C. Peter McColough Series on International Economics With Brian Deese

Wednesday, February 9, 2022
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Director, National Economic Council


Founder and Senior Chairman, Evercore; CFR Member

Director of the National Economic Council Brian Deese discusses the first year of the Biden administration’s industrial strategy and its effect on U.S. global economic competitiveness and national security. 

The C. Peter McColough Series on International Economics brings the world's foremost economic policymakers and scholars to address members on current topics in international economics and U.S. monetary policy. This meeting series is presented by the Maurice R. Greenberg Center for Geoeconomic Studies.

ALTMAN: Thank you. Good afternoon, everyone. I’m Roger Altman, and welcome to today’s Council on Foreign Relations discussion with Brian Deese. Brian is the director of President Biden’s National Economics Council. And Brian also served as a senior advisor to President Obama in that second term.

Today’s discussion is part of the C. Peter McColough Series on International Economics. You’ve heard the ground rules, but I would simply repeat this. This is on the record. The meeting will be divided into roughly two equal parts. In the first part, I will ask a series of questions of Brian. And following that we’ll open this up to questions from Council members. And when we get to your questions, if you can, please keep them as succinct as possible so that we can accommodate as many questions as possible.

Brian, welcome to the Council. Let me start by thanking you for taking the time to talk to us today, and also by noting that I’ve had the pleasure of knowing and admiring Brian for some time. So it’s a particular pleasure for me to preside today. Brian, let’s start by discussing what you’ve called the administration’s industrial strategy, expanding industrial production and industrial activity here in the United States, with the attendant benefits to jobs, and communities, and consumers. I’m sure the recent and very major announcements by Intel and by General Motors of new production facilities in Ohio and Michigan presumably illustrate this. So let’s start by having you explain for a moment what the administration means by industrial strategy, and how you’re pursuing this.

DEESE: Well, let me just start by saying thank you to the Council on Foreign Relations, and to you, Roger, for the opportunity. Really appreciate it. And appreciate the chance to have this conversation with you, after many years of good friendship along the way.

So, yeah, the—we start with this idea of an industrial strategy, which I think in prior periods has raised more controversy around the negative attendant tones of industrial policy. But for our administration, it’s really predicated on two ideas. The first is that the pandemic exposed clear weaknesses to our industrial base and our—the resilience of our supply chains in areas of critical health and security, and also in areas of convenience that have affected everybody in their lives. And that that vulnerability was exposed by that pandemic, and really sort of built up over the course of years and decades, and is tied to a(n) endemic unwillingness of this country to make public investments in ways that generate more productivity, and make the U.S. a more attractive place to invest.

And the second is that it’s predicated on the idea that our competitors in a globally competitive market have changed. Principally China, but other countries as well are not—no longer operating in a global environment where there is a free and unfettered market. And that that has to affect our own thinking and our own policy. So we have been thinking and cutting a through-line of our efforts, or domestic economic strategy, infrastructure, our foreign policy as well is this idea of building greater industrial strength, which is about supply chain resilience. It’s about investing in our physical infrastructure, our R&D, our human capital areas where we know public investment has a high return, using tools like federal procurement to try to accelerate those goals. And also doing it in a way that reflects the reality that we need to invest, cognizant of the challenges that the climate crisis poses, and that we need to harness the full productive potential of all of our workers in regions across the country.

So we’ve—you mentioned the recent announcement by Intel. I think this is a good example where you have—we have seen now in the past year, for the first time in decades, companies making very significant commitments to build semiconductor capacity here in the United States. We started the industry. The IP that went into semiconductors is American made. And we’ve lost our edge across time in ways that now create critical national security vulnerabilities. And we have a deliberate strategy to try to use public capital and federal policy to encourage private domestic investment to rebuild that capability and build more resilience here at home.

I will say, you know, that’s not without controversy. And there are instances in the past where we have done that poorly as a country. But we are committed to the proposition that both it is possible, feasible, advisable, and, in fact, necessary if we want to build that industrial resilience here in the U.S. that is critical for having a stronger foreign policy posture as well. And I’d just note, as a final point, we are seeing this happen. Nascent in some places, but the fact that we saw the degree of growth we saw in manufacturing last year—357,000 jobs, the fact that we’ve seen over $200 billion of commitments of domestic investment in areas where lots of people would have made the argument several years ago that the U.S. just wasn’t going to be competitive before, I think that reflects a lot of economic trends. But I also think it reflects the fruits of this deliberate strategy that we’re trying to—we’re trying to put in place.

ALTMAN: And just a quick word of the important piece of competitiveness legislation that’s on the Hill? Very different bills have passed the Senate and the House respectively. Tell us what you think is going to happen here, and how important that is, or not important.

