MNI: Transcript of MNI Interview with CEA Chair Stephen Miran
The following is a lightly edited transcript of MNI’s interview with White House Council of Economic Advisers Chair Stephen Miran. Miran is a nominee for the Fed Board of Governors. He did not comment on monetary policy due to his pending Senate confirmation.
MNI: What do you make of this month’s jobs revisions and the idea that we’re in a significantly weaker labor market position?
CEA Chair Stephen Miran: Well, in the first half of the year, underlying job creation wasn’t as strong as we thought it was. I understand why that might be the case. In particular, we heard an awful lot about uncertainty in the first half of the year from a lot of people, financial markets, businesses. And they were really, generally speaking, two types of uncertainty. One was over tax. We were very potentially facing the biggest tax hike in world history that would have sent the economy careening into a recession. And there was a lot of uncertainty of, ‘is that going to be resolved? Are we going to get a tax cut extension? Is there going to be a $4 trillion tax hike? What's going to come?’
And so not only has that uncertainty been resolved, it's been turned into a tailwind because the One Big Beautiful Bill isn’t merely an extension of Tax Cuts and Jobs Act, and it also contains significant incentives for investment in the form of full expensing equipment on new factory structures, and R&D, things like no tax on overtime and tips, re upping of opportunity zones. So there's all sorts of things the One Big Beautiful Bill that are actually quite expansive for the supply side of the economy.
The other area where we heard lots and lots about uncertainty was trade, of course, which I think has occupied a very significant, disproportionately significant amount of ink, but I actually don't think was necessarily any more important than tax uncertainty. At the end of the day, imports are only 14% of the economy, and so I think there was a disproportionate amount of ink spilled over this. But I understand why people want to talk about it, but trade uncertainty was a real thing. The President was always very upfront about that, but that's another instance in which the headwind has dissolved, and we now have trade deals that cover almost 60% of global GDP, including the U.S., many of our most important trading partners are covered by trade deals. And so we have a situation in which the uncertainty has resolved, and again, just like the tax, not only has the uncertainty resolved, but it's been replaced with tailwinds in the form of the investment commitments that other countries have made as means to secure the tariff rates that they secured.
(Japan and Europe) each pledged to invest roughly half a trillion a dollars, some of it investments, some of it increased purchase of LNG, some of it increased purchases of defense procurement. There's large inflows into the US economy coming from the commitments these countries made as part of their trade deals. Also, many of our trading partners are opening their markets to American goods and services in a way that hasn't happened before, again, as part of this, part of these trade deals. So when they make it easier for us firms to sell into their markets, obviously that's a good thing for for economic efforts. So, I do think that what we saw is the first half of the year got a little bit revised downward, and obviously in the most recent, most recent economic data. But I do think that there's reasons for expecting growth to perform quite well as we look forward to what's changed.
MNI: I guess this weakness applies to GDP as well right, it also relates to this uncertainty?
Miran: Yes, job creation and growth are connected.
MNI: The last time we spoke (in June) you talked about a 3% rate of growth for the second half, is that still a fair assessment?
Miran: Yeah, I think it’ll start kicking in.
MNI: And you expect that growth to be noninflationary, and you expect the tariffs to continue to not have a significant inflationary effect, as they have, surprisingly to some not yet had?
Miran: Yes. So those are two separate questions, right? The answer to the first question is yes, I do expect it to be noninflationary growth because growth, because we're pushing up the supply side of the economy, and that's what we saw in the President's first term is that when you push up the supply side of the economy, if demand increases, then there's more supply to accommodate it, and you get non inflationary growth. That's how we get 3.5% unemployment with no material inflation in the first term.
How do you push up the supply side of the economy? Through deregulation, we’re cutting regulations as fast as the rule-making process will allow, through energy abundance, through incentives for capital deepening, like our expensing provisions, the one in the One Big Beautiful Bill, incentives for increased labor supply, things like no tax on overtime, no tax on tips. These all push out the supply side of the economy and allow you to accommodate increases in demand.
