New York Times Column on the "Weak" Dollar

I am always surprised by how many people believe the weak dollar is a negative economic indicator. Maybe they shouldn't call it a "weak" dollar. Maybe they should call it an "export strong" dollar. At any rate, the "weak" dollar is the source of much unnecessary anxiety, typically fueled by the media. Lowering the value of the dollar without inflation is actually considered one of the most significant achievements of the Reagen Administration. On Saturday, the New York Times published an opinion column by Tyler Cowen, a professor of economics at George Mason University, that sets the record straight. Here is an excerpt,

ANXIETY about the dollar continues to spread. The falling greenback is often seen as a sign of an impending recession or the fall of the United States from global leadership. A low dollar simply looks bad. We are, after all, used to judging ourselves against others — comparing our salaries with the earnings of our peers, and our homes with those of our neighbors. We’re used to thinking it is a big advantage to stand at the top of a numerical list.

But when it comes to currencies, a higher value neither brings national success nor predicts future prosperity. The measure of a nation’s wealth is the goods and services it produces, not the relative standing of its currency. Take a look at 1985-88, when the dollar lost more ground than in the last few years. Those were good times, and the next decade was largely prosperous as well....
For the rest of the column, click here. (registration may be required.)

2 comments:

Kelly Killarny

December 4, 2007 at 3:14 PM

The question of weak dollar v. strong dollar is a tough one. With a strong dollar TVs are cheap and I can stay home and watch Dr. Phil. With a weak dollar there are more export jobs here in the U.S.

Watch Dr. Phil or go to work?

But if I don't have a job I can't buy a TV no matter what their price. Darn. That's a hard decision. Can I get back to you on this?

das Kapitalist

December 4, 2007 at 6:50 PM

TV sets are mostly made in China. Since China unpegged its Yuan from the dollar in 2005, it has gained 12% against the dollar. At the same time the price of flat panel TV sets continues to fall at about 30% per year. This is due to economies of scale and other factors that overwhelm exchange rate considerations. So you still get your TV cheap.

Meanwhile the "weak" dollar is allowing the export sector of the economy to grow. I predict that when the data for the fourth quarter of 07 comes in we will find that the growth in the export sector outpaced the decline in the finance sector. So you get your job too.