Christina Romer and the strong versus weak dollar debate

Here's a recent piece in the New York Times from Christina Romer, former Chair of the Council of Economic Advisors to the Obama administration and since 1988 an economics professor at the University of California at Berkeley (faculty profile here).

Entitled "Needed: Plain Talk About the Dollar," the essay decries the longstanding talking points that declare that "The exchange rate is the purview of the Treasury" and "The United States is in favor of a strong dollar."

Romer counters both these assertions, explaining that the dollar responds to a lot more factors than simply the actions of the US Treasury (she outlines them clearly and articulately) and chastising those she calls "strong-dollar ideologues" who reflexively prefer a strong dollar, without realizing what she sees as the occasional benefits of weak-dollar policies.

She says:
A weaker dollar means that our goods are cheaper relative to foreign goods. That stimulates our exports and reduces our imports. Higher net exports raise domestic production and employment. Foreign goods are more expensive, but more Americans are working. Given the desperate need for jobs, on net we are almost surely better off with a weaker dollar for a while.
We would respond to this argument by asking why we want the government to be engineering swings in the dollar's value in the first place! It strikes us that Professor Romer's argument assumes the premise that a small cadre of elite government officials are best able to decide when a strong dollar and when a weak dollar will create a situation in which "on net we are almost surely better off." Even if they could accurately make this determination (which is dubious), we are not sure that would argue that they should then act on it.

We would much prefer that the government get out of the business of engineering a stronger then weaker then stronger dollar and simply concentrate on creating a stable dollar. While proponents of government steering of the dollar might counter that such an idea is naive, we would argue that the government has no business steering the economy, and that their efforts to do so consistently result in disaster. For extensive evidence from recent history, see here, here, and here.

As for the idea that a weak dollar is good for Americans because it "stimulates our exports and reduces our imports," it strikes us that Americans who make their living importing goods (which other Americans want) might not be so quick to agree that taking away their livelihood in order to protect the livelihood of someone else is justified on the basis of the platitude that "on net we are better off."

This kind of privileging of one group at the expense of another was highlighted in our post entitled "The ugly tomatoes of protectionism," in which we saw how the family business of John Nix and his sons, who lived in New York and imported tomatoes from the Caribbean, was penalized by a law designed to protect domestic tomato growers from foreign competition. Where does the government get off in deciding that the interests of the tomato growers are more worthy than the interests of other citizens such as the Nix family? What formulas do economists use to decide that "on net" the oppression of the Nixes is more than compensated by the reduced competition experienced by the Smiths or the Joneses?

We completely disagree with those who argue that deliberately weakening the dollar is a good idea, and for reasons that go beyond the rather considerable problem we just discussed. In addition, artificially weakening a currency creates capital misallocations just like the ones discussed in the Fed oversteering posts linked above, feeding speculation and asset bubbles while starving worthy businesses of capital that would normally flow to them.

By the same token, we do not argue that the dollar should be artificially strengthened either -- the government simply does not have a good track record whenever they tilt the playing field to cause capital to flow one way or another. We believe that those decisions should be made by private parties, not by government officials. In order to allow private parties to make those decisions most effectively, the government should try to create a stable dollar and disavow any illusion that its public officials know better which way capital should flow.

This is not a position we are taking simply in response to Professor Romer's piece: we made this same argument almost two years ago in a post entitled "The 97-pound weakling," about the problems being caused by the weak dollar back then.