilient economy. We need them to be an ally, and there’s a lot of examples. That’s just one. 

David, you have such a great perspective on working with allies both, you know, having to coordinate across lots and lots of countries in the World Bank but then also with your international seat at Treasury. 

When we think about using all these tools, especially the more punitive tools, and the potential over the next years that we use them even more, right, that we have broader trade, trade—broader tariffs or other tools do you think we can square the circle?  

Can we have a broader trade war but still be able to get our allies to agree with us when we agree on a risk that we all identify? I’d love to get your thoughts on that, especially given your experience in those different seats.  

MALPASS: The answer is sometimes there can be agreement. But let me start from a different spot that—in over the—over these ten years and twenty years China’s role has changed very dramatically.  

People see that in terms of GDP. So while we are seeing weakness there now we don’t want to overlook the giant economy that they’ve created. So the international system and the coordination system is not well set up to deal with the second largest economy by far in the world. 

China is way behind the U.S. but everybody else is way, way behind China, and the world system is not set up to deal with that. So that’s one of the problems within the trading system. You know, it’s not set to work with a communist country that has a central industrial plan, and so I think we have to really rethink what coordination means within that and one thing I’ll mention is I think there needs to be a stronger focus on the U.S. national interest within this, and then bringing friends along to say we want to help protect you and we want you to help protect us and we’re going to work on this together and make it really clear. 

So and I think we’re not really on the right track with that. Many of the—for example, the growing role of the G-20 is problematic because China and Russia are main members within it with substantial power and that gets into their control of the debt—the developing country debt but also the international financial regulatory system where there’s substantial influence from the G-20. 

So I think there’s rethinking that needs to be done on that with a strong focus on U.S. national interest and a recognition that that we have to really rethink how to do it given this change from China.  

So I’ll stop there, but that gives us—I mean, if you set out to do that there’s a lot of explaining on that within the G-7 in order to have an understanding of what is the U.S. trying to do. I’ll give you one example. You know, in the more recent years the U.S. Department of Agriculture has been added to the CFIUS. So, you know, this was discussed in the 1980s and then into the ’90s, and so now we recognize agricultural land in the U.S. as being part of economic interests. 

Well, that immediately takes you to the question of does that mean Canadian ownership of U.S. agricultural land? Where do you want to go with your understanding of economic interests? Are you trying to have a carveout that applies to China?  

So I just put all that on the table. 

BLANCHARD: If I may just come in on this, I think actually, David, some of the points you’ve made underscore the utility of two particular forums for actually economic security that have naturally risen to, you know, come to the fore in the last several years and that’s specifically the G-7 and the Five Eyes partners.  

Now, they have become these forums. I don’t think they would have been the natural candidate forums we would have anticipated at the beginning of this administration that is now coming to a close imminently in the United States.  

But, nevertheless, they have come to represent the most effective forum for this conversation in part because it sidesteps the problem of Russian and Chinese participation into the broader G-20 format, and for Five Eyes this is a resurrection of the opportunity to speak in secure channels and reaffirm national interests among that group of nations.  

So even while New Zealand and Australia are not quite the formidable economic players of a couple of—several of the other Five Eyes partners, nevertheless, that becomes a way to discuss, negotiate, and articulate exactly what you were just noting. 

So Canada and the United States or the United States and the U.K., how shall those closest of partners and security economic partners negotiate their relationship in this highly dynamic economic and security environment?  

MALPASS: Rebecca, quick addition to that. 

PATTERSON: Please. 

MALPASS: It is that within the G-7, six are men and the seventh is Meloni in Italy. She’s the only one that is likely to be there, say, two years from now, because all the rest are in a rotation cycle or probable rotation. And so one of the challenges within the G-7 is building that as the new politics transforms each of the countries. 

PATTERSON: That’s— 

BLANCHARD: Can I add one— 

PATTERSON: Yes, please, Emily.  

BLANCHARD: Oh, sorry. 

PATTERSON: Go ahead. 

BLANCHARD: (Laughs.) Sorry, I get—I get very excited about plurilateral coordination.  

Completely agree with Liz. Again, G-7 and Five Eyes are both increasingly important and that’s where the U.S. can have some of the most sensitive conversations around economic security. 

