Hello and welcome to the American Compass podcast. My name is Oren Cass. I am the chief economist at American Compass. And today we are speaking with an even more chief economist, Stephen Miran, who was chair of the Council of Economic Advisers for the Trump administration during the first year when they were doing so much important work on tax, on immigration, especially on trade. And he has played a leading role in explaining that policy and developing that policy and really articulating the core economic arguments. So I really enjoyed speaking with him about where economists are on these kinds of questions. What is a heterodox economist? Why is it that the political position of so many economists today seems so disconnected from what the economics actually says? I think you'll really enjoy the conversation. But first, of course, have to tell you about what's going on at Commonplace. We just spent a week on education in honor of going back to school. Actually republished a series of essays that American Compass had run a number of years ago that really deserve more attention. So don't think of it as a rehash, think of it as a re-up. Take a look at those. And then some great new stuff this week. Had Leah Libresco Sargeant on AOC's egg freezing and the difference between pro-family policy and anti-anti-family policy, and a great piece by Fred Bauer on common-good economics and the through line from Reagan to the new right. So give those a read and enjoy this conversation with Steve Miran. And here we are with former CEA chair Steve Miran. How are you today, sir?
Good to see you. Thanks for taking the time.
No, thank you for taking the time. This has been on the list for quite some time. Really excited to get to do it. Could probably go four hours, but we'll try to constrain ourselves to only the most pressing topics and whatever meandering digressions we think of along the way. But I guess I wanted to start with big picture, your experience as something of a heterodox economist. I don't think I've ever really asked you sort of what brought you to that and what has your experience in the profession been like as you made your way in it.
So, it's funny you should say that. I actually don't really think of myself as a heterodox economist. I think of myself as a pretty mainstream economist. I think of most of my views as being well within the establishment of where economic literature, economic research has been in recent decades, but also recent centuries. Some of the things that I've worked on, like optimal tariffs, you know, those have been around for 200 years in the economics literature. What's heterodox about me is not accepting the seeming consensus in economics, right? If economists come to a consensus about what good or bad policy is, and so I'm heterodox to the extent that I feel free to disagree with consensus, but I don't think of myself as a heterodox economist. I think that consensus is just misreading the literature, and I point out that I think that they're misreading the literature and that they're misreading the economic logic of things. But I don't think my views are somehow not founded in orthodox economics or require sweeping it all aside. I think actually the truth is that there's a lot more variety and a lot more debate actually in the literature than you'd get from the small sample of what makes its way up to the public debate from academic economists. And you know, I think maybe part of that is because academia is a very rigid, almost taste-based system, and the folks who disagree with the powerful superiors may not feel that they have the liberty to do so publicly. But the truth is that I think that a lot of these ideas actually are already encapsulated within economics. It just takes somebody to disagree with the political consensus of the herd among the senior folks and point out that those ideas are actually there.
I suppose this is a fair point that heterodox has to be in relation to some sort of orthodoxy. And to your point, one could be heterodox vis-à-vis the actual core of economic thinking, which I think as you say you're not. And this is something, you know, we're always making the point about: go all the way back, whether it's Paul Samuelson or Keynes or pick your economist, even more recently, even look at what Krugman was actually writing about trade. There's nothing even especially controversial here in questioning some of the dogma of recent decades. But then there's the orthodoxy of how economists interpret and define. It's such a bizarre thing to say that you have a field where basically most of the practitioners have established a consensus that departs from their own subject, from their own material. How does that happen? Why do you think we've gotten there?
