A Strange Case for a Strong Dollar
Joel Kurtzman begins his case for a strong dollar with:
Since 1971, the dollar has had no real-world backing other than the level of confidence the rest of the world puts in the United States and in its future.
As I thought he might be about to make a case for a return to the gold standard, I immediately thought of Milton Friedman’s The Case for Flexible Exchange Rates. But as one reads this Townhall op-ed, the argument seems to be that a stronger dollar is the cure for our current problems. Given that the slow aggregate demand growth for the U.S. economy has been in part due to weak export demand, this argument does seem strange indeed.
Kurtzman seems to be trying to explain the last 30 years of U.S. macroeconomic history as if the single relevant exogenous variable was our exchange rate. Yet, most macroeconomic models put forth a host of exogenous variables including fiscal and monetary policy and have the exchange rate as an endogenous variable – assuming the exchange rate regime is floating.
It’s not clear what policy mix Kurtzman is advocating with his call for a stronger dollar. Is he hoping for a return to tight money and easy fiscal policy ala 1981? That policy mix did lead to a dollar appreciation, which alas lowered net exports making the monetary contraction stronger and the fiscal stimulus weaker. My preference would be a policy mix more akin to that of 1993 with expansionary monetary policy and phased in fiscal restraint. Yes, this mix might mean a weaker dollar but if done right could raise both net exports and aggregate demand growth.