Okay, good afternoon. It's a great pleasure to welcome you to the panel discussion. My name is Marca Rindisparker. I'm the faculty director of the Morochra Institute for Business Markets and Society who kind of helps to sponsor this great event. It's a real pleasure to welcome Stephen Miran. He's a member of the board of governors of the Federal Reserve System. Previously, he served as chair of the White House Council of Economic Advisors and as senior adviser for economic policy at the US Department of the Treasury. Before public service, Dr. Miran worked in financial markets and most recently served as senior strategist at Hudson Bay Capital Management and a senior fellow at the Manhattan Institute for Policy Research. He earned a BA in economics, philosophy and mathematics here at Boston University and a PhD in economics from Harvard University. Joining him on the stage is Professor Hassan. He focuses in his research on international finance, macro finance and social factors in economic growth. He studies the effects of uncertainty on firm behavior and on the allocation of capital across countries and the effect of social structure on economic growth and the effect of historical migration and ethnic diversity on foreign direct investment. Professor Hassan's work has appeared in the top economics and finance journals. He's a research fellow at the National Bureau of Economic Research and the Center for Economic Policy Research. So, it's a real pleasure to have both of you here. I think you know each other from before and I'm really looking forward to this conversation. Thank you.
Yeah, thank you so much. So welcome, Stephen. So we've actually not seen each other for 10 plus years. We were in grad school together. So this is also sort of a reunion for us. Adam was also in class with us. But we both still have the same amount of hair as we did 10 years ago. And some of Stephen's former professors are also in the audience. So, one thing that Marcel didn't mention is you got the undergraduate prize for economics here and your professors described you as a bright kid, thoughtful and inquisitive. You were also somewhat famous for lobbying that we really need an undergraduate course in the history of economic thought. Okay, so I hope you're all listening to this. So, let me get straight into it. So, I think the idea is that we chat a little bit and then we're going to open it up for questions from the audience. So my first question, Stephen, what's your fondest memory from your time at BU?
So, first of all, thank you all for coming out to chat with us today. Thank you for having me. It's a real honor and a privilege to be here. You know, as you know, I went to college here, so it's really a particular thrill for me to be back. I suppose you know, I was just so happy with all of the really thoughtful people that I was really fortunate to engage with here, the faculty but also my classmates and I still have many very close friends from college from when I was undergrad here. I see them whenever I'm in a city that one of them is in. We chat all the time. So you know, it's a very fortunate place to meet lots of really interesting inquisitive people and to just have those lifelong relationships that are a blessing your whole life.
Yeah, I often say this in class, right? So, one of the most important thing you take away from this degree is the people sitting next to you as opposed to what we say in the front. So before entering public service, you were making a lot of money I guess in the private sector. You had prominent positions in the financial industry where the financial rewards are obviously quite different from public service. Can you talk a little bit about what motivated you to step away from all that and take on senior roles in policy? So at the treasury, at the council of economic advisory, now at the Fed board.
Sure. So I'd always been interested in public policy and public service and you know, as an economist in graduate school, I specialized in public finance, right? You know, which is all about policy. And I found myself in the financial industry by accident. You know, as I was finishing up my PhD and preparing to go on the job market. A friend of a friend reached out and said, 'I know somebody in a hedge fund that wants to hire a policy economist. Like, can they talk to you?' And I had no idea what a hedge fund was at the time. It just happened. I thought they probably speculated in bushes or something. It just happened by accident, right? That was never my intention. So, I'd always had this big interest in public policy. And then when the pandemic happened, what happened was I called a friend of mine in Treasury and said, you know, this is the biggest economic policy support program in world history. You guys probably need a hand with the CARES Act and everything. And he said, 'Yes, yes, we do.' So I leaped at the opportunity to be able to jump into policy at the moment and obviously worked in Treasury during the COVID recession in 2020. We just last night submitted our, as you know as an academic, our second or third revision in our paper on the paycheck protection program to the Journal of Finance. Last night we submitted it because we're still, you know, we have this proprietary data. We're still going through the evaluations of the paycheck protection program which I worked quite a bit on and stayed involved in policy since then and you know, sort of obviously have had the good luck to be able to continue to be involved in something that I care so much about.
Yes. Okay. So, we have at least one editor of a top journal sitting somewhere here. So, in case it doesn't work out in the Journal of Finance, so yeah, so that's a, I guess, so the Council of Economic Advisors is the place in the White House where economic research and data are translated into policy. So when you arrived there can you describe a moment when you felt that really like your econ degree really helped with this? So economic analysis really shaped policy and where you the work that you and your colleagues did really mattered.
