Trump Economic Advisor, Stephen Miran, on Tariffs and Tax Cuts

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1:54Hello and welcome to another episode of the Odd Lots podcast. I'm Jill Weisenthal. And I'm Tracy Alloway. Such a cliche to say that there is a lot going on right now, but there's a lot going on. It was CPI Day today. Yes, it was. And it came in softer than expected. Actually, it was a really unexpected figure. I think all the economists surveyed by Bloomberg had the number higher than what it came in as. And so kind of a surprise. Kind of a surprise, of course, when the tariffs were announced in early April. Some people, you know, a lot of people reasonably thought they were going to go up. So far, four straight months of going to the downside.

2:30Obviously, that means we have, A, a lot of just sort of straight up macro uncertainty, and B, a lot of policy uncertainty still between both the ongoing trade discussions and, of course, the one big beautiful bill and what's going to happen on taxes and spending. In short, there is a lot to talk about. We really do have the perfect guest, I think, to talk about all of this. We're going to be speaking with Stephen Myron. He is the chair of the Council of Economic Advisors at the White House. so we can ask him all these questions about the state of the economy and policy. Stephen, thank you so much for coming on OddLots.

3:03Look, thanks for having me. I've been a big fan for a long time, and it's a real honor and a privilege to be here. Amazing. We're going to clip that and send that around. All right. If CPI had come in hot today, I would have started with a question on that, but I'm not going to start by giving you a softball on CPI. I'm curious about the other side. Right now, how do you perceive the momentum on labor in this economy or just the growth momentum on this economy? How robust is it? Look, I think that the economic data have been coming in pretty good. And you mentioned CPI, you mentioned inflation.

3:34I do think it's worth noting that in all four months since the president was inaugurated, inflation, CPI is surprised to the downside. And I think that was very much in contrast to lots of people's expectations. And we also experienced the same on the upside, right? We had three beats in a row on jobs day for jobs numbers. I think that the underlying economy is been pretty healthy. There has been whipping around of the sentiment data. But I think that the correlation between the sentiment data and the real economic activity has really declined in recent years. The sentiment data are driven by stocks, right, and volatility in financial markets.

4:11They're driven by political sentiment and people's reactions to policy if they like it or if they don't like it. But there's been minimal connection between the two of them. And if you look at the the real economic data, it's been pretty good. And yeah, okay, so the first quarter GDP print was, you know, a hair negative. But if you looked at underlying private, you know, final domestic demand, which strips out the really volatile components like inventories and imports, you know, that was high twos, almost 3%, right? You know, so like underlying growth in the first quarter was pretty good. Then, you know, the GDP trackers for the second quarter seem like they're 3 % plus almost 4%.

4:47You know, I think it's really hard, you know, I think you really got to squint to find, you know, sort of bad news in the economic data. Okay, Tracy, so the Fed doesn't need to cut is what I'm here. No, I'm just kidding. Anyway, Tracy, go on. Just on the labor market, how are you thinking about the interaction between the administration's immigration policies and overall employment? Because on the one hand, it seems like deportations might be helping to keep the unemployment rate kind of low right now. But on the other hand, you know, if you deport enough people, you start to get worker shortages, Maybe you get higher wages.

5:22Maybe you get business disruption and things like that. Let me make a couple of observations. One, you know, there were lots of predictions, again, from, you know, the typical doomsayers and chicken littles out there that when the president shut down the border to protect Americans, that job creation would fall out of bed. And again, that has not been the case. There's no evidence of that in the data. Two, if you do look for slack in the labor market, if you do look for pockets of weakness, you are going to find it in exactly the cohorts of the labor market that are in direct competition with illegal immigrants who come invading over the border, right?

5:57You will find the unemployment rate for people in the 20 to 24-year-old age cohort is about twice the national average. It's like 8.2 or something. You will find the unemployment rate for people in the 16 to 19-year-old cohort is about three times or more than the national average. It's like 13 and a half or something like that. These are the folks who are in direct competition with illegal migrants. These are folks who are high school students, college students, just finished one or the other, got their GED, dropped out, whatever it is. These are people who are at the start of their careers who are the most in competition with illegal migrants.

