Marketplace - Democracy is critical to prosperity, Treasury secretary says 

Episode Date: May 9, 2024

Treasury Secretary Janet Yellen sat down with “Marketplace” host Kai Ryssdal to discuss inflation, economic growth, U.S.-China relations and why having a strong democracy matters for our economy. She also highlighted federal investments in clean energy, concerns about Chinese overproduction and more. Support our nonprofit newsroom today and pick up a fun thank-you gift like our new Shrinkflation mini tote bag or the fan favorite KaiPA pint glass!

You turn to Marketplace for the latest news about what's happening in the economy and how it impacts you and your community. When you donate to support our nonprofit newsroom, you can also get something a little more tangible. We've got a great lineup of donor thank you gifts right now, a shrinkflation mini tote bag, water bottles, mugs, hats, and yes, the Kai PA glasses are back, but only while supplies last, and I'm taking some of them. Contribute any amount to make a difference and pick up one of these gifts. Go to Marketplace.org slash donate. The state of the American consumer, Sino-American relations, and democracy, and the state of this economy, all as Janet Yellen sees them, from American public media, this is Marketplace.

In Washington, D.C. today, I'm Kai Rizdal. It is Thursday, the 9th of May. Good as always to have you along everybody. The way it works when you've got an interview with the Treasury Secretary is that you show your ID to the uniformed Secret Service agent standing at the gate on Pennsylvania Avenue right outside the White House and the Treasury Department building. Then you give your ID to the uniformed Secret Service agent inside the guard house on Pennsylvania Avenue. Then you get inside the building and you give your ID to the uniformed Secret Service agent at the guard desk. Pennsylvania Avenue. Then you get inside the building and you give your ID to

the uniformed Secret Service agent at the guard desk. A quick pass through the metal detector, up a flight of stairs and down a long tiled corridor into a kind of underwhelming conference room really. You wait for a couple of minutes and then you're on. Madam Secretary, welcome to the program. Good to have you back. Thanks for the invitation. I want to start with inflation, just as a quickie, even though technically not your job, I get that. You said a number of months ago, this is it. We've had this off landing. And given the way inflation has been bumpy, to quote Chair Powell, would you like a do-over

on that one? Well, look, I think the economy is doing well. We have a strong pace of job creation. Growth is running around 3% over the last year, and inflation has come down substantially. It's not yet where it needs to be, and it has been a slightly bumpy path, but I think the fundamentals are still favorable.

But look, all that said, many Americans are suffering from a cost of living that is posing challenges to them. Rent, food, other prices are high, and Americans feel challenged to make ends meet. So President Biden's top priority is doing everything he can to get the cost of living down. When you see polls though that show the president not getting credit for economic growth and

in point of fact credit largely going to his presumed opponent, do you look at it and say what do we have to do to get a break? Well I think we have to explain to the American people what we have done to create a bright future for them. And the pandemic was a serious challenge for all Americans and we have a lot of challenges coming out of that. But if you compare the United States with other developed economies, we are doing better. Inflations come down more, growth is stronger, the job market is doing better.

And President Biden has been focused since day one, not only on recovering from the pandemic, but on investing in America in ways that would create good jobs, including for people who don't have a college education and in parts of the country that have really lacked opportunity. And there has been trifecta of legislation passed, the Bipartisan Infrastructure Act, the CHIPS and Science Act,

and the Inflation Reduction Act, which is a monumentally important set of clean energy incentives. And with these investments is coming tremendous opportunities for Americans that will boost their living standards. Let's talk about America and the global economy for a second. China specifically, which is the last time you and I spoke in Beijing. You were just back a number of weeks ago from another trip there. You said the first time you went, what you had to do is set a floor under the relationship And we talked about that at the time and and now you're building on that. Are you satisfied that the relationship is?

stable I Think it's decidedly improved over the last year I've had three very substantial engagements with my counterpart, Vice Premier Ho Le Fung. I've spent a great deal of time with him and we've had very deep and detailed discussions of the issues that we have with one another, what our priorities are. And also importantly, our relationship goes beyond just the Vice Premier and

myself. We've deepened the relationship throughout our governments. We've formed two working groups. They've met four times. And they're really digging in and discussing issues in ways that are including around our concerns, one of which is Chinese over capacity in advanced manufacturing, exchanging papers, analyzing data, and we're working also on joint things, especially when it comes to financial stability that will be good for the entire globe.

