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Home Publications Blogs Beat the Press Ezra Klein Gets It half Right on the Dollar

Ezra Klein Gets It half Right on the Dollar

Tuesday, 17 May 2011 05:17

Ezra Klein makes the case that the United States needs a weaker dollar in order to increase net exports and move towards more balanced trade. (Former Senator Ernest Hollings referred to the weaker dollar as a "competitive" dollar.) However it wrongly thinks the need is temporary and that China' currency policy is the sole problem.

In fact, the problem of the over-valued dollar is longstanding and dates back to Robert Rubin's days as Treasury Secretary. When Rubin took over as Treasury Secretary he reversed his predecessor's position that the dollar should be allowed to drift downward.

In fact, the decline in the value of the dollar was supposed to be one of the fruits of President Clinton's deficit reduction policy. A lower valued dollar was suppose to boost U.S. net exports and turn our trade deficit into a trade surplus. In standard economic theory rich countries are supposed to run trade surpluses, lending capital to poorer developing countries.

Rubin instead insisted that the United States wanted a high dollar. He put muscle behind this view in 1997 East Asian financial crisis. He used the Treasury Department's control over the IMF to force the crisis countries to repay their debts in full, instead of allowing for defaults and write--downs. The repayment was financed by a massive boost in exports from the region. This was made possible by sharply lower values of their currencies against the dollar. In other words, the value of the dollar rose.

The harsh conditions imposed by the IMF in the East Asian crisis led countries throughout the developing world to begin to accumulate reserves on a massive basis in order to avoid ever being forced to deal with the IMF. This meant deliberately depressing the value of their currency against the dollar.

The huge U.S. trade deficit in the late 90s and the last decade was a major source of the imbalances of these years. A trade deficit logically implies (i.e. there is no damn way around it) either a large budget deficit or negative private savings, or some combination.

In the late 90s, the country had a budget surplus, but negative private savings. This was the result of the stock bubble. The wealth created by that bubble led to a consumption boom which pushed savings rates to levels that were at the time record lows.

After the stock bubble collapsed, the budget deficit returned. While the deficit fell back to more normal levels in 2006 and 2007, this was associated with private savings again becoming highly negative as the household saving rate fell to near zero in the years 2004-2007. The culprit in this case was the wealth created by the housing bubble.

Klein misses this story. The over-valued dollar is not a side-bar, nor is China a lonely culprit in this story. The over-valued dollar is central to any understanding of the U.S. economy over the last 15 years. 

Comments (8)Add Comment
The Rubin Era: Ushering in the Multinationals
written by izzatzo, May 17, 2011 6:43
The repayment was financed by a massive boost in exports from the region. This was made possible by sharply lower values of their currencies against the dollar.

Rubin understood under a revised 'Beggar Thy Neighbor' policy that those who reap in others' global back yards shall gain by keeping solvent their debtors with a high dollar value at the expense of those consuming the output.
written by paine, May 17, 2011 8:11
"The over-valued dollar is central to any understanding of the U.S. economy over the last 15 years"

and the imperial dollar
is over valued against
a battery of potential replacements for
imports currently china sourced

if bilateral struggles see china
follow japan
up the forex pole
the gremlins of cross border arbitrage can move on
to other undervalued production platforms

south asia beckons like a painted whore
written by paine, May 17, 2011 8:13
rubinite wing of the dembo party oughta get targeted by other pwog pundits
where's pk on this
for instances
Don't Forget about Japan's Manipulation of the Yen
written by Paul, May 17, 2011 8:16
For decades, Japan has openly manipulated currency markets to depress the value of the yen which has led to huge trade surpluses and a trillion dollar hoard of U.S. treasury bonds. When China does this, the U.S. demands that it stop and allow the value of the yuan to rise, but Japan, our ally, gets a free ride.
written by PeakVT, May 17, 2011 9:16
@Paul - AFAIK Japan doesn't have the same degree of capital control as China does, so it's not quite the same. Look at the chart below.

written by skeptonomist, May 17, 2011 9:24
Is the trade-weighted value of the dollar the main determinant of the trade balance? The evidence clearly says no:


From 2002 to 2008 the dollar went down more than it had gone up during Rubin's tenure, but the trade deficit continued to increase until after 2006. The dollar/yuan ratio had been fixed at a very high value at the end of 1994 by Rubin's predecessor and it has only come down (slightly) since then. I keep pointing these things out because Dean keeps referring only to that limited part of the history of exchange rates and trade balance which seems to be in agreement with the proposition that exchange rate is the control.

Dean and other economists put too much confidence in monetary manipulations; international trade is not controlled in such a simple way. Anyway, do Dean and other economists really want wages to be instantly equalized throughout the world? Workers in the developed countries surely think otherwise. Is changing the value of the dollar going to re-institute competition among capitalists so that profits come down to free-market levels?
written by Gary Storrs, May 17, 2011 11:38
Interesting piece, as usual. I was wondering if you were also going to comment on the Allan Sloan piece that was on the next page (after the Klein column) in the print edition of the Post. That one seems to be crying out for a critical analysis.
People still have to want to buy something made here
written by ljm, May 17, 2011 8:45
The value of the dollar is somewhat secondary to having products people overseas want to buy. More and more corporations are making things overseas that used to be made here. A cheaper dollar would make it desirable for people overseas to buy property, houses, buildings, etc.... here. It would be a fire sale. Globalization has in some ways made this moot.

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About Beat the Press

Dean Baker is co-director of the Center for Economic and Policy Research in Washington, D.C. He is the author of several books, his latest being The End of Loser Liberalism: Making Markets Progressive. Read more about Dean.