Stephen Miran, the chairman of the economic advisory council nominated by President Trump, has proposed his economic theory. He advocates high tariffs, a weak US dollar, and the Federal Reserve's QE.
Author and Source: Jin Shi
To serve as Trump's economic advisor, one must embrace his belief that tariffs can make America richer. There are not many economists who meet this criterion. Stephen Miran has put forward such a view. He is the nominee for the chairman of Trump's White House Economic Advisory Council, and he has written that compared to the current 2% tariffs, the average US tariff should be around 20%, or even as high as 50%.
Miran's views are worth studying, not only because he will be advising Trump. He has described tariffs as one tool, and the international intervention to weaken the US dollar as another, which he believes can address the long-standing global tensions: US economic and military support for other countries has led to an overvalued dollar, widening trade deficits, and a hollowing out of the industrial base.
Miran, a senior strategist at Hudson Bay Capital, wrote in a report last November: "Comprehensive tariffs and abandoning a strong dollar policy could have the broadest policy impact in decades, fundamentally reshaping the global trade and financial system."
Before being selected for Trump's White House economic team, Miran wrote a report titled "A User's Guide to Restructuring the Global Trade System". Miran wrote that the report reflects his views, not Trump's, and its purpose is not to advocate policies, but to "understand the range of policies that may be implemented".
Miran, 41, received his PhD in Economics from Harvard University in 2010 and has since worked in financial markets, and is a researcher at the conservative Manhattan Institute. While his arguments are novel, his points, including on tariffs, are based on orthodox economics. Harvard economist David Cutler, who worked in the Clinton administration, said "Miran is not a contrarian who thinks 'all scholars must be wrong'." He "is guided by theory and evidence".
This does not mean his recommendations will work. He acknowledges in the report that these recommendations are likely to fail: "There is a path where the implementation of these policies does not have substantive adverse consequences, but that path is narrow."
Economists generally agree that trade allows a country to consume and produce more, while tariffs make a country's situation worse. However, in the decades after Adam Smith clearly articulated free trade in 1776, economists have found cases where a country is best off imposing tariffs.
Suppose the importers are a monopoly - a dominant buyer capable of affecting the price they pay (just as a monopolist affects their selling price). It can impose a $10 tariff on imported small goods, but the price will not rise by $10, but will remain unchanged, as the exporter lowers their own price by $10 to avoid losing market share.
Thus, consumers are unharmed. Even if they pay a little more, it may be more than offset by the tariff revenue. This rate that maximizes net revenue is called the "optimal tariff". Miran cites relevant research suggesting that a tariff of around 20% is optimal, and tariffs as high as 50% can still benefit the US. This represents a view of raising tariffs as a goal, while some of Trump's allies have defended tariffs as a negotiating tactic.
The optimal tariff policy is a clear "beggar-thy-neighbor": a country can only benefit by harming another. Miran acknowledges that if other countries retaliate, as the EU, Mexico and Canada did in 2018, tariffs are no longer optimal, but a lose-lose situation, "where retaliatory tariffs from other countries would negate any welfare gains to the US from tariffs".
To prevent retaliation, he wrote, the Trump administration could declare that "for countries imposing retaliatory tariffs, it views the binding force or reliability of joint defense obligations and the US defense umbrella as lower". In other words, the US may not protect Japan, South Korea, or NATO members who retaliate.
Another issue is that tariffs will only make the US better off if import prices hardly rise. But in this case, consumers have no incentive to switch from imported to domestic goods, undermining Trump's goal of promoting US manufacturing. Another caveat is that tariffs may not reduce the trade deficit, as the dollar will rise, making imported goods cheaper and exports less competitive.
As an alternative to tariffs, Miran says, the US could weaken the dollar through a "Mar-a-Lago agreement", modeled on the 1985 Plaza Accord, when the US and its allies jointly acted to lower the dollar exchange rate.
He wrote: "After a series of punitive tariffs, trade partners like Europe and China may be more willing to accept some form of currency agreement in exchange for tariff reductions. Or the US could impose a user fee on buyers of US Treasuries."
Miran further wrote that if this triggers a sell-off of long-term Treasuries, the Federal Reserve may have to purchase these bonds to limit the upward pressure on long-term interest rates, i.e. undertake quantitative easing (QE).
He said the Federal Reserve is more likely to cooperate with the Treasury Department on monetary and bond interventions in exchange for independence in monetary policy (Trump has demanded more say in monetary policy. Miran proposes the president and governors should have more control over Fed management).
A key question is whether the threat to withhold defense umbrellas from uncooperative countries is effective. The US has no defense alliances with Mexico, Vietnam or China, which account for half of the US trade deficit.
Last Tuesday, Trump refused to rule out using military force to seize Greenland from Denmark, and said he would use "economic power" to annex Canada. Both are NATO members. Allies may conclude from Trump's repeated threats against them that US defense guarantees no longer exist.
Miran himself bluntly acknowledges: "The potential consequences are unstable......"
