For Cecilia Rouse, chair of President Joe Biden’s Council of Economic Advisers, now is the time for more government, not less.
“This president is focused on policies that really go to where there is what we call market failures,” she said during an interview with “Marketplace” host Kai Ryssdal. Take infrastructure, for example. “The private sector doesn’t do a very good job of investing in roads and bridges because they can’t fully recoup the benefits of their investments there.”
Rouse spoke with Ryssdal at a time when the country is facing historic levels of inflation. Biden even addressed the nation this week to explain his plan to deal with rising prices, which involves letting the Federal Reserve do its work, preventing corporate price gouging and increasing fuel production.
The following is a transcript of their conversation. To listen, use the media player above.
Kai Ryssdal: You have been an economist for a very long time, and you’ve been in and out of government for a very long time. And we are dealing with something in this economy now that we haven’t seen in a long time, and that you, by which really I mean the president, can’t do much to control. And I wonder how that makes you feel?
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Cecilia Rouse: Well, that’s a good question. Here’s how I feel: We have been through a really tough two years. At the beginning of this pandemic, when we told everybody to stay home, we wanted them not to work. We wanted them not to go to grocery stores, although we wanted them to be able to eat and pay their rent. But we wanted to power down our economy. That struck me as the time when we needed to understand that there was an important role for government at that moment. The private sector, we needed it to step back, we needed the public sector to be able to step in. Congress acted with unbelievable speed in passing the CARES Act, [they] didn’t let the perfect be the enemy of the good. It was not a perfect law. But it did what it needed to do and got money into people’s pockets. It tried to save businesses. Fast-forward: President Biden comes into office, we still don’t know where we are in the pandemic. We know we have vaccines that in the lab look effective. We don’t know if they’ll reduce transmission. We don’t know how long the protection lasts. We don’t know if we can get the shots into arms. The American Rescue Plan has passed. It provides additional help for households, additional help for businesses, state and local governments because we didn’t know what their balance sheets would look like. And importantly, it underwrote the strategy against the pandemic. As a result, we had the fastest growth in almost 40 years. Households were able to spend.
Ryssdal: However, let me interrupt you here for just a second and ask you whether because of the American Rescue Plan and all the trillions of dollars that were spent, we are now, in some ways, bearing the inflation consequences of that. That is to say, does the Biden administration bear some of the responsibility for where inflation is today?
Rouse: Here’s what I will say: If you look around the world at advanced countries that did what we did, which said we need to support our households, we need to support our businesses, we have to support our economy through this — we see inflation. Because while demand was supported, the supply could not support that demand. And inflation is fundamentally a mismatch between demand and supply. So if you want to say, did the Biden administration — by helping people get through this pandemic in a way that they were able to stay in their homes, have jobs, have household balance sheets, even among those in the lower part of our income distribution that are stronger than they were before the pandemic — did that cause some of the inflation? Yes, and we are with other countries. It’s part and parcel of the pandemic. We powered down a $22, $23 trillion economy. And we can’t just power it back up without some consequences.
Ryssdal: Let me ask you about the president and the speech he gave on Tuesday about inflation and the efforts that you and his administration are making. Pretty clear that he’s going directly to the American people because he understands not only the political risks, but also the economic risks to everybody out there. Do you think he’s getting through? I ask because people feel terrible about this economy. The underlying economy is good, right? Jobs are strong. There’s some growth — last quarter was terrible, but there’s growth on the horizon. But people still feel lousy.
Rouse: Absolutely. And the president understands that because inflation affects everybody. You go to the grocery store, you feel it, you go to the gas station, and you feel it. And he understands that. He comes from a family where this kind of inflation would really hurt and cause a lot of anxiety every night. So you’re right. He wants to get out. He’s trying to have his economic team go out and explain that he really is focused on this. This is first and foremost the purview of the Federal Reserve. And it is a wonderful thing that at least three of the four current nominees have now been confirmed, and he respects their independence. But we welcome the fact that they are now changing their policy stance towards how they’re addressing the price stability mandate versus the full employment mandate.
