Hands Off The Dollar!

President's Bush's economic adviser responds to Fred Bergsten's attack on the administration's strong-dollar policy.

As noted in my original article, the basis of a strong dollar policy is three-fold. First, the United States should not manipulate the value of its currency for domestic political and economic reasons. Second, the United States should undertake policies which make America an attractive place to invest. Third, the United States should support the Federal Reserve's efforts to achieve maximum sustainable growth without inflation.

Fred Bergsten apparently disagrees. He calls for American participation in a joint effort to lower the value of the dollar "20 percent or so over a couple of years." That would be a substantial decline. It is fair to ask which of the above three principles Bergsten disagrees with. His piece implies that he disagrees with all three.

Consider the first principle of avoiding the direct manipulation of the dollar through verbal and direct market intervention. Bergsten seems to call for "direct intervention in the foreign exchange markets to support the euro."

We've been there before. Intervention has proven unsuccessful over and over. Consider an intervention that worked the 1985 Plaza Agreement. The trade weighted dollar fell 9 percent between 1985, when the Plaza Agreement was negotiated, and 1987, when it was reversed by the Louvre Accord. Bergsten himself says that the post-Plaza decline "set the dollar up for a hard landing" and "contributed mightily to Black Monday in the stock market that October." Bergsten seems to be calling for another Plaza Accord, yet he is critical of its effects.

Second, Bergsten says that it is "stunning" that I believe "that the United States should welcome any level of capital inflow that the rest of the world is willing to supply." He is apparently opposed to foreign capital inflows. On this issue, we simply disagree. The United States has long been committed to the free movement of capital. It would certainly be counterproductive for our capital markets, as well as a historic change in policy, to adopt Mr. Bergsten's view that we should just say "no" to more foreign direct investment.

Third, Bergsten also seems to disagree with our support of the Federal Reserve's policy. He argues that "there is no need for its (the strong dollar's) anti-inflationary impetus. There is no need to promote even lower interest rates." Bergsten is certainly correct that an abandonment of the strong dollar would generate substantially higher interest rates in the United States. Nominal rates would rise in response to higher inflation (or anticipation of higher inflation) caused by a lower dollar. Real rates would rise when capital abandoned a depreciating currency.

In addition to our disagreement about the fundamentals of a strong dollar policy, we also seem to have two factual points of disagreement. The first involves the timing of recent events. Bergsten intimates that President Bush somehow caused equity markets to fall. This is an odd argument given that the data clearly show that the equity markets peaked over a year ago, in March 2000. Industrial production peaked in September 2000, as did hourly earnings and other economic indicators. These events occurred well before the President came to office in January 2001.

Second, Bergsten argues that cutting taxes will lower national saving. But, the facts show that raising taxes during the 1990's generated a decline in

national saving to some of the lowest levels in American history. Unlike Mr. Bergsten, I believe that cutting high-income rates on entrepreneurs and reducing confiscatory rates on inheritances, and promoting social security reform will all help raise our national saving rate over time.

Lawrence B. Lindsey is Assistant to the President for economic policy and Director of the White House National Economic Council. He was a Governor of the Federal Reserve Board from 1991 to 1997.