DEESE: Yeah, it was a little—we’re in February now, so it was a little less than a year ago when the president had a bipartisan group of members of Congress down to the Oval Office to discuss just the urgency of making a significant investment in chips, in building domestic semiconductor capability. From that conversation spawned a set of legislative activity that resulted in the terrible acronym USICA, a bill that passed the Senate but with strong bipartisan support last June, that covered not only investments in semiconductors, but a range of investments in research, deployed research—so not just from a lab, but also into the—into the market, as well as a number of other competitiveness-related provisions.

The House—we were very pleased to see the House pass their version of the bill, COMPETES. And there’s still—it has so many names that I think we’re now all resolved to just call it the make it in America bill. (Laughs.) But that’s where we stand. So the House and Senate both passed versions. There are differences. But there’s a lot of momentum around the core idea, which is we need to invest in our R&D, our deployment, and in particular in semiconductors. We are actively engaged right now with leadership on both—with both parties, both houses. Need to figure out how we can resolve those differences, bring a bill together.

And as the president keeps saying, he wants to see a version of that bill on his desk as soon as possible. That would make a bit difference in trying to help continue this trend, you know, to put a finer point on it. The Intel announcement that they made was $20 billion to invest outside Columbus, Ohio. They’re going to invest $100 billion if that bill passes, because it would provide the long-term certainty to make longer-term and more significant investments in the U.S.

ALTMAN: All right, Brian. Let’s shift gears and talk for a minute about current economic conditions here in the United States. I have three related questions. I’m going to put them on the table at once, and you can answer them as you choose it, in the order you choose. I checked this morning on a few recent polls. We all know the polls vary and are inherently frail. But they all show the same thing, which is a majority of respondents disapproving of the president’s handling of the economy. Now, at one level that’s counterintuitive to me because so many aspects of 2021 were rather stunning. Just the growth itself, I think it was 5.7 percent, very high rate. Six-point-four million new jobs. I think that’s an all-time record for a single year. The supplemental poverty rate, among other things, fell very sharply—9.3 percent.

So some rather amazing aspects of performance. On the other hand, inflation has soared—running recently as high as 7 percent, depending on the measure you like, which is the highest in forty years. So my first question is—or, my questions are: How do you assess the administration’s economic record so far? Secondly, why do you think inflation has risen so sharply? And thirdly, there’s a lot of debate and controversy, all in retrospect, about the American Rescue Plan, and whether at 1.9 trillion (dollars) it injected too much money relative to the output gap into the U.S. economy, and overheated demand. And what’s your point of view about that controversy? Those are the three questions.

DEESE: OK. (Laughs.) There is a lot there. So I will try to—I’ll try to cover it and be succinct. I think, on the first question, I would assess, you know, the progress to date as historic, which work yet to be done. As you say, if we look back objectively over the last year, you mentioned the growth, it bears repeating, 5.7 percent in the last—that’s the highest it’s been since 1982. But in the last, you know, twenty years, we haven’t broken 3 percent growth in any year other than—other than one. The labor market is historically strong. And importantly there, strong compared to, you know, what most projections would be of the potential of this recovery, particularly in the decline in unemployment and in increasing labor force participation, and very strong wage growth as well, particularly for the bottom portion of the income distribution.

It goes to—I’m going to—I’m going to flip your questions. It goes to the assessment I think of the American Rescue Plan, and then I’ll come back to the question of inflation. I think that, you know, to the question of—you know, I should say, assessments broadly of our administration’s record I will leave to other people. I’m not—I’m not in the best, you know, position to do that. With respect to the Rescue Plan, you we do policymaking in crisis there’s always inherent uncertainty. So there’s a lot of humility that certainly I have, and I think everybody should have. But I think—looking back, I don’t think that it was too large. I think that it achieved the goal of driving a very strong, inclusive recovery that has—is delivering an extraordinary amount of economic good for the country.

And so beyond those top line economic statistics, we know from history that when you don’t grow robustly out of a crisis you risk all manner of scarring in the economy, which manifests in sort of practical human suffering, but also for those people for whom the economy often doesn’t work or deliver benefits the most. And so, you know, the striking decline in long-term unemployment that we’ve seen, 60 percent decline over the past year, means that those people who are—who have the hardest time getting into the labor market are now coming in more quickly. The fact that evictions and food—you know, we talk about food prices, but actually real food consumption is up in the U.S., largely because in 2021 hunger fell to historic lows. And that we have an endemic hunger crisis in this country that we—that people, you know, had less human suffering as a result. These were all the goals of trying to provide a robust disaster, you know, relief crisis package that the American Rescue Plan was.

