Treasury Secretary Janet Yellen is wrapping up a weeklong trip to the Indo-Pacific, her first since taking over the role.
She represented the U.S. at G-20 finance minister meetings in Bali before making additional stops in Tokyo and Seoul. And she campaigned for several of the worldwide initiatives that the U.S. is aiming to establish, including a price cap on Russian oil and a global minimum corporate tax.
The latter would entail countries enacting a 15% minimum tax (and allow governments to tax large companies based on where their goods and services are sold, as opposed to where they are headquartered) — with the goal of preventing companies from shopping for lower tax rates around the world.
Yellen, a longtime champion of the plan, has persuaded more than 130 countries to sign on. But the U.S. isn’t one of them: Republican opposition has prevented it from getting the votes needed to pass Congress.
And the path forward has just gotten more complicated, after Democratic Sen. Joe Manchin of West Virginia said amidst budget package negotiations last week that he won’t support a bill that includes climate or tax provisions.
He voiced his opposition to the global minimum tax in an interview with West Virginia radio host Hoppy Kercheval on Friday, saying he doesn’t support the plan because other countries have not yet adopted the tax and he doesn’t want to put American companies at a competitive disadvantage.
“Can’t do that, so we took that off the table,” said Manchin, referring to his Friday discussion with Senate Majority Leader Chuck Schumer, D-N.Y.
It could potentially take years for the U.S. to pass the initiative, Yellen acknowledged in a Tuesday interview with Morning Edition. But she says it’s too important not to revisit — and believes that as other countries adopt a minimum corporate tax, they will incentivize Congress to pursue legislation that will bring the U.S. into compliance too
“They will levy this tax on American companies doing business in their jurisdictions, and America will just lose out on tax revenues that we could use to invest in the strength of our economy, in the middle class,” Yellen says. “So there will be incentives over time to adopt this in the United States.”
Yellen spoke to Morning Edition‘s Steve Inskeep from South Korea about the tax initiative, discussions around the Russian oil price cap and the prospects for a U.S. recession. Below are highlights from their conversation.
On the importance of a global minimum corporate tax:
Yellen describes the tax initiative as a way of closing loopholes that corporations have used to lower their own tax bills, depriving governments of revenue while shifting more of the tax burden to workers.
“So we’ve got 137 countries that have agreed to hold hands, say enough is enough and we’re going to establish a minimum below which we won’t cut corporate taxes,” she explains.
The U.S. is currently the only country that has this kind of minimum corporate tax in place, with multinational corporations facing a 10.5% minimum tax on their foreign earnings. But it needs to raise that number to 15% in order to come into compliance with other countries.
When asked whether that process could take years, Yellen says “it’s conceivable.”
“I hope not,” she adds. “I hope that we will be able to pass this sooner and to take a leadership role.”
On how a Russian oil price cap would work:
As Russia continues waging war in Ukraine, the U.S. wants to cut off oil money to Russia without cutting Russian oil off from the global market — especially since the war’s disruptions have already added to the prices Americans are paying for gas.
Yellen says the U.S. wants to deprive Russia of the revenue it’s using to finance the war in Ukraine, while also shielding itself and its allies from the adverse impacts of higher oil prices. But she notes that if more Russian oil is subtracted from the global supply, oil prices could easily spike to $140 or more per barrel.
“We want to keep it being sold somewhere in the global economy to hold down global oil prices generally, but we want to ensure that Russia doesn’t make undue profit from those sales,” she adds. “And a price cap is the answer we’ve come up with to serve both of those objectives.”
Here’s how the U.S. hopes that would work: European insurance firms are about to stop insuring tankers that carry Russian oil, which would completely block many Russian exports — unless Russia sells the oil cheap.
Yellen says the exact level of the cap is still being decided, but it would be high enough that Russia would make a profit by producing and selling it, to make it economically advantageous for Russia to keep supplying the global oil market.
It’s worth noting that the oil price cap proposal has its share of skeptics. Some energy analysts and economists worry that trying to force Russia to accept less money than their oil is worth could backfire, as Russia could respond by restricting oil production and creating an artificial shortage — which would hurt countries already struggling with high inflation and economic slowdowns.
Critics also point out that while the price cap would require participation from all of the countries that buy Russian oil, two of them — India and China — are getting discounted oil from Russia and may not want to change the status quo.
And even if that were to happen, questions of enforcement remain. For example: What would stop Russia from bypassing the cap and selling its oil for a higher price in the gray market, an unregulated marketplace?
Yellen says U.K. and EU nations would have the leverage to enforce such a price cap because their bans would prevent the oil from moving if it’s sold at a higher price.
“We’re calling this a price exception, that the EU and U.K. will be willing to allow their companies to provide insurance and to provide trade finance and other services as long as the buyers certify that they’ve paid less than the capped price,” she says.
On whether she’s expecting to see a recession in the U.S.:
Record gas prices pushed inflation to a 40-year high of 9.1% in June.
That’s harder for some households to absorb than others, Inskeep notes, citing the example of rural Americans who have to drive farther and pay higher gas and home fuel prices on relatively low salaries.
Acknowledging that inflation poses a substantial burden to every American household, Yellen says getting inflation down is President’s Biden top priority.
“The price cap that we’re pursuing is one of the most important ways we can make sure we don’t suffer from further increases in energy prices that would harm American households,” she says. “And of course the Fed is taking action to bring inflation down.”
The Federal Reserve announced last month that it raised its benchmark interest rate by three-quarters of a percentage point — the biggest hike in nearly three decades (here’s what that means for Americans). Interest rate hikes slow down the economy and, historically, can tip it into a recession.
So how does Yellen rate the risk of a U.S. recession in the next year?
She points to the strength of the labor market, characterizing it as “full employment”: Jobs are plentiful, people feel secure about their employment prospects and the economy has created an average of around 400,000 jobs a month recently.
“A recession is a broad contraction of the economy,” Yellen says. “And that just isn’t consistent with the kind of labor market that we’re seeing.”
She also notes that consumer spending has continued to grow, with retail sales well above their pre-pandemic trends and industrial production rising in four of the first five months of this year.
That said, she says economists expected to see growth slow — and that’s appropriate now that the U.S. has closed the pandemic shortfall. Yellen adds that the Fed will want to achieve “a kind of soft landing.”
“That’s something that will require skill and good luck,” she says. “I’m hopeful that that’s achievable. But let’s be clear eyed, there are risks that our economy faces. The war in Ukraine; global developments could further raise food and energy prices, commodity prices; we’re seeing a slowdown in China. There are global risks and those do pose risks to our economy.”
This interview was produced by Chad Champbell and Shelby Hawkins, and edited by Reena Advani and Jan Johnson.