It's less unusual than you would think when you look across academia. And think about English literature, right? If you were a young professor of English literature today and you say, "Look, I think that Shakespeare is among the best literature that's ever been written." Are you heterodox within the world of English literature and the history of English literature? I would say no. Are you heterodox within the context of a contemporary English literature department staffed with professors who focus on decolonization and gender studies and this studies and that studies and Marxist this and post-structuralist that? Arguably, yeah, you would be heterodox in the context of that department, right? And I think a lot of my views on economics I would think of as similarly, but maybe less pronounced than that example. Because there is, I would say, a lot more debate under the surface in academia and in economics on a lot of these subjects than maybe there is in those departments, which I think are a little bit more monolithic. But there's a political consensus on some things within the economics world. But the truth is that there's a literature that would support multiple sides and multiple readings. And of course, everything that I say, I think it's correct. I don't publicly espouse views that I don't sincerely hold. I sincerely hold all the views that I espouse. But I think what you were describing is probably pretty commonplace across academic departments where a specific view is not heterodox within the historical context of a field, but maybe academia has gone a little bit unbalanced and a little bit off-kilter and a little bit highly political and concentrated in one corner of the political body, and therefore bucking the consensus can seem heterodox even if intellectually it isn't really.
Yeah, I guess political is sort of the key word there. And there's kind of small-p politics and capital-P politics because you're right that every field is political in whatever way. I guess the difference is the way that economics becomes political is the national politics in a sense. It spills directly into our politics and policy debates in a way that it becomes everyone's problem in a way that the fight over Shakespeare maybe is not. What are your favorite of these sorts of issues? I mean, to some extent, what are the biggest and most significant ones, but I'm curious what you see as the kind of most distinctive illustrations of these places where the politics of economics just went furthest afield of the economics of economics?
Well, look, I think the tariffs debate, which is a debate that you and I have both participated in, is very much one that would fall under what you were just describing. The way that I think about this is there's really two ways in which the debate over tariffs is really classically front and center in the scope of classical economics. One is the optimal tariff literature, right, which sort of relates to optimal tax policy and what are the best ways of raising revenue. You've got multiple distortionary tax instruments: income taxes, capital taxes, tariffs, multiple ways of raising revenue. They will each have consequences for the economy. An income tax will discourage people from working. A capital tax will discourage people from saving. A tariff will discourage people from importing. It would be really unusual, to use the language of economics, to use the language of economists, it would be really unusual to find yourself at what economists call a corner solution where you have all of one thing and none of another thing, right? And if you have zero on tariffs, but a positive number on income taxes or capital taxes, that's a corner solution where you're on the zero corner of tariffs. And it's as strange as being on the 100% solution where all of your taxes are raised from one type, right? And economics is a study of trade-offs. And usually economists would say an interior solution as opposed to a corner solution is better. It's better to have some guns and some butter, not all guns and no butter, not all butter and no guns. It's better to have some of each. And that logic applies to optimal taxes too in the sense that bringing tariffs from a very low level closer to an intermediate level that might be near where the optimal tariff is and using that revenue to cut distortionary income and capital taxes is going to be significantly efficiency-enhancing for the economy as a whole. Now that gets to an even better argument when you start thinking about optimal tariff rates and how much of the burden of a tariff is borne by an exporter. And we can have that conversation too. I suspect we will.
Well, I'm sorry, I have my official rules here. It says here that if and only if discussing tariffs, questions of incidence are no longer permitted in the economic analysis.