With respect to tariffs, we don't see any evidence that tariffs are inflationary in any meaningful sense. There will always be relative price changes of this or that, this or that product that's more or less expensive relative to another product. That will always be happening. But when you look at the macroeconomically, when you look at the aggregate price level indices, there's no evidence whatsoever of inflation. We've released studies where we went through the input-output tables and we looked at every single component of every single good down to the smallest level that you can get in the inflation indices and said, ok, this percentage of each good is domestic, and this percentage of each good it is international. And we were able to look at sort of what was going on with the international and domestic components of these two components of these products. And we found that imported goods were actually getting cheaper relative to domestic goods. Which is exactly the opposite of what you would expect to see if you thought the tariffs were leading to material inflation. There's also, if you look internationally – US goods prices have mirrored many foreign trade partners. When you look at places in North America, entirely Canada, Mexico have the same pattern. The UK as well. Core goods inflation is at similar levels to both the EU and the UK, and none of these countries are engaging in the type of aggressive tariff increases that the President has been engaging in.
So I just don't see any evidence that tariffs are causing any meaningful inflation. Could that happen down the line? I'm sort of like a ‘never say never’ kind of person. So obviously you have to allow for some possibility that there is some increase in prices at some point. However, I don't see any evidence, any evidence to date, and I think the track record is pretty clear on this, because we ran this experiment in 2018 and we know what happened, and we're running it again and thus far again, still no material evidence, but people have been saying this for a really long time. There's been all sorts of Cassandras howling about a global depression, endless, retaliation for foreign governments, all the benefits, hyperinflation, empty shelves.
MNI: Sticking to the job market. How do you think the President's deportation and immigration agenda is affecting the job market? There's two different schools of thought, I guess. One is that restricting the supply of new entrants is kind of inflationary and growth damaging. And there's another school of thought that says that it's just just a restructuring of the labor market in favor of American workers. Should we expect a lower breakeven rate on payrolls for instance?
It may be a bit lower. I don't expect it to be enormously so, because I do think that there is, that there is slack in the labor market to be absorbed. One point I’ve often made is that the people in the U.S. labor market who are in the most direct competition with the immigrant surge of the last few years are not, you know, people with PhDs from Ivy League schools. They're young people who are getting started, trying to get on the job ladder, get their first job, start acquiring skills and get their career off to a good start. People in high school, people in college, just graduated high school, that are most regularly in competition with migrants that kept pouring over the border in the Biden administration.
If you look at employment rate of those groups, it is where there is slack in the U.S. labor market. The unemployment rate in the group of (ages) 20-24 about twice what it is in the national average, and the unemployment rate among 16-19 is about 3x one is the national average. Those people that are being competed out of the labor market by migrants, and there's just so much evidence in the labor market literature. My friend Lisa Kahn, we went to grad school together, she wrote a really influential paper that sort of found that whether you graduated in a recession or a boom really affects your job outcomes decades down through because there's path dependency, the first job leads the next job, right? Skills lead to more skills. So if you have trouble getting on the ladder, you can be much less likely to be participating in the labor market five, ten, 20 years down. People whose careers never got off to a start, who are still born because they got competed out of the job market by a migrant, are much more likely to not be in the labor force 10 years later. So what we really want to do is, we want to make sure that we're giving all these people a fair shot at starting their careers and getting on the ladder, getting their careers off on a path that will lead to a fulfilling job trajectory.
There's also provisions in the One Big Beautiful Bill Act that will increase labor supply. Some of these are more on what economists call the intensive margin market, like no tax on overtime. And so people who work overtime are already probably what we consider to be the most elastic workers in the country. They're the most responsive to incentives. If you're working overtime, you're responsive to incentives. You don't work overtime if you don't care about the extra money. The fact that you're now giving them more extra money for working overtime is going to get them to work even more, because those are the most elastic people. That's what economists call the intensive margin, meaning you have somebody working and they work more, as opposed to an extensive margin, which is you have more workers.