Ryssdal: Let me go back to the president’s speech the other day. He made a point, I think a couple of times in that speech, of calling out corporations for what he called price gouging. And I guess my question is, do you really think that companies making profits are responsible for inflation in this economy?
Rouse: Well, here’s what we know about companies, is that their profit margins, so that’s looking at what they’re taking in minus their costs, are almost at record highs. That they increased, especially after-tax, that they increased something like 14.5% last year. And so companies have a choice when they are making those kinds of profit margins: They can lower prices, increase wages, they can pay their shareholders. The president believes they should be paying their fair share in taxes. He has proposed increasing the corporate tax rate because, notice I said that it’s their after-tax profit margins that have increased, and that’s largely due to the 2017 tax cut.
Ryssdal: Tax policy aside, you didn’t really answer the question. Do you think companies are responsible for inflation in this economy?
Rouse: Well, we have a longstanding problem with [corporate] concentration in this country. And we know that economies or sectors that are more concentrated, that they have higher price levels, and that’s bad for innovation. That’s bad for workers, if it’s more [monopolized]. So the president has had a whole-of-government approach to address competition and to try to improve competition in our economy. So we know that that’s a long-term problem, and we need to be addressing it.
Ryssdal: You talked about the role of the public and the private sector in this economy as we started this conversation, and in the Economic Report of the President that came out last month, you guys spend a lot of time on that very issue. One of the things that became clear as the Biden administration took over is that he and you and, I imagine, his other economic advisers have a more expansive vision of the role of government in this economy. And I guess my question out of that is, given inflation and the challenges that poses right now, and whatever’s happening with his Build Back Better agenda, which, to be completely honest, I’ve lost track with and you’re kind of shrugging, right? Is his domestic policy, not agenda, but his aspiration, is that now fundamentally dialed back?
Rouse: You have completely identified what I, was the heart and soul of the Economic Report of the President, which was over the last three decades or so our federal government has been following a policy of saying the private sector can solve all problems. In Economics 101, we teach our students that the private sector has many, many virtues, but that there are certain problems that it does not solve very well. That’s what we tried to emphasize in the Economic Report for the President, where there are what we call externalities, where my actions are going to impact not just me, but you, such as in a pandemic. If I’m sick and I go to the store and I make everybody else sick, that’s a problem. I believe that, and this president is focused on policies that really go to where there is what we call market failures. So the bipartisan infrastructure law, not a small accomplishment by this administration, and really important investments in infrastructure which have some of those qualities. The private sector doesn’t do a very good job of investing in roads and bridges because they can’t fully recoup the benefits of their investments there. Another part of the president’s agenda is investments in human capital because that’s another part of our infrastructure, really. If I don’t have adequate child care or home care, I cannot go to work. And we know that the country benefits if I’m able to go to work. Right now, if we talk about some of our challenges in our economy, labor supply has come back very robustly in the last year, but we still know that we have room to grow. We still need more people who are in the labor force looking for work. And for some of those people, it’s very difficult to do so without adequate child care.
Ryssdal: Let me try to go another way at that question and get, with all possible respect, a better answer out of you. To what extent do you think the political polarization in this society — and I don’t want to get into the politics of it, right, because that’s not our remit here — what extent do you think the political polarization in our society but also on Capitol Hill, obviously, is impeding what President Biden wants to do with this economy?
Rouse: I think we’ve got a country right now where there have been winners and losers. This is seen very clearly with our increasing income inequality and wealth inequality. And that is part of the challenge that President Biden actually wants to try to address. He wants to have an economy in which we have economic growth, and he wants that economic growth to be more widely shared, whether that’s by race and ethnicity, by rural, urban [or] different parts of the country. He feels, in particular, for the former workers in manufacturing who have really suffered because those jobs have gone away. He wants to have good-paying jobs, so that people have a reason to get up in the morning. They have a purpose in their lives, and they can pay, that support their families with good-paying jobs that reflect a hard day’s work. So I do believe that some of this polarization reflects the fact of the increasing income inequality, and we need to have policies that help to redress that.