That should have been the question asked by the Financial Times in an interview in which Mr. Rubin defended his "strong dollar" position. Mr. Rubin argued that the strong dollar could have been sustained if Bush had not shifted the country from surpluses to deficits. This calls for a quick trip back to econ 101. The immediate reason that the dollar is falling is that the country has a massive trade deficit that peaked at almost 6 percent of GDP in 2006 (more than 3 times the unified budget deficit). The reason that the country has a trade deficit is because of Mr. Rubin's strong dollar policy. Those who can remember back to the late 90s will recall that the trade deficit began to soar following the run-up in the dollar in 1996-97. In other words, the high dollar brought about an automatic correction process in the form of a large and growing trade deficit. But, Mr. Rubin says that the high dollar was a good thing, the problem is Bush's budget deficits. Okay, suppose that we had a $300 billion budget surplus (@ 2 percent of GDP) instead of a $170 billion deficit. This would help to bring down the trade deficit as Mr. Rubin suggests. It would bring down the trade deficit by lowering output and employment. With a lower level of income we would buy less of everything, including less imports. If we maintained a low level of output and a high level of unemployment, then in principle we could keep the trade deficit at a manageable level and thereby sustain the strong dollar that Mr. Rubin cherishes. For most people the costs of high unemployment would not be offset by the gains of a high dollar (cheaper imports and travel to Europe), but apparently for Rubin this is a good trade-off. Since Rubin is likely to carry enormous influence in a future Clinton administration, his eclectic views on this issue deserve serious attention. Voters would like to know if the next president intends to raise the unemployment rate in order to keep the dollar high.
--Dean Baker
