Last November, President Trump’s designated chair of his Council of Economic Advisors (CEA), Stephen Miran, published a lengthy paper entitled “A User’s Guide to Restructuring the Global Trading System.” The paper starts by laying out the intellectual justification for Trump’s aggressive interest in trade barriers. Miran argues that the preeminent role of the dollar in the international financial system has boosted the demand for dollars, pushing the dollar’s value above its equilibrium level. This overvaluation, in turn, has led to reduced export competitiveness, persistent trade deficits, and most importantly, the erosion of US manufacturing. Accordingly, Miran outlines some decidedly outside-the-box suggestions for depreciating the dollar while still preserving its dominant global role, including a “Mar-a-Lago” accord with our trading partners to intervene against the dollar, a “user fee” on foreign holdings of US Treasuries, and browbeating foreign governments into lengthening the maturity of their Treasury holdings.
Although the exact extent to which the dollar exceeds its equilibrium value is quite uncertain, our external deficit has probably widened somewhat in response. The chart below indicates that among the G20 countries, the US current account deficit has been the third largest, suggesting some degree of dollar overvaluation. On the other hand, the US deficit trails that of a country with little reserve-currency status (Australia) and one with essentially negative reserve status (Turkey). Taking a different approach, studies have found the US current account deficit to be several percentage points of GDP too large, once controlling for economic growth, fiscal deficits, and other factors. All told, it looks like the dollar’s preeminent role probably has widened our external deficit, but by how much remains unclear.
Figure 1: G20 Current Account Balances 2000-2019
A strong dollar, however, is not the reason for lower manufacturing employment. The chart below shows no correlation between the steady erosion of the share of manufacturing in US employment and the wide swings in the value of the dollar.
Figure 2: The Manufacturing Share of US Employment and the Dollar
In fact, the declining share of employment in manufacturing is hardly limited to the United States. As indicated in the chart below, countries with persistent trade surpluses (Germany, Japan, South Korea) as well as trade deficits (UK, US, Australia) have all experienced trend declines in the share of manufacturing jobs, and of roughly the same extent. These shared trends importantly reflect the rapid pace of productivity growth in manufacturing, which shrinks the need for labor even as it boosts manufacturing output.
Figure 3: The Manufacturing Share of Employment Internationally (percent)
Once it is conceded that the dollar is not a primary cause of the decline in US manufacturing employment, the justification for taking aggressive measures to lower the dollar goes out the window. As I’ve noted in previous writings, the trade deficit per se is not a problem: with unemployment near record lows, our spending on imports is no threat to our economy, and, in fact, it reduces the likelihood of overheating and inflation. Rather, as evidenced by the recent declines in household confidence and consumer spending, one of the greatest threats to our prosperity is uncertainty about Trump’s future actions in the realm of international economic policy. I hope the future head of the CEA is prepared to acknowledge that fact.
CEA Chair Nominee Stephen Miran’s Critique of the Global Monetary System—Part II
The past week has seen the Trump Administration upending US support for two critical facets of the post-war international order: the rules-based arrangements for international trade and the Western geopolitical alliance of liberal democratic governments. It is only a matter of time before the Administration sets its sights on the system of floating exchange rates, (relatively) free international capital flows, and cross-border investor protections that make up a third facet of the post-war order, the global monetary system. What problems would the Administration have with these arrangements, and what would it do about them? The answers are likely to be found in a lengthy essay published last November by Trump’s designated chair of his Council of Economic Advisors (CEA), Stephen Miran: “A User’s Guide to Restructuring the Global Trading System.”
The paper argues that the dominant global role of the dollar has boosted its demand, appreciated its value, and led to reduced export competitiveness, persistent trade deficits, and, especially, the erosion of US manufacturing. But at the same time, the dollar’s dominance confers benefits such as lower interest rates and the scope to use financial sanctions against our enemies. So the central problem Miran seeks to solve is how to lower the dollar’s value while preserving the benefits that come with its role as an international reserve currency. Miran’s solution is a suite of very outside-the-box policy options. As I will argue below, these options, like Trump’s forays into trade policy, would be misguided, ineffectual, and severely destabilizing. But insofar as their attempt to simultaneously lower the dollar and interest rates dovetails with Trump’s own interests in this arena, and insofar as implementing these options will likely involve browbeating and threatening our closest allies, they stand a good chance of being taken up by his administration.
In an earlier blog (CEA Chair Nominee Stephen Miran’s Critique of the Global Monetary System—Part I), I argued that dollar dominance had little to do with the object of Miran’s greatest concern, the declining share of US workers in manufacturing. This decline largely reflected the fast pace of productivity growth in manufacturing, and could be observed in many economies, including both those running trade surpluses as well as those running deficits. So the primary justification for Miran’s proposed measures go out the window.
But this may not be enough to deter the Administration, intent as it is in lowering the dollar. Miran goes on to outline a “multilateral” strategy in which the United States and its trading partners enter a “Mar-a-Lago” accord to intervene in foreign exchange markets to sell dollars for foreign currency; in order to offset any resultant upward pressure on US longer-term bond yields, foreign governments increase the duration of their remaining dollar reserves.
Could this plan work? At the margin, the intervention would probably lower the dollar somewhat, while “terming out” Treasury holdings could restrain longer-term yields a bit. But as countless studies of sterilized intervention have shown, without the cooperation of the Fed in lowering US interest rates and foreign central banks in raising their rates (which almost certainly would not be forthcoming), there is little chance of a substantial and sustained decline in the dollar. Moreover, Miran understands that foreign finance ministries would not enter the Mar-a-Lago accord of their own accord—they would have to be threatened with tariffs and ejection from the US defense umbrella. So “multilateral” does not mean “voluntary,” and the price of small temporary declines in the dollar would be further ruptures in US relations with its closest allies and trading partners.
Miran then outlines some “unilateral” approaches to achieving his goals. One option would be for the United States to intervene unilaterally in foreign exchange markets to lower the dollar. However, unless the Fed agreed to use its unlimited resources to fund purchases of foreign currencies, and on a non-sterilized basis, this move, again, would not likely achieve a substantial and sustained depreciation of the dollar. Another, more nuclear option would be to impose a “user fee” on foreign official holdings of Treasuries in order to discourage their demand. Such an action might well lower the dollar, but as it would represent a default on US Treasuries and a capital control on cross-border financial flows, it would likely plunge the global financial system into crisis. Not good.
So all told, Miran’s suggested options to lower the dollar while containing interest rates would be ineffectual, destabilizing, and ultimately for no good purpose. In his conclusion, he acknowledges some of these risks, but argues that because of Trump’s focus on financial markets, “I therefore expect that policy will proceed in a gradual way that attempts to minimize any unwanted market consequences…” Well, if the past few weeks of trade policy are any indication, be afraid . . . be very afraid!