Sure. So let me just offer one small correction first which is that economic analysis and modeling and data aren't translated into policy. They're translated into policy advice. I'm fond of telling people or I was and I guess remain fond of telling people that it was the Council of Economic Advisers not the Council of Economic Deciders. You know we give our advice and people who make decisions whether the president or cabinet secretaries then go out and make the decisions based in part on the analysis that we give them. One, you know, there's a couple areas that I would say I'm particularly proud of. One was the efforts on the full expensing front. If you look at the One Big Beautiful Bill Act, one of in my opinion the more powerful provisions of it was the full expensing provisions meaning you get to fully deduct from your corporate tax as a business what you invest on capital equipment, on structures, on R&D which is a very powerful incentive for investing. And so in my mind that'll sort of do a lot of work on stimulating investment in the United States in coming years. I think the evidence from the Tax Cuts and Jobs Act is that the full expensing provisions were the best bang for the buck in terms of incentivizing investment from the Tax Cuts and Jobs Act. When you look at the penalty of policies from the TCJA in terms of efficacy so there's a couple things that happened. One is we managed to get that to be a permanent policy instead of a temporary policy which I think is really important for the long-run capital deepening of the United States. And two is that because of the intersection and I think this is a point that's sort of still underappreciated is the intersection of the full expensing provisions with the tariffs meant that it was a way of exempting most intermediates from the tariffs because if you pay the tariff on the intermediate and then you expense the cost of the intermediate on your tax return, there's a slight time delay, but at the end of the day, the tariff doesn't really apply to the intermediate good that you expense because you get it back. And so it was a way of actually making the policy a little bit better from an economic perspective. And I think that was quite powerful. So I think there was a lot of good that was done. There's also a lot of other stuff. You know one of the other cool things about being in one of these positions which to be clear I'm no longer in. But one of the other cool things about being in these positions is the vast amount of stuff that you can't talk about either because it's classified or it's national security stuff. But like there was a lot of really cool stuff going on on supply chains. That was really, that continues I think to be really important and I think that national security is going to continue to be an important driver of economic policy for a long time would be my expectation.
Okay great. So can you also share an example where like you gave advice and said advice was not heeded or you really wish that it was.
Well I don't know about really wish that it was but you know, one example of where I would have been wrong right is when you look at the trade deals that were negotiated, you know ultimately they came with significant promises from other countries to make investments in the United States or to buy certain amounts of goods and services from the United States. You know and I don't think I would have been a negotiator capable of getting those deals right so I probably would have given up earlier. You know so that's an area where I think I was actually outdone by what actually happened on policy.
So can you, so on that, I, you know, when I talk, sorry to be clear none of that has to do with the Federal Reserve. We're sort of speaking purely retrospectively on my previous existence.
Yeah we should whenever people from the Fed speak there's a disclaimer that Stephen's talking about his own views and not the views of the Federal Reserve.
I think one interesting thing and I don't know if you want to comment on this or not but sort of what I teach my students in class is that the trade deficit is equal to an investment surplus. So in some sense the reason we have a trade deficit is because foreigners want to invest in the US more than Americans want to invest abroad. And one thing that I found very interesting during that period is that on the one hand we were talking about reducing the trade deficit and on the other hand we were talking about raising foreign investment in the US. That's just an equation. So it seems to me that that's a contradictory policy. Did you manage to explain that to someone at the White House?
Well, you know, I think that there's distinctions between what type of investment you want. Right. And so I think everyone would accept a distinction between portfolio flows that sort of may just end up parked in financial assets versus flows that go into the real economy. And I think that that difference is sometimes elided in the conversation. And when you look at the things that people focus on that they try and affect, I think there's often a very greater preference for flows that result in economic activity. So but so for example foreign direct investment as opposed to just buying treasuries. Well, as opposed to portfolio flows. And I think you sort of see that as a result of some of the, you know, sort of when I look at and again this is nothing to do with the Federal Reserve, but I do think there's a bit of a distinction that sort of comes out in some of the deals that occurred last year.
Okay. We've had a number of questions actually so I'm condensing a bunch of them here about central bank independence. So particularly from some of our Latin American students. So can you just as a governor just say why is central bank independence considered so important for controlling inflation and achieving economic growth?
Sure. So you know central bank independence is going to lead to better policy. It's a means to an end not the end in itself. What you want is to have monetary policy that's attuned to the business cycle that's tight when the economy calls for tight policy and loose when the economy calls for loose policy. Not to have monetary policy that's attuned to a different calendar, say the political calendar or anything else. The sports calendar, you know, you would want monetary policy to be tied purely to the economic cycle. Central bank independence is going to increase the likelihood that that's the case. And so therefore it's going to increase likelihood that you get good economic policy and it's going to increase the likelihood that you get good economic outcomes.