Now, to the two criticisms, and I think I’ll tie that to the inflation, right? The first is, to your point, if you view the right paradigm as an output gap, did we overfill the output gap? And I think there’s a lot of good reasons why, given the economic circumstances of this crisis, the output gap framework is not correct or, at least, sufficient to answer that question. But even on those terms, there’s a lot of confusion that in fact the—you know, the American Rescue Plan probably added about a trillion dollars into the economy. That’s the upper end, but not above at least some of the measured estimates of the output gap. There has been a lot of overstatement, I think, of the—of the magnitude that not all of these resources have gone out immediately.

And if you just look at aggregate measures, the U.S. economy is not running well above long-term output if you look at real PCE or GDP trend prior to pandemic. Now, there’s debates about whether we’ve had a structural step-down in potential output, but I don’t think that that’s—so then you go to the question of inflation, right? And inflation is happening globally. We’re seeing it everywhere. Compared to before the pandemic, inflation has been somewhat elevated in the U.S. compared to other G-7 countries. Although, if you look at inflation recently over the past couple of quarters, particularly in the period where the ARP was providing the most demand support, inflation in the United States and Europe, for example, is running, you know, basically neck and neck.

And so I think that goes to your question of sort of what’s going on, what’s the cause or the driver of inflation today, right? And I will—you know, my basic view is that what we’re seeing is the impacts of a pandemic-effected recovery that is playing out globally. It has principally had a compositional effect on the demand side. Certainly, demand is elevated, but the principal impact is within this shift from services to goods, and the impact that that has had on the supply chain. We are moving more things through our supply chain than we ever have before, but demand for goods is elevated. We have seen some good news on that front in the last couple of months, that rotation coming back. We certainly saw that in fourth quarter GDP. And then a negative shock to supply, including labor supply, even notwithstanding the comeback we’ve seen in labor force participation.

And so, you know, I think that that leads you in a position to see a lot of reasons why those things—those things will moderate across the course of time. That’s certainly where most independent forecasters are. And of course, I guess I’ll end here, which is the orientation of U.S. fiscal policy, including with the ARP, has been around trying to achieve that strong growth that positions the U.S. to tackle pandemic-related challenges from a position of strength, reduce scarring, help lift lower- and middle-class people up, also with the understanding that monetary policy, acting independently, has tools and tools in place to address that. That has always been, you know, our operating assumption, continues to be our operating assumption as we think about crafting fiscal policy. So that was a long answer, but I think I covered all elements of your question.

ALTMAN: OK. You touched a couple of times on labor markets. Let me ask directly about that. There’s a little schizophrenia there too in the sense that by most measures labor markets are very strong, job creation rates, ratio of job openings to unemployed, and wage trends themselves. At the same time, the labor participation rate, while it improved last month, is still meaningfully below pre-pandemic levels. And there are roughly two million who have not returned to the labor force. So a two-part question. What are the continuing weaknesses in the labor markets as you see them? And how much stronger do you think labor markets can get than they are right now?

DEESE: Well, I think we have a very strong—a very strong labor market recovery underway right now. And I think you see that in not only the headline data about the—you know, the unemployment rate coming down and labor force participation increasing, but also things like I mentioned, long-term unemployment coming down as well. In terms of the areas of remaining weakness, we have a—I would—I would point to two. You know, one is the headline and topline totals don’t capture stark differences in terms of the economic situation of different groups in this country.

The unemployment rate for Blacks is still double the headline unemployment rate. If you look at women, and in particular women of color, they dropped out disproportionately of the labor force during this crisis and have not come back at equivalent speeds. And so I think that the strength of this recovery actually, you know, manifesting and pulling more of those people into the labor market, into higher-paying jobs, is important. But overall, we have a very strong labor market recovery.

And to your point of how much stronger it could get, you know, one of the things that I think is striking when we think about labor force participation and the recovery is that, yes, on the one hand the recovery has been—we have not gotten back yet to pandemic levels. But we’ve recovered about 60 percent of the—of the decline. If you look at the past—if you look at the past recovery, labor force participation continued to decline for seven years before bottoming out and starting to increase again. So we have a very different situation. Obviously, that’s a function of the strength of the labor market today.

When you look at the gap of the people—and this goes to our forward policy in terms of how much more—you know, how we can get more people to work, and expand the capacity—expand the size of the labor force, the capacity of the labor force. You know, the single biggest driver of that—of that wedge of people out of the labor force is retirements, both those that were projected—the aging of the workforce—and those that were not projected, pandemic-related, what is referred to as excess retirements. But in the second-largest category is people who self-identify in surveys as not in the labor force or fully in the labor force for care or other family obligations. And that’s a place where I think we can make a lot of progress, and that policy would make—would make a big difference.

