On Wednesday, Treasury Secretary Steven Mnuchin said something that is both true and common sense, through rarely spoken by people in his position: “Obviously a weaker dollar is good for us as it relates to trade and opportunities.”
He’s right. When the value of the dollar falls against the currencies of our trading partners, our exports are cheaper and our imports are pricier. All else equal, those relative price changes tend to improve our trade balance. Of course, there are many more moving parts to these relationships, but the overheated response to Mnuchin’s comment was not because it was substantively controversial.
So why the big reaction from markets (dollar indexes fell), the media, at least one former Treasury secretary and President Trump, who tried to walk Mnuchin’s comment back, even though he has made the same point himself with the same rationale as Mnuchin (improving the trade balance)?
Because, at least since the days of President Bill Clinton’s treasury secretary, Robert Rubin, it has been the explicit policy of the Treasury Department that the United States supports a strong dollar. Rubin was a former currency trader, so perhaps one motivation for his position was that currency traders tend to be kind of skittish, and if they catch a whiff of the U.S. government disparaging the greenback, they’ll sell it off, as they did on Wednesday.
But that doesn’t argue for a mantra of “we’re always and everywhere for a strong dollar.” How about something neutral, like “currency markets are very liquid,” and we believe in free currency movements? Maybe something like: “There are both advantages and disadvantages on where the dollar is in the short term.” In fact, those are all versions of what Mnuchin said Thursday, when everyone was all up in his grill about this.
To be clear, a weak dollar has costs. It makes imports more expensive, and thus puts upward pressure on inflation, though that’s less of big deal in the United States where imports are 15 percent of GDP, compared to, say, Britain, where they’re twice that share. The weak dollar raises the cost of energy imports, though as the United States has ramped up domestic fuel production, we’re less exposed to that downside. It can also lower foreign investors’ demand for U.S. assets, and thereby lead to lower asset prices.
Somebody over in Davos was complaining that the weak dollar made travel abroad more expensive for Americans (you’re breakin’ my heart), which is a pretty one-sided complaint, as it also makes American vacations cheaper for foreign tourists, providing a boost to our tourism sector.
The punchline is simple: U.S. officials shouldn’t try to talk key variables like this down or up. Their stance should be neutral.
For the record, I don’t think Mnuchin was trying to talk the dollar down. I think he was stating the obvious: There are upsides to the weak dollar. But whatever his intention, officials certainly shouldn’t mindlessly repeat a position that everyone knows they don’t mean. It’s particularly ironic to hear these alleged free traders implicitly saying: “We don’t want currency values — at least not that of the dollar — set through free trade in open markets. We want the dollar to be strong, even if market forces (or central banks, or whatever) are pushing it down.” In fact, that’s not what they believe. At this point, it’s just a verbal tic.
Readers of this column know I have little appreciation for team Trump’s economic policies. During the tax debate, I was particularly critical of Mnuchin’s ridiculous claims that Trump’s tax cut plan would more than pay for itself. But in this case, I welcome their, or at least Mnuchin’s, disregard for an established practice with no good rationale. I hope it sticks.