I’m 30% Poorer!

Tomorrow I leave for a short trip to Europe for a conference. I just checked the latest exchange rates, and am now cursing Bush’s incompetently executed weak dollar policy. Take a look at the graph below of the euro/dollar exchange rate:

The dollar has lost nearly 30% of its value against the euro over the past 18 months. That means that a lunch at a café that used to cost me about $15 will now cost me about $20. A night in a hotel that used to be $90 will now be about $120. In other words, compared to the last time I was there, in the spring of 2002, I will be 30% poorer!

This highlights a significant downside of a weak dollar policy. Yes, it does help to make exports more competitive. It also makes imports more expensive, presumably shifting some consumption away from imports and toward domestically produced goods. So if your goal is tilt your trade balance toward a surplus, the weak dollar helps. And if your goal is to shift domestic resources toward the manufacture of import-competing goods, the weak dollar also helps. (Whether or not those goals are sensible ones is another subject.)

But these benefits come with a cost: in real, tangible terms, Americans are unambiguously poorer with a weak dollar. Our real incomes fall every time the dollar falls. Mind you, one could argue that this may not be a bad thing, for various reasons. However, I’ve always thought that one could make an argument that Americans feel more confident and optimistic about the future when the dollar is stronger (e.g. mid 1980s and late 1990s) — primarily because when the dollar is stronger Americans are simply richer. I’m not sure how well this hypothesis would stand up to serious empirical scrutiny, but it has always seemed plausible to me.

Regardless, it’s worth keeping this in mind: if you’re someone that has been applauding a weak dollar in the hope that it will help US manufacturing, you are also cheering for Americans to be poorer.


p.s.: To AB and everyone else, have a good week. I’ll be back in about 7 days.