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, 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.