Christy Speaks Truth

May 22nd, 2011 at 7:31 am

A great piece in the NYT today by economist Christy Romer (disclosure: a friend and former colleague) on the right way to think about the strength or weakness of the dollar in an international context.  It’s not only straight talk, which as Christy says, is rare on this issue, but it’s a crystal-clear discussion of something–dollar policy–that can be pretty arcane.

A few points to add:

–This is a nice companion piece to Krugman’s oped the other day on much-needed and much-welcomed improvement in manufacturing employment.

–I’ve always thought a big part of the problem here is simply the negative power of the word “weak.”  It’s hard for us to wrap our heads around the idea that it can actually be a good think when those hard-earned green pieces of paper we’re schlepping around are “weak.”  I don’t know the answer to this, but we need a more muscular word that implies improved  international competitiveness when the value of the dollar falls relative to other currencies.

–In this sense, I understand the pressures on US officials.  It’s just very hard for the Sec’y of the Treasury to get up and say, “I’m ok with a WEAK dollar.”  What you have heard lately, which amounts to the same thing but, as Christy points out, is unintelligible to normal people, is: “we think currency values should be set in markets, not by countries managing their values.”

–Maybe they should say “competitive,” instead of “weak.”   Like this: “The US supports a currency value that makes our goods most competitive in foreign markets.”    I know…needs work.

–Final point: there’s a class bias in this debate.  Note that the editorial page of the Wall St. Journal is constantly arguing for a strong dollar, disregarding all the points Christy made today.  The reason is that a stronger dollar typically leads to less inflation by lowering the cost of imports to dollar-holders like us.  But at times like the present, that policy leads to higher unemployment than would otherwise prevail, by reducing our exports and increasing imports, missing out on the type of gains that PK documents in the link above.  Obviously, high inflation hurts everyone, but that’s not our main problem right now.   We still suffer from a deep jobs deficit, and the weaker…I mean “more competitive” dollar can help…in fact, it is helping.

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9 comments in reply to "Christy Speaks Truth"

  1. Dick C says:

    I like “light” and “heavy” for a couple of relatively neutral metaphorical terms.

  2. foosion says:

    Another excellent post. One nit:

    Obviously, high inflation hurts everyone

    This is far from obvious. If it is anticipated (and therefore current pricing reflects it), it has little effect, other than the ministerial cost of re-marking prices.

    Unexpected inflation helps debtors, who get to pay back loans using fewer real resources.

    Inflation is typically not uniform, so unexpected inflation helps those whose prices rise more than average.

    Many people forget that inflation and rising wages are often linked. They think their compensation is exogenous and that they’d be paid as much in the absence of inflation, so that they would be able to buy more stuff.

    At some level, inflation gets out of control and makes planning difficult, but that’s not what I think of as high inflation. In any event, we’re very far from that sort of problem.

  3. marc sobel says:

    What about bloated dollar ? Or Bubble dollars

  4. Kevin Rica says:

    Dr. Romer’s description of the current exchange rate system and how the dollar’s value is determined is one of the better expressions of the conventional thinking on the matter. However, the passage below is misleading and erroneous on two counts.

    “Some countries, like China, essentially fix the price of their currency. But since the early 1970s, the United States has let the dollar’s value move in response to changes in the supply and demand of dollars in the foreign exchange market. The Treasury no more determines the price of the dollar than the Department of Energy determines the price of gasoline.”

    1. The dollar’s value is not allowed, “to move in response to changes in the supply and demand of dollars in the foreign exchange market.”

    2. It is true that the Treasury Department does not determine the price of the dollar, but the People’s Bank of China DOES determine the price of the dollar against the Renminbi.

    If China were to allow its currency to float (which would also mean finally allowing the value of the dollar to be determined by market forces), our trade deficit would shrink dramatically almost over night. If the other Asian countries, which also fix the value of the dollar against their currency followed suit, it is likely the U.S. current account deficit would probably return balance very quickly. That might not be a benign adjustment if it happened in 3 days instead of 3 years. But it would represent a powerful jolt of stimulus to the U.S. economy, far greater than the President’s fiscal stimulus program and it would not cost the Treasury Department a cent of new debt – It would just mean that China would have to buy less U.S. debt.

    Why does China do this? Because undervaluing one’s currency (deliberately running persistent trade surpluses) is a means of parasitically diverting (Shanghaiing) aggregate demand from the U.S. to China. If China did stop fixing the value of the dollar against the Renminbi, the recession that China exported to the U.S. would return to China.

    Instead of worrying whether the dollar is strong or weak, America should make sure that the dollar’s value is not determined by the Government of China.

  5. alex says:

    lets go with “competitive”. after all, whenever we hear about states or nations becoming “more competitive” internationally it is a euphemism for *weakening* protections for society, working folks & the environment. but that fundamental truth is thoroughly obscured by the word “competitive.” after all, when an athlete or a firm becomes more competitive we believe it be stronger than and ultimately victorious over its opponent.

  6. Robert Waldmann says:

    I agree that a large part of the problem is the negative power of the word “weak.” Also “fall” and “decline.” I’d be interested in one of those surveys aiming to plumb our national ignorance (now with economics too and even without the assumption that economists are by definition libertarians) in which people were asked to rate as true of false the statement “Other things equal, a weak dollar makes US manufacturing more competitive.” I’d rate that one as unambiguously true (yes it is a standard implication of standard economic theory, but I also think it is true, which is unusual). I’d be willing to bet some weak dollars (not a whole lot) that a majority would rate the claim as false.

    I’d go for “more competitive dollar” except that is maybe pushing the sloganeering too hard and also doesn’t have the added advantage of being quite true, since the claim I believe is that a weak dollar makes us made goods (and services call the help desk) more competitive.

  7. Robert Waldmann says:

    Uh blush I didn’t read the whole post before commenting. I thought up “more competitive dollar” on my own (really) and didn’t know I was criticizing you (plenty of that up above in a comment on your post on Lyin Ryan).

    I agree it needs work. Also “The US supports a currency value that makes our goods most competitive in foreign markets” may be overlong, but it does have the advantage of being true.

    I think the accurate word which could replace competitive in “competitive dollar” is competetivitogenous dollar. And, yes, that is a joke.

    Does need more work. In particular we need a Democratic Frank Luntz (but honest) and a pony.

  8. Robert Waldmann says:

    OK this has the advantage of being true, but it is too clever by half.

    Why does a statement about exchange rates have to include the word “dollar.”

    How about a “higher trade weighted average exchange rate” or “higher average exchange rate” to be simpler. Why that means a weaker dollar. I mean e is the domestic price of foreign currency. This would confuse the hell out of people, but at least they would understand that they didn’t understand and maybe learn that a weak dollar rate causes increased competitiveness.