ALTMAN: OK. Let me ask about the administration’s signature domestic policy legislative priority, the Build Back Better legislation. From a distance, it looks to have stalled. What do you think the state of play on this is? And then in particular, the administration has steadily argued that it’s the right bill at the right time because it would loser costs for families in terms of childcare, in terms of health care, and other day-in, day-out costs. There’s a lot of disagreement about that, with many people saying, yes, it will enable families to better afford childcare, health care, and so forth, which is a good thing. But it won’t actually lower the costs of those services. So tell us where the bill stands, as you see it, and tell us how you’d respond to those who say it’s a good thing because it will help people better afford them, but it’s not going to lower costs and lower inflation.

DEESE: Yeah. I think we can—some of it is semantic, in terms of clarifying, you know, the difference between costs and prices. If you define costs as the burden, or affordability in either—in either case. But I think, you know, in terms of—in terms of where we stand, we are—we remain committed to and optimistic that we can get something meaningful done here. Obviously, we are going to need to do what we can and get what we can done. And we need fifty votes in the Senate and 218 votes in the House. And that is a challenge in any context and is a particular challenge now.

But I think in terms of my sense of where things stand, we—part of why we remain optimistic about this is the degree of alignment on the economics and the practicalities of the major components of this—of this approach. Put aside what we call it and just think about the actual economic impact, you know, starting with clean energy. I just came from a meeting that the president convened of the largest—the CEOs of the largest utilities in the country. Everybody from Duke Energy to Southern Company and American Electric Power.

And the universal message from those CEOs was that providing long-term, technology-neutral, consistent incentives to produce zero carbon energy—whether that be wind and solar, or hydrogen, nuclear, carbon capture and sequestration—is the right thing for their industry, will produce more reliable power, but importantly will allow them to deliver lower cost energy to their customers, because we provide tax credits, it’s first new investment, and they pass that onto their customer. So lower-cost energy, that’s a lower-cost energy because we can actually drive down the price of this transition, which is happening. But it would happen more quickly and cheaper at the end of the day.

If you look at health care, there is broad agreement around the provisions around prescription drugs and allowing negotiation for better prices for prescription drugs using the federal government’s buying power, carefully negotiated, balancing lots of different interests. There’s some people who’d like to go much further. There’s some people who wouldn’t like to do it at all. But this is a package that would lower prescription drug prices while also making—delivering some relief on the affordability side as well.

The reduction in health care premiums, one thing we’ve seen this year is we took a step in February to lower health premiums for people who were buying health care on the Affordable Care Act exchanges, people who were going into the exchange. And by making it cheaper that makes—that lowers the—that makes it more affordable to the end consumer, but it has also increased coverage significantly. Because it turns out when people—when you make health care easier and cheaper to buy, more people get covered. If we can get more people covered, that actually will lower costs in the health care system over the long term.

And then there’s a question on something like childcare, right? Our proposal would cut the actual cost that a family pays by about half. It would, you know, cut their out-of-pocket cost by about half. And we know that that will do two things. One, it relieves families’ budgets. But two, it’ll help get more people work, particularly parents and women, for whom the lack of quality care is one of those things about, you know, family responsibilities we were talking about people not being in the labor force.

So if you look at it in all, I think on the economics of it, these investments, if they’re fully paid for, then they’re not going to have any net impact on aggregate demand. They won’t have an inflationary impact. Some of them will actually—all of them will make things more affordable to a typical family thinking about their budget. Some of them will drive down costs at a sector level, like in energy. And—and this is where, you know, I think we have a real exciting opportunity as a country—by investing in things like childcare or preschool, we’re actually going to expand the productive capacity of our economy, get more people working, increase human capital. And across time, that will actually lower price pressures by expanding productive capacity.

So that’s a more nuanced answer. But the short answer is these types of provisions would provide people with practical relief today that they would feel in their pocketbooks and would do so in a way that doesn’t add to inflationary pressure but would likely reduce it across time. So that’s how we see these provisions. We think about them more as practical than, you know, ideological. We’re thinking about how do we put something together that addresses the current economic moment? And again, we remain, you know, focused, committed, optimistic we’re going to be able to get something done here.

ALTMAN: All right. I’m going to sneak in one last very quick question, because I’m about to go into overtime on my portion of this. So it’s a simple one: There’s been speculation in the press—and this is about COVID—that the administration will propose an additional spending bill on COVID relief this year. Can you give us a sense of how you’re thinking about that? And you mentioned the unspent portion of the American Rescue Plan. I think it’s still several hundred billion dollars. Isn’t there an opportunity to repurpose any of that towards COVID relief?