6:28And that's exactly where the slack is in the labor market. And these are the people that we have to protect because there's so much evidence in the labor economics literature that the initial conditions when you graduate, the conditions of the labor market when you get your first job affect your career for decades to come. And if you graduate school into a bad labor market, you can have worse wage profile decades into the future relative to someone who graduated into a stronger labor market. And there are reasons why, because, you know, skill accumulation matters. You know, what your last job was matters for what your next one is.

7:01And it's so important that we get these young people on the job ladder, on the skills ladder to start, even if it's something like a summer job in high school at a construction site where you're learning something important. When the boss says you show up to work at 830, you show up to work at 830. That's the rule and you do it, as opposed to starting your first job four, five, six years later, and you show up at 10 or 11 because that's when you feel like showing up. It's so important that we get people on the jobs ladder to start their career, to start learning skills of all sorts. They can climb that career ladder and make good lives for themselves.

7:35I really do believe that if you get this process started, not only does it help them now, but it also helps them throughout their careers and will start to address problems like declined labor force participation among prime age males, for example, right? A lot of those people had gotten on the jobs ladder right out of school. I think that you'd have higher participation rates there. So this is all super important. But you also brought up another issue, which is prices, which is inflation, right? And I think, you know, if you remember a year ago, there was a lot of conversation about how immigration had helped to, you know, quote, rebalanced the labor market and folks of all sorts were praising it for helping to calm inflation.

8:14I think that's really wrong because, well, A, I just discussed the slack in labor market being exactly where the competition with the migrants is. But two, if you take a large number of people, right, a large number of new entrants into the country, and you throw them into what is a only sluggishly adjusting capital stock, things like housing, things like hospital and medical care, things like infrastructure in schools, the price or the quality, the price of those things will go up or the quality will go down, which means the quality adjusted price goes up. Put another way, if you throw 10 million new residents into a fixed supply of housing or only sluggishly adjusting supply of housing, that's going to put upper pressure on rents.

8:56And the connection, the empirical relationship between rents and measured inflation is much, much, much, much stronger than the empirical relationship between wages and measured inflation. And so the inflationary effect of throwing millions of new residents into a relatively fixed supply of housing dramatically outweighs any disinflationary effects to the labor market, which again, have come at the expense of these young Americans who are trying to start their careers. So I think that the overall interpretation of these policies in the economics commentariat has been really backwards and really wrong.

9:33I think that large scale immigration was pretty inflationary. If you throw a positive population shock into an economy, you know, traditionally it will be inflationary. And there are studies of this in, you know, German reunification. There's been a number of studies about what happened when German, you know, when East Germany and West Germany reunified, and then you had tons of immigrants going from East Germany to West Germany. And that was very inflationary for West Germany. You know, that type of inflation caused the Bundesbank to start raising rates, which led to the breaking of the Bank of England, pound of sterling to the Deutschmark.

10:03This is not a new concept. This is a concept that's out there. And I think that a lot of folks have got it backwards. There was also a large fiscal expansion in Germany at that time because they sort of recognized that that was needed to integrate the East German economy. But I want to talk about tariffs. Here's a question that I've had for a long time. I hear different goals of tariffs. Sometimes it's about, okay, it's going to bring in this much revenue. Sometimes it's a matter of national security because we can't be so reliant on foreign manufacturing for various reasons. Sometimes it's about jobs, et cetera.

10:41Setting aside what the ultimate trade deal looks like, what are the benchmarks that we should use to see, did these tariffs achieve the goal? What does that look like? Yeah. So this is another great question. And so I want to point out that there's not just one set of tariffs. There's a lot of sets of tariffs. There's a 301s and the 232s and the EPA tariffs. And they each have their own particular statutory justification. Some of them are national security. Some of them are unfairness. Some of them are the emergency of trade deficits. So they're all sort of distinct. But if you were looking to sort of thematically look across them and say, what are we doing here?

11:18I think you'd sort of start to see two broad lessons. One is imbalances, trade deficits, right? A sustained, accumulated series of trade deficits, international imbalances, will lead to economic vulnerabilities. It will lead to financial invulnerabilities. It is unsustainable. If it keeps on going, it leads to places that aren't great. On top of that, it's unfair to American workers and firms. It puts them at unfairly uncompetitive ground. It disadvantages them relative to our trading partners. And there's a real element of fairness. There's a real element of sustainability economically and financially.

