Mnuchin Is Not Wrong: Secular Stagnation And The Value Of The Dollar

A couple of days ago Treasury Secretary Steven Mnuchin touched off a firestorm by saying something that is obviousy true. He said that a lower valued would reduce the trade deficit. 

As I pointed out yesterday, this is based on the radical concept of downward sloping demand curves. The idea is that when the dollar falls in value relative to other currencies, it makes goods and services produced in the United States cheaper for people living in other countries. This means that they will buy more of our exports.

On the other side, a lower valued dollar means that we will pay more for imports. This means that we would buy fewer goods and services from other countries and instead buy domestically produced goods and services.

With fewer imports and more exports, we have a smaller trade deficit. It’s all pretty straightforward. But for some reason Mnuchin’s comments prompted widespread outrage, with former Treasury Secretary Larry Summers leading the charge.

For the most part the complaints don’t make much sense (yeah, a lower valued raises the price of imports — that’s the point), but one of the central lines seems to be the idea that the Treasury Secretary is not supposed to try to talk down the value of the dollar. I’m not sure where that appears in the constitution, but others have violated this sacred principle.

For example, Lloyd Bentsen, one of Summers’ predecessors as Treasury Secretary in the Clinton administration, quite openly suggested that the U.S. would benefit from a lower valued dollar. Going back a little further, James Baker, who was Treasury Secretary during the Reagan administration, negotiated a decline in the value of the dollar with our major trading partners in the 1985 Plaza Accord. In short, the idea that the Treasury secretary has some obligation to blather about the virtues of a “strong dollar” has no basis in either economics or history.

But is worth taking this a step further. We saw a massive increase in the trade deficit in the last decade which eventually peaked at almost 6.0 percent of GDP in 2005 and 2006. This led to the loss of millions of manufacturing jobs, decimating communities in places like Pennsylvania and Ohio.