DEESE: So, on the first question, I am really happy to—you know, to note that congressional negotiators and the White House have come to an agreement—at least, agreement, you know, in principle—around funding an omnibus appropriation topline, an amount of money for defense and nondefense spending, where we can actually write appropriations bills and fund the government in a way that allows for certainty and planning and investment, rather than funding the government in three-week or three-month cycles. And so that’s very positive. There’s still work to do to flesh that out. Obviously, we’re deeply engaged in that. In the context of that, we’ve been discussing with our congressional counterparts what are the additional COVID needs around very practical things, like additional antiretrovirals, testing. And those are things we’re going to keep, you know, engaged with Congress in the context of, you know, how we move a longer-term budget agreement.

On the question of the American Rescue Plan, if you look at the provisions that went out, virtually all of the money has been—this is more technical budget terminology—but has been obligated by the federal government either to individual or, in many cases, to states and local governments. So when people talk about money that has yet to be used, in almost all cases what they’re talking about is money that states or localities have that they are supposed to be putting to work. And in very many cases they are, productively. But in some cases, they aren’t. You know, if you look at—we included in that bill $130 billion for schools—for the very explicit purpose of supporting the physical and additional costs of running schools during COVID. And at the time, that was very controversial. A lot of people said, why are you putting money in there to fund schools in the fall of 2021? We’ll be through this by then, right?

Well, you know, a lot of the reason why we’ve got 95 percent of schools open in this country is that schools have had the resources to do that. But I want to be very frank, we provided the—the federal government provided the resources to the local jurisdictions and the states with the flexibility to use it to support schools. In many cases they have. In some cases, they have not. In some cases, politics has been directly—they’ve made decisions to not invest in their schools. And so what we have done, and continue to do, to your question, less about repurposing, but instead we want to see people use the remaining state and local resources they have to get people back to work, particularly in those areas where we know they have high labor demand, like health care and nursing, like childcare and early education, like trucking.

They have the flexibility to do that. We have worked hard to give states and localities the flexibility. We would like to see them do that and use it for its intended purposes. And in many cases, that’s—you know, that’s something that we’re able to encourage. But we—you know, this was—this was a law that gave states and localities flexibility by intention. And our expectation is that, you know, folks will use that money well.

ALTMAN: OK. Let’s open this up to Council members. And I’m going to turn this over to our moderator for the first question.

OPERATOR: Certainly.

(Gives queuing instructions.)

We will take our first question from Krishen Sud.

Q: Yes. Hi. Thank you for taking my question.

My question relates to the non-farm payrolls number that comes out every month. The last couple of months the data has been so off that, you know, it kind of sort of loses its meaning almost. Is there something unique in these last two months that have caused such—the numbers to be so widely different from expectations? And is there anything that can be done to make those numbers more reliable? Thank you.

DEESE: It’s a great question. I would say that—the first thing I would say is that our statistical agencies at the federal level do a—in general do a great job. And we have a lot of empathy for trying to do this work during a pandemic, where almost everything about comparing to—doing things like seasonal adjustments, you have to think differently about when we’re going through, you know, pandemic swings that don’t have much precedent.

We have seen—part of—let me answer your question specifically, and then more generally. Specifically, in the January payrolls that just came out we saw a—you know, a strikingly strong employment picture, 467,000 jobs added in January from the non-farm payroll, the payroll survey that is done monthly. We also saw a very significant—I think this is what you’re referencing to—upward revision to the job estimates for December and November. And they added more than seven hundred thousand jobs to their prior estimates of job growth in those months. So in total, the January report showed more than 1.1 million jobs, new jobs, beyond what they had reported before.

The principle—one of the reasons for that was that they did an annual re-benchmarking in their January—in their January report. And so they actually re-benchmarked all twelve months of employment to reflect their best estimate of kind of—of addressing those seasonality issues. And the reason why the variability is higher now is a function of the pandemic and the unique seasonality elements to that.

To your question about doing it better, you know, sitting at the White House it can be a source of—it could be a source of consternation, precisely because they operate independently and we studiously guard that independence. And so certainly living through November and December would have been more pleasant here at the White House had we had those additional seven hundred thousand jobs to announce on those days. But, you know, I think the two things that we can do, you know, practically speaking are, one, it does not sound sexy, but fund statistical agencies and provide the resources we need to do this right.

It’s one of the reasons why having government funding bills, like the one I just mentioned, are so important, because if you don’t oftentimes the things that get underfunded in the U.S. system are those kind of basic functions of government that are less sexy, but very important. And, two, also, you know, as researchers and people who look at data, we’re going to have to all learn a lot from this crisis, and recognize that none of our—you know, none of our estimates are perfect. It’s one of the reasons why what we try to do is really not over-index on any individual one-month trend.

And we try to say that when the trend is, you know, a bad month or a good month, and try to look over in the aggregate. Which is why I think if you look at the employment what the January report said, to the point, Roger, you made, you know, 6.6 million jobs in a twelve month period, relatively consistently, is a pattern of job growth and strength that we really haven’t seen at any time in recent history. So that’s a comforting trend to take away. And so I think we can take something important away from that, even as you see this month-by-month variability.