Well, that is a really strange thing. And again, it is in a point of economics that incidence is a critical thing. Incidence is a long-run economic subject. Nobody would look at what happens six months or a year after an income tax change or a corporate tax change and sort of say that's the final word on the incidence of the tax. Nobody would do that in economics. Incidence is a long-run concept, and producers will bear some, consumers will bear some, and it matters to study that. And economists have, I think, taken shortcuts in ways that I think don't reflect well in the profession. Another thing about incidence in my view that gets ignored and shouldn't is that typically, as you're aware, incidence in economics, the basic economic logic of it is that the more inelastic party bears the burden of a tax. And for those who are not economists, it's because if you replace the word inelastic or elastic in your mind with flexible or inflexible, the reasoning is basically that the more flexible person can change their behavior to avoid the burden of the tax. So the example in my mind that makes this the most concrete is if you are looking at houses and property taxes, because houses are perfectly inelastic. They're stuck in place. And so if a property tax moves up, the home price will have to go down to absorb the increase in the property tax. The buyer is no longer willing to pay as much for the home because it now bears a higher property tax burden. So the incidence of that property tax gets capitalized into the value of the house. The reason is the house is stuck in place; it can't move. But the buyer can move his demand across town lines. He can look in the next town over that didn't raise his property taxes. The house can't get up and move to the next town over to avoid the property taxes. So the seller is inflexible, can't adjust his behavior, can't move the house around. The buyer is flexible, can move his behavior around. The seller, the inflexible party, ends up bearing all the burden of the tax in that case. Now in economics, right, you typically would think of what we would call installed capital, meaning the house, meaning a factory that's already built, capital that's already in place and productive and producing goods or services. That installed capital would typically be thought of as the most inelastic factor and be sort of an incidence sink and absorb huge amounts of the incidence. A lot of the models that people use to study this stuff just ignore installed capital altogether. And so this public finance insight that installed capital will usually bear a huge portion of the incidence is one that just gets completely ignored and dropped from the conversation when people are talking about tariff incidence. And it's a bit of a strange thing.
And the thing that's striking about this discussion of tariffs is we haven't even gotten to the question of trade at all. In other words, this is purely public finance assessing a tariff as a tax base and why you would want some share of your revenue from there and why particularly if it's paid by an external party, it's going to be attractive. This would all be true even if we truly did not care about manufacturing at all. If we had no concern with the size of our trade deficit with China, we would still on this basis want to presumably raise at least some revenue from a tariff. What is the counterargument? I mean, steelman it a little bit. You've obviously been stuck in many of these discussions. I think most people don't even get to hear the discussion at this level because it gets shut down before it gets into the details. What is the response of the economist who simply insists that in fact, no, tariffs are not a plausible element of a tax package?
Yeah. So before we get there, there's another part of the argument which is not just the relationship of a tariff relative to an income tax and a capital tax and sort of avoiding corner solutions and favoring interior solutions, which is classic economics language. Right? And this is what I mean when I say I consider myself an orthodox economist. You can't get more classic economics than saying corner solutions are bad and interior solutions are good. The other element to it is sort of just purely in the world of tariffs, optimal tariffs, right? And you brought up incidence a second ago. The differentiating feature of a tariff is that some of the burden of the tariff is borne by the exporter, is borne by a foreigner, not by an American. Whereas if you are raising an income tax or a corporate tax, almost all of the burden, let's just say 100% for the sake of argument, is borne by Americans as opposed to foreigners. You know, if you're thinking about a labor income tax rise, some of that will be borne by the worker and some of it by the employer, both Americans. With a tariff, the exporter is going to bear a significant portion of the burden. That means that it is from a national standpoint overall welfare-enhancing because the revenue raised when you start from low levels and you're raising tariffs higher, the revenue raised is going to exceed the overall distortionary cost of the tariff borne by Americans because a chunk of it is borne by foreigners. Eventually the distortions borne by Americans get so big they overwhelm the revenue gains. And so that combination creates what's called an optimal tariff level, which is the level at which you've maximally improved welfare by extracting as much of the revenue as you can before the revenue gains borne by Americans starts to increase too much. Now, that's aside from issues of labor and capital tax, right? And so these two things together are again classic trade and tax theory that have nothing to do with manufacturing that you said, nothing to do with defense, nothing to do with financial stability, which are other items that we'll have no doubt get into. But that's well within classical economics. The answers are right there if economists just would take the time to think about their own field in a more rigorous and more diverse way.
