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Home Publications Blogs Beat the Press Robert Samuelson Mostly Right on Over-Valued Dollar

Robert Samuelson Mostly Right on Over-Valued Dollar

Monday, 27 May 2013 07:40

Robert Samuelson makes an important point in his column today, the "strong" dollar is hurting the country's economy. This fact is central to understanding the imbalances that have shaken the U.S. and world economy over the last 15 years. Because of an over-valued dollar the trade deficit exploded in the late 1990s.

A trade deficit means that demand is going overseas rather than for goods and services in the United States. To offset this lost demand we must either have public sector deficits or we must have private savings lag investment, or some combination. In the late 1990s the consumption, and resulted low savings, generated by the stock bubble filled the demand gap. In the last decade, when the trade deficit hit a peak of 6.0 percent of GDP in 2006, the construction and consumption booms generated by the housing bubble filled the gap.

Until we get the dollar down to a level consistent with more balanced trade we will have a large demand gap that will have to be filled by either public or private sector deficits. That is a fact of accounting, not a debatable point. Those who disagree simply do not understand.

The part of the story that Samuelson misses is that the over-valued dollar is a relatively recent phenomenon, not something that dates from the U.S. becoming the world's leading reserve currency. The dollars soared in 1997 as a result of the U.S. government and IMF"s mismanagement of the East Asian bailout from the financial crisis.

The conditions they imposed on the countries of the region led developing countries around the world to begin to accumulate massive amounts of dollars as a cushion so that they would not ever be in the situation that the East Asian countries found themselves in 1997. This means that the imbalances of the last 15 years can be directly attributed to the failures of the Greenspan-Rubin-Summers team (a.k.a. "The Committee that Saved the World") that directed the bailout.

The other major misrepresentation is the description of currency manipulators as countries that:

"have regularly intervened in foreign exchange markets by buying dollars and euros 'to keep those currencies overly strong and their own currencies weak, mainly to boost their international competitiveness and trade surpluses.'"

In this comment Samuelson is relying on the work of Fred Bersgten and Joe Gagnon from the Peterson Institute for International Economics. In their work, the leading currency manipulator is Denmark. For the last 15 years Denmark has had its currency rigidly tied to the euro. That does not leave much room for the type of manipulation described in Samuelson's piece.

Rather than imply evil-doing on the part of other countries, it would be more useful if the discussion simply focused on whether the dollar is too high in value relative to other countries' currencies. Accusations of wrong-doing will only distract from the substantive issue that needs to be addressed.

Comments (6)Add Comment
written by Chris Engel, May 27, 2013 8:57
Higher inflation (like a 4% target that Krugman, Delong, etc. are supporting) would also help make the dollar more competitive. I'm starting to think that solution might help on a number of fronts. Curious what Dean's stance is on that idea.
written by skeptonomist, May 27, 2013 9:00
Dean grossly oversimplifies the problem of the trade deficit, attributing everything to the value of the dollar. This is certainly one aspect, and reducing the value of the dollar would help, but many other things are involved. He pointed out one other aspect himself a few days ago, the increased price of oil since around 2000. That and US domestic production of oil and gas will be very important determinants of the trade deficit in coming years. When China switched from an isolated socialist system to a participant in the world economy, this made a huge difference in the availability of cheap labor; there is no reason to think that the impact of China is due only to its currency policy, or that currency value could automatically compensate for the cheap labor available in China or other places. I suggest that Dean's "textbook" approach to the importance of currency valuation is based on an assumption of approximately equivalent living standards and wages in the countries involved.

The "fact of accounting" applies to the trade deficit, not to the value of the dollar.
written by skeptonomist, May 27, 2013 9:53
The yuan/dollar ratio reached a peak in 1994, before Rubin became Treasury Secretary. It was presumably considered very important for political reasons to encourage China to join the "free world" and probably an exchange rate favorable to China was part of this.

The US trade deficit with China actually increased most rapidly starting around 2002, a time when the yuan/dollar rate was constant. The yuan/dollar ratio fell after 2005, but the deficit with China has continued to increase.
A trade deficit isn't necessary bad. But a trade surplus is bad.
written by Joe, May 27, 2013 10:26
Why on earth should we labor to produce stuff only to export it to other countries? A trade surplus is a most supremely stupid idea.
trade and the dollar
written by pjm, May 27, 2013 10:30
Dean's claim, afaict, has always been that the rate at which the US is shedding manufacturing jobs is heavily influenced by the currency situation, not that it is the root cause of the decline of manufacturing. (And I don't think it contradicts your explanation the importance of China in understanding the situation.)
written by pjm, May 27, 2013 10:37
A far as basic economic theory goes, you trade (i.e., sell your stuff abroad and buy as well) is because comparative advantage leads to a lower price (i.e. more efficiency) overall. So there is a good reason, the issue is whether the increased efficiency gains can be distributed (both as income and jobs) to benefit everyone or not. I.e., wages can be depressed by international competition but at the same time, the cost of living should go down as well. Making that happens is as much political as economic (actually more political.

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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.