So you've written that the Fed is not as independent as people think and that the boundary between independence and sort of policy dependence is a little blurred in practice. Can you explain that a little bit?
So look I mean the Fed, you know, accountability for the Fed runs through the Congress. We, you know, the chairman of the Federal Reserve testifies to Congress twice a year. Lots of people in the Federal Reserve have had experience in various branches of government. I myself was previously at the Council of Economic Advisers. We've got other people at the Fed who have been at the Council of Economic Advisers, who have been at the Treasury Department, who have been in other agencies of the government. And there's a lot of collaboration between the Fed and other parts of the government. You know, particularly in times of a crisis, you get extensive collaboration between the Fed and the Treasury Department. And so it's not the case that the Fed exists in some totally, you know, walled-off silo, totally divorced from the world. You know, there's a lot of information that comes to the Fed that affects the decisions that we make that come from the outside world. There's a lot of decisions that we make that are deeply integrated with what other agencies are doing, particularly in times of a crisis. So, you know, there's no such thing as absolute 100% pure independence. Nevertheless, it is really important that we make decisions that we make for the economic cycle to be tight when the economy calls for tight and to be loose when the economy calls for loose and for no other reason.
So normatively, do you think the Fed should be more or less insulated from policy? Just for the students in the room, one of the big reasons and this is actually one of our advisers in grad school like wrote the definitive papers on this. This is like so one of the reasons we say as economists that central bank independence is so important is because in many countries you see something that's called the political business cycle. So the political business cycle is when the central bank juices the economy right before an election so that people are happier. So back to you Stephen. So do you think like so just looking at the institutions that we have in the US today? Do you think that the US central bank should be more or less insulated than it currently is or is it just about right?
Well, look, I mean, I think that we're taking the decisions we're taking for reasons of economic analysis and I have my own economic analysis and I've been extremely forthright with my economic analysis and told people exactly why I have the policy positions that I have, whether it relates to the output gap, the neutral interest rate, the inflation outlook and I think a lot of my colleagues have done the same and you know obviously we have disagreements over where policy should be at any given moment but I think at the end of the day people are taking decisions they're taking for economic reasons not political reasons and that's where it should be.
Okay so in your, so can you just think about like in practice so where's sort of a line that should not be crossed so when so for someone who knows the politicians and also kind of goes to the Fed meetings like so where's the line that you draw?
Yeah so look I'm not going to comment on things that people who are not the Fed do right you know like I'm not going to comment on any of the issues that are pursued by people who are not the Federal Reserve speaking purely for the Federal Reserve I think that part of the thing that entitles us to independence is being seen as non-political and being seen as nonpartisan. And therefore, I think it's really important for us to keep as big a distance as we can from issues that are not monetary policy. What does that mean? I think that means from the Federal Reserve's perspective, I think it means not getting involved in climate politics the way the Fed previously got involved in climate politics. I also think it means not getting involved in highly charged racial politics the way the Fed previously got involved in highly charged racial politics. I can't comment on what other people who are not the Fed are doing. I don't make those decisions, right? But what I can comment on is what the Fed does. And I think that it's important for the Fed to continue to strive to be seen as being nonpartisan, as being seen as non-political, and stay away from any issue that's not monetary policy.
Okay, great. So, onto an issue that's very close to both of our hearts. So if you argue, you've argued that the dollar's role as the world's reserve currency is sometimes more of a burden than a privilege because it leaves the dollar persistently overvalued and contributes to trade deficits. Can you just explain sort of the mechanism? So what exactly links global demand for US assets to weaker US exports?
Sure. So I mean first of all I wouldn't say more of a burden. I would say that there's no doubt about it that you know sort of being and remaining the reserve currency is one of the best things in the world right and that's fantastic. Nevertheless, it is true that if people want our financial assets, the only way that they can get them is by selling us goods and services. And so there is a, as you yourself before pointed out, there's a tight relationship between the financial account and the trade account. And then I think you sort of get into debates about which way does the causality run. And causality probably runs in both directions, right? But I think it's important to understand that it runs in both directions and not just one direction as I think is sort of commonly assumed.
