In November 2008, I was sharing a cab in Chicago with Larry Summers, the former Treasury secretary and a fellow economic adviser to the president-elect. To help prepare me for the interviews and the hearings to come, Larry graciously asked me questions and critiqued my answers.
When he asked about the exchange rate for the dollar, I began: “The exchange rate is a price much like any other price, and is determined by market forces.”
“Wrong!” Larry boomed. “The exchange rate is the purview of the Treasury. The United States is in favor of a strong dollar.” For the record, my initial answer was much more reasonable.
For the record, I’m sure Larry Summers also preferred her original answer. But in Washington, the only good dollar is a strong dollar, and the only economic policymaker the Senate will confirm is an economic policymaker who pretends the only good dollar is a strong dollar. But now that Romer is out of government, she can speak truth on the dollar, and as she says, a temporarily weaker dollar would be a better fit for our economy right now:
At full employment, a strong dollar is good for standards of living. A high price for the dollar means that our currency buys a lot in foreign countries. But in a depressed economy, it isn’t so clear that a strong dollar is desirable. A weaker dollar means that our goods are cheaper relative to foreign goods. That stimulates our exports and reduces our imports. Higher net exports raise domestic production and employment. Foreign goods are more expensive, but more Americans are working. Given the desperate need for jobs, on net we are almost surely better off with a weaker dollar for a while.