Trump Is Wrong, a Weak Dollar Doesn't Make a Strong Economy

When Donald Trump was elected last November, the dollar rallied. Although the New Yorker had given mixed signals about currency policy throughout his presidential campaign, the price of an ounce of gold (historically the best proxy for the dollar’s value) closed the month down more than $100.

The greenback has since given back all its gains. Not only has it weakened against most foreign currencies, the price of gold has crawled back to where it was in the days before Mr. Trump’s election. None of this should come as a surprise to those who have been paying attention.

Presidents generally get the dollar they want. In Mr. Trump’s case, his comments since entering the White House have indicated his desire for a weaker currency. In April he concluded that the dollar “is getting too strong.” Last month he told this newspaper that he likes “a dollar that’s not too strong,” and that “lots of bad things happen with a strong dollar."

Mr. Trump would be wise to temper this rhetoric. He has promised to boost American exports, create jobs and return the country to broad prosperity. A weak dollar runs counter to all three goals. To see why, it’s important to look beyond the initial effects of devalued money.

On its face, a weak dollar might appear wise in that it makes American products cheaper for customers abroad, boosting exports. Yet no country can devalue its way to prosperity. Robert Mundell, a Nobel laureate in economics, once stated a simple truth: “The only closed economy is the world economy.” This matters a great deal because production is increasingly globalized. The Jeep Wrangler, Ford Taurus and Ford F-150 are among the most American-made cars in the world, but nearly a third of their parts are imported. A weak dollar increases the cost of these inputs, limiting any supposed gains from the initial devaluation.

Oil prices have a similar effect. When the dollar is in decline, oil prices are on the rise. The weak-dollar policies of Presidents Richard Nixon, Jimmy Carter and George W. Bush are what explain high oil prices during the 1970s and 2000s. It’s not as though crude suddenly became scarce. A shrunken dollar under Mr. Trump would also push energy prices up—which increases the cost of exporting.

The quickest path to competitive exports is investing to improve productivity. Investment is the greatest enemy rising prices have ever known. Think of Henry Ford, pouring his initially slim profits back into his assembly line. Or think of modern factory automation that allows workers to do more per hour. When investors put dollars to work, they’re buying a future income stream denominated in dollars. Devaluation acts like a tax on the investment needed to improve American competitiveness. The same goes for job creation, since work opportunities are similarly a function of investment.

A final simple point is that American workers are paid in dollars. Devaluing the currency erodes their ability to buy the necessities and pleasures of life, whether they’re created across the street, or on the other side of the world. This obvious truth has long eluded proponents of a weak currency, who are prone to limiting their analysis to first-stage implications. They focus on the economy as an abstract blob, forgetting that it’s made up of millions of individual workers who earn dollars. Never explained by Mr. Trump or any backer of a weak currency is how eroding its value will help these people and companies.

Devaluation proponents can’t rationalize the irrational. The reality, seemingly ignored in the discussion of economic growth, is that workers produce in order to consume. The making is all about the getting. But if the dollar is in decline Americans will, at best, be exporting more in return for fewer imports. It would be hard to conceive a more impoverishing policy.

Yet that is what President Trump is proposing. A weaker dollar will harm American competitiveness, raise prices, tax job creation, and sap workers’ earnings and savings. It does not work in theory, and it has never worked in practice. Unless Mr. Trump changes course, it sounds like the path to a one-term presidency.

This first appeared in the August 9, 2017, print edition as 'Trump Is Wrong—a Weak Dollar Doesn’t Make a Strong Economy.'