The other thing that's really in there is the no tax on tips, which I think will be both an intensive and extensive margin. You'll get more Uber drivers because there's no tax on tips from driving. People who are driving people drive more too, because they get to keep the bigger share of the bigger share of the cut. And what we saw last time with the Tax Cuts and Jobs Act during the President's first term is that people got pulled in from the sides of the labor market. You did see people who had not been the labor force start to get sucked in, because they were just given opportunities to work at wages that were attracted really just were moving higher and managed to find the labor supply, even when, you know, people were claiming that there wouldn't be any, and we had 3.5% unemployment with no inflation. So it's basically that same policy mix.
MNI: So bottom line, you don't think the labor market is showing cracks that are a sign of an imminent burst of layoffs?
Miran: As I said before, I do think that the labor market in the first half was weaker than we thought it was, and it was weaker than I would like it to have been. However, I do think there's a material tailwinds to growth now that obviate a lot of those concerns for me.
MNI: What about the idea that the job market is in kind of a stasis mode where there's not a lot of layoffs, but there's also a lot of hiring, and there's maybe less dynamism, to use a very economisty word?
Miran: Yeah, I think, some of that can be related to uncertainty, right? When you have a large degree of uncertainty, it makes sense to delay decisions, right? And I have no doubt there were people who delayed investments because they thought, ‘Okay, I'm going to wait for the tax bill to pass so I know that I'm doing the full expensing. I need to wait for the tax bill to pass, so I can find out if the full expensing is good this year or if it's only going to kick in next year. Or I need to wait for the tariff rate to settle down and find out what it's going to be for the next two years plus before deciding to import this order and process it for selling.
It makes total sense that you’d have a ton of intertemporal substitution if you have a huge degree of uncertainty over the tax bill and uncertainty over tariff rates, that’s the type of thing that you would expect to accompany company people putting off hiring decisions, because they're waiting for the uncertainty to resolve. As I said, before, that's resolved. We did see some of that the first half of the year, not enough of it that sort of really concerned me, in terms of getting too concerned about it. But I do think there's reasons for thinking that it will get better.
MNI: To close the loop on the inflation side. Do you think inflation will continue to moderate as the year progresses? And are you paying attention – we talked about goods prices – but are you paying attention to other aspects of the inflation picture to get a good sense of where it's heading, including maybe the services side?
Miran: I do. I've been spending a lot of time digging into housing and rents. And, you know, I think that there's actually pretty strong arguments that rent disinflation is going to continue to actually be a meaningful contributor. I think there's a couple reasons for that. One is that we finally sort of seemed to be done with the catch up in high rent rates that sort of finally seems to have resolved itself in the last couple of quarters, and the other thing is migration.
I remember a few years ago, we were hearing all the time about Japan and Japanification, and it was a very common view a decade ago that aging and shrinking populations are deflationary. And then suddenly, two years ago, a number of commenters and policymakers started arguing that younger and growing populations were deflationary, which is sort of a very surprising flip of the economic paradigm that I thought we sort of agreed that Japan, that ageing was deflationary because we sort of held them in Japan for a long time. That always struck me as peculiar. The reason I think that people go wrong is because the housing channel is this important channel when it comes to population shocks, and if you have a declining population, you have a housing overhang, you have a capital stock overhang, you've got lots of vacant housing that puts perennial downward pressure on the largest monthly expense that people have, which is a perennial downward pressure on inflation. And that's why aging and aging and an ageing population are deflationary.
I think the opposite is true also. If you throw millions of new occupants into a relatively fixed housing supply, rents are going to go up. The research that we've done here at the Council of Economic Advisers indicates that the surge in migrants accounted for about six and a half percentage points of increase in rents from 2022 to present, which is just about 30% of the overall increase. That's material when you think about inflation. The correlation between wages and measured inflation is very clearly dominated by the correlation between rents and measured inflation, and so I view the border policies as extremely disinflationary.
