The NYT reported on the decline in the dollar against other major currencies. The articles notes the positive effect the decline in the dollar has had on many export industries. It then tells readers: "over the long term, a weaker dollar could narrow the long-running United States trade deficit, helping close the gap between exports and imports, as American products become more affordable overseas." Actually, a weaker dollar is the only plausible mechanism, other than a prolonged recession, to lower the trade deficit. This means that those advocating for a stronger dollar, like David Malpass, a Wall Street economist cited in the article, are arguing that the United States should run a large trade deficit. Malpass correctly claims that a lower valued dollar will reduce U.S. purchasing power, but it would have been worth adding additional context. A lower valued dollar will mean that the United States does not run as large a trade deficit. In this sense the reduction in purchasing power is a reduction in borrowing. If two families have identical incomes, but one borrows $1,000 a month on its credit card, then the one borrowing $1,000 a month on its credit card has more purchasing power than the family that is not borrowing. The high dollar increases purchasing power in the same way as borrowing on a credit card. The article also notes the complaints about the falling dollar from prominent Republicans, such as former vice-presidential candidate Sarah Palin and Senator John Kyl, the second ranking Republican. It would have been worth mentioning that the trade weighted value of the dollar is still 7 percent higher than the low point reached in 2008 under President Bush. In other words, if these Republican leaders are actually concerned about the current value of the dollar being too low, then they should have really alarmed during the last year of the Bush presidency when its value was even lower. If these leaders did complain about the low dollar during the Bush presidency their complaints did not garner much attention.
--Dean Baker
