Lower Tariffs and a Weaker Dollar Would Be Good for Oakland, Good for Americans

by Will on October 22, 2010

Discussion of trade policy has been anemic in our country for a couple decades.

I often celebrate that our country ditched the Gold Standard, after decades of agitation by farmers and laborers. When you think of FDR’s accomplishments, you probably don’t even think of the fact that he ditched the Gold Standard. But he did! And in doing so, he made prosperity possible for many people who would otherwise have been poor and displaced due to the deflationary feedback loop of an artificially fixed money supply.

But when I do such bragging, I overlook a troublesome reality: that since 1980, the old fetish for gold has been revived in a new form: as the fetish for a strong dollar.

We have a trade deficit. We buy more stuff from other countries than they buy from us. That’s a bad thing. It indicates that the dollar is overvalued.

People like the “strong dollar.” We like to be able to travel cheaply. We don’t want to pay more money for Cointreau and Grand Marnier or Swiss chocolate — the stuff costs a lot already! So the Fed intervenes and keeps the dollar stronger than the international market would price it. The market, sans Fed intervention, would push the exchange rate down until there was no trade deficit, until we were selling as much stuff as we were buying from other countries. The trade deficit is something we choose and prolong, so we can have cheap imports and travel.

People like to bitch about how other countries are “taking our jobs.” They tend to complain about this in the process of bitching about low tariffs and free trade agreements. They neglect to think about the exchange rate, and the role of the “strong dollar” in all of this.

I live in a city that has a port that handles many, many imports and exports. Imagine we raised tariffs. The Port of Oakland would be worse off — fewer imports, fewer exports. Less trade in general. It would probably have to lay some people off, and they’d buy less stuff — everybody’s worse off! Now imagine we instead let the dollar fall to its actual value relative to foreign currencies. There would be a shift — fewer imports, more exports — but the total volume of trade would increase. The port could hire some more people to help with this increased volume. A coup for Oakland! But also a coup for the country. If foreigners want to pay us to make stuff for them, why should we say no?! There are people unemployed who could have jobs if we were exporting more stuff.

The Fed has lately been taking some measures to weaken the dollar. This is decades overdue! And yet the reaction — from the Europeans, from the Financial Times, from the Economist, from gloomy goldbug analysts — has been to ruminate darkly about the supposed threats a falling dollar poses. That’s crazy! This is a case where the libertarians are right — state interference to alter the exchange rate is really bad for us, and just letting the market work would fix the problem. And yet nobody speaks the simple truth.┬áThe strong dollar is today’s “cross of gold.”

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