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President Joe Biden has made reviving manufacturing in the United States a top priority. To achieve this, it may first have to deal with something even more fundamental to the US economy: the strength of the dollar.
Because a strong dollar lowers the price of imports and raises the price of exports, it gives foreign companies an edge over their American competitors and can lead to lower employment in the United States.
“The overvalued dollar is the big problem,” said Mike Stumo, executive director of the Coalition for a Prosperous America, which represents small and medium-sized manufacturers and farmers. Stumo describes the policies supporting the dollar as a “war on the working class”.
Few recent presidents have devoted much attention to this issue. Donald Trump has railed against the decline of the US manufacturing industry and has sometimes considered weakening the dollar, but has focused his policy more on tariffs than on currency.
But Biden has hired a handful of senior economic advisers who are concerned about the strength of the dollar and have explored ways to reduce it.
“There are a lot of people out there who want to try new things in this,” said Stumo, whose group has pitched ideas for weakening the dollar to three of the Biden agency’s transition teams.
The strength of the dollar in recent decades has inflated the United States’ trade deficit, which roughly tripled as a percentage of gross domestic product in the late 1990s and has remained high.
At its simplest level, the trade deficit represents a kind of drain from the US economy: Americans buy more goods and services from overseas than the rest of the world buys from the US, and the country goes into debt abroad to pay the difference. If Americans bought more domestically produced goods and fewer imports, the spending would create jobs for workers based in the United States and require less debt.
Traditionally, however, most economists have taken a jaded stance towards trade deficits, arguing that they reflect underlying economic fundamentals – a country’s appetite to consume or invest rather than save.
A country with a young population can run a large trade deficit because young workers tend to consume more than older workers, who focus on saving for retirement. An economy that grows unusually fast may also experience a larger than usual trade deficit, in the form of spikes in spending on goods like cars and phones.
The problem for the United States is that its trade deficit appears to be much larger than demographics and other fundamentals would suggest. According to an analysis by the International Monetary Fund, a reasonable current account deficit, a somewhat larger measure of the trade deficit, would have accounted for about 0.7% of the US economy from $ 21 trillion in 2019. The real deficit, adjusted for short-term factors such as the strength of the economy, was about 2% of gross domestic product, or more than hundreds of billions of dollars.
This divergence between economic models and the actual trade deficit partly reflects the strength of the dollar against other currencies. In some cases, other countries have removed the value of their currency to make their products cheaper for Americans.
China was the world’s leading currency manipulator for about the first decade of the 2000s, according to an article by Joseph E. Gagnon, former Federal Reserve economist today at the Peterson Institute for International Economics, and C. Fred Bergsten , founder of the institute. director. The newspaper estimated that currency manipulation cost the United States 1 million to 5 million jobs in 2011. Jobs in manufacturing tend to be particularly affected by the strength of the dollar because manufactured goods are easy to find. import.
In recent years, mid-sized economies like Switzerland, Taiwan and Thailand have been the most active in maintaining their currencies, Gagnon found in a more recent study. Collectively, these countries’ cash interventions have been more than half the size of China’s previous interventions, he notes.
But the dollar can appreciate even without foreign exchange intervention – for example, if foreign investors increase their appetite for US bonds, which require the purchase of dollars, as they have done in recent years.
Gagnon estimates that because of these strengths, the dollar was 10-20% above its expected value in 2019, which likely cost hundreds of thousands of manufacturing jobs.
Revere Copper Products in Rome, New York, which manufactures copper strips used in automobiles and air conditioners, has suffered from these changes. In 2000, Revere had two factories and nearly 600 workers. Today the company, founded in 1801 by than Revere, employs around 300 people and operates only one factory.
The strength of the dollar has made it difficult for the company’s customers to compete with imports, said chairman Brian O’Shaughnessy. In the 1990s, for example, Revere supplied copper or brass to several American door lock manufacturers. Today, O’Shaughnessy said, most lock makers have shifted production overseas, underestimated by imports made cheaper by the strength of the dollar.
