Why desire for a 'strong' dollar is not irrational by mattsteinglass
November 10, 2009, 10:00 pm
Filed under: Economics

Thinking about that NY Times article from yesterday on the falling dollar helping US companies, it occurs to me that for companies with manufacturing facilities abroad (like two of the companies the article mentions, Intel and Pepsi), the falling dollar tends to help the shareholders more than it helps workers. If you’re manufacturing in Thailand and making profits in baht, like Pepsi, then the only difference the falling dollar makes is that the baht you send back to the US as profit are now worth more dollars. That’ll help earnings and share prices, but it’s not going to do much for American workers. And the amount of the unit price that gets repatriated is generally pretty insignificant (I see here that as of 1999 Coke was making just 1 cent profit per 8-oz serving), so the falling dollar won’t do much to lower product prices or increase competitiveness or sales.

And that leads to a more general point. People have been reporting Americans’ discomfort with the idea of a falling dollar as if it were completely irrational and based on linguistic confusion, as if Americans just like the idea of “strength”. Dan Drezner hypothesized in late October that Republicans were just looking for an anti-Obama economic talking point, and Ezra Klein advocated switching to the locutions “high dollar” and “low dollar”. But in fact, the short-term benefits of a strong dollar are much more widely shared than those of a weak dollar. Only 11.7 million Americans worked in manufacturing as of October 2009, according to the Bureau of Labor Statistics. (That has been falling relentlessly since 1979; it was at 17.3 million just 10 years ago.) Even fewer work in agriculture and resource extraction. People in knowledge-based industries with international or export components, like software or television, do benefit somewhat from a weaker dollar, but I’m not sure how strongly they benefit or even where to look for an analysis of that effect.

Meanwhile, every consumer benefits from a strong dollar. It means cheaper gas, cheaper mobile phones, cheaper kids’ toys — in short, cheaper almost everything. Of course this is something of a vicious circle: because our manufacturing employment has shrunk and we buy so much from abroad, we don’t feel the effects of a boost to our manufacturing as strongly or as rapidly as we feel the effects of a blow to our import-purchasing power. And in the long run, the dollar has to fall, because we can’t keep importing more than we export forever. Gradually, the effects of more competitive American goods and a falling trade deficit will show up in increased prosperity. But the short-term impact runs in the other direction for most Americans, and to some extent the popular desire for a “strong dollar” is not so much irrational as shortsighted.

2 Comments so far
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Me thinks there is something wrong with the system and manufacturing in the US is not going to go up so we are going to buy more with less…at some point dollars are not going to be such a stable currency for the world.

Comment by libtree09

Excellent economics. We don’t want an infinitely high dollar or a worthless one. We want the dollar that balances the good American production does for others with the good others do for Americans. The evidence suggests that that’s a weaker dollar.

Comment by citifieddoug

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