Janet Yellen on the Danger of a “Banana Republic” Economy

0:06David Remnick.

0:30The Trump administration has just pulled off another sweeping change to the United States. In a few moments, we're going to make official the greatest victory yet when I sign the one big, beautiful bill. The budget bill, beautiful or not, includes cuts to social services that would have been unthinkable in earlier Republican administrations. Ten and a half million people will be kicked off of Medicaid and the Children's Health Insurance Program in the next decade. SNAP and other nutrition programs will be cut by$186 billion. Now, the foundational belief in conservative economics is that cuts to social services are necessary to shrink the expanding deficit.

1:16But the so-called Big Beautiful Bill is hardly an austerity measure. It's a windfall for the wealthy. The Cato Institute estimates that it will add$6 trillion to the national debt. That's$6 trillion. So to get a sense of how this is supposed to work, I called up Janet Yellen. Few people understand the American economy better than Janet Yellen. She's served as Treasury Secretary, leader of the White House Council of Economic Advisors, and chair of the Federal Reserve. Her term as the Fed chair overlapped with Donald Trump's first term in office. And curiously enough, they really didn't come into that much conflict.

1:53But Trump now wants even more control over economic policy. and he's hurling brickbats and insults at his own appointee for the Fed chair, Jerome Powell. I spoke with Janet Yellen last week. What are the implications for us in our daily lives? What are the possibilities that a federal deficit that's grown by that much, how will that affect things? Interest payments on this debt are now the second largest expenditure in our overall budget. Defense comes first, interest comes next. Now, Americans have told us their key concern is the cost of living. Part of that is high housing costs, and part of that in turn reflects mortgage rates that are much higher than they were for many years before the pandemic.

2:49And what this is going to do is to raise interest rates even more. And so housing will become less affordable, car loans less affordable. This bill also contains changes that raise the burdens of anyone who has already taken on student debt. And with higher interest rates, further education, college, professional school become less affordable. And it may also curtail investment spending, which has a negative impact on growth. And so most analysts, when they look at the long-term impacts, this is something that will harm economic growth rather than stimulate it. There are huge, steep cuts to Medicaid, which provides health coverage for the poorest Americans.

3:47What's the extent of the cuts in Medicaid? How will people feel the impact of this bill? Well, it's estimated that 12 million people will lose Medicaid coverage. Entirely? Entirely. So there are work requirements for Medicaid. And one thing the bill does is it makes it very much more complicated and burdensome to show that you qualify for Medicaid. And think of people who have work that is not secure and have low incomes having to go through a paperwork burden of documenting every hour that they have worked to qualify during the previous year. People will just find it impossible to meet that type of burden and won't be able to claim benefits.

4:44But when you listen to President Trump describe the bill, I've heard him say, oh, nobody is going to lose health insurance, only people who were fraudulently claiming it. Well, many members of Congress, including many Republicans, are concerned that rural hospitals that depend on Medicaid patients and this funding, that the states are not going to be able to step in and provide the amount of money that they're losing from the federal government. And so probably many rural hospitals will close. But, you know, he can portray it as he just says the opposite of what is true. Both parties, for as long as I've been around, have talked about cutting deficits.

5:38And in reality, in reality, we keep increasing them. This is not unique to the Trump administration. Why is this different? We, at this point, have a serious deficit problem. and we didn't two years ago we did two years ago and it's getting worse for reasons we have known about for 30 years that is that we have an aging population the baby boomers are retiring the three biggest programs that are so-called mandatory outside of discretionary spending So Medicaid, Social Security, and Medicare. And the size of these programs will continue to escalate over time. So that is a force that's making deficits worse.

6:32There are economists out there who poo-poo the idea that deficits are so profoundly dangerous. They even argue that deficits don't matter all that much. What is their rationale, and why, in your view, are they wrong? Well, I'm not a person who always thinks deficits are terrible, and I think that there are times when deficits are desirable. When are those? I think it was totally appropriate that during World War II, the U.S. debt rose to its highest level relative to GDP. The pandemic, we had huge spending, and this occurred even before Biden was elected to deal with the fallout. That's a good reason for deficits.

7:19And sometimes the economy is just really weak, and we need to create jobs by providing stimulus. But we have a 4.1 % unemployment rate. I would call that full employment. Inflation is low. Growth has been solid. And yet, our debt to GDP ratio is at 100%, which is the highest since World War II. So at this point, knowing that they're going to rise more in the future, if both parties have said they want to protect Social Security and Medicare, if you do that and you're not willing to cut those programs, problems, then you have to find some other way of containing the deficits at least somewhat. And if we get ourselves in a situation where we need to reduce deficits to get our debt under control, we do the tough stuff.