ALTMAN: OK. Next question.

OPERATOR: We will take the next question from Cameron Kerry.

Q: Hi. Cam Kerry. I’m currently at the Brookings Institution.

Thank you, Brian, for uttering the words “industrial policy,” after, oh, forty-odd years of being told we don’t do that. You started off talking about semiconductors and the development of chip capacity. And yesterday the European Union announced its own CHIPS Act under the rubric of digital sovereignty, which sounds like it raises some of the issues that the Trade Technology Council is trying to address in avoiding a subsidies race. So I’m wondering how those discussion with the EU and other like-minded trading partners on supply chain issues are going. And, you know, how you see the threat out of things like the EU CHIPS Act of a subsidies race among other—among trading partners.

DEESE: Well, thanks, Cam. And appreciate the point. And it certainly is—it is our view that we need an industrial strategy, and not an industrial strategy that makes the mistakes of the past, but learns from them, but is unapologetic about the fact that we’re going to succeed in the current globally competitive environment without one. And semiconductors are a great illustration of that. And, you know, if you look at the trajectory, we manufactured about 47 percent—I mean, 37 percent of global semiconductors four decades ago. We’re down to 12 percent now. But more striking for our national security, 12 percent is of legacy chips. Of these sort of leading edge chips, that have the highest IP in them, we don’t make any of those in America—zero. Ninety-plus percent of those are made in Asia, most of them in Taiwan. So the geopolitical and national security ramifications of just allowing for the hollowing out of our domestic semiconductor manufacturing capability are profound.

And, you know, what I would say about the EU is I think it underscores the urgency that we’re not operating in a static environment. Other countries and other jurisdictions are moving forward on this front, which is why, from President Biden’s perspective—and this has been his, you know, dogged perspective from day one—we have to rebuild domestic industrial strength as a top priority, as a way of more effectively engaging with our allies and with our adversaries as well. And that’s why we are so hardened that even before we’ve passed the CHIPS Act here—our CHIPS Act here in the U.S., we’ve seen $100 billion in committed investment. This is happening. We are beginning to rebuild our domestic capability. But we don’t have any time to waste. And if we—if we do put this off as a country, then we know where we’re going to be, which is much farther behind other jurisdictions and countries that are making this effort.

That is my way of getting to your—the last part of your question, which is we are eager to engage on these types of issues through the TTC and other fora with our European allies, with the recognition that certainly we are going to pursue the steps we need to rebuild our own industrial capability here. And we think that that is—everything we are doing is consistent with our international trade obligations. But having a forum to actually understand where we can coordinate and actually how, as we collectively invest, where we can build, you know, resilience through supply chains that is not solely predicated on everything being re-shored to the United States. We’re very clear-eyed, it would be—it’s not feasible or advisable to re-shore everything to the United States. That’s not a way of building supply chain resilience in a global economy. But having clear partnerships with allies and partners that share our values is an important part of that strategy.

So that’s part of the conversation. You’ve seen us try to move out with some innovative partnerships in that respect. For example, in the steel area with our EU counterparts. And I anticipate that semiconductors will be an area of explicit focus as we move forward in the TTC and elsewhere.

ALTMAN: OK. Let’s go to the next question.

OPERATOR: We will take our next question from Meredith Broadbent.

Q: Hi, Brian. Thanks for your presentation. I’m Meredith Broadbent from CSIS.

This is a question about secure medical supply chains. What are you thinking about in terms of partnerships that might build resiliency and avoid disruptions during the next pandemic?

DEESE: It’s a—thank you for that, Meredith. It’s a great question. And it is—it’s an area of very explicit focus for the administration, for two reasons. One is learning the lessons of our exposure during the early waves of the pandemic, but also as we look forward to—we have—we have had an explicit strategy around pandemic preparedness. But frankly, we’ve talked about the nomenclature of that. It’s actually more about variant preparedness. Both, you know, the variants of the COVID strain, as well as other pandemics as well. I would say there’s a couple pieces to that. One is building a clearer roadmap around vulnerabilities and resilience with a clearer understanding of just mapping what those vulnerabilities look like.

And so one of the things that we did early on, a little less than a year ago, was to—the president signed an executive order to task the relevant agencies that are—have responsibility—regulatory responsibility over the health care supply chain to engage in a comprehensive mapping exercise to map vulnerabilities and map areas where we could partner, and other areas where we need to build. And we will be releasing the one-year roadmap and report on that—I’m looking at the—in two weeks, that will reflect the kind of comprehensive view in much more detail around your question.

