Following the passage of the bipartisan infrastructure bill on Friday, President Joe Biden’s legislative agenda now turns to the Build Back Better bill, the social spending package. Treasury Secretary Janet Yellen, recently returned from the United Nations Climate Change Conference in Glasgow, Scotland, has called the proposed legislation “transformational” for the American people and economy.

“Marketplace” host Kai Ryssdal spoke with Yellen at the Treasury building in Washington, D.C., Tuesday about the infrastructure and reconciliation bills, the state of the economy and her transition from Federal Reserve chair to Treasury secretary. The following is an edited transcript of their conversation.

Kai Ryssdal: I want to appeal to you as a labor economist from days gone by. And I want to talk about not the hard infrastructure program that passed [the House of Representatives] the other day, but the president’s Build Back Better program. And here’s what I want to know from you, again, not as Treasury secretary, per se, but as a woman who studied this for a long time. Does the economy need the Build Back Better program? Or do the people in the economy need it? Because the economy is doing pretty well right now.

Build Back Better: “The people need it”

Janet Yellen: Well, I think the economy needs it, and the people need it. It’s something that we need to do. Not because there’s a shortage of jobs. The unemployment rate, well, is declined to 4.6%. Most Americans feel the jobs are pretty readily available at this point. So it’s not a short-run stimulus program. It is really intended to address long-standing problems that have been holding this economy back. It’s meant to boost long-term economic growth and to address inequities. And let me be a little specific about what I mean. 

First of all, we’ve not really invested as much as we should in children to make sure that they’re successful. That they’re able to get the training, and the resources in childhood that they need to lead good, productive lives. So this bill will expand education by two years, it will offer two years of universal preschool to all children. And we know from many research studies that early childhood education has tremendous payoffs. People who have it are more successful, earn higher wages, are less likely to encounter difficulties in later life. It helps families afford child care. Right now, a typical family with child care pays about 13% of their income to finance child care. This bill will limit the amount that most Americans have to pay to 7% of their income. And it’ll provide up to $300 a month for support for child tax credit that will help families provide for their children. So this will help Americans, particularly women, work, it’ll boost labor force participation and growth, and it will provide better resources for children growing up. It also helps support home health care for those who are disabled or elderly. Again, something important for Americans as people, and also for families to be able to participate in the labor force. And of course, climate change. It provides tremendous resources to address what is an existential threat globally and in the United States.

Ryssdal: You say this is not a short-run stimulus program. And I wonder if that’s the basis for your belief that this will not be inflationary in this economy? Because as you know, inflation is a big deal right now. 

Yellen: Well, inflation has been running at higher levels than we’ve been accustomed to seeing for a long time. And I know that really imposes a burden on households.

Ryssdal: On those families, you’re just talking about trying to help, right, the ones on the lower end of the spectrum?

Inflation as a consequence of the pandemic recovery

Yellen: Well, yes, but I think you should see it as a consequence of recovery from a very severe shock due to the pandemic and something that will work itself out over time. And, you know, as a short-run relief matter, we have spent a lot in terms of boosting household incomes, we have trialed payments now, emergency rental assistance, there is money to help with energy bills. But look, over the medium term, this is anti-inflationary, it boosts the economy’s ability to provide goods and services, coupled with the infrastructure package that’s now been passed by both houses. It will add to infrastructure and boost economic growth through these very productive investments. And it’s easing expenses for families, taking some of their most important and worrisome expenses, like child care, like health care, and providing resources, often in the form of tax credits, so that families can bear those burdens. And in that sense too, it’s relieving the stresses from inflation that we’re seeing as our economy is opening back up.

Ryssdal: Can you help people, I guess, understand why you and [Federal Reserve Chair Jerome] Powell, but I’ve got you in front of the microphone, why you believe the inflation that we’re seeing now is transitory, that by the end of next year is not going to be around? Why do you believe that? Because you look around now, it’s not great.

Shift from spending on services to goods

Yellen: Yeah. Well, you know, what happened when the pandemic struck? First of all, our government decided to support people’s incomes so that there would be enough spending to help get them back to work. And so people do have enough income to spend and buy goods and services. Now, with the pandemic, there’s been a dramatic shift in spending away from services toward goods and toward houses and toward food at home, and away from eating in restaurants, traveling, staying in hotels. So there’s been a surge in the demand for goods, for products. And at the same time in many parts of the world, especially in East Asia, closures because of the pandemic have shut down factories where we produce semiconductors and led to reductions in some countries in the ability to produce goods. Now, the production of goods is actually risen substantially, but the demand for them with the shift toward goods has increased by even more. So the consequence is that goods prices, which had been falling for many decades, suddenly have increased substantially. We’re seeing port delays as ships lined up outside ports, like Long Beach in Los Angeles, as ships that are full of these products are finding it difficult to find warehouse spaces to unload and to hold those goods.

Ryssdal: That’s the why, right? It’s incredibly important. And I grant you that, but I want you to explain why you believe by the second half of next year this is all going to be worked through, because it doesn’t — how do you know, is the question, I guess.

