Presidential Q&A: Is a Strong Dollar or a Weak Dollar Good for the Economy?

  Link to Angelo Young's February 14, 2017 Salon explainer "  Should the U.S. dollar be weak or strong? President Trump allegedly wants to know." 

Link to Angelo Young's February 14, 2017 Salon explainer "Should the U.S. dollar be weak or strong? President Trump allegedly wants to know." 

In his Salon article shown above, "Should the U.S. dollar be weak or strong? President Trump allegedly wants to know," Angelo Young reports: 

According to two anonymous White House insiders, Trump recently called National Security Adviser retired Lt. Gen. Mike Flynn at around 3 a.m. to ask whether a strong or weak dollar is good for the economy.

Angelo invited me to answer the President's question. Here is the answer I gave in full, an answer you can see reflected in several ways in Angelo's article:


It is not right to say in an unqualified way that a "strong" dollar is good or to say that a "weak" dollar is good. It depends on why the dollar is strong or weak. The dollar tends to be stronger

a. if opportunities for investing in the US are good

b. if demand for US products is high

c. if US saving is low

d. if trade barriers make it hard to import things into the US

Simplifying a bit, the first two (a & b) are good. The last two (c & d) are bad. 

The best way to "improve" the US trade balance (that is, to reduce the trade deficit) is to encourage additional saving. (This will lead to a weaker dollar in a good way.) Encouraging more saving is surprisingly easy to do. And the extra saving has an especially big effect on the trade balance if people are encouraged to be diversified by including international mutual funds among their investments. I explain all of that in my Quartz column "How Increasing Retirement Saving Could Give America More Balanced Trade." (This column gives my recommendation to the President. I am explicit about that in my more recent post "Border Adjustment vs. Dollar Depreciation.")

By the way, one of the reasons a strong dollar caused by trade barriers against imports is bad is that it defeats the intended benefit of improving the trade balance, but leaves the harms of the trade barriers. (There are other effects of trade barriers that create some winners among American citizens and some losers. Making some Americans lose to benefit other Americans may sometimes be part of the purpose of trade barriers. Trade barriers can rob Peter to pay Paul in this way despite the strengthening of the dollar.)

On who benefits and who is hurt, again it depends on why. The strengthening of the dollar defeats most of the effect of trade barriers and border adjustment on the dollar. By contrast, increasing the saving rate works through the fundamental forces affecting the value of the dollar, and so succeeds. Such a policy would benefit most Americans--some by enhancing retirement security, others by increasing net exports and therefore the number of attractive jobs, others by the increase in the dollar value of their foreign investments. However, imports would become somewhat more expensive, hurting those who import foreign goods for a living and those who consume a lot of foreign goods. 

(Trade barriers, unlike border adjustment, significantly hurts exporters and helps those who compete with imports.)