But the second is, this is a place where we do need additional resources and additional capability. We’re going to need to work with Congress to adequately fund from the R&D to the domestic manufacturing, and also the global preparedness. We’re going to need more resources. I think we have defined pretty well the areas where that will be, but we have—we have gotten to a place where we’re more secure now around using—you know, including using the DPA, the Defense Production Act, and elsewhere. But we’re going to need more resources if we want to get ahead of this. And so I would say eager to get your and others’ feedback when we put the comprehensive roadmap out. But that’s designed to really try to signal for the next five years, you know, where do we need to get to? And then that’ll, I think, give us a clearer roadmap with Congress as well, where we need additional funding as well.

ALTMAN: Can we have the next question, please?

OPERATOR: We will take our next question from Hari Hariharan.

Q: Thank you very much.

Brian, I wonder if you can comment on two quick issues. First, the seeming discrepancy between the Employment Cost Index, which came out as just 1 percent for the fourth quarter, versus the three-month average of the average hourly earnings, which is running at, like, 7.7 percent. And secondly, I saw you on Friday after the payroll report, you know, talking about how the economy looks in good shape, et cetera. How do you square that macroeconomic outlook with a negative 101 basis point in five-year real yields? What am I missing?

DEESE: So, you know, I think that the—on your—on your first question, there are some compositional effects in the wage data that are a result of the—you know, they measure aggregates in the labor market, and who came out of the labor market, and who came back in. I think that there is a—there is also—there’s also some differentiation between hourly earning and weekly earnings that reflect the—well, particularly in January, reflected some of the impact I would anticipate of Omicron, but also obviously reflect labor market leverage.

I think if you take a step back and take a look at the wage data, what you’ve seen is strong wage growth over the course of the year, the strongest in the lower 40 percent of the income distribution, the strongest in retail, hospitality, and leisure, which obviously is correlated with lower income. And we’ve seen an acceleration in that wage growth over the course of the last quarter. And so, you know, it ties into your second—the second part of your question, which is what leads—what leads to the economic outlook. Look, we have a—I think—I think there’s no question that from a growth and a labor market perspective we’ve got real strength. We’ve got real strength.

And if you look at household and consumer balance sheets, there is, you know, real remaining strength there as well. And at the same time, we’ve got elevated prices and we have the Fed recalibrating policy in real time. And so while I—you know, I’m not going to—I’m not going to comment on the specifics of their recalibration. That’s part of us preserving their independence. This is a—you know, a recalibration that is necessary. And is—you know, it is going to play out over the course of the next several months. From our perspective, both diagnostically and prescriptively, our focus is on how can we—what can we do to help to accelerate the normalization of the supply-side constraints? Which is—you know, which some of them operate very much in the very short term, like trying to untangle some of the bottlenecks at ports.

And then what can we do to provide long-term policy certainty that would help to—help private business to accelerate their investment in measures that will expand the productive capacity of the economy, like we were talking about in the clean energy sector as well. So, you know, I think we are—there’s no question we’re in a historically unique period, from a macroeconomic perspective, and uncertainties abound. But, you know, our focus is on how do we move forward in sustaining the historic progress that we’ve made, understanding those uncertainties but also, you know, understanding that policy can make a difference here.

ALTMAN: Can we have the next question, please?

OPERATOR: We will take our next question from Paul Sheard.

Q: Thank you very much. Paul Sheard from the Harvard Kennedy School.

Industrial policy by its nature needs to be very long term. That was a point underscored by the comments that you cited from the utilities CEO. Which means it needs to survive several, maybe multiple, changes in administration. So my question to you, Brian, is to what extent is it your sense that there is bipartisan support for an industrial policy strategy, both in terms of the concept and then, you know, importantly, also in terms of the potential contents of that strategy? Thank you very much.

DEESE: Well, if you look at the two most significant pieces of legislation that I would argue kind of provide the foundation for this emergent industrial strategy, they are the bipartisan infrastructure law that the president signed last fall and the competition legislation that Roger and I mentioned before, that has lots of unfortunate names but has a clear purpose. And in both cases, what you see is large bipartisan majorities—or, bipartisan majorities in Congress supporting the policy direction. Obviously, the work of actually getting those enacted into law is very hard.

And it’s why—but I would—I would say that, you know, the most—the most significant thing—and this is why I think that in an international context the bipartisan infrastructure law that was signed last year should be understood as far more significant than the, you know, U.S. finally making some overdue investments in deferred maintenance in roads and bridges. Both because of the substance of that bill, it is a long-term, multi-year, in many cases six-, eight-, ten-year domestic investment strategy to try to build the productive capacity of our economy. In transportation, in energy, in the new digital economy by providing broadband and high-speed internet to all Americans. And in taking on big national projects that will improve human health, but also improve the productivity of our economy, like eliminating all lead pipes in service lines in the country.

