NCPA - National Center for Policy Analysis

Would a Modest Decline in The Dollar Hurt or Help?

May 16, 2002

Since 1995, the U.S. dollar has risen more than 40 percent. The move helped keep inflation in check by reducing import prices. But it also greatly increased world prices of U.S. manufacturing exports -- making them less competitive.

Some economists now believe it is time to encourage a modest decline in the value of the dollar relative to other currencies.

Here are some of their arguments:

  • Jerry Jasinowski, head of the National Association of Manufacturers, asserts that the high dollar has cost manufacturers $140 billion and 500,000 jobs in the last 18 months.
  • Others warn that a strong dollar is going to restrain the expansion.
  • The current level is unsustainable -- and if allowed to continue unchecked, a sharper fall is distinctly possible, a jolt which could ignite inflation.
  • Over an extended period, a high dollar misallocates capital resources -- leaving some export industries neglected, while lavishing more investment capital on other sectors than is optimal.

Some economists estimate the dollar is overvalued by 20 to 25 percent and would like to see the Treasury intervene.

Others point to the risks in changing dollar policy and raise the prospect of a possible collapse.

Source: Jeff Madrick (Challenge Magazine), "Economic Scene: The Muscle-Bound Dollar, a Pillar of the Strong American Expansion of the Last Decade, May Have Turned into an Achilles' Heel," New York Times, May 16, 2002.


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