The Huffington Post’s S.V. Dale and Christina Wilkie have written an interesting story about the Trump administration’s problems with leaks. The most interesting part has little to do with the leaks and everything to do with President Trump’s foreign economic policy:
President Donald Trump was confused about the dollar: Was it a strong one that’s good for the economy? Or a weak one?
So he made a call ― except not to any of the business leaders Trump brought into his administration or even to an old friend from his days in real estate. Instead, he called his national security adviser, retired Lt. Gen. Mike Flynn, according to two sources familiar with Flynn’s accounts of the incident.
Flynn has a long record in counterintelligence but not in macroeconomics. And he told Trump he didn’t know, that it wasn’t his area of expertise, that, perhaps, Trump should ask an economist instead.
Trump was not thrilled with that response ― but that may have been a function of the time of day. Trump had placed the call at 3 a.m., according to one of Flynn’s retellings ― although neither the White House nor Flynn’s office responded to requests for confirmation about that detail.
Let’s assume that the sources are correct (although it should be noted that Trump complained about the strong dollar last month, suggesting that either he knows more about this issue than the HuffPo story suggests, or that maybe his call to Flynn preceded that complaint).
The hard-working staff here at Spoiler Alerts might not be the biggest fan of Flynn, but we nonetheless sympathize with the conundrum he must have faced on the receiving end of Trump’s call. Being rousted to answer a question outside of one’s area of expertise sounds pretty daunting. The instinct of any staffer is always to be able to answer the question. Furthermore, Flynn can’t exactly rely on his own experts, as it appears that the NSC is pretty short-staffed right now and Trump does not have any economists on staff as of this moment.
In the interest of doing my duty as a concerned American, let me take the baton from General Flynn and try to answer the question:
Hello, President Trump? Hello? Are you working the phone buttons correctly? Great! Okay, so I have two answers to your question about the effect of the dollar on the U.S. economy. First, actual economist Justin Wolfers offers the short Econ 101 answer to your question:
The answer: A strong dollar makes foreign stuff cheap (yay!), and stuff we make expensive for foreigners (boo!). Depends on what you want.
— Justin Wolfers (@JustinWolfers) February 8, 2017
As someone who has been delving into how your chief adviser’s economic policies will affect the American economy, however, I’d like to offer an important addendum to Wolfers’s answer: Almost everything you are thinking of doing as president will cause a stronger dollar.
- Significant tax cuts
- Greater government spending on infrastructure and defense
- Preserving entitlements
- Higher barriers to imports, be it through stronger tariffs or a border adjustment tax
A border adjustment tax would likely cause the dollar to strengthen, as your own Treasury Secretary-designate told Congress last month. High-profile tariffs would have a similar effect. Your tax and spending proposals translate into an expansionary fiscal policy — i.e., the government will be spending even more and taxing less. This certainly will boost economic growth, but it is also likely to accelerate the Federal Reserve’s plans to raise interest rates. Because most of the other major developed economies have even looser monetary policies because of more sluggish growth, capital will rush into U.S. financial markets to take advantage of higher rates, causing a further appreciation of the dollar.
As Wolfers noted, a strong dollar will only further widen a trade deficit that you neither like nor understand very well. Is there anything you can do to implement your campaign promises, weaken the dollar, thereby shrinking the trade deficit?
I have some bad news here: Given the policies listed above, your options are limited. It’s simply not possible to make fiscal policy contractionary; after defense and entitlements spending, there just ain’t enough left to cut. Sure, you can try to jawbone the dollar down by complaining about how it is overvalued. That will move markets for a few hours, but the effect doesn’t last.
Now there is one way you can cause the dollar to fall, but it’s a doozy. You could try to impose capital controls to restrict the inflow of capital. That’s likely to trigger a fair amount of financial panic. And as I wrote in September: “The only way a President Trump could actually reduce America’s trade deficit is by causing the economy to crash. A recession or depression would undeniably reduce the U.S. appetite for imports. [But] that’s a really stupid way to reduce the trade deficit.”
Hope that helps! Talk to you later, Mr. President.
I guess that will suffice until the president manages to scrounge up some real economists.