All of it dedicated multi-year domestic investment strategy that is the kind of long-term, planned—that allows for the long-term planning. That this is—this is not a bill that is stimulus. It’s not about shovel ready at all costs, or at the cost of other policy goals. Which is why I think it is also relevant, you know, internationally that this is a law that was passed with bipartisan majorities, that will be with us for multiple years, and will help to drive transformation across multiple sectors of the U.S. economy. So, you know, the politics of getting things done in Washington is hard. There’s no question about that today. But I think that you are seeing more durable, bipartisan support for these types of approaches than you’ve seen in the past. And you see a president that has a pretty clear vision about how these steps domestically connect to the United States’ strength and reliability as a partner on the international stage. And I think those are both, you know, positive signs for the durability of this going forward.

ALTMAN: We have time for one or two more questions. May we have the next one, please?

OPERATOR: We will take our next question from Sarah Williamson.

Q: Hi. It’s Sarah Williamson. I’m the CEO of FCLT Global. Nice to see you.

I’ve heard this discussion today about industrial policy and building domestic semiconductor capacity, and so on. And I heard Gina Raimondo use the phrase “friend-shoring” when she spoke recently in Singapore. So what I was trying to understand is, is the administration really trying to send a message to companies to build resilient supply chains? Or is the administration encouraging businesses and investors to simply get out of China over the long term? What should investors and companies be hearing from these messages?

DEESE: Well, hi, Sarah. I think that the message in terms of the policy of the U.S. government is we are committed to the long-term project of building resiliency in supply chains and industrial strength, which principally means thinking more carefully about the benefits of location. Certainly, we are encouraging businesses large and small to invest in the United States, create jobs in the United States, do things here, make it in America. But we are also working with allies to think about how we can build resilience in the supply chains. And so first and foremost, this is about what does it mean to have resilience?

We also very much recognize that this—there is a public role and a private role. Part of the mapping exercise I discussed earlier, it’s not just in the health care industry. We’re doing it in energy and defense, in critical minerals and metals, to understand where are there key vulnerabilities and gaps that are clear public goods in national security priorities, where the federal government must play an indispensable role? And where can we help encourage companies to address their own resilience in ways that ultimately obviously, they, as fiduciaries, will make decisions about?

It's really about reinforcing just how economically important resilience is. And, I would say, you know, a key piece of that is to really ask hard questions about whether you’re fully taking into account the costs of locating in, you know, parts of the world where, either because of politics or economics or, frankly, climate, you’ve got vulnerability and supply chain vulnerability that you might not be taking into account. So that’s the motivation. And that’s the—that’s our—that’s our policy push.

And some of that connects to work that you’ve been leading on around disclosure as well, that, you know, we also think that it is helpful to have clearer and more uniform disclosure, so that investors can make better decisions about how companies are prioritizing these issues in an environment where, I think—you know, I mean, I hear from CEOs all the time about this kind of—the conversations they’re having in their boardrooms about how to recalibrate from just in time, you know, supply chain paradigm to what does resilience mean, what does resilience mean for ourselves, and how can we interface with the government in a way that is productive and constructive as well.

ALTMAN: Time for one last quick question. Let’s have that, please.

OPERATOR: We will take our last question from Becca Levin.

Q: Oh. Hey, Brian. Thanks so much for coming to speak with us.

This may not be a short question, but you can do your best. I was curious if you could comment on the Biden administration’s kind of vision or strategy with respect to our economic relationship with China. It’s obviously become, you know, more tense and a little bit more separated in a variety of areas. But kind of where would you like to see things end up?

DEESE: Well, hello, Becca. You’re right, that’s a question that deserves a—(laughs)—deserves a longer answer. But let me just answer very, you know, quickly. We are—we are seeking to manage our relationship with China in a way that is clear-eyed, where we understand one another, and we understand that there are areas where we are going to compete, and compete vigorously, but that that competition should not—we want to avoid situations where that competition slips into conflict. And also want to leave open areas where we can work constructively together. And we’re doing that across multiple different pathways, and with an understanding that China’s approach and their—and the sort of nature of their state-centered economic structure means that we have to think differently about how we engage.

And so, you know, our objective is to manage this competition in a way where we are avoiding conflict and having a very—as clear as we can engagement, so that we fully understand each other. And I will say that even as we have to manage through some very difficult conflicts, and we’re going to be very clear and resolute in standing up for American economic interests and American values, at the leader level President Biden has a very direct and deep relationship with President Xi, and in which all of these issues we have the ability to communicate and discuss them, even as we are working through issues where we’re—where we don’t see eye-to-eye.

ALTMAN: Well, Brian, on behalf of all the members attending today and the Council as a whole, thank you very much for spending this time with us. It was really very illuminating and quite fascinating. And thanks to the members for attending. And we are adjourned.


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