Let me ask you about one of the focuses of that trip, which is, as you mentioned, over capacity in advanced products, electric vehicles, batteries, all of those things. Is it possible we're just being outcompeted by the Chinese in those fields? Well, we don't think the playing field is level. And we think China is massively subsidizing investment in the set of industries that they have targeted as critical to their growth prospects. Subsidizing more than we are with our investments in the CHIPS Act and the Infrastructure Law and all that?

Yes, I think- Because we're pouring billions, you are pouring billions in. Well, we have targeted a few industries, particularly clean energy, electric vehicles, batteries, renewables, where we're not trying to dominate the globe and be the only country in the world that supplies these goods, but we do think it's critical for national security, for the sake of supply chain resilience, and to create good manufacturing

jobs where people can get ahead to have presence in these industries. And what we don't want to see is massive Chinese subsidies to firms with huge overcapacity that will just drive our firms out of business. I think what's happened in China is that China has a macroeconomic situation where an unusually low fraction of their output, their economy's output, is devoted to consumer spending. And they have a savings rate that's the highest,

among the highest in the world, around 45%. They used to channel that savings into infrastructure, then into real estate and property development. Which has been problematic. And that sector has problems. And what to do with all of those funds? Well, their decision is let's channel those funds that we don't need to put into property

and infrastructure into advanced manufacturing. And China has built enough capacity for example in solar panels to supply Twice the total global demand So, you know we suffered in the late 1990s and early 2000s what's called a China shock in which really Chinese dumping and over capacity in which really Chinese dumping and overcapacity caused layoffs of many American workers in many parts of the country.

And we don't want to see that happen again. I'm going to oversimplify here, but bear with me. Your message to the Chinese, at least as reported publicly, has been we want to engage. We do not want to decouple you've been very clear about that But you've also said when it comes to national security Fundamentally all bets are off. Do you think they hear you when you say that they do? I think they're worried that when we say national security That that's a very broad concept and that we're using

national security to impose restrictions with the idea of harming their economic progress. And my job is to explain to them that we are trying to carefully target restrictions to make sure that they really address national security concerns and are not harming their economy broadly. And to open up a channel by which we listen to their concerns if they think that our restrictions are too broad. More from the 78th Secretary of the Treasury of these United States about American democracy and this economy coming up after the fold. Wall Street on this Thursday. Traders were in a pretty good mood actually.

A little bit of softness in the labor market is the reason why. Should you be curious? First time claims for unemployment benefits were up just a hair, and that might, emphasis on might, make the Fed more inclined to cut interest rates. Maybe. We'll have the details when we do the numbers. So Alright, let's do the numbers. Dow Industrial is up 331 today, more than 8 tenths percent 39,387. The NASDAQ added 43 points a little over a quarter of 1% finished at 16,346. The S&P 500

picked up 26 points about a half percent finished at 52 and 14. A place and a palace of teenage rock and roll dreams is filed for bankruptcy. Musical instrument retailer Sam Ash is filed for bankruptcy. Musical instrument retailer Sam Ash is filed for chapter 11 bankruptcy in a federal court in New Jersey. The family owned company is closing its 42 remaining brick and mortar stores. It was the pandemic says the company,

according to court documents, one of Sam Ash's biggest unpaid debts in that filing is to Yamaha, which is in turn, one of the few musical instrument manufacturers that is publicly traded. Its shares picked up nine and three tenth3% today after a strong quarterly report. Revenue up, profit forecast looking rosy. A sweet, sweet quarter for Cheesecake Factory.

Ticker symbol, come on, this one's too easy. Come on, come on, come on, come on. Cake, cake. Revenue speed analyst S.Mitts and shares rose 6.2%. Same story for Krispy Kreme. Take our symbol, this one's a little trickier. D-Nut. But it managed to pocket just 1.8%.

The bonds rose yield on the 10-year T-note, 4.45%. You're listening to Marketplace. You turn to Marketplace for the latest news about what's happening in the economy and how it impacts you and your community. When you donate to support our nonprofit newsroom, you can also get something a little more tangible. We've got a great lineup of donor thank you gifts right now, a shrinkflation mini tote bag, water bottles, mugs, hats, and yes, the Kai PA glasses are back, but only while supplies last and I'm taking some of them.

Contribute any amount to make a difference and pick up one of these gifts. Go to marketplace.org slash donate. With access to so much information, it's hard to feel like an informed, discerning citizen. That's why on Make Me Smart, which is a podcast from Marketplace, we make it easy for you to stay in the know. Hi, I'm Kai Rizdal. Every weekday, Kimberly Adams and I unpack the latest from Washington, D.C. The Senate minority leader has announced that he will step

down as the Republican leader. What's happening in AI? I mean, don't buy at the top, but holy cow, artificial intelligence and all the companies related to it are the hot new thing. And we do the numbers. So as a refresher, inflation is the rate of increase in the prices of things. It's not just sort of things getting more expensive. It's a speed at which things get more expensive. Because in a world that's constantly changing, we all need to stay smart.