Great. So I think we, so just on that point, so to explain this a little bit more to the audience. So the United States has been able to run persistent trade deficits for many decades in ways that other countries just can't. And so think of Argentina as really trying to run trade deficits all the time and it's not working. Right? So whereas the US experience is very different. So we've had trade deficits for a very long time without triggering a currency crisis, without sudden stops, without a collapse of the dollar. So how is that fact connected to the dollar's role as a global reserve currency? I think that was sort of implicit to what you were saying just to spell it out a little bit more.
Yeah. So as I was saying, you know, we are the world's reserve currency, right? And we will forever remain the world's reserve currency. If we are going to be the reserve currency, we have to provide reserve assets to the world. And I don't mean purely for the official capacity. I mean sort of also, you know, the international role of the dollar and the international role of our debt markets. But the only way that other countries can get a hold of those assets is by selling us goods and services, by trading us something for them. If we're going to be net sellers of financial assets, then we'll be net importers of goods and services, right? And so as a result, there's going to be a relationship between the two that will persist for some time.
So many economists emphasize the benefits of the reserve currency status. So I guess we're all agreed on that. Arguing that sustained foreign demand for the dollar lowers US borrowing costs. So typically the way that we quantify that is we estimate how much higher US interest rates would be if the dollar weren't the reserve currency. And, you know, some like most estimates are around like 1 percentage point, something like that. I might actually put it a little bit higher. But most people, I think, in the profession would say something about one percentage point lower interest rates for US borrowers. So I do this kind of calculation in class. So the US government the different layers of it have about $40 trillion in debt. If you 1% of that per year is $400 billion that you're saving and you know now we can cut this in different ways but essentially we're talking about a flow value just to the official sector in the US of $400 billion. How do you weigh that against sort of other issues like overvaluation of the dollar? So how can we figure out like which one of these forces is bigger?
So you know I think in order to figure out which one of these forces is bigger is going to be an epic undertaking for economists right and I'm delighted to see that economists continue to grapple with this question. You know the research on the China shock has sort of grown and proliferated and that continues to be underway. You know I have no doubt that being, you know obviously being, the reserve status of the United States is a crown jewel right in our country right and so it is something that obviously lowers interest rates and is an absolutely fantastic thing.
Okay so just so you guys know so China shock is so the literature on the China shock is literature that's been looking at what happened after China entered the World Trade Organization and got better trading access to the United States and essentially the result of that literature is that there are some places in the United States very highly localized places where manufacturing shut down and that led to persistent job losses. Whereas more generally if you ask economists is trade going to increase jobs or decrease jobs? they're typically going to say increased jobs but you know there are sort of clear losers from trade with China and that's what that literature on the China shock is about. So related to this so US government debt is high so and many of us are worried that that might at some point affect what the Federal Reserve can realistically do with interest rates. So the idea is if the government has $40 trillion in debt and then the Fed believes you know for business cycle reasons we want to increase interest rates that then the government has to pay more on its debt. So at what point should we worry that we get into this zone of what we call fiscal dominance where the central bank feels like it can no longer move because a sovereign debt crisis might result from higher interest rates.
Sure. So before I answer that question directly, let me tie this a little bit back into what we were talking about a second ago. You know normally when you think about reserve provision and you think about international sustainability you know I think that it's important to understand that the net international investment position of the United States is $25 trillion right we owe the rest of the world $25 trillion more than we own of them right if that number became explosive to the upside then I think you run into positions of instability right where you sort of then run into these tail scenarios that economists don't really like to contemplate. I think that things have changed and I think that it's related to these questions of fiscal sustainability. It's related to questions of fiscal dominance and sort of where you get to borrowing so much that the interest expenses tend to dominate everything else. And part of the reason is because the government sector is the net borrower. When you look at the financial accounts of the United States, the corporate sector and the household sector are in moderate net financial surplus. It's the government sector that's net deficit, which means that that's the net swing both internationally and domestically. So when you think about net national savings, it's the government sector that's really the swing sector and then it's the international sector. I think that tends to respond on the surplus side. Although arguably you could say the household and corporate sectors do as well. The tariff revenue is substantial, right? And I think that that goes a long way towards covering a lot of the various costs that we just discussed as well as addressing a lot of the fiscal issues. So the CBO thinks tariffs are going to raise at a decadal pace about $4 trillion, right? So that's about $400 billion a year of tariff revenue. That's also coincidentally the same number that you get if you boost GDP growth by a point over a decade is about $400 billion a year. Now GDP growth as a result of a variety of policies, as a result of I think what we were discussing before, the tax incentive for capital deepening in the One Big Beautiful Bill Act, as a result of what I view to be quite aggressive changes to the regulatory landscape over the last 12 months that I expect to continue into the future. I think that these as a result of a variety of these policies I expect GDP growth to be maybe not quite a full point higher but closer certainly to a full point than to a half a point. And so I think between the two of these things you get pretty close to at least a couple of points of primary deficit reduction from those two things. As you know interest expenses have been a large outlay as well. And so as the primary deficit comes down from those two things I would expect the interest expense to come down as well. So between these three things, I'm a little bit less concerned about these issues that you're describing with fiscal dominance versus monetary dominance, fiscal sustainability, interest rates, long rates as a result of these changes that have been enacted over the course of the last year. And I think they have material implications for the neutral interest rate of monetary policy because the neutral rate is pinned down by the net national borrowing.
