The debt limit is not a tool for “extortion,” Biden adviser Lael Brainard says
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The debt limit is not a tool for “extortion,” Biden adviser Lael Brainard says
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In February, economist Lael Brainard made the 1-mile trek from the Marriner S. Eccles Federal Reserve Board Building to the White House when she became the newest director of the National Economic Council. The former vice chair of the Federal Reserve now serves as one of President Joe Biden’s top economic policy agents, overseeing initiatives like the implementation of the 2021 bipartisan infrastructure bill.
Brainard is no stranger to 1600 Pennsylvania Ave., having served in both the Bill Clinton and Barack Obama administrations. This time around, she’ll help enact Biden’s agenda amid historic inflation and a looming crisis over raising the federal debt ceiling.
“Marketplace” host Kai Ryssdal spoke with Brainard at the White House. The following is an edited transcript of their conversation.
Kai Ryssdal: Lael Brainard, welcome to the program. It’s good to have you on.
Lael Brainard: It’s nice to be here.
Ryssdal: How’s the new job?
Brainard: You know, it’s busy, and I really enjoy it.
Ryssdal: Let me dig into that a little bit, because you’ve been doing monetary policy now for nine-plus years at the Fed. And here you are now in fiscal policy land. And I wonder how that’s different for you.
Brainard: Look, for me, it is a chance to really make a huge difference in terms of the supply side of the economy. So the president has an investing in America agenda that is transformative. It really has the power to reindustrialize the U.S. economy, to put us on a clean energy path in a transformative way and to create hundreds of thousands of good-paying jobs all around the country. So that agenda will really lead to a much more resilient supply side of our economy and put us on track for strong growth for years to come.
Ryssdal: So we had [Commerce] Secretary [Gina] Raimondo on the program yesterday, talked about that, actually, for the whole interview, right, what, what is going to happen in industrial policy in this country. I do wonder, though, if given the current state of things in Congress, we’re kind of done with fiscal policy in this country for the next two years, and you now have to manage implementation.
Brainard: So it is absolutely the case that we had three historic pieces of legislation. And the focus now is on making sure that those historic bills really show up in terms of opportunities for communities all across the country, including communities that have been left behind. And it’s opportunities to be part of industries that are going to be important for the future.
Ryssdal: Let me ask you that when we had Cecilia Rouse, and I hate the name drop, but, but we did have her on the program like a year and a half ago, right, when she was on the Council of Economic Advisers, the chair. I asked her about the fiscal inputs from the Biden administration and inflation. And I wonder how worried you are now that as this $3 trillion flows through the economy, it’s going to make the Fed’s fight against inflation all the tougher.
Brainard: I really am not worried at all. I don’t think that, that is not where this historic legislation is really going to have an impact. They’re going to lead to a much more resilient domestic clean energy infrastructure and a very strong domestic manufacturing supply chain for semiconductors. Those are two of the main constraints that led to high inflation during the last few years. Of course, we’re also seeing inflation coming down pretty rapidly now.
Ryssdal: We are, and you’re right to point that out. I do wonder, though, what you’re looking at now, as you look at this economy, are you looking at inflation? Are you looking at the labor market? What are your markers? I mean, you’re a trained observer of this economy.
Brainard: Yeah. So looking across the economy, we are transitioning to sustainable, stable growth. We see a labor market that has been recovering very rapidly, and that is going to transition to a more sustainable pace. But in terms of the improvements, there are 12.5 million new jobs over two years, record low unemployment and participation, importantly, among working-age Americans is now greater than it was pre-pandemic.
Ryssdal: I’m sure it hasn’t escaped your notice, though, that first-time claims for unemployment are up, and continuing claims have now been trending up for, I think it’s six months.
Brainard: Yeah. So as the transition to more stable growth, which is important because we want to have low inflation while we also keep unemployment low, that transition is going to be important to continuing to see progress on inflation and to see more moderation in the labor market. And that’s what we’re starting to see for precisely the data that you’re referring to suggests a labor market that’s coming into better balance.
Ryssdal: Let me tick through a couple of specific issue areas. I want to talk banking, and I don’t want to know if you think banking is stable because your answer will be yes. I want to know what you’re expecting on Friday, when the Fed’s report on Silicon Valley Bank and supervision comes out. You did a lot of banking supervision at the Fed. You have spoken out against some of the relaxation of the rules. I wonder what you’re expecting that report to say.