But a slightly broader group with critically—and this is the difference from G-7 and Five Eyes with a secretariat with analytical firepower—many very important at least precursor conversations are happening at the OECD.  

So the key member countries here are also involved there. They’ve got folks who are thinking really hard about these issues. It’s not just that when we talk about economic security identifying risks is really challenging and figuring out best policy is really challenging.  

Let’s be clear. I think when we approach new sets of policy tools every country is kind of flying without a manual here. We’re making it up as we go along. There’s a lot of analytical work.  

How much do certain provisions cost? How much will a barrier between countries A and B and product X—how much is that going to disrupt global commerce? At what extent—at what expense?  

And that requires some coordination just to do the math together with other countries, and some of that’s happening at the OECD. Not around the most sensitive topics but among many of the most productive. So I want to give that a shout out.  

PATTERSON: No, that’s a good one to raise. I don’t think that’s on many people’s radar screens so I appreciate you bringing that one up. 

And especially since we mentioned Five Eyes and then you mentioned flying blind, that prompts a final question I want to ask our group before we open it up to questions, which is technology.  

And when I think about the U.S. economic security I think technology is one of our greatest strengths and also one of our greatest risks. You know, we are the most competitive, dominant technology economy in the world, I would argue, and that attracts capital to our country.  

It creates growth through productivity, innovation and, yet, we also have risks including things like cyber. And I would just cite a Microsoft report that was published earlier this week which was striking to me, maybe not to some others here. Microsoft reported that their customers are now facing—and this is all their customers—but facing more than 600 million cyberattacks a day—a day. I mean, it’s just an extraordinary number to get your head around. And that’s one company’s reporting. 

And so when I think about technology and economic security—and I throw this open to anyone on our panel who has a thought—we have a number of initiatives now within the government, certainly, coordinating with allies and also within the United States, everywhere from NSA to Commerce and on, looking at AI, looking at AI safety, et cetera. Are we doing enough? What else should we be doing in the name of economic security? This has got to be one of the most important parts of it, I’d imagine, as we look ahead. 

GOODMAN: Well, I just would say that, yes, absolutely, the technology is at the center of this conversation, and the U.S. has to maintain its preeminence and protect itself against some of these risks. And there are—cyberattacks are one of the most important and prominent and, as you say, frequent ways that our adversaries try to harm our position in technology. 

But there are a number of others that are also parts. That’s one pillar. We have to have strong cybersecurities. And I think there is a lot of work in the Biden administration, and I would expect in either a Harris or Trump administration there will be a lot more work to tighten our cybersecurity. We have other experts at CFR who are doing a lot of work on this, Kat Duffy and Adam Segal and others. So I commend their work to you. But it’s one of the pillars. 

We also have, you know, the risk of technology transfer through acquisition. So that’s what CFIUS is about. As Emily said, you know, it’s not just inbound. It’s also outbound. And we have the possibility of selling the technology. That’s why you have export controls as well. And we need to do all of these things and we need to remember that we have to maintain an innovative edge. 

And that means we can’t just focus on control, but we need to enable development of new technologies, including AI, which I think, on balance, is probably—I mean, I’m maybe going to get in trouble someday when it comes for my job—but I think AI is a positive development and I’m broadly optimistic about it. But it does have downside risks, and we have to have sensible regulation but also promote innovation. 

Let me also pitch the OECD and G-7, both of which have done really important work in all of these issues. And I would commend all that work to you. 

PATTERSON: Great. 

I want to make sure we have time for questions. So just I’d like to invite members to ask a question. If you have a question, if you could just remind us who you are, your affiliation, and then ask a question. And this, just to remind you, is on the record. And I’d like to take a first question, if we have any, from the room here in New York. 

Yes, please. 

Q: Steve Freidheim, Cyrus Capital Partners. 

I’d like to ask my question on the national debt in the context of national security. Perhaps we start with you, Professor Blanchard. You outlined the risks. So, starting with your first, the idiosyncratic risks. To deal with idiosyncratic risks, that takes money. And over the last century, the United States has enjoyed a strong enough balance sheet to be able to deal with these idiosyncratic shocks. 

Could you comment—and perhaps, David, you as well—on at what point does our balance sheet become overly stretched that we may be at risk of not being able to address shocks? 