8:20It's not pleasant, but the United States - What would be the tough stuff? The tough stuff is we have to raise taxes. Okay. And that's what's wrong with what's happening now. Because let me be clear about this. If you don't touch Social Security and Medicare, and Congress just cut Medicaid and food stamps significantly, what else is there? Okay, now people carry on about, oh, we have out-of-control discretionary spending. But discretionary funding is not that profound in the big picture, is it? It is very small and it has been declining as a share of GDP. And there is just not enough waste, fraud, abuse or anything like it to be able to find significant further cuts outside of defense.

9:10Despite the spectacle of Doge, for example. Yeah, Doge came, and you know what Doge did is they found minor savings by choking off foreign aid to the rest of the world and the like. And then what they did was slash the Internal Revenue Service staff, and we have estimated uncollected taxes. This is called the tax gap. And what it is, is the amount of taxes we ought to be collecting versus what we actually are collecting under existing law. That gap is estimated at something like$700 billion a year. Because people are able to cheat more efficiently. Cheat. And who cheats? It's not working class people who are Trump voters who get W-2s in the mail.

10:03It's high income and net worth individuals. It is complex business partnerships and corporations. And Congress cut the funding of the Internal Revenue Service to such a low level that the audit rate went to close to zero on these entities. And we were in the process of rebuilding the Internal Revenue Service. Every dollar we spent on that, we estimated over 10 years would yield $10 of additional revenue. So it's not costly, it's net saver. And Musk came in and he's cut IRS staffing by a third, and he fired all of the tax accountants and lawyers and IT professionals. And when we see what the cost of that is going to be to revenue collections, I would absolutely think that those losses will overwhelm any savings that he got from the slash and burn he did elsewhere.

11:12And do you suspect that was Elon Musk's idea all along? It would not surprise me. I don't know. Because I think anyone who knew anything about the federal budget would have seen that discretionary government spending outside of defense had been declining and declining and is way below the level it's averaged for the last 30 years. When you look at Donald Trump insulting his own pick for Fed chair, Jerome Powell, what do you think? He's called him a fool, a numbskull, a stupid person. This is a guy that he put in place. Why is he so abusive toward Jerome Powell? And why is he so desperate to lower interest rates, which is what he's constantly on Powell to do?

12:07One of his most recent comments about Powell, he said, look, interest on the federal debt, it is huge. As I mentioned, it's the second largest spending item after defense. We're spending about a trillion dollars a year on interest on the federal debt. Well, look, if interest rates were lower, the cost of financing the federal debt would be lower. And doesn't that sound like it's a great way to lower budget deficits and help us solve our underlying problem? And that's exactly what Trump said he wants Powell to do, and he can't understand why he's such a numbskull that he won't do that. Well, if I'm allowed to give the answer as to why Powell's not allowed to do it, the words that Trump uttered are the words one expects from the head of a banana republic that is about to start printing money to fund fiscal deficits when a country, and I can give you lots of examples.

13:17Argentina is a classic case. Think of all the countries that have suffered from bouts of high inflation in Latin America and Zimbabwe and other places. Governments get in a position where their expenses can't be financed by tax revenue. And they find it politically difficult to either cut spending or to raise taxes. and then the market becomes less and less comfortable with absorbing the debt they have to issue to cover this shortfall. And so the ramifications and the outcome of that is what? The outcome of that is that they go to their central bank and say, we're selling the debt to you and you should pay for it by printing money.

14:06And then you get very high inflation or hyper inflation. And Powell absolutely won't do this and won't accept this type of reasoning because this is the road to allowing inflation to get out of control. And the Fed made an explicit agreement back in 1950 with the U.S. Treasury because during World War II, the Fed had tried to keep interest rates low to help finance the war. And it allowed inflation to pick up. And there was an agreement that essentially created Fed independence. It was later enshrined by laws that, no, the Fed's job is to keep inflation low and stable or price stability and to try to create a strong job market, maximum employment.

15:04That's what the Fed does. You spent two years as Fed chair under Barack Obama and then two years under Donald Trump. Tell me a little bit about how those experiences differ. Well, I met infrequently with both. But in Obama's case, he expressed interest in understanding the economy and the economic outlook. And I met with other members of his administration. And there's a long tradition in which the Fed chair and treasury secretary meet on a very regular basis. But I will say during that time, never did anybody attempt to lobby me about monetary policy. Not a soul ever uttered to me, we think you should do X.

15:59And under Trump? I had the same set of contacts, and I met a couple of times with Trump. What was that like? Well, so first let me say, interest rates were extremely low during this time. And he once said to me, you're like me. You're a low interest rate person. I like that. Well, you know, I probably should have added, I'm a low interest rate person for now.

