One of the reasons why administrations fail is that they often fall victim to the law of unintended consequences. The Bush administration discovered this when it imposed tariffs on imported steel last year in order to help steel producers. What it forgot is that there are far more people working in steel-using industries than for producers. Steel users were harmed by the tariffs because their costs increased, leading to reduced sales and employment. After 18 months, the administration finally figured this out and eliminated the tariffs it should never have imposed in the first place.
Unfortunately, the Bush administration is in danger of making the same mistake with respect to the dollar. Having become obsessed with the trade deficit, it is looking for other ways to reduce imports and raise exports. One way of doing this is to reduce the value of the dollar on foreign exchange markets. A lower dollar makes imports more expensive and exports cheaper in terms of foreign currencies. When this happens naturally, economists view it as part of the free market's automatic adjustment mechanism for trade imbalances.
The problem is that this process is not taking place on its own, nor is it costless. The Treasury Department has been signaling for some time that it would not be displeased if the dollar fell. This sort of "benign neglect" can be as effective as direct action in foreign currency markets, such as having the Treasury sell dollars. When currency traders know that we won't defend our currency, they take advantage of it by selling dollars against other currencies. That is a key reason why the dollar has fallen sharply against the euro and is now at a record low.
Another effect of this weak dollar policy became evident in recent days when the OPEC oil cartel indicated that it might raise prices to compensate for the falling dollar. It has always priced oil in dollars, so a fall in the dollar means that its members have to pay more for goods and services purchased in Europe, Japan and elsewhere. Ali Naimi, the oil minister of Saudi Arabia, complained on Thursday that the dollar had fallen 35 percent in the last three years. He said OPEC would price oil to maintain "the purchasing power of the old, good dollar."
Bruce Bartlett is a former senior fellow with the National Center for Policy Analysis of Dallas, Texas. Bartlett is a prolific author, having published over 900 articles in national publications, and prominent magazines and published four books, including Reaganomics: Supply-Side Economics in Action.
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