11:53And the idea that we should start addressing those imbalances, you know, sort of is a strong driver of what's going on with – is a very primary driver of what's going on with the tariffs. And by the way, you know, if we address those imbalances, if we bring those imbalances down, it creates more balanced trade, which is more sustainable, right? It will create more resilient, more robust trade and more trade, by the way. If other countries open their markets to our products, it will be a world of more trade, not less trade, but more balanced trade. And that will be more resilient, more sustainable, and actually increase the longevity of the global trading system, which I think is something we should – which I think would be a good thing.

12:30The other thing that's really going on is, as you said, national security. It's really important that the United States be able to defend itself, its alliance partners, preserve open shipping lanes without having to rely on strategic adversaries or hostile countries for key parts to do that. If we have to rely on a country like China or somebody else for key parts to make bullets or tanks or satellites or other things that we need to keep our people safe, it's not a good situation. We don't want to have to ask permission to keep ourselves safe, right? We want to be able to keep ourselves safe out of our own power to do so.

13:06And so one thing that a lot of people say to me is, well, why don't you just balance the international deficits with services? And I think that you really have to think about national security here too. I think that services are great and I love that the United States is the world's biggest export of services and I want to sell as many services as we can. That's fabulous. We should do more of that. But selling services doesn't address the national security dilemma because you need manufacturing too. And if you think about it, the United States just took steps to open the Red Sea to shipping, right?

13:36We don't really ship to the Red Sea. It's our trading partners that, largely speaking, ship through the Red Sea. But we took – we exerted kinetic force to open it. We needed a robust manufacturing sector to do that. We will continue to need a robust manufacturing sector to do that. No amount of selling financial services or of selling internet advertisements or of selling legal services will be able to open the Red Sea. You need kinetic force. And so it's not a case of one or the other. It's a case of diversification and both and saying, yes, services are good. Services are important. But we also need to be thinking about manufacturing for the sake of being able to defend ourselves and our alliance partners and keeping shipping.

14:14when it's open.

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16:31Crypto trading provided by Backed Crypto Solutions, LLC. Complete disclosures available at public.com. It seems to me that the administration is very focused on perceived inequalities or injustices with other countries, with foreign trading partners or just foreign allies in terms of trade, in terms of military spending, etc. And I guess my question is, do you see or do you have any policies to address perceived economic inequality within the U.S.? Like, why is all the focus international versus domestic policy? You know, the best way to approach to approach that subject in the United States is to create opportunity for everyone so that everyone can work better themselves and share in American prosperity.

17:17And that's exactly what the president did in his first term, right? The same policy mix from the president's first term, trade renegotiation, tax reform, deregulation, energy abundance, same exact mix in the first term that led to 3.5 % unemployment, negligible inflation, and historic gains in income for – in real median household incomes, historic reductions in poverty rates, new lows in unemployment rates for various disadvantaged groups in America. You know, this was a very successful recipe. And the best thing that you can do for folks who are less well off is to create a situation in which firms want to hire them, in which firms want their labor, want them as employees.

17:56And the best way to make firms want to hire more employees is to create a pro-business environment in which firms are doing well, because the better they do, the more employees they want. Right. And so that's why we're focused on creating an environment of economic growth, of economic dynamism, where firms are prospering and therefore hiring workers and paying them well and workers are experiencing real wage growth. That's what we're trying to do. I want to go back to manufacturing, and I find this to be a very compelling point, that as many services and digital ads that you sell, that will never be from a security standpoint, even if it is from a dollar standpoint.

18:32It'll never be from a security standpoint the same as being able to build something in that kind of sovereignty. With the last administration, the Biden administration, I sort of understood, I think they had actually similar, they clearly had very similar concerns. And you saw it through CHIPS. You saw it through the loan programs office with things like energy and so forth. I had this very sort of, I understood their theory about, okay, de-risking and subsidies. And there were a lot of new, ostensibly advanced manufacturing facilities that went up. How does this administration actually think about like pushing the U.S.