Yeah. Let me interrupt you just briefly there just to clarify. So are you saying that we are actually already more on the path of fiscal sustainability than we were a year ago?
I think so. I think that the tariff revenues are going to be significant in terms of reducing the primary deficit when you just make a forecast. And I think that the better GDP growth as a result of the One Big Beautiful Bill Act, as a result of AI as well as a result of cutting regulations I think that's also going to reduce the primary deficit and I think that there's well-known quantifications of the link between economic growth to primary deficits because you get better revenues if you're growing faster.
Right. I just want to note that there is sort of like a disagreement there. So my understanding of what the Congressional Budget Office predicts is that we are actually kind of wandering still off the charts even after factoring in the tariff revenue. But then of course there's a big open question which is what are the effects going to be on economic growth and I think you have a more positive outlook there than maybe what the Congressional Budget Office had in mind.
Well, I think that they were underpredicting the positive effects of some policies in the past like the Tax Cuts and Jobs Act. I think I'm expecting some better growth from AI and I'm also expecting some better growth from the changing regulatory apparatus which I gave a speech on the effect of regulations for monetary policy about a month ago. But the general thing is like if we can boost economic growth then the budget deficit is not so much of a problem. The combination of revenue from tariffs and boosting economic growth will also boost revenues and I think between the two of those I think you're getting at least a couple of points worth of primary deficit reduction with those couple of points will bring with it reductions on the interest expense bringing the overall deficit even further down and so as a result I view the overall sustainability outlook for these things as being materially better than it was a year ago.
Okay. All right. So, somewhat related to the tariff revenue. So, over the past year, tariffs that the United States charges on imports have massively increased and there are ongoing trade disputes with several of our largest trading partners. What's kind of interesting is that whenever there's a threat of higher tariffs, the dollar depreciates. So we saw this basically on the day that the large tariffs were announced beginning of last year and we saw it again actually like just a couple of weeks ago when there was sort of an escalating trade conflict with the EU. So altogether we're down about 10% over the past year. So dollar depreciated significantly. Are you at all worried about the effects of tariffs on the dollar's role as the anchor and reserve currency?
No, I'm not. And as I said a moment ago, I think that the improved revenue outlook for the United States which does really have monetary policy consequences through the neutral rate through the supply of loanable funds, the supply demand balance of loanable funds in the economy. I think that the revenue has really helped improve the fiscal situation which improves the longevity actually of the dollar's role as a reserve currency. The best way to undermine that would be to have explosive borrowing. And I think steps that we take to increase revenues and reduce national borrowing actually improve the longevity of the system. And as I said before, if that net international financial position exploded to infinity, that would more quickly than anything else eliminate the dollar's role as a reserve currency and as an anchor. So the fact that we've taken steps to improve the revenue outlook to improve the fiscal outlook have in my mind actually reinforced the role of the dollar as the anchor currency.
So that's, so economists hate budget deficits as you can see so we're all on the same side here. Nobody likes them. I should, I'm going to send you a paper of mine that kind of makes a direct link between the US's openness to trade and the dollar stature as a world reserve currency. But we'll discuss that at dinner. How do you expect the weakening of the dollar and the ongoing trade disputes to affect inflation over the coming year?
So the pass through of the dollar into consumer price inflation has been something that it exists but it's not one of the primary when you think about what's first order what's a primary determinant of the inflation rate. The dollar is something that matters but you need a really big move for it to sort of really be a first order issue that would really affect consumer inflation in the United States. And I think that's less so in other countries where maybe they're not the reserve currency. They don't invoice in their own currency. They're more open economies, they have a much greater import share of the economy. And so when you get a currency move, it can pass through into consumer prices a lot more directly or maybe they have more commodities in their consumption basket than we do and fewer services. But the result is that it doesn't matter that much for consumer inflation unless you have a really really big move in a really short period of time. And what we've had is pretty much a pretty modest garden variety currency move. I don't view it as something that's sort of had material consequences for monetary policy thus far.