Now, with respect to your question about how do economists respond, when I first brought up optimal tariffs as a guide to setting tariff rates in 2024, and then I was nominated to be the chairman of the Council of Economic Advisers, my training as an economist is in public finance. I was a Marty Feldstein student, right? I'm not a trade economist by training. So I did what economists do when they're sort of venturing into someone else's field: they pull the handbook for that field off the shelf. There's a handbook for econometrics and a handbook for macroeconomics and a handbook for development economics. And I pulled off the handbook of international trade and I looked up the chapter on optimal tariff rates, and I just cited that handbook chapter to say this is where the field right now thinks optimal tariff rates are. And one of those economists is French, and Le Monde asked them to respond to my paper when I was nominated for CEA in the fall/winter of 2024 right after the election. And the response in Le Monde was I think what the typical response from the academic community is, which is that it's true the logic of an optimal tariff works. However, in their view, it's just a nice useful pedagogical tool for illustrating logic, because in the real world there'd be retaliation and that retaliation would erode the benefits of the tariffs. It's true that the tariffs give you benefits, but then your trade counterparty would retaliate, and that retaliation would itself erode the benefit of the tariffs. Okay, that's I think the classic academic response. Now, that may be true for a small country that has really limited market power or really limited defense power, but we're the United States, right? My thinking was always, okay, if you retaliate against us, that's a bad move. You don't want to do that. We provide the global defense umbrella and we're the biggest consumer market. So let's take each of those in turn. We provide the global defense umbrella. My thinking was always, okay, well that's really expensive and we need help paying for it. And my thinking was if you retaliated for the tariffs and you said we're not willing to help you pay for providing that defense umbrella, it might stop to be as rigidly enforced when it comes to you. My thinking was always that burden sharing is important. Providing that global defense umbrella is very, very expensive. We can and should keep doing it, but we need others to pull their weight and to contribute to it as well. And paying the tariffs without retaliation is one important way by which other countries can help finance that defense umbrella. And the defense umbrella would become unviable if other countries retaliated. That was my thinking the entire time.
The other question is market power and who needs whom more? There's only one United States consumer market, right? We're the biggest consumer market in the world. There's lots and lots and lots of small and middle-sized consumer markets. And they're not completely interchangeable, but they're somewhat interchangeable. And if one country retaliates and another country doesn't, well, we can reorient our trade to the country that doesn't. And so, as a result, because we're unique—there's only one United States, there's only one US consumer market, but there's many small and medium-sized consumer markets—that gives us bargaining power, which meant that retaliation would be unlikely. And so the economist counterargument that retaliation would undo the benefits of optimal tariffs to me always seemed like it wouldn't apply to the United States. And I think that's actually, we've got now pretty good evidence that it doesn't, right? Not only was there very limited retaliation to the tariffs that we enacted last year, with a couple of exceptions, and as you're aware, Canada is an ongoing story and a curious choice of self-harm by the Canadians. But in general, there's been very limited retaliation through tariffs, and indeed there's actually been negative retaliation because the president negotiated the trade deals. Other countries said, "Okay, just stop raising tariffs and we'll lower our non-tariff barriers, right? We'll invest in the United States. We'll procure more goods from the United States." Right? That's negative retaliation. That's the exact opposite of what the typical economist objection to optimal tariffs was. So for me, we've lived through the intellectual collapse of the opposition to optimal tariffs as a legitimate means of raising revenue, in my opinion. And I think the academics are starting to move there, but they're doing it very, very slowly because academia moves very slowly always. And I think that they don't want to admit that they're wrong. And also there's lots and lots and lots and lots of foreigners in academia, and a lot of them rightly recognize that these are not so great for their home countries. And so I think they're very, very reluctant to move quickly in recognizing that these are good policy for Americans.
It definitely does seem like that consensus is shifting. I think you're right. And it is both on the kind of retaliation point and the public finance dimension. It also seems to just be on the practical kind of macroeconomic effects dimension where none of the horribles—whether on price or inflationary impacts, somehow harming manufacturing, collapsing growth, you name it—none of it happened. In fact, in virtually every measure, things stayed steady or got better. And I think the other piece of it is that China's behavior, for whatever reason, has become ever more egregious and predatory to the point where now you even have Paul Krugman saying, "Actually, I guess we probably need some tariffs." What do you think this means politically looking ahead in national politics? Is this now the new status quo? Do you think we're still headed for kind of another big "The Empire Strikes Back" sort of situation in the sequel?