Yellen: Well, I believe that these vaccinations are increasing, and we can see that the incidence of COVID has declined off its peak. So as the pandemic recedes in importance, people feel safe going back to work. You know, also a part of the inflation is that firms are finding it hard to find workers. So we have an unemployment rate that’s declined to 4.6%. But the labor force participation, people who were working have dropped out of the labor force. And I think that’s largely due to health concerns, issues with child care. And as people feel safer, they’ll go back to work. So expect to see more labor supply, a more normal pattern of demand. As people feel safer, the demand for these goods, whose prices are rising, will diminish, and they’re going to go back to services in a more normal pattern. And at that point, I’d expect the price increases to level off, and we’ll go back to inflation that’s closer to the 2% we consider normal.

What if you’re wrong about inflation?

Ryssdal: OK, last question on inflation, then I’ll get out of your hair on that one. What if you’re wrong?

Yellen: Well, it’s something to be watched carefully. And I know the Federal Reserve is doing that. Monetary policy would have a role to play if this turns out to be something that’s endemic. In the 1970s, we saw supply shocks turn themselves into endemic inflation, wages increased, prices increased as a consequence. We’re not seeing that now. I don’t believe we will. But if that were the case, the Federal Reserve would have a role to play to keep it under control.

Ryssdal: I just want to be clear on that, since you brought it up. There’s a lot of chatter in inflation circles about, “Ooh, the 1970s. And it was terrible! And we can’t go back there.” You don’t see that happening?

Yellen: No. And I mean, no, I don’t see it happening. That happened in the 1970s because people thought that policymakers wouldn’t bring it to an end. And their view that it would continue incented them to try to protect themselves by raising wages, so they wouldn’t suffer losses when prices rose. And then firms, in turn, passed along wage increases into price increases, and inflation expectations became embedded in the American psyche. And that isn’t happening now, and the Federal Reserve wouldn’t permit that to happen.

Ryssdal: I lied. One more inflation question, because you brought it up: Inflation expectations — why are they so important?

Yellen: Well, they’re important because inflation can be a self-fulfilling prophecy. And when people expect inflation, they tend to raise prices and wages in order to make sure that they’re not left behind. And then as wages go up, and firms see their costs go up and raise prices, we get into what’s called the wage price spiral that just continues unless a central bank comes in and puts that to a halt.

Ryssdal: OK, enough about Janet Yellen, labor economist, Janet Yellen, Treasury Secretary. I want to talk about the debt limit. You have been outspoken, as have all treasury secretaries, since the debt limit became a thing, about how catastrophic it would be. How confident are you that Congress is going to do the right thing?

Raising debt limit: “To not pay our bills would be catastrophic”

Yellen: Congress has always, in the end, done the right thing, although sometimes they wait a long time to do it; they wait to the last minute. In 2011, the debt ceiling was raised, but Congress waited so long to do it that the United States suffered a downgrade. I believe Congress will do it, they have the power to do it, and they must do it. Because to not pay our bills would be catastrophic for Americans. Interest rates would rise if we were to fail to make payments that are due on the debt, we would see people, 50 million Americans who receive Social Security, who wouldn’t know when their next check is coming. Similarly for American troops, child tax credit payments that come monthly would be held up. This is something that would harm all Americans, would result in, likely, a recession. 

Ryssdal: You’re a political animal, now. And I apologize for that insult, I guess. But I feel OK asking you this question: Why do you think this Congress will do the right thing? Have you met this Congress?

Yellen: Well, I have, and I believe that it’s understood that it would be catastrophic. We simply must pay our bills. And I think members of Congress understand that, in the end, they’ll find a way. I believe it should be done on a bipartisan basis. Both —

Ryssdal: — but, if not, you’re OK with the Democrats just doing it?

Yellen: I believe … I want it to be done. I, I believe that both Republicans and Democrats should do it. It’s a kind of housekeeping chore, it’s not covering new spending. It’s necessary because of commitments that both Democrats and Republicans have made in the past. It’s like running up a credit card bill and then saying that you’re reluctant to pay that bill. It’s simply a must. American Treasury securities are the safest asset in the world, and it would be utterly catastrophic and irresponsible to endanger that.

Treasury secretary or Fed chair?

Ryssdal: Very last thing, and then I promise I’ll let you go. I’m not going to waste the question on what you think about the renomination or new nomination of a Fed chair. But since you used to have that job, and I’m not sure I’ve heard anybody ask you this question, which do you like better: being Treasury secretary or running the Fed?

Yellen: They’re both terrific.

Ryssdal: You are a political animal.

Yellen: They’re both terrific and important jobs. I very much enjoyed being Fed chair and all the, all the jobs I had at the Fed. [The] Fed has a critically important set of responsibilities. And so does the Treasury secretary. Macro-policy is monetary policy, which is the Fed’s job, and fiscal policy, which is an important responsibility of the Treasury secretary. I, I think the infrastructure bill, I think the Build Back Better package and the recovery plan, which was enacted shortly after President Biden was elected, they’ve all been, they’re all tremendously important to the well-being of America and the American economy. I’m so privileged to be able to participate in fiscal policy.

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