WWKD? Get the Dollar Down
I am sympathetic to much of Tom Geoghegan’s piece. It is often said that there are two types of economists: those who believe in accounting identities and those who don’t; and unfortunately, those in policy positions fall primarily in the latter category.
Geoghegan is right to point out the inescapable logic of a large trade deficit. Either we must have a large budget deficit or we must have negative private savings, as we did when the stock bubble spurred a consumption boom in the late 1990s, or—worse—when the housing bubble drove an even bigger consumption boom in the last decade. Economists who are fine with large trade deficits want either large government deficits or negative private savings, or they don’t know what they are talking about.
I am also a big fan of a financial transactions tax to help rein in the bloat in the financial sector, as well as raise a ton of revenue for the government. And I would certainly not argue with Geoghegan about the merits of Medicare for all.
However, I would take issue with some other items in his analysis. First, there was absolutely zero surprise with the stimulus. The best analysis we have shows that it worked almost exactly as planned. Of course as planned, it was not nearly big enough. It was designed to create to 2-3 million jobs in a context where we needed 10-12 million jobs. There is no mystery that needs to be explained.
The second place I would take issue is with the role of the value of the dollar. Geoghegan seems to think that devaluing the dollar will not lower the trade deficit. In fact, movements in the trade deficit follow the course of the dollar almost perfectly.
The deficit first grew large in the mid-eighties when Paul Volcker’s tight money policies sent the dollar through the roof. When the United States negotiated an orderly decline in the dollar later in the decade, the trade deficit stopped rising and rapidly shrank.
We had modest trade deficits through the mid-1990s until Robert Rubin took over and pushed the high dollar. He put muscle behind this policy with his engineering of the bailout from the East Asian financial crisis in 1997. From that point forward, the East Asian countries, along with much of the rest of the developing world, adopted a policy of propping up the dollar to increase their exports to the United States.
This is all 100 percent textbook. There are four obvious remedies. The first three are get the dollar down, get the dollar down and get the dollar down. Yes, we can do this.