Listen to Make Me Smart, wherever you get your podcasts. This is Marketplace. I'm Kai Rizdahl. We talked, Secretary Yellen and I did, for 15 or so minutes today. Eight-ish of it you already heard. Big picture economic issues, American consumers, the China relationship. And then I made a turn. Here you go.

New subject. You gave a speech last Friday in Arizona in which you, by your own words, sort of went where Treasury secretaries don't usually go and you started talking about the importance of democracy to the American economy and democratic institutions to the importance of this economy, among them rule of law, regulation to the importance of this economy, among them rule of law, regulation, the right of appeal, all of those things. Do you believe that the rule of law is under threat in this country right now?

And what will that mean for this economy? Well, we have seen attacks on institutions, American institutions, independent institutions, like the Federal Reserve. And of course, January 6th was a huge attack on American democracy and something that was frightening. So I think we do have to worry about the state of American democracy. And when we look around the world, we see similar threats in a number of countries and some questioning

of whether or not democracies can actually deliver and address the challenges that people face. You did what economists do in that speech and you gave some data and some case studies and it was, I recommended people read it or go listen to it on the stream. I want to know why you decided it was important to give that speech now. Well, President Biden has also talked about the importance of... Not the President, ma'am, you, right?

These are words coming out of your mouth. Oh, sure. Well, you know, from my standpoint, I think it's important for Americans to understand how critical democracy is to economic performance. Of course, democracy is important in and of itself, but I thought what I can add is to elucidate the relevance of democracy to good economic performance, and to fight back against the idea that democracies

just aren't an efficient way to help people get ahead. And you sometimes hear this in countries like China that say, well, you know, we have an authoritarian government. We decide to do something and we can move quickly and look how slow it is for sometimes democracies to move. But the research suggests that democracy is actually critical to high living standards. On average, are the things equal?

Income is 20% higher in democracies and there are very good reasons and it's important for Americans to understand that. Did you clear that speech with the White House? I always share remarks I'm going to give with my colleagues in the administration. When we were in China and you were, you know, you got the red carpet treatment, you came down the stairs and ambassadors and dignitaries were there to welcome you and I asked you if you were a diplomat now and what you thought of that. And it was an interesting answer.

I guess the corollary question now is, it's not really a question. You're kind of a politician now. I'm not allowed to get into electoral politics. But it is really important for me to explain what President Biden's economic strategy is and how we see that as helping Americans prosper over time. And there are a lot of different ways that we can do that.

And I think that's a very important point. And I think that's a very important point. And I think that's a very Biden's economic strategy is and how we see that as helping Americans prosper over time. And there are a lot of different dimensions to that. And one of them, I believe, is to explain why the policies we're putting into place are the appropriate ones to address a lot of long-standing structural issues. Look, you know, we've seen in this country over decades that the typical American who

does not have a four-year college degree has barely seen any increase in their real or inflation-adjusted wages, really really in 40 or 50 years. And there's been deindustrialization through many parts of the country that have reduced job opportunities. And what do we see? We see even rising death rates, deaths of despair in parts of the country where jobs have dried up. And Americans feel that that's an economy that's not working for them. And President Biden, the Biden-Harris administration is focused on changing that and developed

a strategy that first succeeded in generating a rapid recovery from the pandemic and is now investing for the medium and longer run. We were talking on the way over here, Nancy, my producer and I, and we realized that depending on how this election goes, this might be the last chance we have to sit down with you. So I'm gonna ask you the legacy question and it goes like this. I did an event with Chair Powell in San Francisco six weeks ago.

We were at the San Francisco Fed, which you ran for a long time, and in point of fact, we were in the Janet Yellen Conference Center at the San Francisco Fed. It's a good team here. And so I used that as a... Well, there you go. And it's lovely. I recommend you swing by and take a visit. I asked Chair Powell what his legacy was based on your legacy in the San Francisco Fed being that conference room. But bigger picture, what's the first line of your New York Times O-bit? That I tried to work with President Biden and in other ways throughout my life to create economic conditions that make Americans feel

they're getting ahead and enjoying good lives, that they have opportunity and that they're able to realize their dreams. And we can do that by, earlier in my career, through a monetary policy that is geared toward keeping the economy operating near full employment with stable prices. And in this phase, working with President Biden to put in place fiscal policies that create important job opportunities for people, regardless of whether they have a college education, that give them the training and create the opportunities they need to succeed and feel they're getting ahead and creating good and better lives for their children.

