Who is Stephen Miran? The Thinking Might He Bring to the Fed
Trump’s Pick for the Fed
President Trump has put forward economist Stephen Miran, his current head of the White House Counsel of Economic Advisors, to replace retiring Federal Reserve (Fed) board member Adriana Kugler. Suggestions have surfaced that Trump will put him forward as Fed Chair should current Chair Jerome Powell resign or when his term ends next May. Trump may pick someone with similar thinking to replace Fed Governor Lisa Cook when that matter is settled. Naturally, everyone in policy, banking, and investment circles wants to know the biases and perspectives that Miran (and perhaps others like him) will bring to the Fed. Fortunately, Stephen Miran has left a long and broad paper trail.
Miran’s Economic Focus
One thing from his writing is clear: Miran has thought deeply about trade, currencies, and the role of monetary policy. Even those who might disagree with his conclusions will (or should) welcome his thinking as a refreshing change from a Fed that for too long has moved in well-worn economic assumptions and has shown a preference for short-term, reactive thinking. This change alone, though welcome in many respects, will make Fed policy less predictable and will cause disruptions in financial markets as Miran’s influence is felt.
The Postwar Trade System and Its Legacy
Miran’s most interesting work centers on the unsustainable nature of current trade and currency arrangements. The problem emerges, as regular readers of this column should know, from the system established by the United States in the years following the Second World War. In order to stem the communist tide in Europe and Japan, Washington sought the fastest economic recovery possible for these regions. It advanced generous aid packages, of which the Marshall Plan is most famous, and also set trade and currency arrangements to favor European and Japanese production, mostly at the expense of American producers.
At one level, the approach kept American tariffs low so that Europeans and the Japanese producers could sell their products at attractive prices to Americans while keeping their tariffs relatively high to protect their producers from American competition. On another level, the system set the foreign exchange value of the dollar high so that Americans could buy foreign goods cheaply while making American-made products expensive to Europeans and Japanese. Because the U.S. economy was so dominant, it coped relatively well with the system’s biases against it. The approach worked. Europe and Japan developed rapidly into viable trade competitors of the United States. Neither place went communist. America prospered despite the biases built into the system.
Though the specifics of the system changed over the intervening decades, the competitive biases largely remained intact. Indeed, those biases were extended to China in the early 2000s—clearly not as an anti-communist move but because U.S. foreign policy favored Chinese development. Thus, before the Trump tariff policy went into effect earlier this year, the United States, according to the World Trade Organization, still had the lowest tariffs in the world, averaging only about 3 percent. The European Union (EU) had tariffs averaging about 5 percent and China’s averaged about 10 percent. In particular areas, the differences were much greater. Europe, for instance, imposed a 10 percent duty on American cars, while the United States imposed a duty of 2.5 percent on European-made autos.
Currency matters contributed to this uneven competitive situation. Efforts were made at times to ease the pressures of the system by adjusting down the dollar’s overvaluation on foreign exchange markets, most notably in 1971 when Nixon took the dollar off its gold peg. But the greenback has nonetheless remained expensive against other currencies, making American-made products costly to the rest of the world and keeping down the price of foreign made goods to Americans.
While the great dominance of the U.S. economy had once allowed it to cope well with the system’s biases, the development gap with the rest of the world narrowed significantly during the intervening decades. U.S. gross domestic product (GDP) amounted, for instance, to some 40 percent of global GDP in 1960, but by the early 20-teens, it had fallen relatively to some 20 percent, though it has gained a little relative ground since. According to Miran, the United States is no longer able to sustain this structure. This economist measures this inability with the U.S. trade deficit. In 1970, he points out, American imports exceeded exports by some $2.6 billion, about 0.2 percent of the nation’s GDP. By 2024, the deficit amounted to $910 billion, about 3.1 percent of GDP—15.5 times the relative burden of 1970. Another way to view this unsustainability is to note that the United States presently consumes over 30 percent of the world’s goods and services but produces barely over 25 percent. No economy can go on for long consuming so much more than it produces.
The Dollar’s Role and Its Consequences
Miran’s focus on the effects of the overpriced dollar is critical given his proposed position at the Fed. He contends, quite correctly, that the dollar’s value has remained stubbornly high because it is the premier global reserve currency. Most of world trade and investing is denominated in dollars, whether an American is involved or not. This dominant position means that most businesses and governments around the world have to hold substantial dollar balances. Some 60 percent of the official government and central bank currency reserves are in dollars. The holdings are likely much larger because this figure does not count the dollar holdings of international businesses and investors.