19:06to the frontier of advanced manufacturing when it comes to some of the energy stuff? Some of that's being curtailed. I don't hear much about chips. How do you think about the incentive structure such that we get sort of risky, CapEx-heavy investment here so that we can still sort of build the things, whether it's chips or larger things, that are important for national security? One thing about industrial policy that's important to keep in mind is that you have to think about sustainability. And I mean economic sustainability here. And if an industry is reliant upon government subsidies to exist and the government subsidies go away, you know, it's very likely that the industry goes away too.

19:48And you just set yourself up for another wave of deindustrialization. And that was the fatal flaw at the heart of the Biden administration's industrial policy and all the climate stuff that they were engaged in. was it was industries that were designed to be permanently, you know, sort of permanently reliant. And so if you want to create a sustainable manufacturing boom, what you need to do is to create a pro-business environment to make America more competitive and to make it a place where people want to do business. And that's what we're aiming to do. The deregulatory agenda is incredibly important for that, incredibly important for that.

20:22Economists are so underappreciative of the importance of regulation because it's difficult to study. It's not quantitative. You can study interest rates quantitatively. Joe has a 3 % interest rate. Tracy has a 7 % interest rate. Let's compare outcomes. That's right. That's unfair. True, by the way. You can study taxes quantitatively. Sorry, just to be clear on this, I just want to, national security is like a public good, right? And does the market price public goods? Well, I mean, even if we're just talking about normal defense, there's always this public investment that is sustained. And the big defense contractors always need public money coming in, et cetera.

20:56And so when you talk about this national security element to spending, I get your point about sustainability. But when we're talking about this, isn't there always going to be sort of a level of public backing that's necessary when it comes to something like securing the national security? Oh, there absolutely will be. And national security is forever, right? And so there always will be the primary element of the government backing this stuff. And that's going to continue. Also, industrial policy, I think, tends to be more successful with national security because we have a better idea of what works and what doesn't work than someone in a government trying to predict consumer preferences 10 years from now.

21:33That's really hard. It's hard to predict what consumers are going to want 10 years from now, this type of car, that type of car. But it's much easier to listen to the military and say, we need this weapon or our soldiers are going to have trouble. And so it's easier to pick winners and losers as well. And there will always be government backing for national security. You know, you can sort of do things to ensure more of that supply chain becomes domestic. And I would expect that you I would expect that you see that type of thing over time. I think we have to tie this back together to the overall policy program, making America a more competitive place to do business, a better environment to do business in.

22:07And some of the tax incentives that are in the big, beautiful bill for investment, like full equipment expensing, full R &D expensing, full expensing of new factories, these are very substantial incentives to invest in manufacturing capacity in America. If you look at the academic research, the paper by Gooder O 'Reich and Zwick et al. from a couple of years ago, they found that the full expensing was the best bang for the buck in terms of incentivizing investment, right? So the combination of cutting the red tapes that firms can do what they want without begging permission from Washington, creating very strong tax incentives for investment, creating energy abundance to make it cheap to do stuff, opening foreign markets to American products, that American products are more competitive.

22:45This is a very powerful overall combination for saying that America is a good place to do manufacturing and America is a good place to do business. Well, let's talk about the big, beautiful bill for a second. And one of the things that has really caught the market's eye is this Section 899 idea, which would basically tax foreign holders of U.S. bonds. So I've seen this described as a retaliation tax that's targeting countries with which the U.S. again sees them as having unfair tax policies. And so I'm curious, what exactly is the strategic goal of this provision? Is it mostly to try to incentivize foreign governments to maybe change their tax policies so as to make them better or more beneficial to the U.S.?

23:31Or is it a revenue generator at a time when clearly the deficit is getting bigger and people are worried about that? Or is it maybe a first step, a tiny step to revamping the role of the U.S. dollar in the global financial system? What is it exactly? This provision is about the OECD global minimum tax and us trying to prevent American tax sovereignty from being exported overseas. We shouldn't be in a situation in which the taxes that American companies pay can be automatically determined by what's going on in other countries with their domestic tax rates. That shouldn't be the situation. And also, the OECD minimum tax process really disadvantages American firms by its structure and advantages Chinese firms because it's all about how you calculate corporate profits.