The New York Times had yet another editorial warning that the dollar might fall because the United States has so little savings. Of course, according to standard economic theory the causation goes in exactly the opposite direction -- low savings in the United States leads to higher interest rates, which attracts foreign capital, which pushes up the dollar. The high dollar causes a large trade deficit. The link between the value of the dollar and the trade deficit should be evident to anyone with the faintest grasp of economics. Consumers don't opt to buy imported goods at Wal-Mart because the government is running a budget deficit, they buy imported goods because the high dollar has made them cheap. An over-valued dollar is the cause of the trade deficit, not Bush's tax cuts. And of course the high dollar was a legacy from the Clinton administration, it has actually declined somewhat during the Bush years. A falling dollar will be painful. It will mean higher import prices, higher inflation, and quite likely higher interest rates. But there is no way to avoid a decline in the dollar. A high dollar can be thought of as being like a big tax cut that results in a large budget deficit. In the case of a tax cut, people can spend more money for a period of time, but eventually a growing interest burden forces tax increases down the road. The same is true of the high dollar policy of Rubin and Clinton. In the short-term this meant cheap imports and lower inflation (and millions of lost manufacturing jobs). However, it also led to a huge trade deficit that is not sustainable over the long-term. In this sense, the Rubin-Clinton dollar policy was every bit as short-sighted as the Bush tax cuts. The trade deficit and the over-valued dollar is not something that can be blamed on Bush, except insofar as he failed to bring down the dollar sufficiently.
--Dean Baker
