It’s not often that Greg Mankiw and Dean Baker
both attack the same New York Times editorial – and on the same grounds,
no less – but today is one of those days. The Times says
this morning that the Fed has its hands tied when it comes to cutting interest
rates, because cutting rates would weaken the dollar further, exacerbating the
Bush Administration’s weak-dollar policy. Rather than choosing a weak dollar,
it concludes, the Bush Administration should have opted to raise the US savings
rate.
But a higher savings rate causes a weaker dollar, says
Mankiw. And a weaker dollar is an excellent way of boosting the savings
rate, says
Baker. Basically, the NYT has no idea what it’s talking about.
Which is all enjoyable enough – except for the fact that no one seems
to take issue with the very idea that exchange rates are something the White
House can realistically hope to control.
The NYT complains that "the administration has gone for a quicker fix
— letting the dollar slide". Baker, on, the other hand, criticises
the strong-dollar policy of Clinton and Rubin, which he says was responsible
for unsustainably large trade deficits.
But the fact is that Bush hasn’t somehow successfully executed on a cunning
plan to weaken the dollar, any more than Rubin, through endless repetition of
the mantra that "a strong dollar is in the national interest", made
his own prediction come true. Fiscal policy has much less influence over the
dollar than monetary policy does, and monetary policy is set by the Fed, not
the White House. Ultimately, however, it’s the markets, and the flow of international
capital, which determine exchange rates.
A weak dollar is neither a bad idea nor a good idea: it’s just a fact of life,
imposed on the US by the international currency markets. Policymakers don’t
cause it; rather, they just have to respond to it.