“The industry has moved overseas,” he said. “It was money. It goes beyond everything else. “
The US government could reverse these trends using one of the following two approaches. He could essentially fight fire with fire – buying enough foreign currency to lower the value of the dollar by 10-20% and restoring the balance that would exist without the excessive buying of dollars by foreigners. Or it could tax foreign purchases of US assets, like stocks and bonds, an approach prescribed in a bill sponsored by Sens. Tammy Baldwin, D-Wis., And Josh Hawley, R-Mo.
A tax would make these investments less attractive to foreigners and therefore reduce their need for dollars. It would also increase government revenue.
But a tax would spark opposition from financial firms, which would see it as an alienation from customers, and could raise interest rates by reducing the supply of potential lenders to the US government. (John R. Hansen, a former World Bank economist who devised such a proposal, said the rate hikes were probably not significant.)
To date, a major obstacle to action on the currency and the trade deficit has been resistance from senior US government policymakers. Stumo said his group’s efforts to persuade the Obama administration of the dangers of an overvalued dollar and a large trade deficit were “the opposite of successful.”
Gagnon said that institutionally the Fed and the Treasury Department tended to oppose the adjustment in the dollar’s value, both for philosophical reasons – economists believe markets should fix exchange rates. – and for practical reasons. This might require complicated judgments about when a foreign country’s efforts to sway the dollar should trigger intervention, while the Treasury is likely to resist anything that makes U.S. government debt harder to sell, such as a tax on debt purchases by foreigners.
Menzie Chinn, an economist at the University of Wisconsin, said foreign investors might find ways to get around paying the tax, as they have done to some extent in similar cases overseas.
Even pundits like Bergsten who admit the dollar is overvalued and causing job losses for workers in the manufacturing sector are reluctant to call for aggressive action. Some argue that the trade deficit is helping support economies abroad during a delicate time for the global economy.
“It would essentially be an act of economic warfare to intervene aggressively to drive the dollar down against the euro, the yen, the Canadian dollar,” Bergsten said. “These countries are doing worse than us. “
But the political landscape has changed in recent years, as evidenced by Trump’s rise to power, and the momentum to curb the dollar and the trade deficit may grow. Although Trump’s tariffs on products like steel and aluminum have been ineffective on this front – tariffs tend to increase the value of the dollar, leading to increased imports of other goods – the Trump administration has gave the Commerce Department new power to penalize countries that had weakened their currencies.
It first used that authority in November to impose tariffs on Vietnamese tires, after the AFL-CIO submitted a petition claiming Vietnam had used its currency as an unfair subsidy to producers.
Biden’s team could take over. One of its top economic advisers, Jared Bernstein, has long been worried about the dollar being overvalued. A second, Bharat Ramamurti, oversaw the economic policy of Senator Elizabeth Warren’s presidential campaign, which proposed “to more actively manage the value of our currency to promote exports and domestic manufacturing.” And the Biden administration has hired the strong dollar skeptical Brad W. Setser as an advisor to its sales representative.
These assistants may meet resistance from Biden advisers with more orthodox views. Treasury Secretary Janet Yellen said during her confirmation hearing in January that the value of the dollar “should be determined by the markets” and that “the United States is not looking for a weaker currency to gain a competitive advantage”.
But some former Treasury officials interpreted this as a more nuanced position than that of other recent secretaries, who have explicitly supported a strong dollar.
“Secretary Yellen speaks for the administration on the dollar, and her approach fully reflects the President’s emphasis on promoting strong and equitable economic growth,” a White House spokesperson said. .
Those who discussed the dollar and the trade deficit with Biden’s advisers felt that many see it as a problem and are ready to push for internal action.
“I think they’re probably having this conversation,” Stumo said. “Who will come out on top, we’ll see. “