Dollar Devaluation Will Impoverish Americans, Weaken the Economy

After years of complaining about countries manipulating their currencies, trade protectionists have finally found a country they would be happy to see drive down the value of its money: the United States.

Sens. Tammy Baldwin (D-Wis.) and Josh Hawley (R-Mo.) make amazing promises about legislation they have introduced, the Competitive Dollar for Jobs and Prosperity Act. According to the bipartisan duo, the bill would “make U.S. exports more competitive, boost American manufacturers and farmers, and reduce our trade deficit.”

The measure may be well intentioned, but it is fundamentally misguided because it misunderstands the underlying economics. This congressional version of “if you can’t beat them, join them” would harm the U.S. economy and make us poorer.

The plan would require the Federal Reserve to impose a “market access charge” on foreign investments in the United States. This tax would cover asset purchases including stocks, bonds, real estate, or intellectual property – pretty much everything foreigners might want to buy, except for goods to be exported. The stated goal is to achieve a current account balance within five years. In the event the Fed is unwilling to calculate an appropriate level for the tax, the bill helpfully sets it at half a percent.

The theory is that taxing the inflow of foreign funds would reduce the value of the U.S. dollar relative to other currencies. A cheap dollar makes it easier for exporters to sell their products in the global economy. The hope is that this approach would reduce the trade deficit, which is by far the largest component of the current account deficit.  

It’s a forlorn hope.

The economic realities of currency manipulation are counterintuitive. A shift in exchange rates changes a country’s “terms of trade,” an expression used by economists to describe the ratio of a nation’s export prices to its import prices. From a U.S. perspective, if another country sets its currency at an artificially low level relative to the dollar, the U.S. terms of trade will improve. We will be able to obtain a greater amount of imports for the same amount of exports. Exporting the same quantity of airplanes and soybeans as before will pay for the importation of larger quantities of shoes, coffee, and smart phones.

Just as individuals at the grocery store would be better off if they are able to buy more apples for the same amount of money, so the United States is better off when our dollar is strong and we can purchase from other countries at favorable prices. 

Any country that consciously devalues its currency is choosing to place an unrealistically low value on the output created by workers and capital in its domestic economy. It will, in effect, be selling its exports for less than their true economic worth. If another nation is intentionally devaluing, it is making a decision to transfer wealth to the United States. We should think twice before rejecting such a gift, and three times before devaluing the dollar to provide that type of giveaway to others. 

The bill’s advocates tout the desirability of boosting exports of American famers and manufacturers. There’s nothing wrong with wanting exporters to do well, and both of these are important sectors of the economy.  Manufacturing accounts for 11.3% of GDP; agriculture, forestry, and fishing chips in another 0.8%.  Manufacturing employs 12.8 million workers, while agriculture and forestry employs in the neighborhood of 2.5 to 3 million.  

They’re not the whole economy, though. Thanks to 10 years of economic growth, total employment now stands at 157 million, the highest level in history.  So the export-sensitive industries targeted by the proposed legislation account for perhaps 12% of U.S. economic activity and nearly 10% of employment.

Peoples’ standards of living tend to fall when the dollar depreciates. There are 330 million U.S. consumers, but only a modest subset of them would be in a position to benefit from legislation that artificially stimulates exports. This proposal would harm a whole lot more American than it possibly could help. 

If Congress wanted to do something that genuinely benefits exporters, it would work to end the trade war. Farmers and manufacturers are suffering from U.S. tariffs on imports – more than half of which serve as inputs for manufacturing – and punishing retaliatory measures adopted by other countries. Ending those restrictions would provide far more lasting help to farmers and manufacturers than any type of currency manipulation. 

Let’s get the economics right. Ending the trade war will lead to increased U.S. prosperity.  Devaluing the dollar will not.