Madam Secretary, thanks for your time, ma'am. Thank you very much. Hi. As you heard from Secretary Yellen, the U.S.-China economic relationship is complicated. But you get away from the high-level controversies down to the doing business nuts and bolts, and it all comes down to a person having a good idea that the market likes. True, most of the time. Not true for a guy who came up with one of the hottest toys in all of China last summer. Marketplace at Jennifer Peck has that one. In the central Chinese city of Wuhan, college student Zhou Wenhao studies marine engineering

by day. By night, he's tinkering with 3D printers. Two years ago, he designed a mini toy switchblade and called it a carrot knife because the plastic blade is orange. He films it and posts it on the video platform Bilibili. In the first two weeks, the video didn't get much traction. Then it got hundreds of thousands of views, and I sold a couple hundred carrot knives. Orders started to fizzle.

Zhou Wenhao moved on to other designs. And last summer, at the urging of a friend, he uploaded the carrot knife video again, this time on another platform, TikTok's Chinese sister site Douyin. It got five million views. Then some manufacturers started hyping the toy online. Among them, manufacturer and seller Yu Pinghai. He says the carrot knife was a good idea, so he wanted to copy it. He hesitated at first because the design was pretty simple.

He hesitated at first because the design was pretty simple. If the technical barrier is very low, there would be lots of other imitators, and the price would go down until there would be no profits. I didn't want to join the price war, so I normally wouldn't do it. But he didn't have any other product on hand, so he took the carrot knife design. It was just a coincidence and luck that I became one of the first to manufacture the carrot knife. And I sold a lot. He did so because he's some 400 miles east of Wuhan in Yiwu city.

Factories there are known for producing all things small. Again, inventor Zhou Wenhao. When the carrot knife went viral, manufacturers and sellers in Yiwu didn't care about copyright. A lot of them just skimmed his design. This didn't bother him at first, because he was busy with orders for another one of his products. I had no time for new orders. Besides, I thought the carrot knife was an old product and would not last long on the

market. He was very wrong. News reports say carrot knives were all the rage last summer among elementary students, a customer base he didn't think to target. Because his carrot knives retail at $4, whereas ones from Yiwu, less than $1.50 each. From making plastic molds, manufacturing and logistics, it's all concentrated in one area. That's why Yiwu's production cost is so cheap. These industrial clusters are the reason you have a lot of toys selling for cheap on Amazon. Chinese factories make money by selling a lot and moving quickly. Again, toy manufacturer, Yu Pinghai. In the Yiwu business circle, information spreads fast.

Production of the carrot knife lasted two to three months. But by last fall, news reports were questioning the safety of carrot knives, and sales collapsed. Inventor Zhou Wenhao estimates between 10 and 100 million carrot knives were sold. Of those, he made maybe 500. I earned less than $900 from the carrot knife. He did try to work with the factory, but one of the partners ran away with all the money. Over a meal of braised fish, he says a patent would not have helped him in time. In the internet era, things can be easily amplified, but things that come fast can go

just as fast. He says the best way to earn money is to control the manufacturing and sales process yourself, and somehow not get swallowed up by China's manufacturing machine. In Wuhan, I'm Jennifer Pakancaccio, and the gang at the Marketplace Morning Report. Check it out. ["The Last Word of the Day"] This final note on the way out today, the last word of the day from Secretary Yellen. One more China question. You get all kinds of social media love for your food choices when you go to China. Your chopstick skills are apparently impeccable. What do you make of that?

I think the Chinese are happy to see a person who appreciates Chinese culture and is a regular person that they can identify with. Is that your regular person? Yeah, I think so. John Buckley, John Gordon, Noya Carr, Diantha Parker, Amanda Petrie and Stephanie Sieck are all regular people as well. They're the marketplace editing staff. Amir Bivaway, also a regular person, is the managing editor.

I'm Kyle Roslahl. We will see you tomorrow, everybody. This is APM. Hey everyone, it's Rima Grace, host of This Is Uncomfortable. If you're looking for some good recommendations on books to read, well you should join This Is Uncomfortable's Summer Book Club. Every other week in our newsletter, we'll share a new book that'll make you rethink your relationship to money, class, and work, while also featuring an interview with the author or an expert on the topic.

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