Basic macroeconomics for Republican congressional leaders, part II

As John Irons has already noted, the letter from four leading GOP legislators to the Federal Reserve isn’t just wrong – it’s oh-so-wrong (a jargon-y new economics term).

This post just highlights one of many wrongs – it’s hand-wringing over Fed actions that might “erode the already weakened U.S. dollar.” Weakening the dollar is just what the U.S. economy needs to do to support a real economic recovery. Since the phrase “weak dollar” is a PR disaster, let’s just call it a “competitive dollar,” or even a “lean and mean dollar;” but, whatever you call it, it’s necessary if we want net exports to be a contributor to overall growth rather than a drag.

The figure below shows the contribution of net exports to GDP growth since 2000 – an overvalued dollar has led trade flows to be a consistent drag on growth for pretty much the entire period except for the Great Recession – when spending on everything (including imports) plummeted and led trade to be a stabilizing force.

Click figure to enlarge

So, to recap – the GOP Congress is against fiscal support to the economy, is against monetary support, and thinks a lean and mean dollar is a bad thing. That’s three-for-three in arguing against the only policies we have that can create jobs and lower unemployment in the near-term. It’s going to be a very long election season indeed for Americans looking for work.


  • Michael

    As I point out on my blog at http://www.ProudlyMadeInAmerica.com, one of the major problems with China is that they artificially keep their currency “weak” compared to the dollar.  It is common knowledge, even by non-economist, that by keeping their currency weak, they increase their ability to export to us.  At the same time this reduces our exports to them.  If we were to push for a stronger dollar we would reduce our ability to export, as our items would cost more abroad.  So to push for a stronger dollar at a time we need manufacturing, and other areas of the economy, to create job seems to be mis-guided.

  • Andrewclearfield

    But a weaker dollar makes importing energy more expensive. And rising energy costs would be a huge drag on our economy.