Focus Needs to be on Pro-Growth Policy, Not Dollar Manipulation

By at 4 October, 2022, 1:16 pm

by Raymond J. Keating –

We’re in a tough economy, which often leads to the rise of silly talk on the economy. And one area where silly talk seems to gain great traction is on trade, and I’m not even talking about politicians on both sides of the political aisle arguing for protectionism via tariffs.

Another form of protectionism often materializes in terms of trying to manipulate the value of the dollar. Since the dollar has been rising recently, voices also have risen in political, and certain business (largely in manufacturing) and economic circles, that the dollar is “too strong.” The story largely goes that a strong dollar is bad because it makes U.S. exports more expensive and imports cheaper.

Should the business community be focused on the value of the dollar and pushing politicians to act?

There are several problems with this line of thinking.

First, a rising dollar – even in this stagflation environment – is a rather amazing statement of confidence regarding the U.S. economy, at least relative to the economies of other nations. Do we really want a falling or weak dollar, which would be a sign of low or declining confidence in the U.S.? Also, dollar instability, including any threat of further decline, creates risk and uncertainty, and thereby undermines investment in the U.S., and therefore, economic growth.

Second, other nations don’t sit idly by when misguided political actions – such as currency manipulation, tariffs and quotas – are taken in attempts to control international trade. That is, other nations react with misguided trade policies of their own, and the economies of all nations involved suffer accordingly (see the Great Depression).

Third, while there are short-term issues with shifts in the value of the dollar, those changes or challenges eventually are washed away due to arbitrage and price changes. So, any advantage that exporters might gain from a weaker dollar would be short-lived.

Fourth, but to the degree that a weaker dollar does make imports more expensive, that’s not good news for U.S. businesses as nearly all imports are inputs to domestic businesses, from U.S. manufacturers to retailers. So, to the degree that the argument of those supporting a weaker dollar holds true, the same argument would be undermined by making imports – both capital and consumer goods – more costly for U.S. businesses.

In the end, it’s hard to find any reliable relationship between the value of the dollar and U.S. manufacturing output, for example. Consider the following point made in my book Free Trade Rocks! 10 Points on International Trade Everyone Should Know:

Finally, currency fluctuations really matter little to the well-being of U.S. manufacturers when compared to economic growth. It’s difficult to unearth a reliable pattern tying U.S. manufacturing production to fluctuations in the dollar. For example, manufacturing output grew robustly from late 1982 into 1989. But during that period, the value of the U.S. dollar experienced a dramatic rise, and then a big fall off. Also, manufacturing grew from late 1993 to mid-2000, and the dollar rose over that same period.

Rather, the well-being of U.S. industry, including manufacturing, is about the state of economic growth – here and abroad. Looking at data since the early 1970s, U.S. manufacturing production has declined notably only during and around each recession.

It would be best if policymakers put aside both dollar manipulation dreams and nightmares, and instead, focus on pro-growth policy measures. As a reminder, here’s a quick summary of the policy agenda that would help the U.S. economy, including entrepreneurs, businesses and workers operating at home and in international markets: Low taxes, a light regulatory touch, limited government spending, free trade, and sound monetary policy that provides low inflation and a stable, strong dollar.

Raymond J. Keating is chief economist for the Small Business & Entrepreneurship Council. His latest book is The Weekly Economist: 52 Quick Reads to Help You Think Like an Economist.


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