BLANCHARD: Happy to answer this. Wish this were in a question that we have to deal with, but thank you for asking it, because I don’t think enough people are focused on the national debt right now. And I say this as somebody who is, to be clear, not a macroeconomist, international economist—that’s one piece of the puzzle—but somebody who, for a long time, has not worried particularly much about U.S. consistent, persistent fiscal deficits. They weren’t as large, as a share of GDP, for a long time. And borrowing costs were a lot lower. 

We’re now entering a period where our national debt is very close to 100 percent of GDP and our fiscal deficits are projected to get higher, greater, not smaller. We’re looking ahead to the imminent expiration of the 2017 tax cut, which is likely to leave a hole in the fiscal budget. So, over the course of 10 years, it could grow on the order of—I think it’s about $4 trillion that we need to find under the mattress cushions. And that’s a lot of money, right? That’s the Inflation Reduction Act. That’s many, many orders of magnitude of critical spending initiatives. I mean, CHIPS and Sciences Act, critically important, $52 billion. And now we’re talking about a $4 trillion hole. 

So the gist of your question, I think, tells us how severe the challenge is. We don’t have a lot of fiscal space right now for the unexpected. And this worries me enormously. Again, I’m not a macroeconomist, but I do know what it looks like to go into a situation where you don’t have a lot of elasticity. You don’t have a lot of room to respond. It feels like we’re painting ourselves into a corner. 

And the last thing I’ll say on this is I hope I’m wrong, but I haven’t heard either presidential candidate express much concern about the federal debt. And I don’t see much progress for constructive engagement across the aisle in Congress. So that suggests it’s going to be really tough. Again, if interest rates were 1 percent, I’d be a lot less worried. But I share your concern. Sorry. 

Hopefully, David has something more optimistic to offer. 

MALPASS: Well, I’ll add to what you said there, Emily. One is the short duration of the government’s debt adds to the burden and the size of the current and the projected fiscal deficits and the rapid growth in spending. 

On the positive side, the U.S. is the world’s biggest economy, and therefore has a lot of borrowing power. So one of the things I’m worried about is that the U.S. can continue borrowing, but it takes money from the rest of the world. So I really do think there is a link between the giant expanse of the U.S. government getting bigger and bigger and that slow growth rate that I mentioned at the beginning of the call. So we’re driving down global growth by borrowing so much through the U.S. government. 

A couple of other points is markets look ahead. So if you can create some image that there’s hope into the future, then there will be a positive response. And that particularly gets into energy. We talked about the technology wave. But one of the core points of that technology wave is the need for huge increases in the amount of energy, not only in the U.S. but worldwide. So the U.S. is well positioned to build strength from that. 

We need to do a lot more in nuclear. We need to do more in our energy output. The Panama Canal was mentioned earlier. It doesn’t make sense to have LNG passing from Texas through the Panama Canal to go to Asia. So that puts emphasis on pipelines and transmission mechanisms for the huge supplies of natural gas that the U.S. can marshal. 

All of that goes into the dollar as a reserve currency. So I think there needs to be a clear focus that, for the world to be safe or to have—certainly for the U.S. to have economic security, we have to be thinking about dollar security. And that means the dollar as a brand name for the U.S. You can’t have a situation where people outside the U.S. are regulating the safety of the dollar in their countries. That would be this rise of regulatory policy outside the U.S. controlling some of our destiny. 

So those are all points that, you know, if we can be stronger as an economy with more output, then we might be able to bend the curve on the fiscal deficit and the national debt. And markets will reward that because they look ahead. 

Thanks. 

PATTERSON: And maybe this is one that I will step in on just for a second as a macro researcher. 

One of the U.S.’s strongest points in terms of our security economically is our Treasury market, $27 trillion. The next-largest Treasury market or government bond market is a fraction of that. And that means that central banks and sovereign wealth funds around the world, who are looking somewhere to put their assets where they know they’ll have liquidity—they can get in and out very easily and cheaply—and they know it’ll be safe. 

And they know it’s safe because the Federal Reserve will always come in and stabilize it when things get a little off kilter. And we saw that during the pandemic. We’ve seen it more recently. That means that there’s always very strong demand for our market, including from overseas players, particularly Japan and China, which are the two largest foreign holders of U.S. treasuries. 