Brainard: So I don’t know what that report will say, I’m no longer at the Fed. And of course, I have no insights into that. But I do know —
Ryssdal: Wait, you must have some insights, right? Not into the report but generally into banking supervision and the state of banking.
Brainard: So what happened, I think, over the course of the [Donald] Trump administration is there was a kind of broad effort to both relax rules and relax supervision, particularly for banks of the sort of Silicon Valley and Signature. And I think that’s what we saw as interest rates rose. Some of those weaker rules and weaker supervision really came home to roost in particular banks who were poorly managed and taking unacceptable risks. So I think we will see continued tightening or retightening of the rules that were relaxed just for those midsize regional banks to make sure that they have liquidity requirements, they’re testing their liquidity, that there are stress tests. Silicon Valley was never stress tested, it was over $200 billion in assets. It never got stressed tested, and it was not stressed tested for interest rate increases, which would have shown a lot of the holes in the balance sheet that were, in the end, very destructive.
Ryssdal: Supervisory failure, do you think?
Brainard: So I think in terms of supervision, we certainly need to see that relaxation reversed. And we need to make sure that senior executives are held accountable, that they know they need to risk manage those banks tightly, or that supervisors will call them on it and it will have consequences.
Ryssdal: The global economy, as you know, the International Monetary Fund came out with its forecast, what a week, 10 days ago, the lowest medium-term forecasts for growth in 30 years, right? Three percent globally. What’s your sense of stability and growth in the global economy today?
Brainard: So you know, we are also seeing some crosscurrents there. On the one hand, China is coming back, but rebounding perhaps with not quite as much, sort of, momentum, as some observers were expecting. And of course, China, you know, has been a very important contributor to global growth. And here in the U.S., which we are also a very important part of global growth, we’re transitioning to more stable growth. So if you look across the world, we’re seeing some moderation in global growth. But there are reasons to think that, at least in the U.S. case, we will see that transition taking place relatively smoothly.
Ryssdal: You know, it’s interesting, you say “crosscurrents” in a very academic and lawyerly way. No offense intended. I wonder if you could explain to people listening to this what those crosscurrents in the global economy are, what do you see? This is your job.
Brainard: So in terms of what are the risks that are out there, obviously, for a number of countries that experienced high inflation due to the pandemic, due to the war, they raised interest rates. And those interest rate increases start to weigh on activity because they raise the cost of credit. And of course, you have countries like China who were very slow to lift restrictions associated with COVID. And so they’re only just starting to return to normal levels of economic activity. Here in the U.S., of course, we also have some political risks to our outlook. And of course, the most important of those is the fight over the debt limit.
Ryssdal: So let’s go there. And thank you for going to my next question on my list. At some point, the president is going to come to you if he hasn’t already and say, “Lael, what do I do?”
Brainard: So in terms of the president’s approach on this, I think it’s been clear, it is to say we need to lift the debt limit, we need to suspend the debt limit, we can’t threaten to take the U.S. economy into default. And separately, we need to sit down with Congress, as is always the case, to have regular-order negotiations over the budget. So I think that’s the two-track. Now, why is it so important to avoid default? It’s important because even playing brinksmanship with default, calling into question the full faith and credit of the U.S. government, is enormously destabilizing to financial markets. And of course, it is not intended to be used for extortion. It’s good to negotiate, but the negotiation takes place every year over the budget. What we can’t see is that the debt limit be used by a part of Congress to hold an entire agenda of unrelated items hostage to this threat of default.
Ryssdal: Why do you think the market hasn’t reacted yet? Because that’s what’s going to concentrate the minds, right?
Brainard: So I think we are starting to see some observers taking a look and noticing that this question about holding the U.S. economy hostage is going to be very, very disruptive. And so you’re starting to see some of the financial market indicators flashing yellow, and I think it will become rapidly clear, as people focus on exactly when the debt limit could be reached, I think you’ll start to see financial markets reacting much more strongly. And again, there’s no need for that. What is the normal course is to simply take the threat of default off the table and negotiate in good faith on the budget, which is going to be a compromise. That, I think, is just the regular-order way to handle the nation’s finances in a responsible manner.
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