Don’t Blame Rubin

Things are back to normal: I disagree with Dean Baker. But there is still something not quite right. Usually he is the one more critical of the Bush administration. This time he seems to be the one defending Bush.

Baker argues that the New York Times is wrong to blame Bush’s budget deficits for the high level of US foreign indebtedness and its potentially destabilizing effects. The problem, he argues, is the strong dollar, and this, he contends, is not the result of the budget deficit. If any American is to blame, he suggests that (former Treasury Secretary) Robert Rubin is the man.

He’s wrong. (Ah, yes, that feels natural.) First of all, he’s wrong because Treasury policy has little to do with the value of the dollar anyhow. Granted, there are occasions when a strategically placed gust of hot air from the mouth of the Treasury Secretary can shift the winds of a volatile foreign exchange market, particularly if the gust is supported by well-timed intervention and cooperation from foreign authorities. And granted, the Treasury can exert a slight modicum of influence over monetary policy, at least in the short run, when it comes to the value of the dollar. All these mechanisms might have been operative in 1985, when the dollar made a dramatic shift in direction after the Plaza Accord. But ultimately, the subsequent weakness of the dollar depended on a loose monetary policy occasioned by the sudden drop in oil prices in early 1986, which reduced the inflation rate while causing a regional recession in the Southwest. (Interestingly, the rest of us seemed not to notice that recession. Here in the Northeast, I only became aware of it several years later when I was studying regional data for my thesis.) In any case, the Plaza Accord seems to be a unique event. There is no analogous reverse event in the 1990s that caused the dollar to strengthen. It was strong not because of US Treasury policy but because the US was perceived as a good place to invest.

Second, he’s wrong because a strong dollar in the 1990s was a good idea, whereas a strong dollar (or even a not-weak-enough dollar) today is a bad idea. In the 1990s, the capital inflows supporting the strong dollar were largely going to private investment (directly or indirectly). A weak dollar in those days would have either dried up that foreign investment or caused our economy to overheat. Today, the capital inflows are largely going to consumption. A weak dollar today, properly engineered, could be associated with a higher savings rate rather than less investment.

Finally, he’s wrong because the budget deficit is the reason for the strong dollar. If the US were not trying to borrow so much, dollar interest rates would be lower (relative to other currencies), there would be less incentive to hold dollars, and the value of the dollar would be lower against those currencies that don’t peg to it (including that of our largest historical trading partner, the UK). (I’m glossing over a lot of details here, but that’s the gist of it.)

When I think about what might happen (or what might have happened) to the world economy without the US deficit (and the strong dollar), though, I wonder if it’s really such a bad thing. But that’s a big topic, and this post is already too long.

A Point of Agreement

In an earlier post, I noted that I seem to disagree with Dean Baker more often than I agree. Today, though, he made a point about rent inflation that echoes one I made last month. (Somehow I don’t think either one of us was the first person to think of it, though.)

Rolling On About Blogs

Even though Dean Baker and I are both “liberal Democrats” (he more than I, I think, or at least he’s more loyal), I seem to disagree with him more often than I agree with him. Nonetheless, I am quite impressed with his blog. I’m something of an academic snob when it comes to economics blogs: that is, I’m hesitant to “waste my time” on any blog that isn’t written by someone with the title “Professor”. (For example, you’d have a hell of a time getting me to read my own blog – at least until I realized how smart the author is:) However, I find that Dean Baker makes up in provocative thought for what he lacks either in academic credentials or in agreeing with me.

Other non-academic blogs that I like: Economics Unbound (Michael Mandel of Business Week), Brad Setser (international finance; not an easy read, but he clearly knows his stuff better than most), Battlepanda (Angelica Oung, though lately she seems to be leaving it mostly to her co-bloggers). That last one is kind of an outlier in my blog space: as far as I know, Angelica doesn’t even have an advanced degree, much less an academic appointment, but I like her writing, and her perspective seems unique. (I could say that Angelica is my link into the lefty/feminist/youth blogosphere, but she seems rather to the right among the lefties.)

Now that I’ve mentioned the non-academics, I should be true to my snobbery and give the prominent final position to the academics. Brad DeLong and Greg Mankiw are the acknowledged kings, and they provide a nice political counterpoint to each other. Also excellent are Econbrowser (James Hamilton, the energy macroeconomics and time series analysis expert, with Menzie Chinn, who writes mostly about international finance issues), Economist’s View (Mark Thoma, University of Oregon, leaning left but more faithful to economic analysis than many on the left), macroblog (David Altig of the Cleveland Fed and the University of Chicago), and EconLog (Arnold Kling and Bryan Caplan, who lean right/libertarian). [A few others that I have to mention: William Polley (academic; interesting but not prolific); New Economist (academic?? I don’t know, but many of the posts certainly are); Angry Bear (distinctly left-leaning and often more about politics than economics; academic?? Again I don’t know). As for Marginal Revolution (Tyler Cowen and Alex Tabarrok), being a macro guy, I seldom read it, but everyone else seems to.]