You know, a risk I see going forward is kind of a one-two punch in that if our deficits keep going up and our debt gets higher, that means we have to issue more and more bond supply. And to have more bond supply in the market is going to push our borrowing costs up, our yields higher, unless we have equally more demand. 

And without those foreign entities being excited to own U.S. debt, that demand has to come from somewhere else, more domestic demand. And we just put that at risk if we don’t continue to coordinate and collaborate with allies. If we push them away, they will start looking to reduce the amount of U.S. treasuries they hold and hold something else instead, whether that’s a domestic currency, gold, or other financial assets, even if they don’t offer the same liquidity. 

So one risk is that we have less foreign demand. The other risk is we have greater supply. Both of those things push up borrowing costs, higher capital costs for consumers and businesses alike, at the margin will slow our growth. And so it’s more of the frog in a boiling pot of water than a Liz Truss U.K. moment where you have a sudden crisis in the bond market because of fiscal policy. But nonetheless, I think it is a risk to our economic security. So I would just add those quick points on. 

We probably have time for one more question. I don’t think we have any on the Zoom, but we can have one more in the room. We’ll get a mic to you, please. 

Q: Thank you. I’m Christian Ravenna (sp) at Bank of America. 

I want to follow up on the prior question, also the prior speaker, by looking at the limits of Fed policy and on interest rates, if you link interest rates and growth and debt, like David mentioned, the imbalance there. What’s really happening with the Fed interest-rate policy when you only look at price stability and employment, and only look at it in terms of a delta for inflation? And if gets close to 2 percent, they will—they will be happy, and maybe at the end of next year an interest rate of 3 percent. But is that really sufficient to address the imbalance that David is talking about? And prices have risen maybe in the last three years by, say, 40 percent for building a new power plant or getting EVs on the road. So how or what’s the institutional framework to look at the absolute price increase rather than the delta that the Fed is focused on its mandate as laid out in the law? So how do you get the price down globally to make the economy grow and make it work again? 

PATTERSON: David, do you want to start on that? 

MALPASS: I’ll say briefly, because that’s a—you know, that question deserves really a full-day kind of answer. 

So, you know, the Fed has a dual mandate of price stability and full employment, and sometimes treats those as competitive goals. I think they have to be unified goals that, in order to have full employment, you have to have laid the groundwork for price stability. But a lot of that foundation for price stability comes from outside the Fed. 

So I’ve wanted the Fed to think that it’s not solely responsible for inflation or for full employment, that it contributes to those through good policy. But then that needs to look elsewhere within the economy, and that gets you directly into, you know, the overall success of fiscal policy, of small-business policy, and so on. 

So I think—I think there is a way forward where you can get hope for price stability into the future and, you know, rapid growth in employment. But it’s going to take a more—a bigger effort across not just the U.S. government but, in fact, the government needs to be smaller in order to allow the private sector to be participating more in the supply chains and in the growth of energy and all those other things that go into it. 

So that’s kind of a brief answer. And I wanted to leave a little bit of point of optimism in that we have this giant, powerful economy of the United States. And so there are ways through this. 

Thanks. 

PATTERSON: Thank you for that, David. 

And I would—I think it’s kind of a great question to end on, because it almost perfectly circles back to Treasury Secretary Yellen’s comment about modern supply-side economics, where her hope is that through some of these policies you can increase capacity, which can support growth without having a further increase in the cost of living. Increasing the labor supply, increasing the housing supply can be productive for growth, but not necessarily inflationary. Not every policy is aiming that way, but some of them definitely are, and hopefully that can help address this going forward. 

We know that most of the time bringing down the actual cost of living requires a recession, and I don’t think that’s anything anyone wants to engineer. And that certainly would go against our topic today, which is economic security. 

On that note, I would love to thank our panelists again—Emily, Liz, David, and Matt here with me today. Thank you so much for your insights on this topic, which I think we’re all going to be hearing a lot more about in the years to come. So you can remember we all kicked it off here today. 

And for those of you joining us in New York, there is going to be a cocktail reception immediately after in the Greenberg Room. So please join us if you can for that. 

And everyone on Zoom, thank you so much for listening today. And thank you again, Stephen Freidheim, for supporting this symposium. Thank you so much, CFR. 

GOODMAN: Thank you. (Applause.) 

(END) 

This is an uncorrected transcript.