Treasury Secretary Janet L. Yellen has given only a handful of interviews since taking office about a month ago. Business leaders and investors hold on to every word trying to figure out how they and the Biden government steer politics and how that will affect the economy and markets. Ms. Yellen, previously chairman of the Federal Reserve, is able to keep track of this, but in an interview with me for the DealBook DC Policy Project, she pointed out some policy priorities in her typically understated manner.
Here are the highlights of what she said on some of the biggest topics – and my take on what it means.
When I asked Ms. Yellen what metric she would use to measure success in her new role, she made it clear that there was one problem above all others: “A simple problem would be how long it would take us to lower unemployment levels, that we enjoyed before the crisis, ”she said.
Don’t just look at the overall unemployment rate as a measure, however. It is applying an even stricter measure, which means it is likely to push for incentives and other measures to boost the economy above expectations. “Remember, the unemployment rate was a 50-year low at 3.5 percent,” she said of the pre-pandemic situation, comparing it to the current rate of 6.3 percent. “Really, if you add to the nearly 10 million registered as unemployed, if you add the 4 million who left the workforce for health reasons, being responsible for childcare, and two million people, those who have reduced or paid their working hours see an unemployment rate of almost 10 percent. “
How much is too much This is the key question that economists are debating as public debt rises. Some argue that the old tax rules no longer apply. Ms. Yellen, who was known for her reticent tendencies at the top of the Fed, does not go that far. However, she argued that “traditional metrics” like the debt ratio are the wrong way to judge whether the country can afford more debt. “I remember in 2007 the debt ratio before the financial crisis was 35 percent. And now it’s about 100, ”she said.
A more important measure for them is the cost of debt. “For example, look at the interest payments on the debt as a percentage of GDP. Now that’s less than 2 percent,” she said. “And it’s not higher than 2007. I think we have more tax flexibility than before because of the interest rate environment. And I think we should use it now to address an emergency. “
Ms. Yellen said she was not planning a Senator Elizabeth Warren property tax – “it’s something that has very difficult implementation problems” – but in her most direct comments on the matter, the Treasury Secretary said she was ready to look at the termination tax treatment, which could have a similarly profound effect. She plans to stop a rule that would allow assets to be passed on at their current or “increased” value after death without paying taxes on profits accrued over time. The Center for Budgetary and Policy Priorities compiled the numbers and estimated that unrealized capital gains account for up to 55 percent of property assets valued at more than $ 100 million.
Private equity managers should also take note of the following: She implied that she would like to deal with “interest income” which allows some financiers to pay taxes on their income at capital gains rates as if they had invested the money themselves.
Ms. Yellen seemed less convinced of a financial transaction tax, which some have suggested could bring in $ 80 billion a year by imposing a small fee on every trade that would hit Wall Street especially. “It might deter speculation, but it could also have negative effects,” she said.
Ms. Yellen doubled the message “buyers beware” to Bitcoin investors. “I don’t think Bitcoin – I’ve already said that – is widely used as a transaction mechanism. I’m afraid it is often used for illegal finance, ”she said. “It’s an extremely inefficient way to conduct transactions. And the amount of energy that goes into processing these transactions is staggering. But it’s a highly speculative advantage and I think people should be careful. It can be extremely volatile and I am concerned about possible losses that investors could take. “
Ms. Yellen is more interested in the prospect of the Federal Reserve developing what is known as a digital dollar than she has first made public comments on the prospect. Crypto backers might interpret this as confirmation of the idea – Ms. Yellen’s predecessor Steven Mnuchin seemed less interested – that shares some of the technologies underlying Bitcoin and other cryptocurrencies. “It makes sense for the central banks to look at this,” she said. “We have a financial inclusion problem. Too many Americans really don’t have access to basic payment systems and bank accounts, and I think this is something that a digital dollar – a central bank digital currency – could help with. I think this could lead to faster, safer, cheaper payments. “
There are a number of “problems” that need to be resolved before central banks move into digital currencies, she said. “What would be the implications for the banking system? Would this lead to a huge movement of bank deposits into the Fed? Would the Fed deal with retail customers or try to do so at the wholesale level? Are there any concerns about financial stability? How would we deal with money laundering and illegal financial problems? There’s a lot to consider here, but it’s definitely worth checking out. “
On the climate
Ms Yellen has said that dealing with climate change is part of a broader mandate for the Treasury, as well as for other departments under President Biden. One of the most intriguing comments she made was about the role of financial institutions and the risk they are exposed to by investing in or lending to companies exposed to climate change. “There is now a new movement toward stress testing financial institutions,” she said, recognizing that financial firms face risks from the changing climate in terms of “physical risks and also risks from price changes, stranded assets and the like”.
It is “encouraging” that the Fed is investigating this, she said, “and I think this is something we in the Treasury Department can possibly discuss and facilitate.” She added, “These tests are not intended to have the same status in terms of capping withdrawals and capital requirements, but I think they would shed some light on both regulators and the companies themselves.”