This characteristic of the dollar, what economists call seigniorage, has kept up demand for the currency and severely biased trade against American producers by making their output expensive on global markets while encouraging Americans to import by making foreign-made goods and services look cheap. And because foreigners are willing to hold dollar balances, the system has also allowed Americans to consume more than they produce by allowing them to exchange dollar holdings for real goods and services.
This structure has, according to Miran, had yet another detrimental effect. Because foreigners often hold their dollar balances in U.S. Treasury bonds, the currency’s reserve status and the foreign demand for treasuries it creates has allowed Washington to borrow more cheaply and easily than it otherwise could, tempting it to pursue less-than-prudent fiscal policies. Not only has this fiscal largesse encouraged Americans to consume more than they would otherwise, but ever-larger budget deficits have created a debt overhang that is unsustainable in its own right. In 1970, for instance, U.S. Treasury debt outstanding amounted to some 35 percent of U.S. GDP. At last measure the figure was 120.9 percent.
A Bold Proposal: Dethroning the Dollar
As a parallel to Trump’s tariff efforts to erase the last vestiges of the older biased tariff structure (though in reality, Trump’s behavior leaves some ambiguities as to his ultimate objectives) Miran would like to correct the currency component of the problem by dethroning the dollar from this premier reserve status. This, to Miran’s way of thinking, is the only way to erase the dollar’s overvaluation and put the global trading and currency system on a sustainable path. He is well aware that such a move and the inevitable dollar depreciation would greatly reduce the global buying power of Americans, but he seems to argue that this otherwise unwanted result is necessary to keep Americans from consuming more than the nation produces. He implies that the tariff policy plus such a currency adjustment would return production to the domestic economy, raising the nation’s output enough to mitigate or even erase the impact on living standards. Though possible, such a counterbalance is far from assured, especially over the short run.
Challenges and Contradictions
This bold policy goal also flies in the face of another aspect of Miran’s program. He has argued that Trump’s tariffs will have a minimal effect on living standards or inflation because a dollar appreciation would keep the prices of imports to Americans low despite the cost of the tariffs. He has pointed out, correctly, that such a dollar appreciation against the Chinese yuan erased the ill effects on Americans from Trump’s 2018-19 tariffs. But this is the opposite of what would happen if he were to implement his program of dollar dethroning and depreciation. Such actions would exaggerate the cost of the tariffs to Americans. In his available writings, Miran never quite squares this circle.
Miran admits more openly to other difficulties involved with dethroning the dollar. He offers two possible routes to accomplishing his objective: one with international cooperation and the other unilateral. His unilateral means to dethrone the dollar are especially dubious. They would involve outright currency manipulation by the Fed and the Treasury and penalties on those who hold U.S. Treasury debt. Either would require cooperation in Washington beyond the Fed, and neither has much hope of winning such cooperation.
On the side of international cooperation, he notes that such arrangements have worked in the past. The Plaza Accord of 1985 and the Louvre Accord of 1987 organized the major economies of the world—then the United States, France, Germany, Japan, and the United Kingdom—to work together not to dethrone the dollar, but to ease the pressures of unsustainability on the global trading system by bringing down the greenback’s foreign exchange value in an orderly way. Miran proposes another such accord, which he styles the “Mar-a-Lago Accord.” Even he admits that such an arrangement would be difficult today, because unlike the 1980s, the major currency holders and traders are no longer allies of this country. They are Middle Eastern and Asian nations, most notably China, none of which have much interest in helping the United States reach a sustainable balance in global trade and currency arrangements. Indeed, Beijing is eager to wreck the system and leave U.S. arrangements in disarray.
The Trump Factor
Possibly the biggest impediment to Miran’s plans on the dollar is his sponsor, President Donald Trump. Trump very much enjoys the power afforded him by the dollar’s premier reserve status. It allows him to pressure other countries by, for instance, threatening to cut off their access to American banking and therefore global trade arrangements. The buying power of a strong dollar makes American threats to cut off trade a great pressure on any who oppose the president. However much Trump otherwise wants to move toward more sustainable trade and currency arrangements, it is highly doubtful that he would relinquish the diplomatic, financial, and economic power offered him by the dollar’s premier reserve status.
The Bottom Line
The bottom line then is that even as Fed chairman, Miran would be hard pressed to implement his full program. Still, knowing what he would like to accomplish should give bankers, investors, policy makers, and journalists, a better notion of what will guide his decision making at the Fed and hence how he and the Fed will respond to smaller issues as well as at the margins of these larger issues of sustainability that seem to matter so much to Miran and in part to Trump as well.