16:30Janet Yellen:Right. Because inflation is too low and unemployment is too high. And we're doing everything possible we can to try to improve that picture. And it calls for low rates. But in another time and under different circumstances, I wouldn't be a low interest rate person. One of the names being floated is Powell's replacement as Fed chair is the current Treasury Secretary, Scott Besson. Now, Besson said he would, quote, do what the president wants. What happens if the Federal Reserve is completely beholden to the president? How does that change the dynamic and the ethics of government? Well, I mean, in my experience, we really haven't seen that in decades.

17:22There are stories about Arthur Burns having been strong-armed by Richard Nixon and some earlier stories. So it would have various implications. And I say, Trump has said he absolutely intends to appoint a replacement for Powell who will lower interest rates. And I want to be careful here because right now the economy is doing well, but there are reasons to think the labor market may get weaker and that inflation may subside. and it could be appropriate to lower interest rates at some time in the future. So there are good reasons to lower interest rates and bad, but if a replacement lowers them for reasons considered to be inappropriate, given an independent institution, you will see a pronounced market response.

18:27And markets let the Fed and the president know what they're thinking about his proposals and actions. And in addition, the Fed's structure is set up so that the chairman of the Fed, he's not an independent decision maker over interest rates. All of the governors, there are seven governors and then five presidents of reserve banks, there are 12 people who vote on interest rates. And it's not so easy to strong-arm them or necessarily other members of the Board of Governors. I know you're pressed for time, but I'd be remiss to not ask you about the president's tariff policy, which you at one point said was the worst self-inflicted wound that you could imagine.

19:19And you said that the average household would see a$1 ,000 reduction in income, at a minimum. At least. At least. Now, so far, after a lot of chaos in the markets, there's been a kind of evening out a little bit more stability, certainly in the stock market and other indicators. Is there no chance that Donald Trump has proven himself at least to some degree as a dealmaker, as he has with NATO, for example? He really pushed the NATO countries hard. And that turned out to be just arguably a good thing. I agree with that. Is it not possible that on tariffs he set out to freak out, to use a technical economic term, some competitive countries knowing that he would dial things back as the bargaining process went along?

20:10He signed a very minor deal with the United Kingdom. He claims that there's a deal with Vietnam, but he's going to impose 20 % tariffs. He doesn't like the fact that South Korea and Japan, two of our biggest trading partners after Canada, Mexico, and China, aren't offering enough concessions. And he said they're both going to face 25 % tariffs. Now, when you say success, I guess the question is, what do you mean by success? First of all, he just thinks that the United States is being treated really unfairly and always has by every other country in the world. And I don't know what factual basis there is to think that.

20:57Now, China, I have a lot of problems with. I don't want to put China in the bucket of all is well. You agree that we get a bad deal with China on many levels. In many ways. But I still think we benefit from trade and investment with China. So I would not want to see that collapse. But what about Canada and Mexico? We have deeply integrated economies. He signed a trade deal with them during his first term. Billions and billions of dollars of investment in all of our countries, including the United States, have been made on the basis that we are a tariff-free area. And no one said that these countries have not played by the rules.

21:41They have. And we've benefited from this, and he's just, I'm coming in and ripping this up. Janet Yellen, thanks so much. I appreciate it. My pleasure, David. Thanks for the invitation.

21:58Janet Yellen is a professor of economics at the University of California, Berkeley. She's a former chair of the Federal Reserve and served as Treasury Secretary under President Biden. Now, the budget bill, as Janet Yellen has just laid out, is going to have enormous consequences in this economy. It will raise the deficit by trillions of dollars, and it's going to hurt a great many of Trump's supporters. So what were the Republicans in Congress thinking when they passed it? I think it tells us about a new political reality in which the Trump White House has concluded that its voters, even if they are forced to bear some of the pain of this bill, will not abandon them because of other priorities such as partisan loyalty, tribal loyalty and the culture war.

22:51The idea that Trump is on their side, even if he's not on their side. Washington correspondent Susan Glasser joins us next. This is the New Yorker Radio Hour. Stick around.

23:08Thanks for listening. And you can hear more of the New Yorker Radio Hour by subscribing to the show wherever you listen to podcasts or on public radio stations across the country.

23:19Janet Yellen:Hey, listeners. This is Liz Mainz-Amanzadi, the New Yorker's puzzles and games editor. If you're someone who likes making lists and organizing your bookshelf, we think you'll love Catalogs, our new daily game that challenges you to put things in order based on a hidden rule. You might be asked to sort peppers by spiciness, world capitals by population, or Martin Scorsese movies by release date. You can play Catalogs every day at newyorker.com slash games and in the New Yorker app for iOS or Android. Here's a helpful hint. The app gives you free access to our entire archive of catalogs, along with our word scramble game Shuffleo and the mini crossword.

23:59Janet Yellen:So download the New Yorker app for new games to play every day.